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Document of The World Bank FOR OFFICIAL USE ONLY C, /gc;20 - / Public Disclosure Authorized Reprt No. 5887-KE KENYA SECONDRAILWAY PROJECT STAFF APPRAISAL REPORT Public Disclosure Authorized Public Disclosure Authorized May 14, 1987 Public Disclosure Authorized This document has a restricted distribution and may be used by reipients only in the performance of their official duties. Its contents masy not otherwrise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS The official currency unit in Kenya is the Kenya Shilling; large values are often expressed in Kenya Pcunds (K£) in official documents. K Sh 1.00 US$0.0606 K£ 1.00 K Sh 20 KE 1.00 US$1.2121 US$1.00 K£ 0.8250 US$1.00 K Sh 16.5 1/ WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 miles (mi) 1 square kilometer (km2) = 0.386 square miles (sq mi) 1 metric ton (ton) = 2,204 pounds (lb) ABBREVIATIONS CIDA - Canadian International Development Assoc. EARC - East African Railways Corporation KfW - Kreditanstalt fuer Wiederaufbau KR - Kenya Railways Corporation MoTC - Ministry of Transport and Communications ODA - Overseas Development Administration FISCAL YEAR July 1 - June 30 11 Since December 1982 the Kenya Shilling has been pegged to the SDR at a rate of = KSh 14.06. The rate vis-a-vis the dollar has fluctuated since that time. A rate of US$1.00 = KSh 16.5 has been used in evaluating this project. FOR OFFIAL UU ONLY KENYA SECONDRAILWAY PROJECT TABLE OF CONTENTS PaRe No. DOCUMENTS IN THE PROJECT FILE ...... .....................iv LOAN/CREDIT AND PROJECT SUMKARY ... ......................v-vii I. INTRODUCTION.. 1 II. THE TRANSPORT SECTOR . 2 A. Transport System ............................... 2 B. Regional Importance... 2 C. Government's Policy in the Transport Sector 3 D. Kenya Railways Corporation (KR) .......... .... 4 1. Management and Manpower. 4 2. Property.. 5 3. Performance. 6 E. Bank Group's Role ....... ....................... 7 III. THE PROJECT ........................................ 9 A. Identification and Preparation ................. 9 B. Objectives and Description ..................... 9 1. Institutional Development .............. 9 2. Motive Power ...... .........................11 3. Operational Improvements ......... .......... 12 C. Project Cost and Financing Plan ................ 12 D. Implementation ...... ...........................13 E. Procurement ........ ............................. ......... 14 F. Disbursements ....................... i5........... G. Reports and Audits ... ...........................15 IV. PROJECT BENEFITS AND RISKS ...... ...................16 A. Benef4ts ... 16 B. Risks ... 17 C. Sensitivity Analysis ... .17 V. FINANCIAL EVALUATION.... 18 A. Past Performance . 18 B. KRRs Action Plan. 19 C. KR's Financial Projections . .20 D. Financial Targets ... 22 Thi document has a restkted ditrbuton and may be used by rcientsonl i te penfortnex of their ocil duties Its contwts may not othewie be diclosedIwithout Wodd BDnkauthoiaton. - Li - Table of Contents (contimued) VI. AGREEMENTSREACHED AND RECOMNENDATION.............. 23 This report is based on the findings of a Bank appraisal mission Which visited Kenya in JunelJuly 1985. Tha mission was composed of Messrs. Silvio Capoluongo (mission leader), G. Temple, J. Van der Ven (Bank) and Messrs. M. Bery, B. Christianson, and Mrs. J. M. Holt (Consultants).In December 1586 M. Bery and S. Capoluongo returned to Kenya to update and revise the report. Finally Mr. B. Bostrom, Sr. Economist, contributed to the revision of the report. Mrs. Yvonne Hensley and Dr. M. Fenyo assisted in processing the report. - iii - Table of Contents (continued) ANNEXES 2.1 KR's Organization 2.2 KR's Manpower and Training 2.3 KR's Property 2.4 KR's Operating Performance 2.5 KR's Traffic Review 2.6 KR's Financial Evaluation 3.1 New Organization: KR and the Government 3.2 Project Components 3.3 Locomotive Requirements 3.4 Performance Objectives 3.5 Cost Estimates 3.6 ImplementationSchedule 3.7 Financing Plan 4.1 Economic Analysis 4.2 Potential Freight Traffic by Rail 4.3 Costs and Benefits 4.4 Details of Economic Analysis 4.5 Sensitivity Analysis MAP IBRD No. 14712R Kenya - iv - KENYA SECOND RAILWAY PROJECT Related Documents and Data Available in Proiect File 1. Draft Agreement between Kenya Railways Corporation and the Uganda Railways Corporation for Railway and Marine Services between Kenya and Uganda. 2. Kenya Railways Economic Survey 1984. 3. Kenya Railways Working Timetable, Brown Waweru, Chief Traffic Manager, April 1981. 4. Annual Reports, Kenya Railways, 1979, 1980, 1981, 1982, 1983. 5. Financial Report, Kenya Railways, Balance Sheet as of December 31, and Operating Statements for 1984. 6. Kenya Ra±lways, Short Term Action Program-e, Main Report - Volume 1, Appendices - Volume 2, Coopers & Lybrand Associates, June 1985. 7. SFort-Term Action Programme, Summary of Key Points, Coopers and Lybrand Associates, June 1985. 8. Draft Proposal, Financing Implications, "The Funding Gap', Coopers and Lybrand, May-June 1985. 9. Kenya Railways, Training Requirements Study, Final Report, Volumes I, II, III-Appendices, and Executive Summary, Coopers and Lybrand, February 1985. 10. Motive Power Study, Volume I-Smary, Volume II Main Report, Volume III- Appendices, Henderson Busby International Limited in association with Coopers and Lybrand Associates, March 1985. 11. Government of Kenya, Ministry of Transport and Communications, Kenya Railways Corporation, Study of Central Mechanical and Electrical Engineering Workshops-Nairobi,Draft Final Report, Rendel, Palmer and Tritton, Consulting Engineers, January 1985. 12. Training Requirements Study, Building Development Plant, Norman & Dawbarn; Coopers and Lybrand Associates, February 1985. 13. Kenya Railways, Headquarters Organizational Structure Study, Final Report, Executive Summary, and Appendices, Coopers and Lybrand Associates, March 1985. 14. Kenya Railways Corporate Plan, 1986187 - 1990191, October 1986 KENYA SECOND RAILWAY PROJECT CREDIT AND PROJECT SUMMARY Borrower: Kenya Beneficiary: Kenya Railways Corporation (KR) IDA Credit Amount: SDR 21.8 million (US$28 million) Terms: Standard. Government would onlend the proceeds of the IDA Credit to Kenya Railways at an interest rate 1.1 times the Bank rate at the time of negotiation; four years grace period; and final maturity of 20 years, except for funds for technical assistance on standard IDA terms. Beneficiary would bear the foreign exchange risk. Project Description: The project would comprise the following: (a) Institutional Development --reorientation of Kenya Railway's management toward more commercial practices, introductionof modern management skills, and human resource development. (b) Increased Motive Power --through the purchase of locomotive spare parts, improved locomotive repair and maintenance, and training. (c) Improved Train Operations --through organizational changes, minor capital investments, and technical assistance. - vi - Estimated Prolect Cost: (including taxes and duties, estimated at about US$2.8 million equivalent) Foreign 2 of Z of Local Total Foreign Base -- (million US$'s)-- Exchange Costs A. Institutional Development Corporate Mgement 0.4 1.8 2.2 82 6 Operational Management 0.3 1.2 1.5 80 4 Human Resources 1.1 2.2 3.3 67 9 1.8 5.2 7.0 74 19 B. Motive Power Availability Increase 1.7 15.2 16.9 90 45 Workshop Recruiting 1.5 3.8 5.3 72 15 3.2 19.0 22.2 86 60 C. Operational Improvements Traffic Management 0.6 1.8 2.4 75 7 Permanent Way Efficiency 1.0 4.0 5.0 80 14 1.6 5.8 7.4 78 21 TOTAL BASE COSTS 6.6 30.0 36.6 82 100 Physical Contingencies 0.7 3.0 3.7 81 10 Price Contingencies 1.0 4.2 5.2 81 14 TOTAL PROJECT COSTS 8.3 37.2 45.5 82 124 Financing Plan: Local Foreign Total ----- US$ million ---- ODA 0.0 13.3 13.3 IDA 4.1 23.9 28.0 Kenya Railways 4.2 0.0 4.2 Total Expenditures 8.3 37.2 45.5 ss. ~ m ,.= m - vii- Estimated Disbursements: FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 ------ - US$ million ------------- IDA Credit: Annual 0.6 3.6 5.9 6.2 5.0 3.6 2.3 0.8 Cumulative 0.6 4.2 10.1 16.3 21.3 24.9 27.2 28.0 Economic Rate of Return: 20% Benefits and Risks: The main economic benefits of this project are expected to be savings in transportation casts. The project will enable Kenya Railways (KR) te carry more freight traffic than it could carry without the project, at a lower cost than road transporters. The economic rate of return of the project was calculated at 20%. The institutional development benefits of the project are also expected to be substantial and can be expected to contribute to improving management of the parastatal sector in Kenya. The major risk of the project is that the projected increase in rail traffic fails to materialize because of insufficient Government support for railway reform or ineffective use of techuical assistance by KR. The Cabinet's approval of KR's Corporate Plan and an intensive supervision effort to ensure understanding of and support for this project at all levels of Government should mitigate this risk. The sensitivity analysis shows that if benefits were 20S lower than projected the project's economic rate of return would still be satisfactory at 162. Nap: IBAD 14712R Kenya May 14, 1987 KENYA SECONDRAILWAY PROJECT I. INTRODUCTION 1.01 The Government of Kenya has requested the Bank Group's financing for a project to provide training and technical assistance and urgently needed equipment and spares to Kenya Railways Corporation (KR). The estimated project cost is US$45.5 million equivalent with a foreign exchange component of 822. KR would contribute US$4.2 million equivalent to the project; the UK about £8.0 million (US$13.3million equivalent);and IDA, US$28.0 million equivalent. 1.02 The proposed project would be the Bank Group's second operation with KR. Its major objective would be to support institutional reform and structural adjustment of the railway sector. In the short term, the project aims to improve KR's performance through the provision of technical assistance, appropriate training and essential equipment and spares.