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ReportNo. 10667-ZA Zambia FinancialPerformance Public Disclosure Authorized of the Government-OwnedTransport Sector November1992 InfrastructureDivision MIC PCFICHE COPY SouthernAfrica Department F N. Type: (f Africa Region r i ti e: F INANCIAL FPF'RFOPMANCTE(F' THF CT FOR OFFICIAL USE ONLY Axt.': 3 B(: or2IJ11125 Dept.t :AFtN Ext. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Docunentof the World Bank Thisdocument has a restricteddistribution and may be used by recipients -onilyin theperformance of theirofficial duties. Its contents mnay not otherwise b!etisclosedwithout World Bank authorization. ZAMBIA CU ECEYOIVALENTS CurrencyUnit - ZambianKwacha ExchangeRates YM ~~~~~~~~~~~~~~~Kper US Do:lar 1987 8.9 1988 8.2 1989 12.9 1990 29.0 1991 50.0 1992(assumed average) 120.0 FISCAJ.YEARS Government:January 1 - December31 TransportEnterprises: April 1 - March31 ABBREVIATIONS AJAS - AfricanJoint Air Services BAU - Business-As-Usual BP - BritishPetroleum Ltd. CHL - ContractH-aulage Ltd CSO - CentralStatistical Office DC - DistrictCouncils DCA - Departmentof CivilAviation EEC - EuropeanEconomic Community ESCO - EngineeringServices Corporation Ltd IATA - InternationalAir TransportAssociation km - Kilometer MC&T - Ministryof Communicationsand Transport MH - MpulunguHarbor Corporation Ltd M-Roads - MainRoads MSD - MechanicalServices Department MT - MulungushiTraveller Ltd NACL - NationalAirports Corporation Ltd PSO - PuDlicService Obligation PTA - PreferentialTrade Area RD - RoadsDepartment SADCC - SouthAfrican Development Coordination Conference SATCC - Southern Africa Transport & Communications Commission sq km - SquareKilometer TC - TrafficComm!ssioners T-Roads - InternationalTrunk Roads TYDP - Ten YearDevelopment Plan UBZ - UnitedBus Company of ZambiaLtd. UNCTAD - U. N. Commissionon Tradeand Development ZA - ZambiaAirways Corporation Ltd. ZIMCO - ZambiaIndustrial and Mining Corporation ZIMOIL - ZambianNational Oil Company ZNSL - ZambiaNational Shipping Company Ltd. ZR - ZambiaRailways Ltd. FOROFCML USEONLY EtNANCILPPEQRFORMANCE F THE GOVBERNMEU-OWNEDTRANSPQRTSEC Table of Conents EXECUTIVE SUMMARY ....... .............. i I. INIRODUCTION.............................. 1 II. PUBLIC EXPENDrlrURE REVIEV . ........ .. 3 IH. REVIEW OF AGENCIES WITH MAJOR PROBLEMS...... 4 A. The Roads Sector.... 4 A.1 Current Financing Arrangements . ............ 5 A.2 Options for Reform . 10 A.2.1 Revenue Mobilization .. 10 A.2.2 ManagementArrangements . 13 A.2.3 Maintenance of DC Roads .... 14 A.2.4 Road MaintenanceCapacity . 16 A.2.5 Road Rehabilitation . 17 A.3 Conclusions . .19 B. ZambiaRailways .... 20 B.1 Current Financial Performance . .20 B.2 Options for Reform . .21 B.3 Conclusions . .23 C. Zambia Airways .... 24 C.1 Current Financial Performance . 26 C.2 Options for Reform . .31 C.3 Conclusions ... 32 IV. ROAD TRANSPORT INDUSTRIES ......... 34 A. Contract Haulage Ltd . .34 A.1 Current Financial Performance .. 34 A.2 Options for Reform . .35 A.3 Conclusions .. 36 Thisreport is basedon the findingsof a missionconsisting of Ian G. Heggieand Ms. A. Fantaye whichvisited Zambia in November/December1991 and presentedan initialdraft of the report to the governmentin February,1992. Thetext was finalized and formattedby NellieSew Kwan Kan and MaryJackson. The missionwould like to thankofficials from the Ministryof Finance, Ministryof Communicationsand Transport,Ministry of Worksand Supply,and the individual transportenterprises for their generoushelp duringpreparation of the report. IThis document has a restricteddistribution and may be used by recipients only in the performance |or their official duties. Its contents may not otherwLsebe disclosed without World Bank authorization. pagn No B. United Bw Company of Zambia Ltd. ...................... 36 B.1 CurreotFinancialPer; nance ...................... 36 B.2 Optionsfor Reform ...................... ... 37 B.3 Conclusions......................... i8 C. UrbanBus Services ........................... ; ...... 38 V. AIRPORTSAND OTHERCIVIL AVIATION..... ... 40 A. NationalAirports Corporation Ltd .. 40 A.1 CurrentFinancl Performance.42 A.2 Optionsfor Reform.43 A.3 Conclusions.45 B. Departmentof Civil Aviation .. 46 B.1 PresentFinancial Perfbrmance .48 B.2 Optionsfor Reform.50 B.3 Conclusons.. 51 VL OTHERTRANSPORT AGENCIES . .52 A. EngineeringServices Corporation .52 B. MpulunguHarbor CorporationLtd .53 C. ZambiaNational Shipping Company Ltd. 54 VIM. OVERALLSECTOR PERFORMANCE . .56 A. OverallFiscal Balance.56 B. ExternalIndebtednes .58 C. DiversifyingOwnership and IncreasingPrivate SectorInvolvement .... 60 D. Postscript.......... i .... 61 -TABLES 1. Length and Costs of MaintainingTrunk, Mainand DistrictRoads 2. Centraland ProvincialRoads Departments: Revenues and Expenditures 3. Revenuesand SelectedExpenditures: Kabwe Urban DC 4. Build up of Retail Pricesof Fuel in Lusaka S. Prices of Gasolineand DieselFuel in selectedcountries 6. IndicativeFinahcing Plan for Trunk, Main and DistrictRoads 7. OverallDevelopment Budget, Ongoing and New Projects 1991-1994 8. Passengerson Intercontinental,Regional and DomesticServices 9. EstimatedOperating Results, FY91 First Two Quarters 10. Zambia Airways,Cash Flow From IntemationalSales Office 11. Amountof TrafficHandled at the Four AirportsManaged by NACL 12. Chargesat SelectedRegional Airports in Africa 13. Amountof TrafficHandled at CategoryH AirportsManaged by DCA 14. Civil AviationDepartnent: Revenuesand Expenditures 15. ConsolidatedPublic Expenditure Program for Transport 16. TransportSector Outstanding and DisbursedGovermment and Government GuaranteedDebt ANNEXES 1. EstimatedNumber of Vehiclesand Incomefrom LicenseFees 2. Accounts:Zambia Railways 3. Accounts:Zambia Airways Corporation 4. Acounts: ContractHaulage S. Accounts:United Bus Companyof Zambia 6. Accounts:National Airports Corporation EXECtIIQOVERVIEW 1. The overriding Issuearising fromthe present Transport SectorPublic ExpenditureReview is the need to reduce the sector's drain on the government'soverall fiscal revenues. In FY91 the drain amountedto almost K 5 billion (nearly $100 million), or 12 percent of the government's total current revenues. The drain took the form of injectionsof cash and/or equity, overdrafts and short-term loansfrom government-ownedbanks, or short-termloans from commercialbanks with government guarantees. The financial situation is even worse when the decapitalizationof roads, due to shortfalls in regular road maintenance,is included. 2. Sincethe financialdrain is largely attributableto Zambia AirwaysCorporation Ltd. (ZA), Zambia RailwaysLtd. (ZR) and the roads sub-sector, these are the areas targeted by the review for immediate reform. First and foremost, ZA needs to revise its route structure (probably by giving up routes to Bombay and Mauritius), consider terminating its air freight business or continue operating it using cheaper aircraft, and extending pooling arrargements with other airlines with a view to disposingof one or both of its two B-737 aircraft. Second, ZR needs to cancel its Ten Year Development Plan and replace it with a smaller and more realistic commercially-orientedone which focusseson its core business as a freight railway. It also needs to Improve its accountingsystem to ensure it provides a true picture of the corporation's financial health. Third, priority actions for roads include increasingroad user charges over a period of five years to finance road maintenance(higher vehicle license fees and an additional fuel tax), agreeing on cost-sharing arrangementsfor maintenanceof district roads, sub-contractingmost road maintenance to the private sector with maximum involvement of local consultaits and contractors, and developing a road rehabilitation program consistent with the availability of governmentlocal currency contributions. 3. The report further outlines an agenda for improving the overall financial performanceof the aector over the next five years. Althoughit is difficult to be precise about the impact of the proposed reforms and the speed at which they might be implemented,the program of reforms could reduce the sector's overall cash shortfall to 6 percent of total current revenues by the end of FY92, 4 percent by the end of FY93 and 1 percent by the end of FY94. The program would also ensure that current shortfalls in road maintenancespending were brought into balancewithin five years. The proposed reforms are listed in a policy matrix attached to this overview. For convenience,the reforms have been given an order of priority and a time-scale. A final column of the matrix also lists actions taken by the governmentsince the mission's first visit to Zambia in November/December1991. I tI 3 c !ifl E|SE j E s EN E CA 4 eV E E c t I Is c It I & I, 1 ~~ i i | i |t .1ti Pae, 2 of 3 Polinv MawCotinud Polcy Isuo Pr fiequlrd Actionsm Timing Status IV. ContractHaulage Ltd Set CommOrI ObjcIes I Mak6it clew tht thOecorpoation Immediate Agreed In principle Is pctbd to operast.on a wholly commemcWbasi wihout the need for govnmnt support SetGuidelines for Bilaral Aid I Ensurebilateral aid Is mad. Immediate cavlabls Uas of crdit which do nct discriminateIn favor of th publo sedor. Deslfy Owneship 11 Invib a stslf buy-out and. If thd Late FY02 To be studIed Is unsuccessful.consider outright esb. V. Unitd BusCo. of Zembia Ltd: se CommrciW Objectis I Make i clew that the ccpor n Immediate Agreed In prInciple Is expcted to operateon a wholly ccvnmwroWbasis withoutth need for governmentsupport. SetGuidelines for Bilateral id I Ensurebiltea