Document of The World Bank Public Disclosure Authorized
Report No.13491-MAI Public Disclosure Authorized STAFF APPRAISAL REPORT
THE REPUBLIC OF MALAWI
RAILWAYS RESTRUCTURING PROJECT Public Disclosure Authorized
MARCH 3, 1995 Public Disclosure Authorized Energy and Infrastructure Operations Division Southern Africa Department CURRENCY EQUIVALENT (as of November, 1994)
Currency Unit = Malawi Kwacha (MK) and Tambala US$1.0 = MK 16.0 MK 1.0 = 100 Tambala
FISCAL YEAR
April 1 to March 31
WEIGHTS AND MEASURES
1 foot (ft) = 0.305 meters (m) i mile (mi) = 1.609 kilometers (km) 1 square mile (mi2) = 2.590 square kilometers (kin2) 1 ton (t) = 0.907 metric tons (m ton)
GLOSSARY OF ABBREVIATIONS
BOD = Board of Directors CIR = Country Implementation Review EMP = Environment Mitigation Plan GDP = Gross Domestic Product CFM (N) = Caminhos de Ferro de Mocambique (North) CFM = Empresa Nacional de Portos e Caminhos de Ferro de Mocambique EE GOM = Government of Malawi IDA = International Development Association IMF = International Monetary Fund KfW = Kreditanstalt fur Wiederaufbau LS = Lake Services Department MLS = Malawi Lake Services Limited MK = Malawi Kwacha MOTCA = Ministry of Transport and Civil Aviation MR = Malawi Railways MR (M) = Malawi Railways (1994) Limited OA = Operations Agreement ODA = Overseas Development Administration PA = Performance Agreement RRP = Railways Restructuring Project USAID = United States Agency for International Development ZR = Zambia Railways REPUBLIC OF MALAWI
RAILWAYS RESTRUCTURING PROJECT
STAFF APPRAISAL REPORT
Table of Contents Page Nos.
CREDIT AND PROJECT SUMMARY ...... i
CHAPTER 1. SECTOR BACKGROUND .1 A. Country Setting ...... I B. The Transport Sector ...... 2 C. Transport Policy ...... 8 D. Previous Bank Involvement ...... 9 E. Lessons of Past Experience ...... 9
CHAPTER 2. THE PROJECT ...... 10 A. Project Objectives .10 B. Main Project Outcomes .10 C. Rationale for IDA Involvement .10 D. Project Strategy .11 E. Project Description .12 F. Project Cost .22 G. Project Financing .23
CHAPTER 3. PROJECT IMPLEMENTATION ...... 24 A. Implementation Arrangements .24 B. Role of Technical Assistance in Implementation .25 C. Status of Project Preparation .25 D. Procurement .26 E. Disbursement .28 F. Auditing and Accounting .29 G. Monitoring and Reporting .29 H. Supervision .29
CHAPTER 4. PROJECT BENEFITS AND RISKS ...... 30 A. Scenarios .30 B. Traffic Projections .30 C. Financial Benefits .31 D. Economic Benefits .32 E. Key Indicators of Success .34 F. Environmental Impact .35 G. Sustainability .35 H. Project Risks .36 ... / cont'd
CHAPTER 5. AGREEMENTS REACHED AND RECOMMENDATION ...... 37 A. Conditions of Effectiveness .37 B. Conditions of Disbursement .37 C. Assurances Provided at Negotiations .37 D. Recommendation .39
ANNEXES
Annex 1 1.1 Trend of Performance Indicators in Malawi Railways 1.2 Letter of Transport Sector Policy 1.3 Completed and Active World Bank/IDA-Financed Transport Projects 1.4 Active World Bank/lDA-Financed Projects
Annex 2 2.1 Project Cost Summary 2.2 Project Cost by Years 2.3 Project Financing Plan
Annex 3 3. 1 Project Implementation Plan 3.2 Project Mission Plan
Annex 4 4.1 Traffic Projections 4.2 Profit/Loss and Profitability Projections 4.3 Economic Benefits and ERR 4.4 Key Indicators of Success 4.5 Environmental Mitigation Plan
Annex 5 5.1 Documents in Project Working Files
Maps: IBRD Nos. 26395 and 26396
This report is based on the findings of a Bank appraisal mission which visited Malawi in April 1994, comprising Messrs. Yash Pal Kedia (Senior Railway Engineer and Mission Leader), Sture Karlsson (Port Engineer), R. Gopalkrishnan (Senior Procurement Specialist), Carlos de Castro (Transport Specialist), Wim Spit (Transport Economist), Duane Lougee (Transport Specialist, USAID), Samuel Mintz (Transport Economist, USAID), Tony Davis (Financial Analyst, USAID), Bill Brands (Project Officer, USAID) and John Craik (Railway Specialist, ODA). Ms. Josiane Luchmun provided administrative support. Mr. Ian Heggie, Mr. Lou Thompson, and Mr. Yusupha Crookes were the peer reviewers. Mr. Jeffrey S. Racki and Ms. Katherine Marshall are the managing Division Chief (Acting) and Department Director, respectively. - j -
REPUBLICOF MALAWI
RAILWAYSRESTRUCTURING PROJECT
CREDITAND PROJECTSUMMARY
Borrower: Republic of Malawi
Implementing Agencies: Malawi Railways (1994) Limited and Malawi Lake Services Limited
Beneficiaries: Ministry of Transport and Civil Aviation Malawi Railways Limited Malawi Railways (1994) Limited Malawi Lake Services Limited
Poverty: Not Applicable
Amount: SDR 11.2 million (US$16.16 million equivalent)
Terms: Standard IDA terms with 40-year maturity
Onlending Terms: To Malawi Railways (1994) Limited and Malawi Lake Services Limited at 7.1 % interest rate and 13 years repayment period including five years of grace
Financing Plan: (US$ million) Local Foreign Total IDA 0.75 15.41 16.16 USAID 8.92 3.06 11.98 Government 0.66 0.20 0.86 Total 10.33 18.67 29.00
EconomicRate of Return: 88% for Privatization scenario and 67% for Restructuring scenario
Staff Appraisal Report: Report No. 13491-MAI
Maps: IBRD Nos. 26395 and 26396
REPUBLIC OF MALAWI
RAILWAYS RESTRUCTURING PROJECT
CHAPTER 1. SECTOR BACKGROUND
A. Country Setting
1.1 Malawi, with a per capita income of around US$210, is one of the poorest countries in the world. The economy is fragile, as it depends on a limited range of exports and small domestic markets; the population growth rate is high; and social indicators are low. Agriculture is the mainstay of the economy, accounting for more than 30% of the Gross Domestic Product (GDP), 90% of exports, and 85% of employment. Foreign trade is important, as the value of exports and imports is roughly 50% of GDP overall. These conditions render Malawi's economy vulnerable to internal and external shocks, and, in particular, to fluctuations in terms of trade.
1.2 Indeed, after one and a half decades of economic growth, Malawi's economic performance faltered between 1981 and 1987 due in part to a number of exogenous factors which included declines in terms of trade, a prolonged drought, and an influx of about one million Mozambican refugees. The insurgent activity in Mozambique also led to closure of the shortest and least expensive rail routes to the ports of Nacala and Beira. The alternative route to the port of Durban being three times longer, the average transport margin for imports (transport and insurance cost as a percentage of the total landed cost of imports) increased from about 25% in 1975 to about 45% in 1987. The resulting burden on the economy has been estimated to be between US$50 and US$80 million per annum, about 4 to 6% of GDP.
1.3 A broad-based recovery, however, began in 1988, aided by well implemented stabilization and structural adjustment programs that gradually liberalized foreign trade and domestic regulations. In addition, increased external capital inflows and higher export prices financed needed imports of intermediate and capital goods. and raised investment. In response, growth rates of GDP increased from 0.5% in 1987 to 4.8% in 1991. Average transport margins on imports also decreased to about 40% due to: (i) increased use of the all-road and the rail/road routes to the port of Dar Es Salaam resulting from the implementation of the Northern Transport Corridor (NTC) Project (Cr. 1879-MAI) (formally called Transport I Project) by the Government of Malawi (GOM); and (ii) more foreign road transport operators competing for Malawi's international traffic under the liberalized transport policy.
1.4 After 1991, Malawi's economic situation again deteriorated mainly due to two droughts in the last three years (which led to a sharp fall in aggregate output) and terms of trade losses cumulatively amounting to around 10% of GDP over two years. In recent months, the poor functioning of the foreign exchange market and a large fiscal deficit caused mainly by the costs of the political transition have also contributed to macroeconomic difficulties. However, the newly elected GOM has shown its commitment to stabilization and structural reforms through coming to an agreement on a medium term policy framework with the World Bank and the International Monetary Fund. This framework calls for measures to increase revenue collections, and tighten controls on government borrowing and expenditure, and for a return to fiscal stability and lower inflation. In the sphere of structural reforms, the framework seeks to increase burley quota allocation to smallholders, improve the transparency of quota allocation, encourage private sector participation in domestic trade, remove fiscal subsidies to fertilizer, and publicize policies that have been liberalized and deregulated. A fully functional Nacala rail route would greatly help in promoting economic growth by bringing the transport margin on overseas imports down to about 30%, resulting in annual savings of US$25 to US$35 million in transport costs. -2 -
B. The Transport Sector
Geographic Setting and Transport System
1.5 International Traffic. Malawi, as a landlocked country, must depend on neighboring countries for all imports and exports to the sea. The rail routes to the ports of Nacala and Beira were the main routes used by Malawi until their closure in 1984. Since then Malawi has tried various road and rail/road routes to the ports of Durban, Dar Es Salaam, and Beira (Table 1.1), the share of traffic on the different routes varying according to the security situation in Mozambique, the overall transport cost, and perceptions about the reliability of operations on these routes. Currently: (i) the 640-km long rail route to the port of Beira, the shortest of all the routes available to Malawi for external trade, is closed and is likely to remain closed for a long time due to the heavy investments required to rehabilitate the track on both the Malawi and Mozambique sides of the route; (ii) the road and rail/road routes to the port of Durban via Tete and Harare continue to be used most followed by the road and rail/road routes to the port of Dar Es Salaam; (iii) the abnormally long road and rail/road routes via Zambia to the port of Durban, though used extensively between 1990 and 1993 due to poor security conditions prevailing on the Tete- Harare section, are not in much use any more; (iv) the multi-modal route to the port of Dar Es Salaam using Lake Malawi is not fully operational due to problems of draft in the main ports of Chilumba and Chipoka though the road and rail/road routes continue to maintain their share of traffic; (v) the traffic to the port of Beira using the recently-opened direct road route via Tete/Vanduzi is gradually increasing; and (vi) the Nacala rail route, which reopened in 1989 but where commercial operations were resumed only in 1993 after restoration of peace in Mozambique, is attracting increasingly more traffic (IBRD Map No. 26396).
Table 1.1: Transport Routes from Blantyre for Malawi's External Trade
Port Served Mode(s) Key Points en Route Countries Transited Malawi Border Point Length (Kmn)
Beira Rail Luchenza MOZ Nsanje 640
Beira Road Tete, Vanduzi MOZ Mwanza 884
Beira Road/Rail. Road Tete, Harare, Mutare ZIM, MOZ Mwanza 1,500
Nacala Rail Nayuci MOZ Nayuci 815
Durban Rail/Road Tete, Harare MOZ, ZIM, RSA Mwanza 2,667
Durban Rail/Road Lusaka, Harare ZAM, ZIM, RSA Mchinji 3,467
Durban Rail/Road Lusaka, Gaborone ZAM, BOT, RSA Mchinji 3,806
Durban Road Lusaka, Harare ZAM, ZIM, RSA Mchinji 3,500
Dar Es Salaam Rail/Road/Lake Chipoka, Chilumba TAN Kaporo 1,728
Dar Es Salaam Rail/Road Mbeya TAN Kaporo 1,770
Dar Es Salaam Road Mbeya TAN Kaporo 1,789
Dar Es Salaam Road Mbeya ZAM, TAN Mchinji 3,030
Dar Es Salaam Rail/Road Lusaka, Mbeya ZAM, TAN Mchinji 3,100
Source: Malawi NTC Project, World Bank Staff Appraisal Report No. 6022-MAI, January 27, 1988. Note 1: The Beira rail route is currently closed. - 3 -
1.6 Of the total estimated imports of 1,150,000 tonnes in 1993 (both regional and overseas), the share through different border posts was as follows: (i) through Mwanza, the entry point for regional imports originating in the southern African countries and overseas imports through the ports of Durban and Beira via Harare - 65 %; (ii) through Kaporo, the entry point for overseas imports through the port of Dar Es Salaam - 14%; (iii) through Mchinji, the entry point for regional imports originating mostly in Zambia but also in other southern African countries and overseas imports through the ports of Durban and Beira - 9%; (iv) through Nayuci, the entry point for overseas imports through the port of Nacala - 8%; and (v) through Mwanza, the entry point for overseas imports through the port of Beira via the direct road route - 4%.
1.7 The total estimated exports (both regional and overseas) of 250,000 tonnes were shared as follows: Mwanza - 6%, Kaporo - 48%, Mchinji - 8%, and Nacala - 38%. Most imports and exports, other than those moving over the Nacala rail route, moved by road. The future projections are that the share of regional imports passing through Mwanza would increase further at the cost of Mchinji, while the bulk of overseas imports and exports would move through the ports of Nacala and Beira.
1.8 The average surface transport cost of overseas imports (inclusive of port charges) through the port of Nacala is less than 50% of the cost through the port of Durban (Table 1.2) even after adding an average feeder service charge of US$360/container from the port of Durban to the port of Nacala. For a total shift of 300,000 tonnes of overseas imports from the port of Durban to the port of Nacala, which is quite possible if the Nacala rail route operates efficiently, the savings to the Malawian economy could be about US$20.0 million per year assuming that 50% of the total import traffic is containerized and subject to additional feeder service change. The savings to the economy could go even up to US$45 million per year with the privatization of Malawi Railways and consequent increase in traffic on the Nacala rail route and more conference lines calling on Nacala.
Table 1.2: Comparative surface costs on various corridors, Blantyre to Port (US$)
TRANSPORT CHARGES FROM BLANTYRE TO
Dar Nacala Beira via Harare Beira via Chingara Durban
Distance (Kms) 1,789 815 1.500 800 2,667 Average Transit Time (Days) 7 4 6 3 6 Min-Max Transit Time (Days) 4-15 2-7 4-8 2-4 4-8
Cost of General Traffic/mt Road 70 60 n.a. 60 Rail 35 43 56 n.a. 73 Port 27 18 18 n.a. 15 Total 132 61 134 n.a. 148
Cost of Imports/Twenry-foot Equivalent Container Unit (TEU) 1,050 900 651 900 Road 525 647 833 n.a. 1,094 Rail 407 269 269 269 226 Port 1,982 916 2,002 920 2,220 Total
Cost of Exports/TEU Road 840 720 651 720 Rail 361 518 667 n.a. 875 Port 326 215 215 269 181 Total 1,527 733 1,602 920 1,776 - 4 -
1.9 Despite the Nacala rail route being the shortest and least expensive of the currently available routes, the route has so far attracted only 15% of Malawi's overseas freight traffic. Apart from a 77-km section of the track on the Mozambican side of the Nacala rail route which is reported to be in poor condition and is adversely affecting reliability of operations, the main impediments to cost-efficient operations on the rail route are: (i) low frequency of conference lines calling on the port of Nacala; (ii) problems concerning revenue collection and distribution between Malawi Railways Limited (MR) and the northern railway system in Mozambique, Caminhos de Ferro de Mozambiqe (North) (CFM (N)); (iii) inadequacy of managerial and operating skills as well as management and operating systems on both MR and CFM (N); and (iv) inadequate level of computerization on both the railway systems and consequent difficulty in providing timely information about the consignments or ship's arrival to the customers. Nevertheless, there are visible signs of improvement in operational efficiency and, on many occasions, the train transit time from Blantyre to the port of Nacala has been less than one day.
1.10 Domestic traffic. Malawi is one of the smallest countries in southern Africa, measuring some 120,000 km2, of which some 20% (24,200 km2) is covered by Lake Malawi (IBRD Map No. 26395). The aerial distance between the northernmost point at the border with Tanzania and the southernmost point at the border with Mozambique is some 900 km; the longest east-west distance is about 250 km. The major cities are the capital, Lilongwe, located in the central region, and Blantyre in the south. The distance between the two cities is about 300 km by road and 370 km by rail. Other major population centers are Zomba, the former capital, in the south (70 km northeast of Blantyre) and Mzuzu in the northern region, some 360 km north of Lilongwe. The population, presently about 10 million, resides primarily in rural areas and is growing rapidly, at about 3.4% p.a.
1.11 According to GOM's Economic Report 1994, the road share of the domestic freight traffic increased from 44% in 1990 to 57% in 1993 almost entirely at the cost of railways which declined from 52% to 40% (Table 1.3). However, due to difficulties in collecting road traffic data, the road share appears to be understated and could, in fact, be as much as 70%. The domestic freight traffic carried on Lake Malawi has declined by 50% over the last four years. The share of air mode, despite showing a gradual increase, remains insignificant.
Table 1.3: Domestic Freight Traffic Distribution by Transport Mode
|______000 Tonnes % Share Transport Mode 1989 1990 1991 1992 1993 1989 1990 1991 1992 1993
Road 278 310 379 267 424 41 44 57 51 57 Rail 374 368 264 237 303 55 52 40 45 41 Lake 28 24 19 17 13 4 3 3 3 2 Air I I 1 2 3 0 0 0 0 0
Total 681 703 663 523 743 100 100 100 100 100
Source: EconomicReport 1994,Department of EconomicPlanning and Development,Malawi.
1.12 The passenger traffic by road has almost tripled in 1993 compared to 1992 (Table 1.4). The passenger traffic by air also increased by 45% in one year. The passenger traffic by rail, however, showed a sharp decline and has led to cancellation of a number of regular trains. This trend is likely to continue. - 5 -
Table 1.4: Passenger TrafficDistribution by TransportationMode
'000 Passengers % Share
Transport Mode 1990 1991 1992 993 __1990F _1991-1992_ _1993
Road 18,191 16,453 17,841 57.757 90.8 90.6 93.8 98.3 Rail 1,622 1,469 901 734 8.1 8.1 4.7 1.2 Lake 179 169 199 115 0.9 0.9 1.0 0.2 Air 52 62 71 129 0.3 0.3 0.4 0
Total 20,004 18,153 19,012 58,735 100 100 100 100 Source: EconomicReport 1994, Departmentof EconomicPlanning and Development,Malawi.
Transport Sector Development and Performance
1.13 Development Expenditure. Transport infrastructure has dominated development expenditure since Independence, often absorbing one-third or more of the development budget for all sectors. For the last four years, i.e., from 1990/91 to 1993/94, the allocation of development expenditure for the transport sector as a percentage of the total for all sectors has, however, shown a gradual decline from 40 to 25 %. Expenditure on roads accounted for about two-thirds of total transport development expenditure until 1991/92 and almost 80% since then. These figures do not reflect the total government spending on transport, as they do not include either implicit or explicit subsidies to the transport parastatals. The government subsidies to MR have averaged Malawian Kwacha (MK) 10 million per year since 1990/91.
1.14 Transport Sector Performance. Despite a number of encouraging developments in the past few years - reopening of the shorter and less expensive Nacala rail and Beira road routes, entry of a number of foreign transport operators in the Malawian international transport market, and the emergence of a competitive environment for international traffic - the overall performance of the Malawian transport sector continues to be much below expectation and is proving to be a serious constraint to the growth of the national economy in general and of exports, industry, and agriculture in particular. The below- expected performance of the sector is reflected in (i) high cost of international traffic; (ii) high cost of domestic freight traffic; and (iii) inadequate and unreliable supply of domestic transport particularly in the rural areas and during peak periods. Additionally the following are also indicators of the inadequate performance of the sector: (i) poor profitability and sustainability of many of the domestic transport operators in spite of the very high unit freight rates; (ii) dominance of international freight traffic by foreign transport operators almost to the complete exclusion of the Malawian operators; (iii) heavy losses suffered by the GOM-owned MR and its subsidiary department, the Lake Services Department (LS), imposing a substantial subsidy burden on GOM; and (iv) a very poor safety record. The main reasons are policy-related and formulating an appropriate transport policy needs to be a government priority.
Transport Sub-sectors and Main Issues
1.15 Highways and Road Sub-Sector. Malawi has a road network of about 14,000 kms - 2,480 (17 %) bitumen, 1,480 (11 %) gravel, and 10,200 (72 %) earth. The main road network of about 2,900 kms is concentrated in the south, but with an important spinal link to the north. Road density is about 1.5 km per 1,000 inhabitants, above average for southern and eastern Africa. The road coverage is considered adequate for the country's present needs. Even though various initiatives aimed at improving maintenance practices and upgrading programs are underway, the frequent violation of the axle load limit of 8.2 tonnes by transport operators is causing considerable damage to roads. - 6 -
1.16 The Road Traffic Department, one of the agencies of the Ministry of Transport and Civil Aviation (MOTCA), is responsible for all aspects of road transport through enforcement of the Road Traffic Act,
Trend of PerformanceIndicators - Operating rato 350 r O Freight traffic
-- -- Staff prod.otivit 300 - \ Locoot.v utto
= -- Wg 1 ut.Wglz9ation 2250 t- --A - k density
c200~
~150~ E
197 190 18a96 197 18d99 190 19 92 19 A~~~~~~~~~~A
50
1975 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 Years e.g., implementing policy relating to road transport; enforcing safety regulation pertaining to road traffic; collecting road user charges such as road tax, road service permit fees, driving license fees, and certificates of fitness fees; and controlling and monitoring of investments through road service permits. The Road Traffic Act is, however, outdated and there is an urgent need to revise and improve enforcement of regulation.
1.17 While there is no regulation for international traffic, the maximum and minimum tariffs for the domestic traffic are being set by MOTCA, partly under pressure from the Road Transport Operators Association. This is directly against GOM's policy of transport rate liberalization and is resulting in high cost of domestic freight traffic. Difficulty of fresh entry into the market due to inadequate availability of credit, restrictions on import of second-hand equipment, and high cost of spare parts and tyres have also contributed to the continuing problems of availability and high cost of road transport within Malawi. A Transport Sector Policy and Implementation Strategy is required to address the main issues of the road sub-sector.
1.18 Rail Sub-Sector. The main railway line lies entirely in the south, extending from the southern border northward through Blantyre to Lake Malawi and then west through Lilongwe to the Zambian border. At the southern border, this line is connected to the Mozambique rail line (Sena Line) serving Beira port. An eastern extension of MR connects to the Mozambique rail line serving the port of Nacala. There is no rail connection to Zambia Railways (ZR), other than a 24-km extension from Mchinji to Chipata, which is under construction. A link with the main ZR network would require a costly 390 km track construction project, which is unlikely in the foreseeable future.
1.19 Freight traffic (both international and domestic) on MR has steadily declined from its peak of 1.35 million tonnes in 1975 to 340,000 tonnes in 1992/93. The passenger traffic also declined from a peak of 1.7 million passengers in 1987 to 0.9 million in 1992/93. As MR maintained the full complement of staff and physical resources despite the declining traffic in the hope of reverting back to its 1975 status, the decline of financial performance was even steeper; the operating ratio (expenditure/income) increased from 80% in 1975 to 150% in 19931/. Other key performance indicators - staff productivity, track density, and locomotive and rolling stock utilization - also showed similar sharp decline to between 50 and 70% of their original value. The trend of seven key performance indicators is shown graphically in the figure below. Almost all key performance indicators have shown a deteriorating trend. The freight traffic has dropped from a level of 250 in 1975 to just 52 million net tonne-km (NTK) in 1993, staff productivity from 62,000 to 14,000 NTK per staff, and locomotive utilization from 250 to 55 kms/locomotive day. Trend of all key indicators is given in Annex 1.1.
1.20 MR is currently implementing a Restructuring Plan (which preceded the Project), as a result of which: (i) 1,200 staff have already been retrenched; (ii) passenger services have been substantially reduced; (iii) the Lilongwe-Mchinji and Limbe-southern border sections have been relegated to a siding status; (iv) many uneconomic stations have been closed; (v) international trains are being operated as block trains; and (vi) LS has been separated from MR in terms of financial reporting and management. The Restructuring Plan is scheduled to be fully implemented by December 1994. Despite these gains, MR would still continue to be a loss-making entity. There is an urgent need for a more intensive restructuring of MR followed by its revitalization and eventual privatization.
1.21 Lake Sub-Sector. At present, transport on Lake Malawiplays a relativelyminor role in both freight and passengertransport (about 13,000 tonnes and 115,000 passengersp.a.). Lake Malawi has a complexof 21 ports and landing points. Chipoka is the only port served by the railway; the other main ports of Chilumba,Nkhata Bay, and MonkeyBay are served by the main road. For ship repair, LS has a maintenancefacility at Monkey Bay.
1.22 The transport services provided by LS include passengers and parcels, and freight cargo comprising general break bulk cargo and fuel. Traffic evolution of LS's passenger services has been volatile during the last two decades. In the 1970s, annual passengervolumes fluctuated between 105,000 and 147,000. With the additionof a new vesselto the fleet in the beginningof 1980s, volumesincreased substantially,ranging between 180,000 and 220,000 per annum. In 1993/94, however, the number of passengersdropped to 115,000 due to MV Ilala being sidelinedfor major overhaul. Freight traffic on Lake Malawi has dropped significantlyduring the past 10 years - from around 40,000 tons in 1983/84, to its lowest level of around 6,000 tons in 1993/94. This decline in freight traffic, while partly being a result of the developmentof road transport in the areas traditionally served by MR and LS, has to a greater extent been caused by the poor performanceof LS in competing with other modes of transport, and in particular by LS's failure to carry out the required dredging works in the two ports of Chilumba and Chipoka.
1.23 LS's financial performance,never satisfactory,has progressivelybecome worse during the last few years, the operating ratio (cost/income) gradually increasing from 107% in FY1990/91 to 150% in FY1992/93. LS is heavily overstaffed, and its current fleet, with the exception of the new container vessel, is old and in many cases unsuitablefor today's traffic requirements. A restructuredLS, owned by or with the involvementof the private sector in its core business, would have a potential for attracting more traffic and becomingcommercially viable. The lake services componentof the proposed Project will address the issues of the lake services sub-sector.
1/ The operating ratio, computed by providing for depreciation on the book value of the fixed assets, is grossly understated and correctly computed on the basis of depreciated replacement value of assets could be as much as 240%. - 8 -
1.24 Air Sub-Sector. Air transport, another minor player, operates on a limited route network, presently consisting of five regional - Nairobi, Harare, Dar Es Salaam, Lusaka, and Johannesburg - and four domestic destinations - Lilongwe, Blantyre, Mzuzu, and Mangochi. Lilongwe's share of both passenger and freight traffic has declined since 1991, passengers by 15% and freight by 27%, while Blantyre's share is gradually increasing. Even so, Lilongwe remains the largest airport in Malawi having handled about 250,000 passengers, about 70% of the total, and about 6,700 tonnes of freight, 80% of the total in 1993. The proposed Railways Restructuring Project (RRP) does not address this sub-sector except through the Transport Policy component.
C. Transport Policy
1.25 In the case of international road haulage, GOM has actively promoted a competitive and efficient industry, but the policy framework for MR and its subsidiary LS, as well as for Air Malawi, has not been conducive to sustained commercial viability. For domestic transport, GOM has avoided many of the pitfalls of excessive government control and bureaucratic procedures that inhibit operating flexibility, management efficiency and incentives to increased productivity. Nonetheless, there are a number of areas in which improvements could be made, especially with respect to the pricing of domestic transport services, both passenger and freight. Further removal of regulatory and licensing impediments, price liberalization, and improved access to finance are all examples of policy-related changes that could have a substantial positive impact.
1.26 A sound policy environment is essential for the success of MR's plans to become commercially viable. While MR, like all other competing transport modes, needs to operate in a competitive environment without depending on any direct or indirect subsidy or support from GOM, its potential of becoming commercially viable could be undermined if GOM's policies were to stimulate or actively support investments in uneconomic alternative routes2/. Similarly, MR could be at a disadvantage if the transport policy failed to identify and enforce payment of appropriate road user charges by road haulers and/or safety and environment-related regulations applicable to all modes of transport. Consequently, there is a need for MOTCA to formulate and implement a clear and transparent transport policy.
1.27 Policy changes need to aim at: (a) avoiding creation of new and continuation of existing uneconomic international routes and options; (b) creating a genuinely competitive environment both in the international and the domestic transport market; (c) facilitating a fair inter-modal and inter-route competition; (d) removing capacity constraints for domestic traffic; (e) improving access to credit, hence, facilitating the entry of newcomers into the transport business; (f) permitting the use of second-hand equipment and direct import of spare parts and tyres, thus, enabling the indigenous Malawian transport operators to become more cost-effective and, consequently, more profitable; and (g) promoting restructuring, commercialization, and eventual privatization of transport parastatals. MOTCA also needs to be strengthened to enable it to undertake policy analysis on a continuing basis, to monitor the transport sector's performance more closely, and to enforce safety-related regulation more rigorously.
1.28 GOM has already initiated steps for strengthening MOTCA, refining its transport sector policy, and enforcing safety-related regulation. Some progress has been made towards reorganizing the Road Traffic Department, revising the Road Traffic Act, restructuring MR, and easing restrictions on import of equipment, spare parts and tyres. However, domestic freight transport policies continue to be protective and restrictive. GOM has also requested the Bank to include transport policy formulation as
2/ The low level of overseas freight traffic does not justify opening of many alternative rail or road routes to Nacala and/or Beira. The existence of a well-functioning alternative road route to the port of Beira is adequate to provide effective competition and ensure that the Nacala rail route does not function as a monopoly. - 9 -
a componentof RRP. GOM has already submittedto the InternationalDevelopment Association (IDA) a Letter of Transport Sector Policy (Annex 1.2) which will provide the basis of future policy reforms.
D. Previous Bank Involvement
1.29 The Bank Group has been involved in the transport sector in Malawi since 1966 largely in the highway subsector although some of the projects included significant technical assistance and studies concernedwith the entire transport sector. The Bank has been involved with the railway and the lake services subsectorsthrough the transport sector review of 1990/91and to a limited extent with the lake services subsectoras a part of the NTC Project (Cr. 1879-MAI). The Bank group has financeda total of 11 transport projects in Malawi so far. All closed and active IDA-financedtransport projects, as well as projectswith a significanttransport component, are listed inAnnex 1.3 3/and all currentlyactive IDA- financedprojects (all sectors) are listed in Annex 1.4.
E. Lessonsof Past Experience
1.30 Lessons have been learnt in designing and implementingrecent railway projects in Tanzania, Ghana,Kenya, Zambia, Zimbabwe,and Mozambique,many of whichhad a strong restructuringelement. While there are no complete success stories concerning railway restructuring, some of the important lessons of the past projects have been taken into account in the design of this project.
1.31 The main lessons are: (i) successfulrestructuring of railways requires a firm commitmentto the objectivesof restructuringby their respectivegovernments; (ii) the railway managementshave in general found it difficult to simultaneouslymanage two key elements of restructuring, viz., downsizing and stimulatingbusiness growth through increasedefficiency and effectivemarketing, and separationof these tasks can lead to better implementation;(iii) a change in the legislative framework which affects the railways is importantas most past legislationis generally restrictive of railways' autonomy,particularly with regard to its organizationalrestructuring, commercialization, and privatization;(iv) better results are achievedwhen the governments, insteadof providing direct control, exercisecontrol through Boards of Directors (BOD) and the BODs comprise of members with proven record of performance; and (v) sufficientattention must be paid to developingappropriate organizational structures, appointingqualified personnelto key managerialpositions, and upgradingmanagement and operatingsystems.
1.32 Additionally,massive investments in infrastructure,locomotives, rolling stock, andcommunication systemshave generallybeen ineffectivein improvingreliability or efficiencyas the railways' capacity to handle big projects, modern technology or complex equipmentsuch as locomotiveshas proved to be inadequate. Involvementof the private sector in managing big projects and modern technology is absolutelyessential. The usually large and complexorganization structures associated with the railways, apart from adding to the costs of operation, have also generateda massive inertia against any effort at improvement. In this respect, identifyinga core group of persons within the existing organizationor establishinga separategroup or an entity at an early stage to managethe process of restructuringis more likely to prove helpful.
3/ Refer Staff Appraisal Repon No. 6022-MAI on the Transport I Project (Cr. 1879-MAI) also known as the Northem Transport Cotridor Project for detailed description of the IDA-financed highway projects in Malawi. - 10-
CHAPTER2. THE PROJECT
A. ProjectObjectives
2.1 The primary objective of the RailwaysRestructuring Project (RRP) is to contributeto Malawi's economicgrowth through: (a) revitalizingthe much shorter, less expensive, but poorly-operatedNacala rail route and increasing its share of Malawi's overseas traffic, thus, reducing the landed cost of exports/importsand enhancingMalawi's competitive advantage4/; and (b) restructuring,commercialization and eventual privatization of the Railways and the Lake Services, enabling them to operate more efficientlyand without depending on government subsidies, thus, reducing the drain on the national economy. To achieve these objectives, two subsidiary objectives of RRP are to: (i) formulate and implementa transport policy which encouragesgenuine inter-modaland inter-routecompetition; and (ii) set up an institutionalmechanism for close coordinationamong the entities managingthe Nacalarail route, viz., MR, CFM (N), and the Port of Nacala, to ensure sustainabilityof improved operations on the Nacala rail route.
B. Main ProjectOutcomes
2.2 The main outcomes expectedat RRP's completionby the end of FY1997/98, i.e., March 1998, are:
(a) a minimumyearly overseas(both exports and imports) freight traffic of 300,000 tonnes on the Nacala rail route; (b) transport margin (transport cost element of the landed cost of exports and imports) of 35% as comparedto the current 40% on all overseas traffic; (c) a minimum return on capital employedof 1.7% on the Railways, the capital employed being computedon the basis of the current replacementvalue of fixed assets; (d) a minimumworking ratio of 80% for the Lake Services; (e) a transport policy aimed at creating a genuinelycompetitive environment in the transport sector in Malawi; (f) substantialprogress towards privatizing the Railwaysand the Lake Services; and (g) completionof the process of retrenchingsurplus staff, disposingsurplus assets, closing the existingMR, and liquidatingits liabilities.
C. Rationalefor IDA Involvement
2.3 The project would make a significantcontribution towards improvingMalawi's macroeconomic situation by lowering the final costs of Malawian exports, improving foreign exchangebalances, and assisting in reducing inflation through reducing the cost of imported materials. It would also promote improved public sector management. IDA has played a significant role in assistingGOM and MR in clarifyingand concretizingthe conceptbehind restructuring and in providingcontinuous analysis of project features. By continuingits involvementduring the implementationphase, IDA would be able to assist
4/ Direct investment suppon under RRP, viz., civil and mechanical works, equipment and spare parts, and technical assistance will be restricted to the Malawi side of the Nacala rail route. The Government of Mozambique with the support of donor agencies, mainly USAID and Caisse Francaise de Developpment (CFD) , is in the process of defining an appropriate rehabilitation and restructuring project for the Mozambique side of the Nacala rail route. Some definite support, in the meantime, is proposed to be provided to CFM (N) under this and some other projects and programs to enable CFM (N) to upgrade its informationand control systems (more details in paras 2.25 to 2.27). - 11 -
GOM and MR in consolidating this process, helping ensure appropriate donor coordination, and ensuring that lessons from other regional railway projects are being taken into account.
2.4 The project meets the core objectives of the Bank's country assistance strategy (discussed at the Board on June 9, 1994) as it will enhance the domestic supply response in two ways. First, the project will lead to a significant reduction in transport costs for imported inputs, thus reducing production costs and increasing profitability in Malawi's manufacturing sector. Second, reduced transport costs for Malawi will enhance the country's external competitiveness and will enable Malawian producers to reap higher export revenues and retain a larger proportion of the cif export price. Both factors will encourage economic diversification. Moreover, the substantial reduction in transport costs will be a major contributing factor to improved public and private savings which in turn will be necessary to sustain higher rates of investment in the medium term.
D. Project Strategy
2.5 The RRP design is based on the recognition that: (a) it would be impossible to have an efficiently functioning Nacala rail route, if only 40% of the route on the Malawi side were to be revitalized, which is the main focus of RRP, and no attention were to be paid to removing the operating constraints on the 60% of the route on the Mozambique side; (b) the tasks of restructuring and downsizing the railway with a view to reducing losses and eliminating the need for subsidies on the one hand, and corporatizing and commercializing the railway to increase its share of traffic on the other, require different specialized skills and dedicated resources; it is difficult, if not impossible, for one implementing agency to handle both of these at the same time in an efficient manner; (c) as a part of the restructuring plan, a very high percentage of staff, close to 60%, would be rendered surplus; their satisfactory retrenchment, retraining, and redeployment is essential for the success of RRP; (d) the success of RRP in turning the railway around would also depend on the extent to which Malawi's transport sector policy succeeds in promoting a healthy inter-route and inter-modal competition, market-based pricing, full cost recovery for all modes, investments based on economic justification, and enforcement of safety-related regulation; and (e) the Lake Services, though a minor player in the transport sector, has, nevertheless, an important role in serving certain categories of passengers, reducing costs of freight traffic moving to the port of Dar Es Salaam, and efficiently using the huge investments already made in this sector and, thus, reducing its losses and resulting subsidies.
2.6 The main features of the RRP design, therefore, include: (a) use of indirect methods to improve performance on the Mozambique side of the Nacala rail route such as signing of an Operations Agreement between MR and CFM (N), setting up wagon tracking and management information systems on the whole corridor under the regional program of the United States Agency for International Development (USAID), setting up a Joint Review Board (JRB), employing a transit facilitation expert for short durations to assist in setting up mechanisms for effective coordination, computerization of commercial transactions, and providing other forms of technical assistance to CFM (N) by the donor agencies towards preparation and formulation of an appropriate project for the Mozambique side of the Nacala rail route; (b) incorporation of a new railway company to be responsible for revitalization of the Nacala rail route, leaving the task of downsizing to the existing railway company; (c) use of a fair and attractive compensation package for the surplus staff to be retrenched which would include provisions for staff counselling with regard to alternative employment including self-employment, staff retraining, support for housing, and equity participation in the new railway company; (d) the development and implementation of a transport policy component under RRP to enhance MOTCA's capacity for policy analysis and response; and (e) the implementation of a separate lake services component under RRP to promote commercialization and privatization of the Lake Services. - 12 -
E. Project Description
2.7 RRP comprises four components as follows:
(a) Restructuring component, to be implemented by MR, includes (i) setting up of new railway and lake services companies to be called the Malawi Railways (1994) Limited (MR (M)) and the Malawi Lake Services Limited (MLS) respectively; (ii) transferring of assets and staff to the new companies; and (iii) gradual downsizing and final closure of the existing MR;
(b) Revitalization component, to be implemented by MR (M), includes (i) commercialization of rail operations; (ii) eventual privatization of MR (M); (iii) extension of the services of the marketing and transit facilitation experts to CFM (N) to improve performance of the whole Nacala rail route; and (iv) setting up of institutional mechanisms for effective coordination with CFM (N);
(c) Lake Services component, to be implemented by MLS, includes (i) commercialization of its operations; and (ii) eventual privatization of MLS's core activities; and
(d) Transport policy component, to be implemented by MOTCA, includes (i) developing a transport policy that would provide a framework for efficient operations with particular emphasis on restructuring and privatization of transport parastatals; and (ii) enhancing institutional capacity for analyzing the performance of the transport sector and providing adequate response.
Restructuring Component
Component Objectives
2.8 The main objectives of the Restructuring component are: (i) setting up of new railway and lake services companies, viz., MR (M) and MLS respectively by January 31, 1995; (ii) transferring of assets and staff to the new companies by March 31, 1995; and (iii) gradual downsizing and final closure of the existing MR by June 30, 1996.
Component Description
2.9 The Restructuring Plan involves three separate entities: (i) a new railway company to be registered under the Companies Act of Malawi (referred as MR (M) as distinguished from the existing MR registered in UK) that would be responsible for revitalizing the Nacala rail route and its commercialization and subsequent privatization; (ii) a new lake services company to be registered under the Companies Act of Malawi (referred as MLS as distinguished from the existing LS, an autonomous department of MR) to be responsible for its commercialization and subsequent privatization; and (iii) the existing MR to be responsible for completing the winding down operations, i.e., retrenching the surplus staff and disposing of the surplus assets of the railways as well as the Lake Services and finally for its closure. GOM provided assurances at negotiations that the new companies will not be declared Statutory Bodies, either at the time of their incorporation or subsequentlv so as not to inhibit their subsequent privatization (para 5.3 (a)). - 13 -
2.10 The rationale for the approach indicated above, i.e., setting up two new companies in addition to MR, is that: (a) this involves no legal status change to the existing Malawi Railways Holding Company and MR; (b) there is no need to "wind down" MR or declare it solvent in the near term, thus facilitating an orderly disposal of assets; (c) MR (M) management can focus on the task of turning around the railway, without the "distraction" of managing the process of retrenching staff and disposing of assets; (d) the new company will be more attractive to potential private buyers because: (i) it would not be a statutory body and would be a more autonomous entity, which would be more "arms length" from the Government; and (ii) it would have improved financial prospects (assuming complementary operational improvements are made); and (e) no acts of Parliament are required for establishing MR (M). Amendment of related legislation and regulations may, however, be needed to create an appropriate enabling environment for privatization and efficient functioning of MR (M) and MLS after privatization. The need for revising the legislation will be determined by the privatization study proposed to be undertaken under the Project. The legislation requiring amendment could include the Railways Act and also possibly the Statutory Bodies Control of Contracts Act, the Finance and Audit Act, and the Companies Act. Preparing and presenting the revised legislation to the Parliament, if required, would be a condition of disbursement of funds for the categories and amounts specified in Table 3.2 (para 5.2 (iii)).
2.11 Creating New Companies. This would involve three basic actions:
First, the current railway Management will need to decide which assets and staff are required in the "new" companies to efficiently handle all current and projected future freight and passenger traffic. All other assets and staff will be deemed "surplus" and remain in MR. To a large extent this has been done and it is agreed that 1,130 staff (860 for freight operations and the remaining for passenger operations), 12 mainline locomotives (4 for freight operations, 4 for passenger, and 4 as stand-by), 400 wagons (300 required and 100 as stand-by), 30 coaches, and full infrastructure including workshops and maintenance depots would be transferred to MR (M). The staff and assets would be sufficient for the 300,000 tonnes of overseas traffic projected under the restructuring scenario (see Chapter 4), 300,000 tonnes of domestic freight traffic, and the minimum agreed level of passenger services. Provision of stand-by assets and expected increase in operating efficiency and staff productivity subsequent to MR (M)'s privatization will ensure that the assets and staff transferred to MR (M) would also be adequate for the increased overseas freight traffic of 525,000 tonnes projected under the privatization scenario. The staff and assets to be transferred to MLS would be based on the recommendations of the study on restructuring and privatization of MLS. Completion of the MLS restructuring and privatization study, being undertaken under the Infrastructure I Proiect (CR. 2069-MAI), would be a condition of effectiveness (para 5.1 (a iii)). The provision for passenger services, though a loss-making operation, is being made with the understanding that GOM would fully compensate MR (M) and MLS for the losses computed on an agreed basis, the basis forming an integral part of the Performance Agreements to be signed between GOM and MR (M)/MLS. GOM provided assurances at negotiations that it would fully compensate MR (M) and MLS for the losses incurred by them on account of passenger or other services undertaken at GOM's request (para 5.3 (e)).
Second, assets will be transferred to the new companies, after a professional inventory, valuation, and clear title establishment has been done for the assets. In addition, the Government would provide initial working capital (about MK 2.5 million for MR (M) and MK 0.5 million for MLS), as equity to the new companies. Share capital of the new companies would also need to be defined. GOM provided assurances at negotiations that it would make available the working capital of MK 2.5 million and MK 0.5 million to MR (M) and MLS respectively (para 5.3 (b)). - 14 -
Third, GOM will need to: (i) establish Boards of Directors (BOD) of the new companies as soon as the new companies are incorporated; (ii) set in clear terms the procedures and the style of functioning of the BODs; and (iii) ensure that BODs have adequate private sector representation. GOM provided assurances at negotiations that it will set up appropriate BODs for the new companies soon after their incorporation but no later than six months after RRP becomes effective (para 5.3 (c)).
2.12 Winding Down Old Railway Company. Once the new railway and lake services companies are operative, the existing MR will cease its transport activities and concentrate on winding down, viz., sale of surplus assets including locomotives, rolling stock, workshop equipment, land, and buildings; discharging its liabilities; and retrenchment of the surplus staff and eventually also of the "skeleton" staff retained at MR to facilitate the winding down process. The process of winding down is recognized as complex as it comprises: (i) staff retrenchment, counselling service for retrenched staff, facilities and assistance towards retraining, and credit facilities for acquiring housing available with MR; and (ii) disposal of locomotives, wagons, passenger coaches, physical railway assets, land, and houses in the most efficient and transparent manner. The company will, therefore, continue to be managed in a professional manner and the possibilities of involving the private sector in the management of the winding down activities would also be considered.
2.13 An administrator/liquidator will be appointed for the old company, i.e., MR, for this purpose to implement a transparent process for the orderly sale of the assets. The financial proceeds will go to the Government to be used for various purposes, including settlement of debt. Creditors will also have their financial claims settled from the sale of the assets. The value of non-Government debt is estimated to be less than the value of surplus land owned by MR.
Component Inputs
2.14 RRP would support the restructuring of MR through: (i) financing the staff retrenchment package including retraining of retrenched staff for redeployment; (ii) provision of consultancies including short- term consultancy studies, legal and investment advisory services, short-term technical assistance, and staff training to support the effective implementation of the component. The cost of this component of RRP is estimated to be around US$8.27 million, i.e., about 29% of the total project cost.
2.15 Staff Retrenchment and Rationalization Package. This sub-component will support GOM in (i) financing the retrenchment package; and (ii) extending retraining facilities to the retrenched staff. Apart from covering the staff identified to be retrenched under this project (in the current restructuring and subsequent privatization phases), the retrenchment support would also be extended to staff retrenched in the recent past and whose retrenchment packages are found to be below the package to be finally agreed under RRP. MR has already retrenched about 1,200 staff reducing the staff strength for the railway sub- sector to about 2,300 from about 3,500. MR (M) will absorb only about 1,130 staff and the remaining 1,170 will be declared surplus. This sub-component is estimated to cost US$6.0 million including contingencies, about 20% of the total project cost, and would be financed by USAID.
2.16 Consultancies for Project Implementation. Successful implementation of the restructuring sub- component requires skills generally not available with the railways and as such a considerable amount of project implementation support needs to be provided to MR. However, as the task of restructuring is a one-time task, development of institutional capability would prove to be expensive and unnecessary. Project implementation support would be provided through: - 15 -
(a) short-term studies during the restructuring phase of the project to assist MR in: (i) setting up the new railway and lake services companies and providing the legal basis, valuation of assets, and corporate financial structuring for this purpose; (ii) designing MR (M)'s and MLS's organization structure, staffing concepts, and remuneration packages; (iii) assessing ways to mitigate the hardship of the retrenched staff such as providing assistance in housing, retraining of retrenched staff, and offering equity shares in MR (M) to the staff; (iv) establishing computerized systems to expedite the restructuring work and improve the quality of decision-making; and (v) other specific studies that may be identified during the implementation period;
(b) three short-term technical assistance experts, each for a period of one year divided into two or three periods spread over the project: (i) a corporate and organizational restructuring specialist to assist MR in establishing the corporate structure subsequent to setting up of MR (M) and MLS and monitoring the progress in revising the Railways Act, the Statutory Bodies Control of Contracts Act, and other restrictive legislation; (ii) a staff rationalization and retrenchment specialist to assist MR in effective implementation of the staff retrenchment plans and organizing the functioning of special task groups to provide counselling to the out-going staff; and (iii) an equipment expert to assist MR in assessing the requirement of locomotives, rolling stock, and other assets during the project life to facilitate further optimization and effective implementation of the plans for disposal of surplus assets;
(c) legal and investment advisory services throughout the restructuring phase to assist MR in setting up the new companies, transferring staff and assets to the new companies, meeting the current statutory and legal requirements, dealing with long- and short-term creditors, and the sale of locomotives, rolling stock, land, residential accommodation, and miscellaneous fixed assets; and
(d) limited amount of staff training to ensure that the MR staff are able to complete their tasks efficiently.
Revitalization Component
Component Objectives
2.17 The main objectives of the component are: (i) commercialization of rail operations enabling MR (M) to capture by the end of the Project a minimum of 300,000 tonnes of overseas traffic, achieve a real minimum return on capital employed of 1.7%, and reduce the transport margin from the current 40% to 35% on all overseas traffic; (ii) eventual privatization of MR (M) enabling it to increase the Nacala rail route's share of the overseas freight traffic to 525,000 tonnes; (iii) indirect assistance to CFM (N) to improve efficiency and reliability of operations of CFM (N) and ensure maximization of traffic on the Nacala rail route; and (iv) setting up of an institutional mechanism for effective coordination with CFM (N).
Component Description
2.18 The Revitalization of the Nacala rail route has two sub-components: (a) revitalization of the Malawi side of the Nacala rail route through direct support including: (i) setting clear targets of performance for MR (M) through a Performance Agreement between GOM and MR (M); (ii) increasing efficiency and reliability of operations through upgrading of equipment and infrastructure; (iii) intensifying - 16 - marketing effort and client consultation; and (iv) eventual privatization of MR (M); and (b) revitalization of the Mozambique side of the Nacala rail route through indirect support including: (i) increasing efficiency and reliability of operations through inputs outside of RRP; and (ii) facilitating effective coordination between MR (M) and CFM (N).
2.19 Performance Agreement. The Performance Agreement (PA), while reflecting GOM's and MR (M)'s commitment to the commercial viability objective, would specify the obligations and responsibilities of both GOM and MR (M). More specifically, the Performance Agreement would, inter alia, include agreements regarding: (i) MR (M)'s authority to plan its level and pattern of services and manage its operations; (ii) sale and acquisition of assets including land; (iii) financial and operating performance targets; (iv) project implementation targets; (v) targets for implementation of the Environmental Mitigation Plan; (vi) compensation by GOM to MR (M) for services provided by MR (M) at the direction of GOM which are not commercially justified such as passenger services; (vii) reporting arrangements; (viii) appointment of key personnel; and (ix) resolution of disputes. GOM provided assurances at negotiations that it will conclude a Performance Agreements with MR (M) within six months of the RRP becoming effective (para 5.3 (d)).
2.20 Efficiency and Reliability of Operations on the Malawi Side of the Nacala Rail Route. Efficiency and reliability of operations is one of the most important determinants of the Nacala rail route's share of freight traffic. Currently, the level of operating efficiency on the railways is quite low. Apart from getting the physical assets in good shape, the MR (M) management would need to improve staff attitudes towards quality, enhance staff competence and motivation, underscore staff accountability, and upgrade operating and management systems. The component provides for a comprehensive package for addressing these issues which includes: (i) track rehabilitation works; (ii) repair to key mechanical equipment; (iii) new test and maintenance equipment; (iv) spare parts to build an optimal inventory; (v) professional services; and (vi) consultancies for development of MR (M)'s institutional capacity.
2.21 An organization restructuring study for MR (M) has already been completed. The study has recommended moving away from the traditional structures based on functional departments and almost delinked from the nature and magnitude of business and adopting, instead, a flat, less expensive, and functionally more efficient structure which will emphasize accountability, flexibility, and quick adaptability to changing environment. The study has also recommended the actual steps to introduce the new structure, which will be completed by March 31, 1995.
2.22 Effective Marketing. Improving operating reliability and efficiency alone would not be sufficient to ensure an increase in the Nacala rail route's share of overseas traffic. An effective marketing strategy would need to be adopted jointly by MR (M) and CFM (N) and will, inter alia, need to include: (i) setting up systems for frequent and regular client consultation; (ii) setting up a system of keeping clients informed about their shipments by installing a wagon tracking system and extending the terminals to important clients; (iii) a continuing dialogue with the shippers, freight forwarders, and overseas exporters/importers; and (iv) establishing a data bank on the international traffic. The component provides for short-term technical assistance to improve the marketing capacity of MR (M).
2.23 Privatization of MR (M). A privatization study, to be managed by MR (M), is planned to establish the process of privatization. The privatization study will start with the assumption that privatization of MR (M) is both feasible and desirable. The study will establish options for privatization - buy out of stock/shares, leasing of stand-alone units, facilities, or business, a concession, or performance- based contract by a private operator - and, in discussion with GOM and after discussing with interested parties, zero-in on one option. This should take a maximum of 2-3 months. The remaining part of the study will concentrate on defining the process of implementing the selected option: (i) preparing the - 17 -
bidding documents including valuation of assets, operations, and facilities to be considered for privatization, and setting up the main terms of privatization; (ii) developing a system of bid evaluation and choice of operator; and (iii) recommending a system of managing the remaining assets and operations. GOM provided assurances at negotiations that it will privatize MR (M) in accordance with the recommendations of the privatization study (5.3 (h)). Initiating the process of privatizing MR (M) (issue of bidding documents) will be one of the conditions of disbursement of specific items indicated in Table 3.2 (para 5.2 (iv)).
2.24 The whole process of privatizing MR (M) is likely to take three years, the key activity completion dates being approximately as follows: (i) finalization of the terms of reference by March 1995; (ii) commencement of the study by July 1995; (iii) finalization of the mode of privatization and preparation of the bidding documents by February 1996; (iv) issue of the bidding documents by March 1996; (v) selection of the private operator by March 1997; and (vi) taking over the management of MR (M) by the selected operator by December 1997. Considerable private sector interest in MR (M) is expected to be generated by the more agile and efficient, commercially oriented entity that MR (M) is anticipated to become under the initial phase of RRP and with high potential for increasing the level of business. Moreover, with MR (M) already incorporated under the Companies Act of Malawi, implementation of a privatization plan would be greatly facilitated.
2.25 Efficiency and Reliability of Operations on the Mozambique Side of the Nacala Rail Route. While improving operating efficiency of CFM (N) is not a direct objective of RRP, the same is, nonetheless, crucial for the efficient functioning of the Nacala rail route. The Government of Mozambique is currently in discussion with a number of donor agencies for financing an appropriate project for revitalizing CFM (N). Such a project should and, in all probability would, aim at improving the reliability and efficiency of operations on CFM (N) and making CFM (N) a commercially viable entity. While awaiting the outcome of these discussions, a number of actions have been proposed under the Project to enable CFM (N) to upgrade its information and contol systems. These actions would include: (i) studies for revaluation of fixed assets, and upgrading of cost accounting, financial, audit systems under the Bank-financed Beira Transport Corridor Project (Cr. 2065-MOZ); and (ii) installation of a wagon tracking and rolling stock management system on CFM (N) under USAID's regional railways restructuring program. Additionally, MR and CFM have signed an Operations Agreement (OA) requiring each to deliver certain minimum performance targets of operating efficiency and quality of service and also set up JRB to facilitate regular review of operations on the Nacala rail route.
2.26 The new comprehensive Operations Agreement replaces all existing agreements between MR and CFM and between the Governments of Mozambique and Malawi, signed or unsigned with a view to: (i) avoid the persisting lack of clarity regarding the current applicability of the agreements; and (ii) to reflect changes in operating conditions and operations since the signing of the last substantive agreement in 1984. The new Operations Agreement provides for: (i) the minimum targets of performance to be achieved by both MR, later MR (M), and CFM (N); (ii) frequency, level, and mode of review of operations; (iii) penalties on failure to achieve specified targets; (iv) modalities for tariff restructuring; (v) the mechanism for collecting revenue; (vi) running of contracted or sponsored trains with agreements for haulage charges; (vii) through-running of trains with agreements for trackage charges, crew change, locomotive and train examination, insurance of crew while operating outside their country and other relevant contingencies; (viii) using each other's facilities such as training centers, computers, breakdown cranes, and special track equipment; (ix) adopting a common strategy and using common resources for marketing, procurement, and technical assistance etc; and (x) using common contractors and hired equipment to the extent possible. GOM provided assurances at negotiations that the Operations Agreement will be properly implemented (para 5.3 (f)). - 18 -
2.27 The main function of the JRB would be to: (i) review recurring problems with the implementationof the OperationsAgreement; (ii) facilitatesharing of each other's facilitiesand expertise by MR (M) and CFM (N); (iii) suggest modificationsin the OperationsAgreement; and (iv) recommend major strategic changes for improvingperformance. It would be necessary for JRB to have adequate representation from major customers, freight forwarders, and private sector representatives. GOM provided assurances at negotiationsthat it will set up an appropriate Joint Review Board within six months of RRP becomingeffective (para 5.3 (g)).
2.28 Involvementof Private Sector in Core Activities of CFM (N). CFM (N) has plans to lease certain port terminals and maintenancefacilities on the railways. The proposals are expected to be implementedafter (i) the Governmentof Mozambiquehas implementedits corporatizationplan as a result of which CFM (N) will becomean autonomousentity; and (ii) the donor-financedphase 1 of restructuring project for CFM (N) has been completed. CFM (N) will also benefit from the privatizationexperience of the Maputo rail route and port facilities as part of the IDA-financedMaputo Corridor Revitalization Project (Cr. 2454-MOZ),currently under implementation.
ComponentInputs
2.29 The project supports this componentthrough: (i) track rehabilitationworks and services and repairs to key mechanicalequipment; (ii) procurementof new test and maintenanceequipment and spare parts; and (iii) consultanciesfor developmentof institutionalcapacity. The cost of this componentof the project is estimatedto be around US$18.0 million, about 63% of the total project cost. These inputs are discussed in the followingparagraphs.
2.30 Civil/MechanicalWorks and ContractServices. These are aimed at improvingthe reliability of the infrastructure and productivity of equipment. The input for improving the reliability of infrastructurecomprises: (i) rehabilitationof 44 kms of the track out of a total of 478 km of the core railway, i.e., the portion of the track expected to be intensivelyused; (ii) bridge strengthening;(iii) rehabilitationof pointsand crossings; (iv) hiring of tampingmachine; (v) rehabilitationof concretesleeper plant; and (vi) rehabilitationof wheel lathe.
2.31 New Equipmentand Spare Parts. These are aimed at improvingthe reliability and efficiency of operations, locomotives, and rolling stock and comprise procurement of (i) gang and inspection trolleys; (ii) hand-heldtampers; (iii) test equipment;(iv) roller bearings for converting 100plain-bearings wagons; (v) service motor vehicles; (vi) safety-relatedequipment; (vii) spare parts for building the inventory;(vii) equipmentfor rehabilitatingand upgradingthe Limbe PABX;(viii) micro link on Nkaya- Nayuci section; (viii) telecommunicationtest equipment; and (ix) materials and components for manufacturing17,000 concrete sleepers.
2.32 Consultanciesfor InstitutionalDevelopment. MR (M), as a new company, faces a challenging task of capturing the maximumpossible share of the overseas freight traffic in a relativelyshort period of time. Additionally, the staff transferred to MR (M) would be shouldering new and extendedjob responsibilities. Short-term consultancies are provided to accelerate the process of institutional development. These consultanciesinclude the following:
(a) short-term technicalassistance (TA) would comprise provision of four experts to MR (M): (i) a trade and transit facilitation expert in implementingsystems for transit facilitationat the border, implementingthe performanceagreements between MR (M) and CFM (N), and setting proceduresand the style of functioningof a Joint Review Board or similar entity; (ii) a general managementexpert to upgrade management,operating - 19 -
and maintenance systems; (iii) a financial management expert to upgrade financial and other support systems; and (iv) a marketing specialist to intensify marketing effort and client consultation. These experts would be engaged for a period of one year divided into two or three periods spread over the project. Additionally, some short-term TA, one to two months each, may also be engaged to assist MR (M) in addressing some specific issues identified during project implementation;
(b) the privatization study is aimed at identifying the privatization option and preparing the bidding documents for the selected option (also see para 2.22 and 2.23);
(c) other consultancy studies are aimed at assisting MR (M) in conducting a series of investigations into the most pressing problems of efficiency and reliability faced by MR (M) and CFM (N). Not all the studies under this component have been identified so far but would be identified after MR (M)'s restructuring gets underway. The studies already identified include: (i) a training needs analysis study; (ii) a system reliability study to identify the main constraints to achieving reliability on the rail route5/; (iii) a tariff restructuring study; (iv) a study for rewriting the railway operating rule book; and (v) a survey of customer needs and preferences, adequacy of facilities at the customers' premises, and the adequacy of operating arrangements for handling the traffic offered by the customers The studies will be short, focused and will build upon all previous studies and previous experiences. This sub-component also involves setting up of: (i) a wagon and consignment tracking system with terminals at major loading and unloading points on MR (M), the control center of MR (M) and CFM (N), and the port of Nacala6/; (ii) Personal Computer (PC)-based management information systems in MR (M)'s key departments and activity centers along with standard and railway-specific software to improve departmental capability for analysis, and performance monitoring and optimization; and (iii) computer-based training programs in key locations such as workshops to support the quality management program;
(d) investment advisory services would be required in the second phase of the project, i.e., after March 31, 1996 onwards to assist MR (M) in issuing the bidding documents for privatization of MR (M), evaluating the proposals, negotiating with the successful bidder, preparing the lease, concession, or equity participation agreements, and in getting the private group commence operations; and
(e) staff training will follow the completion of the detailed training needs analysis. After almost 15 years of low-key activity, MR (M) now faces a complex task of: (i) improving efficiency and reliability of performance necessary to remain in business; and (ii) coping with gradually increasing traffic with comparatively less staff and equipment. A wide variety of skills need to be upgraded to enable the staff to complete these tasks efficiently; large numbers of staff in almost all disciplines need to be trained. Training consultants will be engaged to assist MR (M) in defining effective training methodologies, in many cases combining system redesign and training to operate under revised systems. More use will be made of PC-based training. This sub-component will include: (i) consultant- managed special training programs to improve staff skills in market analysis and research,
5/ Though financed under this project, the study will cover the entire rail route.
6/ Additional facilities on CFM (N) will be financed by CFM (N) if required by the Operations Agreement. - 20 -
tariff restructuring, marginal pricing, simplifying and streamlining commercial procedures, grade structuring, work study, work load analysis, capacity analysis, setting standards, accident analysis, waste disposal analysis etc.; (ii) consultant-managed hands- on training programs to improve operating and maintenance skills of staff in workshops, offices, stations and yards, in field, and other workstations; (iii) management and supervisory development training programs to be arranged in specialized institutions; and (iv) refresher training programs to be arranged in the railway institutions but with revised syllabus and training methodology.
The Lake Services component
Component Objectives
2.33 The main component objectives are: (i) commercialization of its operations enabling MLS to capture 40,000 tonnes of freight traffic and achieve a working ratio of 80% before the end of the Project; and (ii) eventual privatization of MLS's core activities enabling MLS to further increase its share of freight traffic to 70,000 tonnes and improve its working ratio to 60% by FY1999/2000.
Component Description
2.34 Restructuring. Consequent to MR's restructuring, MLS would become a separate company with its own management and a Board of Directors. Also, only the minimum staff and assets required for efficient freight and passenger operations would be transferred to MLS and the remaining staff and assets would be deemed as surplus and retained in MR for retrenchment and disposal respectively. The process of restructuring by itself should lead to increased efficiency and productivity and consequently to increased profitability.
2.35 Commercialization. However, even after becoming an autonomous company, MLS would need further restructuring and rationalization of staff. MLS comprises two business activities, viz., freight and passenger shipping service, and vessel maintenance. It is intended that, after being registered as a separate company, MLS's business activities would be split into three separate result centers, viz., freight services, passenger services, and vessel maintenance and different decisions would be taken as appropriate for commercialization and privatization of these activities. To link the operation of the different ports (currently under the Marine Department of MOTCA) to the shipping activities, the port operations would be transferred to a concessionaire, if necessary, via MLS. To ensure that all the business activities of MLS are run on commercial lines, it would be necessary for MLS to: (i) increase efficiency and reliability of operations on MLS; (ii) discontinue uneconomic operations and activities; (iii) intensify marketing effort and client consultation; and (iv) have special freight transport arrangements with MR (M), road hauliers, freight forwarders and the main customers.
2.36 Performance Agreement. To ensure that MLS performs effectively, GOM would sign a Performance Agreement with MLS, which, while reflecting GOM's and MLS's commitment to the commercial viability objective, would specify the obligations and responsibilities of both GOM and MLS. More specifically, the Performance Agreement would, inter alia, include agreements regarding: (i) MLS's authority to plan its level and pattern of services and manage its operations; (ii) sale and acquisition of assets including land; (iii) financial and operating performance targets; (iv) project implementation targets; (v) targets for implementation of the Environmental Mitigation Plan; (vi) compensation by GOM to MLS for services provided by MLS at the direction of GOM which are not commercially justified such as passenger services; (vii) reporting arrangements; (viii) appointment of key personnel; and (ix) resolution of disputes. GOM provided assurances at negotiations that it will conclude a Performance Agreement with MLS within six months of the RRP becoming effective (para 5.3 (d)). - 21 -
2.37 Privatization. The privatization plan would follow the lines of MR (M). However, privatization of MLS may be done by activity or service as per the recommendations of the privatization study to be undertaken under the Infrastructure I Project (C20690-MW) and for which the terms of reference are ready and the letters of invitation to the short-listed consultants are being issued. GOM provided assurances at negotiations that it will privatize MLS in accordance with the recommendations of the privatization study (para 5.3 (h)). Initiating the process of privatizing MLS (issue of bidding documents) will also be a condition of disbursement of specific items as indicated in Table 3.2 (para 5.2 (iv)).
Component Inputs
2.38 To enable MLS to achieve the main objectives, the component would provide support to MLS in the form of equipment and consultancies for institutional development. The cost of this component is estimated to be around US$1.23 million, about 4% of the total project cost. The equipment comprises computers, safety and environment-related equipment, and some test equipment. Consultancies for institutional development would comprise: (i) provision of a short-term specialist in corporate and organizational restructuring, business restructuring, and capital assets restructuring; (ii) short-term consultancy studies relating to restructuring and privatization or involvement of private sector in the core activities of MLS; and (iii) staff training.
Transport Policy Component
Component Objectives
2.39 The main component objectives are: (i) developing a transport policy that would provide a framework for efficient operations with particular emphasis on restructuring and privatization of parastatals; and (ii) enhancing institutional capacity for analyzing the performance of the transport sector and providing adequate response.
Component Description
2.40 Even though GOM's transport sector policy has in general avoided economic regulation and encouraged inter- and intra-modal competition, three shortcoming are apparent: (i) the policy decisions taken in the past are not adequately publicized and are amenable to different interpretations by transport operators, customers, overseas exporters, and donor agencies; (ii) the enforcement of policies or their correct interpretation is not ensured due to inadequate enforcement capability resulting in failure of these policies to achieve their intended objective; and (iii) the policies in some cases continue to be restrictive or protective. A comprehensive statement of transport policy has been provided by GOM in their Letter of Transport Sector Policy (Annex 1.2). GOM provided assurances at negotiations that it will implement the project and policy reforms according to the Letter of Transport Sector Policy (Annex 1.2) and the project implementation plan (Annex 3.1) agreed with the Bank (para 5.3 (i)).
2.41 The commercialization of both MR (M) and MLS will shift MOTCA's role from management and economic regulation to policy review and analysis, planning, and monitoring of activities in the transport sector. Policy issues might include the setting of user charges, review of public service obligation payments, evaluating the economic impacts of new transport taxes, determining the demand for, and capacity of, the domestic freight industry, etc. With increasing focus on efficiency, safety, and commercial viability of transport operators, MOTCA will need to strengthen its capacity to adequately perform the above mentioned functions. This component would therefore provide support for strengthening the capacity of MOTCA. - 22 -
Component Inputs
2.42 The main component inputs under the Project would include: (a) collaboration with leading international transport institutions and universities to facilitate staff exchanges, staff training, development of appropriate software for analysis, holding of seminars, and provision of short-term consultancy services for analysis of specific problems; (b) computer hardware and software; and (c) office equipment. The projected cost of the component inclusive of contingencies is US$1.25 million, about 4% of the total project cost.
F. Project Cost
2.43 The total cost of the project, inclusive of physical and price contingencies but exclusive of local import duties and taxes, is estimated to be MK 464.0 million or US$29.0 million, with a foreign exchange component of US$18.7 million. The total project cost includes: (a) physical contingencies of 15% of base cost on all items; and (b) price contingencies amounting to about 2.4% of base costs including physical contingencies. The price contingencies are based on international inflation rates and an implementation period of 3 years starting July 1995. Detailed project cost is given in Annex 2.1 and the project cost summary in Table 2.1. The total import duty and taxes, excluded from the project costs, are estimated to be about US$1.3 million.
Table 2.1: Project Cost Summary
(MK Million) (US$ Million) ------% Total Local- -Foreign Total Local Foreign Total Foreign Base Exchange Cost
Restructuring of MR 86.56 27.68 114.24 5.41 1.73 7.14 24 29 Revitalization of Nacala Corridor 53.71 192.69 246.40 3.36 12.04 15.40 78 63 Commercialization & Privatization of LS 1.66 14.98 16.64 0.10 0.94 1.04 90 4 Policy Formulation 1.68 15.12 16.80 0.11 0.95 1.05 90 4 Total Baseline Costs 143.62 250.46 394.08 8.98 15.65 24.63 64 100 Physical Contingencies 21.54 37.57 59.11 1.35 2.35 3.69 64 15 Price Contingencies 0.0 10.86 10.86 0.0 0.68 0.68 100 3 Total Project Cost 165.16 298.90 464.05 10.32 18.68 29.00 64 118
Project Cost by Years
2.44 The year-wise project cost details are given in Annex 2.2 and a summary in Table 2.2. Disbursement during the three years of RRP is projected to be 55%, 35%, and 10% respectively.
Table 2.2: Project Cost by Years (June-July) (US$ Million)
I=Base Costs Including Contingency
Component 1995 1996 1997 Total 1995 1996 1997 Total /1996 /1997 /1998 /1996 /1997 /1998
Restructuring of MR 5.94 1.03 0.17 7.14 6.85 1.21 0.21 8.27
Revitalization of Nacala Rail Route 6.69 6.60 2.11 15.4 7.80 7.87 2.58 18.25
Commercialization & Privatization 0.52 0.48 0.04 1.04 0.61 0.57 0.05 1.23 of LS
Policy Formulation 0.51 0.37 0.17 1.05 0.60 0.44 0.21 1.25
Total 13.66 8.48 2.49 24.63 15.94 10.09 3.04 29.00 - 23 -
G. ProjectFinancing
2.45 The total project cost of US$29.0 million would be financed by IDA (56%), USAID (41 %) and GOM (3%). USAID would reimburse 100% of the expenditure on its components, while IDA would reimburse 95% of the total cost of its components. GOM's share would amount to 5% of all items financed by IDA. GOM's contribution to the project financing has been kept low for the following reasons: (a) GOM's poverty alleviation program would leave it with a severe domestic resource constraint; (b) GOM would be required to spend an additional amount of US$3.0 million equivalent outside of RRP (18% of the cost of IDA-financed components of RRP) as follows: (i) US$2.0 million as subsidy to MR (M) and MLS for another two years, i.e., until the benefits of RRP are realized; (ii) US$0.5 million as working capital for the new companies; and (iii) US$0.5 million for setting up the new companies and implementing other components under the Pre-RRP Plan. The detailed financing plan is indicated in Annex 2.3 and the summary in Table 2.3. GOM provided assurances at negotiations that it will: (i) allocate and disburse its own share of agreed funds for the project; (ii) exempt goods imported under the Project from import duties and other taxes: and (iii) exempt forei,en consultancy contracts from all taxes (5.3 (1)).
Table 2.3: Project Financing Plan (US$ millions)
Component IDA % USAID % GOM % Total % Foreign I 'I Exchange
Restructuring of MR 8.27 10 8.27 29 25.0 Revitalization of Nacala 15.40 84 2.02 11 0.83 5 18.25 63 79.0 Rail Route l l ~ ~ ~~~~~II 1 Commercialization and 0.76 61 0.44 35 0.03 4 1.23 4 90.0 Privatization of LS l l
Policy Formulation l 1.25 10 I 1.25 4 90.0 .Total 16.16 56 11.98 41 0.86 3 29.00 10 67.5
2.46 GOM would onlend to MR (M) and MLS US$15.4 and US$0.76 million respectively at an interest rate of 7.1 % and 13-year repayment period including a grace period of 5 years, MR (M) and MLS taking the foreign exchange risk. The execution of the subsidiary loan agreements will be a condition of effectiveness of the IDA credit (para 5.1 (b)). - 24 -
CHAPTER 3. PROJECT IMPLEMENTATION
A. Implementation Arrangements
3.1 The four project components would be implemented according to the Implementation Plan indicated in Annex 3.1 and managed as follows: (i) Restructuring component by the existing MR; (ii) Revitalization of Nacala rail route component by MR (M); (iii) Commercialization and Privatization of the lake services component by MLS; and (iv) the Policy formulation component by MOTCA. GOM would designate MR, MR (M), MLS, and MOTCA as the implementing agencies for their respective components and delegate full implementation authority to them. GOM provided assurances at negotiations that it will not materially alter this delegation of authority without IDA's prior concurrence (para 5.3 (i)).
3.2 Though the project will be implemented as one project, two phases of the project are quite clear. Milestones to be achieved during the first phase of about 18 months duration are: (i) retrenchment of surplus staff from MR; (ii) closure of MR; (iii) preparation of bidding documents for privatization of MR (M) and MLS; and (iv) issue of revised transport policy document. Milestones to be achieved during the second phase also of 18 months duration are: (i) privatization of MR (M); and (ii) involvement of the private sector in core activities of MLS.
3.3 The IDA Credit is expected to become effective by June 1995. The milestones under the first phase of the Project are scheduled to be completed by December 1996 and the whole RRP by June 30, 1998. The length of the implementation period has been kept at 3 years, commencing July 1995. Even though the implementation of railway projects in the past has taken much more time, the period of implementation of RRP is expected to be less because the total outlay of the project is comparatively small, adequate expertise is available within the implementing agencies, the implementing agencies have had the advantage of technical assistance provided by ODA over a number of years, adequate arrangements for consultancies for project implementation and institutional development have been provided where considered necessary, and a Pre-RRP Plan (see para 3. 11) is already under implementation. The project's closing date would be December 31, 1998. GOM would hold a Project Launch Workshop during May/June 1995.
3.4 Systematic Beneficiary Assessments and local involvement will be built into the project so as to maximize benefits under constraints. Regular feedback will be obtained from freight forwarding agencies, importers, and exporters with regard to tariffs, availability of wagons, loading and unloading facilities, transit time, damage and pilferage, process and time taken for settling claims. The frequent client-consultations are scheduled to be a part of the more comprehensive marketing strategy to be adopted by MR (M) and MLS. MR (M) and CFM (N) will also set up under the project a wagon and consignment tracking system to keep customers better informed. Local involvement will be increased, first, by nominating representatives of clients on the JRB, and, second, by installing, on a cost-sharing basis, computer terminals in the premises of the main customers, these terminals being linked to the wagon and consignment tracking system.
3.5 GOM provided assurances at negotiations that it shall, by June each year. carry out with IDA and other participating donors annual Project implementation reviews, including the first review in June 1996. GOM further provided assurances at negotiations that it will submit to IDA. not later than four weeks prior to the review, for its review and comments, a report including an evaluation of progress achieved in proiect implementation, and to carry out the recommendations of these reviews as agreed with IDA (para 5.3 (k)). - 25 -
3.6 The annual review will cover, inter alia, the following: (i) improvements in the policy, legal and regulatory framework for the transport sector; (ii) scope and effectiveness of institutional capacity building programs, in particular, the utilization of technical assistance financed under the project; (iii) performance achieved during the year under review with respect to the key indicators of success (Annex 4.4), principally, Return on Capital Employed (ROCE) and shift of overseas traffic to the Nacala rail route for MR (M), and the working ratio and the increase in freight and passenger traffic for MLS; (iv) operation of the Special Account; and (v) overall implementation of the Letter of Transport Sector Policy.
3.7 The reviews will also: (a) examine the adequacy of budgetary allocations for: (i) compensating MR (M) and MLS according to the provisions of the PAs between GOM and MR (M)/ MLS; and (ii) local counterpart funds for implementing the project; (b) identify implementation issues and propose appropriate solutions; (c) update project timetables, the implementation program and performance indicators; and (d) confirm and agree with IDA on (i) a detailed action program of works to be carried out for the next year; and (ii) a long-term capacity building program based on the results of a detailed review of all institution building initiatives.
B. Role of TechnicalAssistance in Implementation
3.8 A limited amount of long-term TA - General Manager, Financial Controller, and Marketing Specialist - is currently available to MR through the ODA-financed program and is proposed to be continued by ODA until March 31, 1995. In addition, a series of short-term consultancy studies have been financed by USAID to assist GOM in implementing the Pre-RRP Plan discussed in para 3.11.
3.9 Seven experts are proposed to be provided for a period of one year each, one for transit facilitation on the Nacala corridor, one to assist MOTCA in implementing the revised transport policy, one to assist MLS in refining and implementing the restructuring plan, three exclusively to assist MR (M) in general management, financial management, and marketing, and one to assist both MR and MLS in staff rationalization and retrenchment. Even though a provision of one year has been made for each of the specified TA experts, TA will actually be utilized in two or three phases - the first phase of between 4-6 months in the first year of the project, 2-3 months in the second year, and the remaining time, if necessary, in the third year. The main objective is to increase the institutional capability of MR (M) and MLS to implement the revitalization and restructuring plans. For this, the short, specific, and target- oriented TA design is likely to be more effective. The total amount of TA-financed under the RRP is 123 manmonths at an estimated cost of US$2.95 million, distributed as follows (manmonths and cost): (a) project implementation - 44 manmonths and US$0.97 million; (b) Institutional development - 57 manmonths and US$1.33 million; and (c) Policy support - 28 manmonths and US$0.65 million.
C. Status of Project Preparation
3.10 Implementation of GOM's Limited Restructuring Plan for MR (preceding RRP and Pre-RRP Plan), based on the Bank's Transport Sector Review of 1992 and studies financed by ODA and USAID is progressing well. 1,200 staff have been retrenched, passenger services have been substantially reduced, the Lilongwe-Mchinji and Limbe-Southern Border sections have been relegated to a siding status, many uneconomic stations have been closed, international trains are being operated as block trains, and LS has been separated from MR in terms of financial reporting and management.
3.11 A short-term Pre-RRP Plan is currently under implementation and is scheduled to be completed by June 1995. The implementation of this plan will set the stage for a speedy implementation of RRP. - 26 -
The Pre-RRP Plan includes the following: (a) incorporating MR (M) and MLS respectively under the Companies Act of Malawi valuation and transfer of assets to new companies, transfer of the rights and obligations in dealing with outside parties, and financial structuring; (b) designing an appropriate organization and staffing structure for the new companies with revised grading structure, remuneration packages, and job specifications; (c) identifying staff to be transferred to MR (M) and MLS and allocating grades to newly transferred staff; (d) issuing a Letter of Transport Sector Policy; (e) finalizing a comprehensive Operations Agreement between MR and CFM (N); (f) preparing a draft comprehensive Performance Agreement between GOM and the newly created companies; (g) finalizing retrenchment packages; and (h) liquidating urgent liabilities. Evidence of having substantially implemented the Pre- RRP Plan will be a condition of effectiveness. The Pre-RRP Plan would be deemed to substantially implemented if: (i) at least 250 appointment letters have been issued by MR (M); (ii) the process of valuing the assets to be transferred by MR to MR (M) and MLS has been completed, and (iii) the study on restructuring and privatization of MLS has been completed (5.1 (a)).
3.12 The following actions have been completed in part fulfillment of the conditions of Board presentation: (i) finalization of Letter of Transport Sector Policy; (ii) incorporation of MR (M) and MLS; (iii) signing of the comprehensive OA between MR and CFM (N); (iv) finalization of the organization structure of MR (M) including staffing concepts and remuneration packages; and (v) finalization of the staff retrenchment and rationalization package including supplementaries. The following documents are at an advanced stage of preparation: (i) draft PAs between GOM and MR (M) and between GOM and MLS; and (ii) terms of reference (TOR) for various studies to be undertaken during the first year of RRP including a commercialization and privatization study for MR (M) and MLS.
D. Procurement
3.13 Procurement arrangements, summarized in Table 3.1, would be as follows:
(a) Procurement is proposed to be done in two phases, the first phase corresponding to the projected expenditure in the first year of the Project and the second for the rest (Annex 2.2 and Table 3.2). Procurement under the second phase would be subject to fulfillment of conditions indicated in para 3.17. Procurement packages will be prepared accordingly.
(b) Procurement of all civil and mechanical works will be carried out under International Competitive Bidding (ICB) procedures except that: (i) the only civil works contracts costing less than US$0.5 million may be procured under Local Competitive Bidding (LCB) procedures; (ii) mechanical works contracts pertaining to rehabilitation of equipment - repair to concrete sleeper plant (total estimated value - US$0.05 million) and rehabilitation of wheel lathe (total estimated value - US$0.60 million)- may be procured on a direct contracting basis as the possibility of getting spare parts from other than the original manufacturers is remote; and (iii) works pertaining to power supply to quarry (total estimated value - US$0.05 million) may be procured under international shopping procedures. As the value of every civil and mechanical works contract is estimated to be less than US$2.0 million, no pre-qualification would be required.
(c) Equipment and spare parts with an aggregated value of US$7.66 million would be procured using ICB procedures. Equipment and spare parts with an aggregate value of about US$1.00 million may be procured using international shopping, or Inter-Agency Procurement Service Organization (IAPSO) procedures, value of each individual contract - 27 -
being restricted to no more than US$100,000. IAPSO procedures would be used only for service vehicles and computers.
(d) Consultants for technical and managerial services and studies would be appointed in accordance with the "Guidelines for use of consultants by World Bank Borrowers" and for consultants being financed by USAID would be appointed in accordance with USAID rules for International Competitive Bidding and in consultation with the World Bank.
(e) Contracts for consultants (firms) and consultants (individuals) above US$50,000, goods above US$100,000, and civil and mechanical works above US$200,000 will be subject to prior review by IDA. This represents about 95% of all IDA financing. All terms of reference and sole source contracts for consultants will be subject to prior review. Bank Standard Bidding Documents for all ICB procurement and Consultants Standard Form of Contract for complex consultant assignments, wherever applicable, would be used. The goods packages to be financed by USAID will be prepared according to USAID's practices or guidelines.
Table 3.1: Procurement Arrangements (US$ Million)
PROCUREMENT METHOD t ------_ _ -- _ _- _ -- _ - _ _ -- _ - _ ------International Local N B F TOTAL Competitive Competitive Bidding Bidding Others
A. Works 1 Civil Works (Track & Bridge Rehab) 2 76 0 43 319 (2 64) (0 39) (3 03)
2 Mechanical (Repair to Equipment) 1 77 0 70ab 2 47 (I 70) (0 64) (2 34) B. Goods 1 Equipment 6 22 0 63b 0 85 7 70 (5 91) (0 60) (6 51)
2 Spare Parts 1 44 0 42b 1 86 (1136) (0 40) (1 76)
C. Service Contracls 1 30 1 30 (1 23) (1 23) D. Consultancies 1 Project Implementation 1 18 1 18
2 Institutional Development 1 36 1 90 3 26 (1 29) (1 29)
3 Policy Support 0 96 0 96
E. Restructuring Support 710 710
13 49 0 43 3 11 11 98 2900 TOTAL (12 84) (0 39) (2 93) (16 16)
a Direct Contracting b InternationalShopping, APSO
3.14 MR's capacity for procurement has been considerably undermined in the past few years for two main reasons: (i) constrained by availability of funds, MR had been resorting to crisis procurement: and (ii) the procurement process for donor-financed spare parts and equipment has been primarily managed by the donor agencies themselves. Reinstituting procurement and supply systems is one of the more difficult tasks facing MR. The process is made more difficult by MR having to comply with different and more demanding procurement procedures of the World Bank and the donor agencies supporting the project. Two actions have already been initiated to develop MR's capacity to handle procurement on a - 28 - systematic basis. First, a short-term consultant worked with MR staff and established the current status of institutional capability, identified major constraints to efficient procurement, and developed preliminary recommendations for improvement. Second, a Bank Procurement Specialist offered a two-day seminar to senior MR staff covering procurement processes in general and the Bank guidelines and procedures in particular. More such seminars would be offered in future. The Bank's standard bidding documents were also left with MR. The main actions proposed in RRP to improve the Railways' and the Lake Services' capacity with regard to procurement include: (i) creating a small and cohesive supplies department in MR (M) as well as MLS; (ii) writing new job specifications for all positions to be created in MR (M) and MLS: (iii) filling the positions only with competent people; and (iv) providing MR (M) and MLS with short-term technical assistance.
3.15 GOM provided assurances at negotiations that it will carry out all procurement for the Proiect (i) using standard bidding and contract documents agreed at negotiations with IDA and (ii) according to the procurement arrangements set out in paras 3.13 to 3.14 (para 5.3 (p).
E. Disbursement
3.16 Disbursement arrangements are summarized below in Table 3.2:
Table 3.2: Allocation and Disbursement of IDA Credit (US$ Million)
Amount to be disbursed Amount to be % of Total Total IDA before the first annual disbursed after the first Expenditure to be Category Amount review Annual review financed
1. Civil Works & Services 3.36 1.16 2.20 95
2. Mechanical Works 2.06 0.42 1.64 95
3. Equipment
(a) Railways 5.11 2.79 2.32 95
(b) Lake Services 0.67 0.27 0.40 95
4. Spare Parts inventory 1.57 0.72 0.85 95
5. Institutional development Support
(a) Consultancy 0.72 0.31 0.41 95 Studies
(b) Training 0.42 0.17 0.25 95
Total Base Cost 13.90 5.84 8.07 95
Unallocated 2.26
Total Project Cost 16.16
3.17 Disbursement of funds allocated for 1996/97 and 1997/98, about US$8.07 million would be contingent upon evidence of satisfactory progress at the time of mid-project review regarding completion of the milestones indicated in Annex 3.1. achievement of key performance targets indicated in Annex 4.4, presentation of modified railway-related legislation to the Parliament, if required, and initiation of the process of the privatizing MR (M) and MLS, i.e.. issue of bidding documents (para 5.2). - 29 -
3.18 Disbursement of expenditure for consultants (individual), consultants (firms) and goods, and works costing less than US$50,000, US$100,000 and US$200,000 respectively would be made against statements of expenditures (SOE). Other disbursements will be made against standard documentation. To facilitate disbursements, two Special Accounts, one for MR (M) and another for MLS, will be established in a commercial Bank acceptable to IDA, with authorized allocations set at US$500,000 and US$100,000 respectively Payment of initial advances would be tranched, with partial deposits of US$250,000 and US$50,000 made after credit effectiveness and the remainder of the allocations to be paid when the level of disbursements justifies the full advance. Replenishment applications will be submitted at monthly intervals. GOM provided assurances at negotiations that it will delegate full authority for the management of the Special Accounts to MR (M) and MLS and will annually review the efficiency of the special account procedures with IDA and make amendments as agreed between IDA and GOM (para 5.3 (m)). The minimum size of direct payment and special commitment applications would be set at US$50,000 for MR (M) and MLS.
F. Auditing and Accounting
3.19 MR, MR (M), and MLS will manage all accounting records and will prepare supporting documentation and statement of expenses (SOEs). Annual audits will be carried out by auditors acceptable to IDA on the project accounts, including the Special Account and SOEs and the audited accounts together with a management letter (including observations and recommendations regarding possible improvements in financial management practices, and controls) will be forwarded to IDA and the other donor agencies within six months of the close of the fiscal year. MR, MR (M), and MLS will also use the same auditor to audit all the donor accounts at one time, hence saving resources and time.
G. Monitoring and Reporting
3.20 All implementing agencies will prepare brief quarterly reports indicating quarterly and accumulated physical, financial, institutional, restructuring, and training progress against agreed targets. These reports will summarize the status of each component and the degree of compliance with covenants and agreements, highlighting problems and offering recommendations for solving them. The reports will be prepared in a format agreed with IDA and other donor agencies at negotiations and will be distributed to the Bank and concerned donor agencies within ten days of the end of each quarter. Within six months of the closing of the credit, all the implementing agencies will prepare a report on the implementation of the project.
3.21 GOM provided assurances at negotiations that it will require the implementing agencies adopt proiect reporting, auditing and monitoring procedures acceptable to IDA, including the timely preparation and submission of guarterly and annual financial reports, and of external audits within six months from the end of each fiscal year (paras 5.3 (n) and 5.3 (o)).
H. Supervision
3.22 The project supervision will comprise on an average two 3-week missions of 3 persons each and 12 staff weeks in headquarters each year throughout the project life. Each mission will include a Railway or Port Engineer and an Economist or Financial Analyst and, for specific review, specialists in the areas of institution and human resource development, environment, legal, and procurement. The supervision missions will typically be joint missions of the Bank and the donor agencies. The skill mix of the missions would be optimized in discussion with the donor agencies before planning of each mission. The supervision plan is given in Annex 3.2 - 30 -
CHAPTER 4. PROJECT BENEFITS AND RISKS
A. Scenarios
4. 1 Projections of the overseas freight traffic, financial benefits, and economic rates of return (ERR) under RRP have been made under two scenarios: (i) the Restructuring scenario; and (ii) the Privatization scenario. While under the Restructuring scenario, MR (M) and MLS are assumed to continue operating as GOM-owned but restructured companies, under the Privatization scenario, both MR (M) and MLS are assumed to be fully or substantially privatized. All projections have been made for a five year period starting FY1995/96, the first full year of operation under RRP. As privatization of the two companies is planned for FY 1997/98, the impact of privatization on profitability of the companies and savings to the economy has been considered only from FY1998/99 onwards. The economic rates of return for both the scenarios have been computed by comparing the projected benefits and costs expected under the Restructuring and Privatization scenarios with those under the "No Project" scenario.
B. Traffic Projections
4.2 Overseas Freight Traffic through Nacala. In each of the two scenarios indicated above as well as the "No Project" scenario, the Beira road route is assumed to remain operational with its share of Malawi's overseas freight traffic being maintained at about 150,000 tonnes7/. The traffic projections, detailed in Annex 4.1, are summarized below:
(a) Under the "No Project" scenario, the traffic is projected to remain at the current level of 100,000 tonnes per annum, even though, due to continuing concerns of reliability and operating efficiency without the Project, the level of traffic could gradually decline.
(b) Under the Restructuring scenario, the freight traffic is projected to gradually increase to 175,000, 240,000 and 300,000 tonnes for the first, second, and third year of the Project respectively. The traffic is projected to remain constant at this level after FY1997/98. The maximum level of traffic projected under this scenario represents 40% of the total overseas traffic of 750,000 tonnes projected for FY1999/2000.
(c) Under the Privatization scenario, traffic is projected to increase to 400,000 in the fourth year and to 525,000 tonnes in the fifth year of RRP. This would represent 70% of the total projected overseas traffic. Since MR (M)'s privatization is scheduled for the third year of RRP, the overseas freight traffic on the Nacala rail route under both the Restructuring and Privatization scenarios for the first three years has been considered to be exactly the same.
4.3 Domestic Freight Traffic on MR (M). The volume of freight carried by MR has significantly reduced during the past 10 years, from 390,000 tonnes in 1985/86 to about 210,000 tonnes in 1993/94. Information derived from major shippers of domestic cargo does not indicate a change in this trend. It is thus to be expected that in the near future the volume of domestic freight traffic by MR will, remain stable. However, once the clinker mine of Portland Cement is depleted (within the next 10 years), MR
7/ It is assumed that the overseas traffic on the Beira road route would not exceed 150,000 tonnes. Even with almost no competition from the Nacala rail route, the current Malawian traffic on the Beira road route has averaged about 50,000 tonnes per year. The main constraining factors are the condition of the road, congestion on the road, since part of the same road also carries traffic from Zimbabwe, Beira port capacity particularly for general cargo, and unwillingness of many road transport operators to offer their services due to inadequate offering of export traffic towards Beira. - 31 - will loose a significantpart of its domestic traffic (up to 60% in volume terms). It is thus tentatively projected that domesticfreight on MR would continueto be about 210,000 tonnes until 1999/2000,and would probably reduce to 80,000 tonnes in 2004/05.
4.4 Traffic on MLS. Significantshipments of both domesticand freight traffic could be captured by MLS if a restructuredMLS developsan aggressivemarketing strategy and, at the same time, provides reliable service. There is potential for attracting some 30,000 to 50,000 tonnes of general break bulk cargo, including fuel, and another 10,000 to 20,000 tonnes of containerizedtraffic. As a result, the freight traffic on MLS is likely to increase to 40,000 tonnes under the Restructuring Scenario and to 70,000 tonnes under the Privatization scenario. With regard to passenger services, the demand is projected to be as high as the level of services provided. With two vessels in service, flexibility in adjustingroutes to travel demand patterns, and revised tariff structure, MLS has the potential to attract 250,000 passengers annually.
C. FinancialBenefits
4.5 Assumptions. Profit and loss projections for MR (M) have been made for the Restructuring and the Privatizationscenarios for five years starting FY1995/96, the first full year of operation under RRP (Annex 4.2). The basic assumptionsof freight and passenger traffic, tariffs, fuel consumption, maintenancecosts, staff costs, capital employed,and depreciationare as follows:
(a) freight traffic levels have been assumedas indicated in section B above; (b) passengerservices have been excludedfrom the analysis as these services are proposed to be operatedon a public service obligationbasis with MR (M) and MLS being fully compensated by GOM for any losses; (c) tariff for the overseas as well as domesticfreight traffic for the first year of performancehas been assumedto be as currentlyused but has been assumedto increaseby about 2 % per year to reflect the progressivelyincreasing quality of service; (d) fuel consumptionhas been assumed to show a sharp reductionon account of the plan to run fully loaded block trains with a gross load of 750 tonnes in place of the current averageof 335 tonnes. However, the fuel consumptionhas been considered as proportional to gross tonne kilometersignoring any reductionin fuel consumptiondue to improvementsin the gross to net ratio as a result of the expectedincrease in the averagepayload of the wagons from the current level of 19 to 38 tonnes; (e) maintenancecost has been adjusted as follows: (i) maintenancecost has been consideredas proportionalto the holding of the locomotivesand the rolling stock as determinedon the basis of optimalutilization; (ii) unit cost of maintenancehas been increasedto 130% of the current level to compensatefor the possible defermentof maintenancedue to cash shortage resulting in apparentreduced cost of maintenance;and (iii) since detaileddata on maintenancecost is not available, the equivalentunits have been used with one locomotivebeing consideredequal to 20 units, one coach to 5 units and one wagon to 1 unit; (f) staff costs have been assumedto be constantfor all the scenarioseven though staff is likely to be reduced after privatization; (g) capitol employedhas been computedon the basis of depreciatedreplacement cost; and (h) depreciationhas been computedon assets valued on a depreciatedreplacement cost basis. This gives a significantlyhigher asset base value than would be estimatedusing a historic book value method as is currently done.
4.6 RestructuringScenaro. Compared to FY1994/95, the year before the start of RRP, the financialperformance indicators at the end of RRP, i.e., FY1997/98,are estimatedto improveas follows: - 32 -
(i) gross margin from about MK 0.2 million to MK 17 million; (ii) gross margin to sales ratio from 1% to 34%: (iii) net profit from about (-) MK 11.0 million to MK 5.4 million; (iv) operating ratio from 138% to 89 %; (v) return on sales from about (-) 38 % to 11 %; and (vi) return on capital employed (ROCE) from about (-) 2.9 to 1.7%. Though financial performance is projected to show a substantial improvement, MR (M) will still not be a commercially viable entity under this scenario as ROCE is still less than 3%, the long-term interest rate in Malawi.
4.7 Privatization Scenario. Privatization is assumed to take place in the final year of RRP, i.e., FY 1997/98 and full benefits of privatization would be realized only in the two years after the completion of RRP, i.e., FY 1998/99 to FY 1999/2000. Compared to FY 1997/98, the financial performance indicators at the end of the Privatization, i.e., in FY1999/2000, are estimated to improve as follows: (i) gross margin from about MK 17 million to MK 41 million; (ii) gross margin to sales ratio from 34% to 55%; (iii) net profit from about MK 5.4 million to MK 29 million; (iv) operating ratio from 89% to 61 %; (v) return on sales from about 11 % to 39%; and (vi) return on capital employed (ROCE) from about 1.7% to 9%. Under this scenario, MR (M) is projected to become a commercially viable entity. To ensure that the commercial viability of MR (M) and MLS is not adversely affected, GOM provided assurances at negotiations that it will require them to consult IDA before making any investments exceeding US$0.2 million (para 5.3 (q)).
D. Economic Benefits
4.8 Three clear benefits to the economy are expected from the project: (i) savings in surface transport costs because of (a) the distance to the port of Nacala being only 800 km as compared to 2400 km to the port of Durban; and (b) more intensive use of the less expensive lake mode as compared to the road mode for traffic moving through the port of Dar Es Salaam; (ii) reduction in operating costs consequent to restructuring of MR and commercialization of MR (M) and MLS; and (iii) capacity building resulting from experience gained from actually commercializing two transport parastatals supported by suitable training programs and finally privatizing them .
Savings in Surface Transport Costs
4.9 Use of Nacala Rail Route. Savings in surface transport costs have been computed by comparing the total surface cost of Malawi's overseas traffic under the Restructuring and Privatization scenarios to the "No Project" scenario. The main assumptions of investment, traffic share, and expenditure under different scenarios are as follow:
(a) in the "No Project" scenario, the capital investment has been assumed to be US$1.0 million equivalent per year, almost the same as annual depreciation, while for the Restructuring and Privatization scenarios, the proposed RRP level of investment of US$29.0 equivalent has been assumed for the RRP duration and US$1.0 million per annum thereafter; (b) in the "No Project" scenario, the share of the overseas traffic for the Nacala rail and Beira road routes has been assumed to be 100,000 and 150,000 tonnes respectively, while for the other scenarios the corresponding shares are as per projections indicated in section B above; and (c) staff and other costs in the "No Project" scenario are considered to be the same as for the other scenarios.
4.10 For computing the total transport costs on different routes, the prevailing average surface transport costs, viz., US$68/tonne for the Nacala rail route, US$84/tonne for Beira road route, and US$148/tonne for the Durban rail/road route have been used. Since the frequency of conference lines calling on the ports of Nacala and Beira is currently low, many consignments particularly of containers - 33 - have to be sent to Durban. An additionalaverage service cost of US$15/tonnehas, therefore,been added for all traffic moving through the ports of Nacalaand Beira.
4.11 The total savingsto the economyunder the Restructuringscenarios as comparedto "No Project" scenario could be US$12 million per annum after full implementationof RRP, i.e., from FY1998/99 onwards and US$26 million under the privatization scenario two years after the commencementof operationsby the private operator, i.e., FY1999/2000. With the increasein the level of traffic on the Nacala rail route and the increased frequency of conference lines calling on the port of Nacala, less containerswould be requiredto be sent from Nacalato Durban and the total savingsto the economycould be much higher. The transport margin on overseastraffic ( percent of transport cost to the landed cost of imports/exports)is also projected to drop from the current 41 % to: (i) 35% under the Restructuring scenario; and (ii) 30% under the Privatizationscenario. The functioningof the Nacala rail route would also help maintain a competitiveenvironment with the Beira road route and help prevent unreasonably high tariffs.
4.12 Use of Lake Services. Tariffs for overseasfreight traffic from/to Dar Es Salaammoving over Lake Malawi are expected to be lower than for the traffic utilizing the road routes. This will also lead to less maintenanceexpenditure on the main road linkingLilongwe and Blantyreto the northern border. The savings, however, are expectedto be small. These savings have not been taken into accountwhile computingthe ERR.
Savingsfrom Restructuring.
4.13 The net surplus (after depreciation)for FY1999/2000and onwards from MR (M)'s operations after full implementationof RRP under the Restructuringand privatizationscenarios are estimatedto be aboutUS$0.7, and US$4.0million per annumrespectively which otherwise, i.e., under the "no objection" scenario would be (-) US$1.5 million. The net savings to the economy as a result of RRP would, therefore, be US$2.2 and 5.5 million respectively. Even after deductingthe interest on the loan taken for revitalizingthe Nacala rail route, the net gain to the economywould be to the tune of about US$3.0 million per annum. Since most of these additional benefits would arise as a result of increased productivity,the savings to the economywould be real. Savingsare also expectedfrom the restructuring and eventualprivatization of MLS. The working ratio (cost/income)for MLS is projected to improve from the current level of 140% to 80% under the restructuring scenario and to 60% under the Privatizationscenario. This would make MLS a commerciallyviable entity and the overall savings could be of the order of US$0.7million per year. These savings, thoughinsignificant, have not been taken into account while computing ERR.
CapacityBuilding
4.14 The net gain in experience in turning parastatals around would be useful in bringing about similar economicbenefits in other sectors.
EconomicRate of Return
4.15 ERR (Annex4.3) for the RestructuringScenario is 67%; and for the PrivatizationScenario is 88 %. ERRs have been computedby taking into considerationonly the savings in surface transport costs and would definitely be much higher if the benefits of restructuringwere to be includedas well. RRP is an economicallyviable project even under the Restructuringscenario without Privatization. However, Privatizationis consideredessential, first, to exploitthe full potentialof the Nacalarail route and, second, to ensure sustainabilityof the benefits. - 34 -
4.16 The impact on ERR of reduced traffic, higher initial traffic on the Beira road route, higher cabotage, and reduced net benefits has been indicatedin Table 4.1. It is clear that even under the most conservativecase when traffic on Nacala is limited to 75% of projectionsand the benefitsare restricted to 75 % of the actual, ERRof 11% would be achievedeven for the RestructuringScenario. The minimum overseastraffic on the Nacala rail route at the end of RRP has to be about 175,000 tonnes to provide an ERR of 10%.
Table 4.1: EconomicRates of Return
ERR (%) Item Description Restructuring Privatization Comments Scenario Scenario
1. The Base case 67 88 - 2.1 Traffic projectionstake place with a delay of 2 years 50 65 - 2.2 Actual overseastraffic being 75% of the projected 31 53 -
2.3 Both 2.1 and 2.2 28 51 - 3.1 Beira share with No Project is This assumes that 300,00 tonnes and Nacalashare Durban would keep increases at the cost of Beira and its share in not Durban 15 44 preferenceto Beira 4.1 Actual cabotageis US$30/tonne 45 64 4.2 Actual savings are 75% of those computed 44 63 4.3 Both 4.1 and 4.2 29 48 5.1 Both 2.2 and 4.2 11 29
E. Key Indicatorsof Success
4.17 Key indicatorsof success for the next five years have been developedfor all four components of the Project and are indicatedin Annex 4.4. For the Restructuringcomponent, key indicatorsare: (i) date of incorporationof the new companies;(ii) date of transfer of assets and staff to new companies;(iii) date of retrenchmentof all surplus staff; and (iv) date of disposalof surplus assets. For the Revitalization component,assuming that MR (M) would be substantiallyprivatized by 1997, the key indicatorsare: (i) overseasfreight traffic; (ii) domestic freight traffic; (iii) operating ratio; and (iv) return on assets. For the Commercializationof LS component,assuming that MLS would be substantiallyprivatized by 1997, the key indicators are: (i) freight traffic; and (ii) working ratio. For the Policy component, key indicatorsare: (i) completiondate for issue of new policy; and (ii) the completiondate for the use of software for policy analysis. - 35 -
F. Environrental Impact
4.18 The project is environmentally benign. Not only is there no addition to the rail network, the overall size of the fleet of locomotives, rolling stock, and other assets is being reduced, and this would result in less noise and atmospheric pollution. Issues such as disposal of lubricants, use of certain chemicals for weed control, pollution and noise in workshops and other activity centers, and enforcement of safety regulations, however, still need to be adequately addressed. Even though the MLS component is a project on international waterways, the project does not involve additions or alterations by way of rehabilitation or construction and as such does not require notification to riparians.
4.19 The Environmental Mitigation Plan (Annex 4.5) takes into account the safety- and environment- related regulation included in Malawi's transport sector policy, the Railways Act, and other railway- related legislation. The plan would form an integral part of the RRP and its implementation would be included in the Performance Agreements to be signed between GOM and MR (M)/MLS and would be periodically reviewed. A total of US$0.8 million has been provided for procurement of safety- and environment-related equipment for the railways and the lake services to enable MR (M) and MLS to implement the Plan. The operating costs towards implementation of the Plan would be provided by the implementing agencies. Provision has also been made for an environment specialist to supervise this element during regular supervision missions. Short-term consultancy assignment and short-term technical assistance will also be provided to ensure that the plan is fully implemented. GOM provided assurances at negotiations that it will fully implement the Environmental Mitigation Plan (para 5.3 (r)). A broader environmental assessment of the transport sector would be undertaken under the Infrastructure II Project, currently under preparation.
G. Sustainability
4.20 The primary focus of RRP is on establishing the long-term sustainability of the railways and lake services in Malawi. To do this, RRP is designed to reorient the operations of MR (M) and MLS to their most competitive and productive areas of operations, and to restructure these two entities to eventually operate on a fully privatized basis. The process is paced to reflect existing capacity constraints and emphasizes phased commercialization preceding full privatization and transparency of all processes such as selection of the private operator and staff rationalization.
4.21 The long-term sustainability of operations on the Nacala route very much depends upon an efficiently working CFM (N) and to ensure this, RRP emphasizes: (i) setting up an institutional mechanism (the JRB) for close coordination among the entities managing the Nacala rail route, viz., MR, the northern railway system in Mozambique (CFM (N)), and the Port of Nacala; and (ii) signing of the OA between MR (M) and CFM (N).
4.22 Once privatized, the sustainability of the both the Railways and the Lake Services would be assured. To ensure sustainability if, for some reason, the two entities are not privatized, RRP emphasizes: (i) correct assessment of staff and assets to be transferred to these new companies; (ii) terms and conditions sufficiently competitive to attract suitable staff; (iii) selection of qualified and experienced personnel for key managerial positions; (iv) staff training; (v) short-term technical assistance in key areas; and (vi) computerization of management and operating systems.
4.23 Sustainability of transport policy component is being ensured by emphasizing: (i) long-term comprehensive capacity building through collaboration of MOTCA with a reputable transport institute; (ii) staff training; and (iii) introduction of computer-based programs for policy analysis. - 36 -
H. Project Risks
4.24 The project has identified some possible threats to the success of the project and the project design incorporates features to minimize the risk of failure from these threats. Potential risks and proposed actions are indicated in Table 4.2:
Table 4.2: Project Risks
RISK ACTION
a. Inability of the MR (M) or GOM to ensure that CFM (N) or the MR and CFM (N) have signed an Operations Agreement for Govemment of Mozambique simultaneously undertakes a project or achieving defined levels of performance and for undertaking plan for the restructuring of CFM (N) which controls greater part of periodic joint reviews while at the same time CFM (N) is being the Nacala rail route as well as the Port of Nacala. encouraged to implement a restructuring project/plan with the assistance of major donor agencies; the signing of such an agreement was be a condition of Board presentation.
b. Inability or unwillingness of MR to control the pace of restructuring The Lake Services is being separated from the Railways and the LS. incorporated as a separate company, and thus is responsible for its own commercialization and privatization; incorporation of the Lake Services as a separate company under the Companies Act was a condition of Board Presentation.
c. Delay by GOM to process the revision of the railway-related Preparation of the draft revised railway-related legislation was a legislation through the Parliament which could delay privatization of condition of Board presentation and presentation of the revised the Railways and the L S. legislation to the Parliament will be a condition of disbursement of funds indicated in Table 3.2.
d. Continued implementation of the project and injection of resources Satisfactory growth of traffic on the Nacala rail route will be a despite the increase in traffic on the Nacala rail route being below condition of disbursement of funds for the second phase of the the projected level. Project.
e. Possible erosion of the traffic share of the Nacala rail route in the GOM provided assurances at negotiations that it will not undertake event of GOM supporting subsidies to altemative routes or actively investments in altemative routes without prior consultations with promoting uneconomic investments in the development of altemative IDA (para 5.3 (s)). routes in direct competition to the Nacala corridor such as the road alternative to Nacala and rail route to Beira.
f. Possible reluctance, if not resistance, in implementing the project The implementing agencies are required to establish special task from staff who are likely to be retrenched. groups to handle the sensitive issues of staff reduction, the duties of the task groups also including staff counseling and arranging for retraining of staff.
g MR (M) and MLS managements being less than effective. GOM provided assurances at negotiations that it will appoint and maintain key management staff of satisfactory qualification and experience (para 5.3 (t)).
h. Possible delay in completing the process of privatization despite The implementing agencies are being required to continue the GOM's willingness and support adversely affecting financial process of intensive intemal reform while at the same time performance of the Railways. persisting with efforts for privatization. - 37 -
CHAPTER 5. AGREEMENTS REACHED AND RECOMMENDATION
A. Conditions of Effectiveness
5.1 There will be three conditions of effectiveness:
(a) Pre-RRP Plan: evidence of having substantially implemented the Pre-RRP Plan which, inter alia, would include: (i) issue of at least 250 appointment letters by MR (M); (ii) the completion of the process of valuing the assets to be transferred by MR to MR (M) and MLS; and (iii) completion of the study on restructuring and privatization of MLS (paras 2.11 and 3.11);
(b) subsidiary loan agreements: execution by GOM of subsidiary loan agreements with MR (M) and MLS for US$15.40 and US$0.76 million respectively at IBRD interest rate and 13 years repayment period including 3 years grace (para 2.46).
B. Conditions of Disbursement
5.2 Disbursements of funds allocated for 1996 and 1997, about US$8.07 million as per Table 3.2 would be contingent upon evidence of satisfactory progress at the time of mid-project review regarding: (i) completion of the milestones indicated in Annex 3.1; (ii) achievement of key performance targets indicated in Annex 4.4 (para 3.17); (iii) presentation, if required, of modified railway-related legislation to the Parliament (para 2. 10); and (iv) initiation of the process of privatizing MR (M) and MLS (paras 2.23 and 2.37) (para 3.17).
C. Assurances Provided at Negotiations
5.3 GOM provided assurances at negotiations that it will:
(a) not declare MR (M) and MLS as statutory bodies either at the time of their incorporation or subsequently (para 2.9);
(b) provide the working capital of MK 2.5 million for MR (M) and MK 0.5 million for MLS (para 2.11);
(c) set up appropriate BODs for MR (M) and MLS soon after their incorporation but no later than six months after RRP becoming effective (para 2.11);
(d) sign separate Performance Agreements with MR (M) and MLS within six months of RRP becoming effective, the Performance Agreements including, inter alia, the performance indicators, the Project Implementation Plan, the Environmental Mitigation Plan, and the basis for computing compensation for services rendered by MR (M) and MLS at GOM's request (paras 2.19 and 2.36);
(e) fully subsidize MR (M) and MLS for losses incurred on account of passenger or other services provided by MR (M) and MLS at GOM's request and computed according to the basis included in the Performance Agreement (para 2.11); - 38 -
(f) ensure that the Operations Agreement between MR and CFM (N) is properly implemented (para 2.26);
(g) set up a Joint Review Board for reviewing the performance of the Nacala rail route within six months of RRP becoming effective (para 2.27);
(h) initiate the process of privatizing MR (M) and MLS in accordance with the recommendations of the Privatization Study as soon as possible but before the first annual review (paras 2.23 and 2.37);
(i) undertake and implement policy reforms according to the Letter of Transport Sector Policy (Annex 1.2) and the RRP Implementation Plan (Annex 3.1) (para 2.40);
(j) undertake not to materially alter the authority delegated to the Project implementing agencies, specifically in respect of procurement, hiring of consultants, and implementation of the restructuring plans (para 3. I);
(k) conduct annual reviews in June each year and a comprehensive major review in June 1996, submit status reports one month prior to these reviews, and implement recommendations arising out of these reviews and (para 3.5);
(I) allocate and disburse its own share of agreed funds for the Project, exempt goods imported under the Project from import duties and other taxes, and exempt all foreign consultancy contracts under the Project from taxes (paras 2.45);
(m) delegate full authority to MR (M) and MLS to manage the Special Accounts and annually review the efficiency of the special account procedures (para 3.18);
(n) require the implementing agencies to ensure timely preparation and submission of quarterly and annual financial reports and ensure preparation and submission of externally audited financial statements within six months from the end of each fiscal year (para 3.21);
(o) require the implementing agencies to adopt project reporting, auditing, and monitoring procedures acceptable to IDA (para. 3.21);
(p) carry out all procurement for the Project (i) using standard bidding and contract documents agreed at negotiations by IDA and (ii) according to the procurement arrangements set out in para 3.13 and 3.14 (para 3.15);
(q) ensure that MR (M) and MLS do not undertake any investment estimated to cost more than US$0.2 million without prior consultations with IDA (para 4.7);
(r) fully implement the Environmental Mitigation Plan (para 4.19);
(s) not undertake investments in alternative international routes without prior consultation with IDA (para 4.24 (e)); and
(t) appoint and maintain key management staff of satisfactory qualifications and experience during the Project life (para 4.24 (g)). - 39 -
D. Recommendation
5.4 On the basis of the above actions, conditions,and agreements,the proposed project would be suitablefor an IDA credit of SDR 11.2 million (US$16.16million equivalent). J REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Trend of Performance Indicators
PERFORMANCE 1984! 1985/ 1986! 19871 1988/ 1989/ 1990/ 1991/ 19921 INDICATOR UNIT 1975 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993
1. Operating Ratio % 81 79 106 127 109 101 107 99 86 106 149 2. Freight Traffic -Tonnes Thousand 1338 1303 543 461 550 415 347 420 418 337 340 - Net-Tonne-Kms Milion 252 247 109 99 132 93 71 69 76 56 52 -Average Haul Km 188 190 201 215 240 224 205 164 182 166 153 3. Passenger Traffic -Passengers Thousand 1211 1267 1720 1814 1639 1710 1664 1713 1501 1282 859 -Passenger Kms Million 88 80 113 121 108 114 112 115 101 88 65 -Average Journey Km 73 63 66 67 66 67 67 67 67 69 76 4. Staff Productivity - Staff Strength No. 4054 4704 4161 3990 3982 4065 4101 3998 3915 3832 3658 - NTK/Staff Thousand 62 53 26 25 33 23 17 17 19 15 14 - (NTK+PK)/Staff Thousand 84 70 53 55 60 51 45 46 45 38 32 O 5. Motive Power Productivity - Availability % 62 78 79 88 79 78 78 77 75 75 75 - Utilization loco km/Loco day 250 116 86 68 87 82 82 82 79 64 55 6. Rolling Stock Productivity - Wagon Availability % 95 97 96 96 95 95 95 96 85 72 75 - Wagon Utilization Wkrn/Wagon day 30.2 42.2 33.0 30.4 33.0 25.7 21.2 19.3 19.2 15.2 14.5 7. Track Utilization - Route Length Km 789 789 789 789 789 789 789 789 789 789 789 - Track Density NTK/km (Million) 319 313 138 125 167 118 90 87 96 71 66 8. Operating Efficiency -Av.Net Trailing Load Tonnes 228 221 147 133 158 129 102 106 111 98 123 -Av.Gross Trailing Load Tonnes 554 512 440 400 424 371 319 335 314 307 366 - Gross To Net Ratio Number 2.43 2.32 2.99 3.01 2.68 2.88 3.13 3.16 2.83 3.13 2.98 - Average Wagon Load Tonnes 23.9 24.9 21.9 20.9 23.4 21.4 20.2 19.9 22.0 21.4 21.7 In - Derailments Number 155 117 75 99 97 75 112 83 112 85 97 X
Source: MR Compendiums and Corporate Plan -- * FY changed from Jan.-Dec. to March-April I - 41- Annex 1.2 Page I of 13 REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Letter of Transport Sector Policy
Telegrams: Fo4k&scm.Lilongwe MiNISTER OF FINANCE Telephone: Lilongwe 7S2 199 P.O. BOX 30049 Telex: 44402 LMLONGWE3 MALAWI
Ref. No.: MF/6 8 November, 1994
Mr. E.V.K. Jaycox, The Vice President, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, United States of America.
Dear Mr. Jaycox,
NATIONAL TRANSPORT SECTOR POLICY FRAMEWORK
I am writing to you in connection with the proposed credit for the Railways Restructuring project (RRP), and especially to inform you about policy decisions and measures that the Government has already taken, or is about to take in order to support the project. The credit, amounting to US$ 16.16 million, that we are seeking from the International Development Association (IDA) in support of the Railways Restructuring Project will enable us proceed with the strategy of restructuring and creation of an environment conducive to the management of Malawi Railways as a commercial enterprise.
As you are aware, recently the Government has made a number of policy changes in the transport sector. Most of these changes have been geared at promoting the operation of a competitive and efficient transport system. These for example include approving the freedom of Malawi Railways and Lake Services to set tariffs without prior Government approval; retaining loss-making passenger services on social grounds, deregulation of bus fares on all but country routes, and removal of restrictions on entry to passenger and freight transport industry. Access to foreign exchange is no longer a problem as the foreign exchange market has also been liberalized. -42 - Annex 1.2 Page2 of 13
Despite all these changes, it has become clear to Government that in some cases policies continue to be restrictive, and quite honestly they do also favor certain transport modes and carriers. As a result of this, operators have found themselves competing (to the extent that competition is present) on an unlevel playing field. This has greatly contributed to poor performance in some modes of transport, particularly rail and lake mode of transport which are in very critical financial position with Government having to inject in funds more or less on a monthly basis to bail them out of imminent liquidation.
With this background, Government is committing itself to further pursue a policy of economic deregulation and of treating all modes of transport equitably. This will entail the need to further minimize controls and removal of all forms of protectionism. Private sector investments and operations will be promoted. Where private sector involvement is not feasible at this time, promotion of a more business-minded approach by public sector bodies will be given urgency. In this respect the Government, under the second Institutional Development Project(IDP II) will develop a privatization policy covering statutory bodies and state- owned bodies, which includes Malawi Railways(1994) Limited and Malawi Lake Services Limited currently in the process of being established. To facilitate this, the Government has already established a privatization committee.
In summary the transport policy framework focuses on promotion of competition and liberalization within the transport industry in line with the rest of the economy. The Bank is invited to note and accept the attached Transport Policy Framework.
Yours sincerely,
Aleke K. Banda MINISTER OF FINANCE -43 - Annex 1.2 Page3 of 13
NATIONAL TRANSPORT POLICY FRAMEWORK
A. Policy Objectives
1. The policy objectives for the transport sector are:
* To meet economic demand while minimizing the cost to the economy;
* To promote and ensure safety in the sector; * To minimize negative impact of sectoral activities on the environment.
B. Policy Principles
2. The following principles shall prevail in the formulation of transport policy guidelines:
* There shall be no government regulation of such a nature that it restricts the ability of any mode to compete freely with any other mode of transport;
* Each mode shall bear a fair proportion of all real costs of resources, facilities and services provided at public expense;
* Each mode of transport shall receive fair compensation for the resources, facilities and services that it is required to provide in the public interest; * Private sector investment and operations will be encouraged and promoted; when private sector involvement is not feasible, more business-minded approach by public sector bodies will be promoted; * Decisions on public investments will be based on economic criteria.
C. Policy Implementation Guidelines
3. The policy framework will be the basis for more detailed policy implementation guidelines including the following important components: -44 - Annex 1.2 Page4 of 13 a) Co-ordination of activities and authority of government ministries and agencies, and private sector bodies active in the transport and civil aviation sector.
Malawi's ministerial portfolios do not correspond precisely with the sectors defined in its statement of development policies. This highlights the need for interministerial consultation and co-ordination in policy making and implementation. The strategy will be to heighten co-ordination between the transport and civil aviation portfolio and the portfolios of works, finance and economic planning, local government and a number of others, and to rationalize certain functional assignments.
Numerous public and private sector organisations and individuals are active in the transport and civil aviation sector. As a result, ongoing consultation and co-ordination between all interested parties will be required if Malawi is to obtain the maximum benefits from the sector. Although Government may take the lead in formulating national policies and strategies, private enterprises and private voluntary organisations, such as industry associations and consumer and trade unions have a major responsibility to provide key inputs to policy and strategy research and formulation.
b) Ensuring that transport authorities and operators are properly constituted and organized and have sufficient resources to perform their functions.
Public and private bodies - be they state departments, public enterprises, private companies or associations - can not be expected to play their proper role in the -45 - Annex 1.2 Page5 of13
sector unless they are properly constituted and organized. That is, they must have:
a solid legal foundation or constitution, including but not limited to a statement of objects, purposes, duties and functions (assignments of conflicting functions such as regulator and operator should be avoided and responsibilities for the operations of commercial versus uneconomic services should be clearly spelt out;
a clear grant of the capacities and powers that are necessary to perform those functions, and an equivocal assignment of decision-making or discretionary authority, including powers of delegation, as well as other procedural requirements; and
a suitable organization framework for the execution of assigned functions, including adequate posts, internal management and information systems and structures (e.g. a body responsible for economic regulation should have or be supported by a staff economist and an appropriate data base), appropriate personnel policies including competitive salaries and a code for disciplinary procedures, and a proper organizational separation of certain types of functions, such as regulatory and operational functions.
The strategy to be adopted is one of continuous institutional appraisal, report and capacity building throughout the Ministry of Transport and Civil Aviation, and the support of organizational capacity building and human resource development in the private sector. -46 - Annex 1.2 Page6 of 13 c) Ensuring responsible and independent decision-making, and public accountability.
Various laws grant ministers, statutory bodies, boards of public enterprise and companies and other decision- maker's power with a certain ambit of discretion. It is a fundamental principle of law and administration that such decision-maker's should exercise the independent judgement that the law permits. At the same time, those decision-makers and their organisations should be held strictly accountable for their decisions and general performance in the management of the matters, finances manpower and assets entrusted to them.
The strategy to be adopted is to clarify responsibilities and to continuously assess the performance of all bodies falling within the portfolio of the Ministry of Transport and Civil Aviation through the implementation of performance agreements with Malawi Railways and Lake Services. d) Improve availability and utilization of freight and passenger vehicles.
It will be the aim of Government to improve rural and urban mobility. While Government will review all restrictive practices affecting the growth of transport services in urban and rural areas, non-motorised means of transport will be encouraged especially for the rural areas. In order to do this, government will need to give operators freedom to set tariffs (fares and rates), allow unrestricted entry upon meeting minimum safety requirements, improve credit availability, reduce duty and surtax on imported vehicles and improve the transport infrastructure, especially in the rural areas. In the -47 - Annex 1.2 Page7 of13
trucking industry Government will encourage as much foreign investment as possible. Indigenous entrepreneurs will also be given all the opportunities to expand their businesses as much as possible. e) Cooperation with other Southern African countries and their transport and communication sectors.
A highly open economy has to continuously assess the benefits and costs of (or threats and opportunities presented by) regional co-operation and integration, and carefully manage its involvement in such efforts. This need is made even more pressing considering Malawi's involvement in such efforts. Thus, in many cases Malawi's national interest can be properly served only by well-designed efforts at regional co-operation and integration.
To follow through with decisions and commitments: The maintenance of a process of policy-making, strategic planning, law-making, organizing, resource mobilization, and general administration can be as important as any given output (e.g., policy, budget etc).
The strategy is to initiate a process that can ensure that policies and declarations of intent are embodied in law, that laws are administered and enforced, and that resources are mobilized and utilized in a timely fashion (e.g. program and project management). In short all parties need to strengthen their commitment to follow through; to turn decisions into actions. -48 - Annex 1.2 Page8 of13
D Sub-sectrol Issues
I Road Transport
1.1 General
Road Traffic Act Will be updated and modified to take account of new circumstances in the road transport industry.
Road Service Permits System of Road Service Permits and Certificate of Fitness will be strictly enforced.
1.2 Road Freight Transport Axle Overloading Strict enforcement of axle limits and imposition of heavy penalties imposed for violators.
Tariffs Tariffs will be liberalized.
Credit Credit facilities to local operators will be improved to facilitate their entry into the market.
Duties & Taxes The system of duties and taxes on vehicles, spare parts etc. will be reviewed fully to ensure that local truckers are obtaining an incentive to increase their fleet and adequately maintain it. -49 - Annex 1.2 Page9 of 13
International Freight The shippers and receivers of freight will be encouraged to use Malawian hauliers. Further harmonization of rates and tariffs on international freight traffic with other countries in the region in the case of road tolls, transit fees etc will be pursued.
Committees The Ministry of Transport and Civil Aviation will establish the Freight Transport Consultative Committee comprising representatives from the Ministry of Transport and Civil Aviation (chairman), the Road Transport Operators Association, the Police (Traffic Department), Malawi Railways, and other groups including users of road freight transport to:
further communication between the Government and private sector bodies in (and affected by) the freight transport industry;
promote the development of the road freight transport industry;
assist the industry solve any problems arising;
discuss the influence of new policies and legislation on freight transport, including intra and intermodal competition; -50 - Annex 1.2 Page10 of 13
discuss issues regarding regional road freight transport, including intergovernmental relations under SATCC, PTA etc.;
enhance quality and safety in freight transport operations.
1.3 Road Passenger Transport
Entry to the Market The prime Route Policy will be abolished as it has not had the desired effect on rural passenger transport. "Matola" will be legalized subject to safety requirements which will be strictly enforced.
Deregulation of Fares The remaining fare that it currently not deregulated is that of Country bus Service. This will be deregulated in association with the Prime Route Policy being abolished.
Credit The Government will encourage and assist in whatever way it can to increase in the supply of passenger transport by giving assistance to these new entrepreneurs.
Duties The present rate of duties on importation of vehicles and spare parts will be reviewed further to be in line with those in the trucking industry. -51 - Annex 1.2 PageI1 of 13
Committees A Passenger Transport Consultative Committee will be established by the Ministry of Transport and Civil Aviation. (Chairman), the bus and minibus associations, Stagecoach Malawi Ltd., the Police (Traffic Department), industry representatives, and representatives of other interested parties, particularly user associations to:
- discuss the influence of new policies and legislation on public transport.
- discuss issues regarding regional road passenger transport, relations under SATCC, PTA etc.
- enhance quality and safety within the public transport operations.
- discuss the need for public transport facilities. 2. Rail Transport
Tariffs Malawi Railways will continue to have complete autonomy in setting tariffs for it to be a competitive mode in the transport industry.
Staffing Malawi Railways will have autonomy in determining its staff levels.
Operational Decisions Decisions to change the nature and frequency of services will be at the discretion of Malawi Railways. -52 - Annex 1.2 Page12 of 13
Social Service If Malawi Railways runs a service at a loss which is deemed a "social service" then the Government will purchase those services on a commercial basis i.e. the Government would reimburse the costs incurred.
Performance Targets Performance targets will be set for Malawi Railways and agreed to by the Government.
Privatization Malawi Railways will be privatized at the earliest, and in line with the recommendations of the Railway Privatization Study and IDP II Project.
3. Air Transport
3.1 Air Passenger
Fares Fare levels will be determined solely by Air Malawi.
Routes Air Malawi will be given control over their route policy and allowed to pursue new market routes that they deem potentially profitable.
Staff Levels Staff level adjustments will be made at the direct discretion of Air Malawi.
CAA The Aviation Act will be updated and modified to take into account new circumstances in the Air Transport Industry. -53 - Annex 1.2 Page13 of 13 3.2 Air Freight
Access The Government will lift the present policy of dedicated freight air transporters having to pay royalties to Air Malawi if they wish to pick up air freight in Malawi.
4. Lake Transport Entry into Market Entrepreneurs wishing to enter into the lake shipping services market in either passenger or freight services will be given all assistance possible to do so.
Tariffs Lake Services will have complete autonomy in setting these tariff rates.
Routes Lake Services will have complete autonomy in choice of routes.
Staffing Staffing levels adjustment will be made at the discretion of LS direct.
Social Services If the Government wishes to maintain certain Lake Services that are non-profitable, but are deemed to be a "social service" and in the public interest, then it agrees to purchase these services on a commercial basis.
Privatization Malawi Lake Services to be privatized at the earliest, and in line with the recommendations of the Lake Services Organization and Privatization Study and IDP II Project.
- 54 - Annex 1.3 Page 1 of 1
REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Completed and Active World Bank IDA-Financed Transport Projects
.Project Loan/ Project MIajor Cost $ Credit Proj. ID Project Name Project Description FY Status Sector NIilion SMillion
3MALPA002 Highway Detailed engineering of the 1967 Completed TH 0.5 0.5 Engineering Zomba-Lilongwe road (290 km)
3MALPA005 Highways Reconstruction, bitumen 1968 Completed TH 11.5 11.5 paving of the Zomba - Lilongwe road. Consultants study of road transport licensing regulations.
3MALPA013 Highways 11 Construction of the Lilongwe- 1975 Completed TH 10.0 10.0 Kasungu road (113km). First phase of a District Roads Improvement and Maintenance l______Program (DRIMP).
3MALPA019 Highways Ill Construction of Kasungu-Jenda 1978 Completed TH 10.5 10.5 road (85km) feasibility study & detailed engineering of Jenda-Mzuzu road.
3MALPA026 Highways IV Const. of main Jenda-Mzuzu- 1981 Completed TH 42.2 33.0 Ekwendeni road & second phase of DRIMP.
3MALPA035 Highways V Road construction, third phase 1984 Completed TH 78.5 44.9 of DRIMP: construction of Luwawa-Champhoyo road; provision of weigh bridges.
3MALPA048 Transport I Upgrading north-south link 1988 Completed TH 100.5 13.4 road and access transport facilities in Blantyre-Dar Es Salaam corridor.
3MALPA056 Infrastructure I The project would finance a 1990 Active TH 157.7 28.8 time slice of the agreed infrastructure investment program, including highways and bridge rehabilitation, district roads maintenance. road safety, improved rural transport services, urban and rural water supply rehabilitation.
- 55 - Annex 1.4 Page 1 of I REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Status of Bank Group Operations in Malawi Summary Statement of IDA Credits (as at January, 95)
Loan or Credit No. Fiscal Borrower Purpose Bank IDA Undisbursed Closing Date Year $Million 50 Credits closed C17670-MAL 1987 Malawi Ed. SectorCredit I 26.96 .47 12/15/94(R) CI 8790-MAL 1988 Malawi Transport I 13.40 .74 06/30/94 C19660-MAL 1989 Malawi Agri. Marketing & 18.30 1 67 06/30/96 ______~~~ ~~~Est, C19900-MAL 1989 Malawi Energy I 46.70 7.76 02/28/96 C20360-MAL 1989 Malawi Instit. Dev. 11.30 1.20 06/30/95 C20690-MAL 1990 Malawi Infrastructure I 28.80 4.99 12/31/95 C20830-MAL 1990 Malawi Educ. Sec. II 36.90 16.71 06/30/96 C22200-MAL 1991 Malawi PHINSector Credit 55.50 31.56 06/30/97 C22210-MAI. 1991 Malawi Financial & 32 00 11.42 06/30/97 Enterprisec C22250-MAI. 1991 Malawi Fisheries Dev. 8.80 4.95 06/30/99 C23790-MAI. 1992 Malawi Local Govt. 24.00 15.49 12/31/99 C23860-MAL 1992 Malawi Power V 55.00 35.89 06/30/98 *C25130-MAL 1993 Malawi Financial Services 25.00 16.81 12/31/96 C25140-MAL 1993 Malawi Agric. Services 45.80 29.63 09/30/99 C26240MAL 1994 Malawi Instit. Dev. II 22.60 16.00 06/30/00 TOTAL = 16 Credits 456.96 304.09 Total of which repaid 104.52 1,302.08
Total held by IDA, Amount sold 50.40 1,272.19 of whichbepaid A Total Undisbursed 304.28 Notes:
* Not yet effective.
** Total approved, and outstanding balance represent both active and inactive Loans and Credits. v Indicates formally revised Closing Date. The Net Approved and Bank Repayments are historical value, all others are market value. The Signing, Effective and Closing dates are based upon the Loan Department official data and are not takes from the Task Budget file.
- 56 - Annex 2.1 Page 1 of I REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Project Cost Summary
% % Total (MK Million) (USSMillion) Foreign Base Local Foreign Total Local Foreign Total Excang Costs A. RESTRUCTURING OF MR Al. Retrenchment Support 1 Support for Retrenchment 83 95 9 33 93 28 5 25 0 58 5 83 10 24 2 Support for Redeployment 1 02 410 5 12 0 06 0 26 0 32 80 1 Subtotal 84 98 1342 98 40 5 31 0 84 615 14 25 A2. Project Implementation Support t TA for 22 manmonths 0 70 634 704 0 04 0 40 0 44 90 2 2 Legal and Investment Advisory Services 022 202 224 001 0 13 0 14 90 1 3 ConsuntancyStudies 0 38 3 46 3 84 0 02 0 22 0 24 90 1 4 Training 027 245 272 002 015 017 90 1 Subtotal 1 58 14 26 15 84 010 0 89 0 99 90 4 Subtotal Restructuring OftMR 86 56 27 68 114 24 5 41 1 73 7 14 24 29 S. REVITALIZATION OF NACALA CORRIDOR B1. Civil Works 1 Rehabilitation of 44 km Track 30 46 7 62 38 08 1 90 0 48 2 38 20 10 2 Bridge Strengthening 1 73 4 03 5 76 0 11 0 25 0 36 70 I Subtotal 32 19 I 165 43 84 2 01 0 73 2 74 27 11 B2. Mechanical Works t Points and Crossings Rehabilitation 2 38 21 46 23 84 0 15 1 34 1 49 90 6 2 Repairs to Concrete Sleeper Plant 0 08 0 58 0 64 0 00 0 04 0 04 90 0 3 Power Supply to NknozbvwaQuarry 0 06 0 58 0 64 0 00 0 04 0 04 90 0 4 Rehabiitation of Wheel Lathe 0 78 7 06 7 84 0 05 0 44 0 49 90 2 Subtotal 3 30 29 66 32 96 0 21 185 2 06 90 8 B3. Services I RentinggofTrackTemper 173 1555 1728 011 097 108 90 4 Subtotal 173 1555 17 28 0 11 0 97 1 08 90 4 B4. Equipment 1 Gang and Inspection Trolleys 2 56 23 04 25 60 0 16 1 44 1 60 90 6 2 Hand - held Equipment 0 50 4 46 4 96 0 03 0 28 0 31 90 1 3 Test Equipment 0 13 1 15 1 28 0 01 0 07 0 08 90 0 4 Roller Bearings for Modifying Wagons 0 54 4 90 5 44 0 03 0 31 0 34 90 1 S Service Motor Vehicles 1 22 1094 12 16 008 068 076 90 3 6 Safety and Envron Equipment 0 67 6 05 6 72 0 04 0 38 0 42 90 2 7 Limbe PABX 0 80 7 20 8 00 0 05 0 45 0 50 90 2 8 Nkaya Nayuci Micro Link 125 1123 12 48 0 08 0 70 0 78 90 3 9 MIS Package including Hardware 0 24 2 16 2.40 0 02 0 14 0 15 90 1 10 Wagon Tracking Package including Hardware 0 51 4 61 5 12 0 03 0 29 0 32 90 1 11 Telecommunication Test Equipment 0 51 4 6t 5 12 0 03 0 29 0 32 90 1 12 Computer Hardvwarefor Training 019 173 192 001 011 012 90 0 Subtotal 91t2 82 08 91 20 0 57 5 13 5 70 90 23 15. Spare Parts 1 Spares for Building Inventory 1 25 11 23 12 48 0 08 0 70 0 78 90 3 2 Concrete Sleepers- 17000 253 1011 1264 016 063 079 80 3 Subtotal 378 21 34 25 12 0 24 1 33 157 85 6 96. Institutional Development Support 1 TA-45 man-months 160 14 40 1600 0 10 0 90 1 00 90 4 2 Legal and Investment Advisory Services 0 18 1 58 1 76 0 01 0 10 0 11 90 0 3 Consunancy Studies 115 10 37 1 152 0 07 0 65 0 72 90 3 4 Training 0 67 605 6 72 004 0 38 0 42 90 2 Subtotal 3 60 32 40 36 0 23 2 03 2 25 90 9 Subtotal Revitalization of Nacata Corridor 53 71 19269 24640 336 1204 1540 78 63 C. COMMERCIALIZATION AND PRIVATIZATION OF LS Cl. Equipment 1 Communication Equipment 0 53 4 75 5 28 0 03 0 30 0 33 90 1 2 Computer Hardware 0 10 0 86 0 96 0 01 0 05 0 06 90 0 3 Envronment Related Equipment 0 45 4 03 4 48 0 03 0 25 0 28 90 1 Subtotal 1 07 9 65 1072 0 07 0 60 0 67 90 3 2. C2. Institutional Development Support 1 TA-6 man-montlh 019 1 73 1 92 0 01 011 012 90 0 2 Legal and Investment Advisory Senvices 0 22 2 02 2 24 0 01 0 13 0 14 90 1 3 Consultancies Studies 013 115 1 28 001 007 008 90 0 4 Training 0 05 0 43 0 48 0 00 0 03 0 03 90 0 Subtotal 0 59 5 33 592 0 04 0 33 0 37 90 2 Subtotal Commerciailzation and Privatization of LS 1 66 14 98 1664 010 094 104 90 4 D. POLICY FORMULATION Dl. Equipment 1 Computers 0 19 173 1 92 0 01 0 11 0 12 90 0 Subtotal 0 19 173 192 001 011 012 90 0 D2. Institutional Development Support I Computers 0 19 173 1 92 0 01 011 012 90 0 Subtotal 0 19 173 192 001 011 012 90 0 D3. Policy Support I Consunancy Studies 0 42 3 74 416 0 03 0 23 0 26 90 1 2 TA-28 man-months 0 88 7 92 880 0 06 0 50 0 55 90 2 Subtotal 1 30 11 68 1296 008 073 081 90 3 Subtotal Policy Formulation 1 68 1512 1680 011 o - T 90 4 Total BASELINE COSTS 14362 25046 39408 808 1565 24 63 64 100 Physical Contingencies 2154 3757 5911 1353 5 5 369 64 15 Price ContIngencies - 10 86 1086 - 068 08 100 3 TOTAL PROJECT COSTS I65 16 29890 46405 1032 166 2900 64 118
- 57 - Annex 2.2 Page I of 1
REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Project Cost By Years
Totals Including Contingencies Base Cost (USS Million) (USS Million) 1995196 1996t97 1997198 Total 1995196 1996197 1997198 Total
A. RESTRUCTURING OF MR Al. Restructuring Support 1 Support to Retrenchment 5 25 0 5s - 5 83 6 05 0 67 - 6 72 2 Support forStaff Redeployment 0 16 016 - 032 0 19 0 19 - 038 Subtotal 5 41 0 74 615 623 0 86 710 A2. Project Implementation Support 1. TA for 22man-months 0 22 0.15 0 07 0 44 026 0 18 0 09 0 52 2 Legal and tnvestment Advory Services 0 14 - 0 14 0 16 0 00 0 00 0 16 3 Consuitancy Studies 0 12 0 08 0 04 0 24 01 4 0 10 0 05 0 29 4 Training 0 05 0 06 0 06 017 0 r6 0 07 0 07 0 20 Subtotal 053 029 017 099 062 035 021 118 Total 5 94 1 03 0 17 7 14 6 85 1 21 0 21 8 27 B. REVITALIZATION OF NACALA CORRIDOR B1. Civil Works 1 Rehabilitation of 44 km Track 0 82 125 0 31 2 38 0 95 1 45 0 36 2 76 2 Bridge Strengthening 0 12 012 0 12 0 36 0 14 0 14 015 0 43 Subtotal 0 94 137 0 43 2 74 1 09 1 59 0 51 3 19 82. Mechanical Works 1 Points and Crossings Rehabilitation 0 37 0 75 0 37 1 49 0 43 0 90 0 46 1 79 2 Repairs to Concrete Sleeper Plant 0 04 0 0 0 04 0 05 0 06 0 00 0 05 3 Power Supply to Nkhozt,wa Quarry 0 04 0 0 0 04 0 05 0 00 0 00 0 05 4 Rehabiltation of Wheel Lathe 0 0 49 0 0 49 0 00 0 59 0 00 0 59 Subtotal 0 45 1 24 0 37 2 06 0 53 1 49 0 46 247 B3. Services 1 Renting of Tramp Temper 0 36 0 36 0 36 1 08 0 42 0 43 0 44 130 Subtotal 0 36 0 36 0 36 1 08 0 42 0 43 0 44 130 94. Equipment 1 Gang and Inspection Trolleys 0 8 0 8 0 1 6 0 93 0 96 0 06 189 2 Hand- heldEquipment 014 011 006 031 016 013 007 037 3 Test Equipment 0 08 0 0 0 08 0 09 0 00 0 00 0 09 4 Roller Beanngs for Moditying wagons 0 0 11 0 23 0 34 0 00 0 13 0 28 0 42 5 Service Motor Vehicles 0 25 0 51 0 0 76 0 29 0 61 00 0 90 t Safety and Enviorn Equipment 0 14 0 14 0 14 042 0 16 0 17 0 17 050 7 LimbePABX 05 0 0 05 058 0 06 006 058 8 Nkaya-Nayuci Micro Link 0 78 0 0 0 78 0 91 0 00 0 00 0 91 9 MIS Package including Hardware 005 005 005 015 006 006 006 018 10 Wagon Tracking Package including Hardware 0 16 0 16 0 032 0 19 0 19 006 038 11 Telecommunication Test Equipment 0 16 0 16 0 032 0 19 0 19 0W0 038 12 Computer Hardwarefor Training 0 04 0 04 0 04 0 12 0 05 0 05 0 05 014 Subtotal 3 1 2 08 0 52 5 7 3 62 2 50 0 64 6 76 95. Spare Parts 1 Spares for Building Inventory 0 47 031 0 078 055 0 37 0 06 0 92 2 Concrete Sleepers - 17000 0 26 0 53 0 0 79 0 30 0 63 0 00 0 94 Subtotal 0 73 0 84 0 1 57 0 85 1 01 o00 1 86 96. Institutional Development Support I TA-45-man-months 05 0 33 017 1 0 58 0 40 0 21 1 19 2 Legal and Investment Adcsory Services 0 11 0 0 o 11 013 C00 0 00 0 13 3 Consultancies Studies 036 024 0 12 072 042 029 0 15 086 4 Training 014 014 0 14 0 42 016 017 017 0 50 Subtotal 1 11 071 043 225 130 085 053 268 Total 669 66 2 11 154 780 787 258 1825 C. COMMERCIALIZATION AND PRIVATIZATION OF MLS Cl. Equipment 1 Communication Equipment 0 11 0 22 0 0 33 013 0 26 0 06 0 39 2 Compuler Hardcware 0 02 0 04 0 0 06 0 02 0 05 0 00 0 07 3 Envronment Related Equipment 014 014 0 028 016 017 000 033 Subtotal 027 04 0 067 032 048 000 080 C2. Institutional Development Support 1 TA-6-man-months 006 004 002 012 007 005 002 0 14 2 Legal and Investment Advisory Services 0 14 0 0 0 14 0 16 0 00 0 00 0 16 3 Consuitancy Studies 0 04 0 03 0 01 0 08 0 05 0 04 0 01 0 10 4 Training 001 001 001 003 001 001 001 004 Subtotal 0 25 0 08 0 04 0 37 0 29 0 10 0 05 0 44 Total 0 52 0 48 0 04 1 04 0 61 0 58 0 05 123 0. POLICY FORMULATION DI. Equipment I Computers 006 006 0 012 007 007 00 0 14 Subtotal 006 006 0 012 007 007 000 0 14 D2. Institutional Development Support I Computers 0 04 0 04 0 04 012 0 05 0 05 0 05 0 14 Subtotal 004 0 04 0 04 01 2 0 05 0 05 0 05 0 14 D3. Policy Support 1 ConsutancyStudies 0.13 009 004 026 015 011 005 031 2 TA-28 man-months 0 28 0 18 0 09 0 55 0 33 0 22 0 11 0 65 Subtotal 0 41 0 27 0 13 0 81 0 48 0 32 016 096 Total 051 0 37 0 17 1 05 060 044 021 1 25 TOTAL PROJECT COST 1366 8.48 249 2463 1585 10 10 305 2900
- 58 - Annex 2.3 Page I of I
REPUBLIC OF NIALAWI RAILWAYS RESTRUCTURING PROJECT
Project Costs By Source of Finance (US$ nillion)
IDA USAID The Government Total Amount % Amount % Amount % Amount %
A. RESTRUCTURING OF MR Al. Retrenchment Support 1. Support for Retrenchment - 0 6 72 100 - 0 6 72 23 2. Support for Redeployment 0 0.38 100 - 0 0 38 1 Subtotal . 0 710 100 - 0 7.10 24 A2. Project Implementation Support 1.TA for 22 manmonths 0 0.52 100 - 0 0.52 2 2 Legal and Investment Advisory Services - 0 0 16 100 0 0.16 1 3. ConsultancyStudies 0 0.29 100 0 0.29 1 4 Training - 0 0 20 100 0 0 20 1 Subtotatl 0 1.18 100 0 118 4 Subtotal - Restructuring Component 0 8 27 100 0 8.27 29 B. REVITALIZATION OF NACALA CORRIDOR B1. Civil Works 1 Rehabilitation of 44 km Track 2.63 95 - 0 013 5 2 76 10 2 Bridge Strengthening 0 39 90 - 0 0 04 10 0 43 1 Subtotal 3.02 95 - 0 0.17 5 3 19 11 B2. Mechanical Works 1. Points and Crossings Rehabilitation 1.70 95 - 0 0.09 5 1 79 6 2. Repairs to Concrete Sleeper Plant 0.04 95 - 0 0.00 5 0 05 0 3. Power Supply to Nkhozbwa Quarry 0.04 95 0 0.00 5 0 05 0 4. Rehabilitation of Wheel Lathe 0.56 95 0 0.03 5 0.59 2 Subtotal 2.35 95 0 012 5 2.47 9 B3. Services 1. Renting of Track Temper 1 23 95 - 0 0.07 5 1.30 4 Subtotal 1.23 95 0 0.07 5 1.30 5 84. Equipment 1. Gang and Inspection Trolleys 1.80 95 - 0 0.09 5 1 89 7 2. Hand - held Equipment 0.35 95 - 0 0.02 5 0 37 1 3. Test Equipment 0.09 95 - 0 0 00 5 0 09 0 4. Roller Bearings for Modifying Wagons 0 39 95 - 0 0 02 5 0.42 1 5 Service Motor Vehicles 0.86 95 - 0 0 05 5 0 90 3 6 Safetyand Environ. Equipment 0.48 95 - 0 0.03 5 0 50 2 7 Limbe PABX 0 55 95 - 0 0 03 5 0 58 2 8. NkayaNayuci Micro Link 0.87 95 - 0 0 05 5 0.91 3 9. MIS Package including Hardware - 0 0.18 100 - 0 018 1 10 Wagon Tracking Package including Hardware - 0 0.38 100 - 0 0 38 1 11. Telecommunicalion Test Equipment 0.36 95 - 0 0.02 5 0.38 1 12. Computer Hardware or Training 0 0.14 100 - 0 0 14 0 Subtotal 5.75 85 0 70 10 0 30 4 6.76 23 8S. Spare Parts 1 Spares for Building Inventory 0.87 95 - 0 0.05 5 0.92 3 2. Concrele Sleepers - 17000 0 89 95 - 0 0 05 5 0.94 3 Subtotal 1.76 95 - 0 0 09 5 1.86 6 86. tnstitutlonal Development Support 1 TA-45 man-months 0 1 19 100 - 0 1.19 4 2 Legal and InvestmentAdvisory Services 0 0.13 100 - 0 0 13 0 3. Consultancy Sludies 0 81 95 - 0 0 04 5 0.86 3 4. Training 048 95 0 0.03 5 050 2 Subtotal 1.29 48 1.32 49 0.07 3 2.68 9 Subtotal - Revitalization of Nacala Corridor 1540 84 2.02 11 083 5 18 25 63 C. COMMERCIALIZATION AND PRIVATiZATION OF LS Cl. Equipment 1. Communication Equipment 0.37 95 0 0.02 5 0.39 t 2. Computer Hardware 0.07 95 0 0.00 5 0.07 0 3. Environment Related Equipment 0.31 95 - 0 0 02 5 0.33 1 Subtotal 0.76 95 - 0 0.04 5 0 80 3 C2. InstitutIonal Development Support 1. TA-6 man-month - 0 0.14 100 - 0 0.14 0 2 Legal and Investment Advisory Services - 0 0.16 100 0 0.16 1 3. Consultancies Studies - 0 0.10 100 0 0.10 0 4 Training 0 0 04 100 0 0.04 0 Subtotal - 0 0.44 100 - 0 0.44 2 Subtotal - Commercialization &Privatization of LS 0.76 61 0.44 35 0 04 3 1.23 4 0. POLICY FORMULATION Di. Equipment 1. Coempuers - 0 0.14 100 - 0 0.14 0 Subtotal 0 014 100 0 0.14 0 D2. Institutional Development Support Computers C 0.14 100 0 0.14 1 Subtotal 0 0.14 100 0 0.14 1 D3. Policy Support 1 Consullancy Studies 0 0.31 100 - 0 0.31 1 2. TA-28 man-months - 0 0 65 100 - 0 0.65 2 Subtotal 0 0.96 100 - 0 0.96 3 Subtotal - Policy Formulatlon 0 1.25 100 - 0 1.25 4 TOTAL DISBURSEMENT 16.16 56 11.98 4i 0.87 3 2900 100
REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Project Implementation Plan
1994 1995 1996 1997 ID RailwaymrestructuringProject Duration Scheduled Start Scheduled Finish 94 95 96 97 156w 10/1/94 9/26/97 2Restructuring of MR 116w 10/1/94 12/20/96 2 3 Creation of MR (M) 6w 10/1/94 3/31,95 t 2 4 Creation of LS (M) 6w 10/1/94 3/31/95 5 Transfer of staff anidassets to MR (M) and LS (M) 12w 4/3/95 6/23/95 6 Retrenchment of surplus staff of MR 12w 6/26/95 9/1 5/95 7 Disposal of surplus assets of MR 78w 6/26/95 12/20/96 8 Discharging of outstanding liabilities 65w 6/26/95 9/20/96 9 Closure of MR 2w 9/23/96 10/4/96 10 Revitalizationof Nacala rail route 156w 10/3/94 9/26/97 0 11 Track and Infrastructure rehabilitation 1 4w 4/3/95 3/28/97 12 Macinery and Plant rehabilitation 78w 4/3/95 9/27/96 13 Procurement of Equipment and Spares 78w 4/3/95 9/27/96
14 Finalization of Operations Agreement 26w 10/3/94 3/31/95 _ 15 Finalization of Privatization Study 39w 4/3/95 12/29/95 2 16 Biddtng documents for privatization of MR (M) 6w 1/1/96 6/28/96 17 Tendering and Selection of private operator 39w 7/1/96 3/28/97 2 18 Handing over to private operator 6w 3/31/97 9/26/97 19 Commercializationand Proivatizationof LS (M) 130w 4/3/95 9/26/97 20 Procurement of Equipment and spare parts 78w 4/3/95 9/27/96 21 Finalization of Commercialization and Privatization Study 39w 4/3/95 12/29/95 22 Bidding documents for privatization of LS (M) 26w 1/1/96 6/28/96 23 Selection of private operator 39w 7/1/96 3/28/97 24 Handing over to private operator 26w 3/31/97 9/26/97
25 Policy Formulation 117w 1/2/95 3/28/97 | _G 2 26 Review of current transport policy 6w 1/2/95 6/30/95 27 Issue 2 of revised policy document 6w 7/3/95 12/29/95 -_ 28 Creating a framework for policy analysis 52w 4/3/95 3/29/96 29 Building institutional capacity for analysis 104w 4/3/95 3/28/97
Project: Critical Progress 1 Summary _ Date: 1/3/95 Noncritical Milestone * Rolled Up
- 60 - Annex 3.2 Page I of I
REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Mission Plan
Approx. Date Main Activities Skills Required SW
02/ 95 Project Launch; Works and Institutional Supervision. Rly Eng., F. 6 Anal.,
05/95 Works and Institutional Supervision. Rly Eng., 9 F. Anal., Legal 10/95 Works and Institutional Supervision; Environment. Rly Eng., 6 l F. Anal., Legal 02/96 Ist Annual (Mid Term) Review; Works and Institutional Rly Eng., 12 Supervision ; Definition of 2nd phase program; F. Anal., Proc., Disbursement condition release; Policy and Capacity Training, Legal, Building progress; TA effectiveness and Transfer; Instit. Environ Previous years works performance; Next year's budget; Annual beneficiary surveys; Compliance with targets and key performance measures.
11/96 Works and Institutional Supervision. Rly Eng., 4 F. Anal. 02/97 2nd Annual Review; Works and Institutional Rly Eng., 12 Supervision; Policy and Capacity Building progress; TA F. Anal., Proc., effectiveness and Transfer; Previous years works Training, Legal, performance; Nest year's budget; Annual beneficiary Instit. Environ surveys; Compliance with targets and key performance measures.
09/97 Works and Institutional Supervision; Environment. Rly Eng., 6 F. Anal., Environ 02/98 Pre closing mission. HW Eng., 6 F. Anal.. 07/98 PCR Mission. HW Eng., 6 F. Anal.,
REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT Traffic Projections
Restructuring Casc Privatization Case 94/95* 95/96 96/97 97/98 98/99 99/20 95/96 96/97 97/98 98/99 99/20 OVERSEAS Imports Fertilizer 20 30 45 55 55 55 30 45 55 67 94 S alt 4 7 8 9 9 9 7 8 9 12 1 W heat (Flour) 25 33 39 44 44 44 33 39 44 60 77 Vegetable Oils 10 15 18 20 20 20 15 18 20 25 35 OtherDry 10 19 25 31 31 31 19 25 31 40 54 Petrol 3 5 10 15 15 15 5 10 15 20 27 Diesel 6 11 22 32 32 32 11 22 32 42 56 Jet A-l 10 18 22 26 26 26 18 22 26 38 45 Subtotal 88 139 188 232 232 232 139 188 232 304 404 Exports S ugar 0 1 2 3 3 3 1 2 3 3 4 Tobacco 8 28 40 51 51 51 28 40 51 70 89 Tea 1 2 3 4 4 4 2 3 4 6 8 Other 3 6 8 10 10 10 6 8 10 17 20 Subtotal 12 37 52 68 68 68 37 52 68 96 121 Total Internatlo 100 175 240 300 300 300 175 240 300 400 525 DOM ESTIC C linker 115 115 115 115 115 115 115 115 115 115 115 C oal 17 17 17 17 17 17 17 17 17 17 17 F e rtilize r 4 4 4 4 4 4 4 4 4 4 4 M a ize 11 11 11 11 11 11 11 11 11 11 11 Tobacco 18 18 18 18 18 18 18 18 18 18 18 o Diesel 6 6 6 6 6 6 6 6 6 6 6 Ethanol 6 6 6 6 6 6 6 6 6 6 6 Parafin & Petrol 32 32 32 32 32 32 32 32 32 32 32 Total Domeslic 210 210 210 210 210 210 210 210 210 210 210 TOTAL 310 385 450 510 510 510 385 450 510 610 735
- 62 - Annex 4.2 Page I of I
REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Profit/Loss and Profitability Projections (US$ 000)
Unit 1994/95 1995196 1996/97 1997/98 1998199 1999/2000
A. RESTRUCTURINGCASE
1. Overseas Trafflc Tons (000) 100 175 240 300 300 300 2. DomesticTraffic Tons (000) 210 210 210 210 210 210 3 Total Traffic Tons(000) 310 385 450 510 510 510 4. Revenue US$(000) 30660 38535 45360 51660 51660 51660 5. Operating Expenditure US$(000) 30461 30461 32268 34207 34207 34207 6. Gross Margin US$(000) 199 8074 13092 17453 17453 17453 7. Gross Margin as % - (7)/(4) ° 1 21 29 34 34 34 8. Depreciation US$(000) 12000 12000 12000 12000 12000 12000 9. Total Expenditure US$(000) 42461 42461 44268 46207 46207 46207 11. Profit/(Loss) US$(000) -11801 -3926 1092 5453 5453 5453 12. Assets US$(000) 403000 403000 387000 322000 322000 322000 13. Operating Ratio - (9)1(4) . 138 110 98 89 89 89 14. Return on sales - (11)1(4) % -38 -10 2 11 11 11 15. Return on Assets - (11)/(12) % -2.9 -1.0 0.3 1.7 1.7 1.7
B. PRIVATIZATION CASE
1. OverseasTraffic Tons (000) 100 175 240 300 400 525 2. DomesticTraffic Tons(000) 210 210 210 210 210 210 3 Total Traffic Tons (000) 310 385 450 510 610 735 4. Revenue US$(000) 30660 38535 45360 51660 62160 75285 5. OperatingExpenditure USS(000) 30461 30461 32268 34207 34207 34207 6. Gross Margin US$(000) 199 8074 13092 17453 27953 41078 7. Gross Margin as % - (7)1(4) % 1 21 29 34 45 55 8. Depreciation US$(000) 12000 12000 12000 12000 12000 12000 9 Total Expenditure US$(000) 42461 42461 44268 46207 46207 46207 11. Profitl(Loss) US$(000) -11801 -3926 1092 5453 15953 29078 12. Assets U S$(000) 403000 403000 387000 322000 322000 322G00 13. Operating Ratio - (9)/(4) US$(000) 138 110 98 89 74 61 14. Return on sales - (11)/(4) % -38 -10 2 11 26 39 15. Return on Assets - (11)/(12) % -2.9 -1.0 0.3 1.7 5.0 9.0
REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Economic Benefits and ERRs (US$ million)
No Project Case Proiect case Benefits Investments Investmtents Savingx in Net Without 'otal Traffic 'I'raffic Traffic Transport With Total Traffic T'raffic Traffic 'I'ransport Iransport Cash Year Project Traffic Nacala Beira Durban Cost Project Traffic Nacala Beira Durban Cost Cost P'low rooo ITonnes (000 rounes) A. Rcstructuring case
1996 * 1 00 650 100 100 450 85 15.94 650 175 100 375 80 4.73 -10.21 1997 1.00 675 100 125 450 88 10.09 675 240 125 310 79 8.82 -0.27 1998 1.00 700 100 150 450 90 3.04 700 300 150 250 78 12.60 10.56 1999 1.00 725 100 150 475 94 1.00 725 300 150 275 81 12.60 12.60 2000 1.00 750 100 150 500 98 1.00 750 300 150 300 85 12.60 12.60 2001 1.00 750 100 150 500 98 1.00 750 300 150 300 85 12.60 12.60 2002 1.00 750 100 150 500 98 1.00 750 300 150 300 85 12.60 12.60 2003 1.00 750 100 150 500 98 1.00 750 300 150 300 85 12.60 12.60 2004 1.00 750 100 150 500 98 1.00 750 300 150 300 85 12.60 12.60 2005 1.00 750 100 150 500 98 1.00 750 300 150 300 85 12.60 12.60
ERR 0 . 67 W
B. Privztiation case
1996' 1.00 650 100 100 450 85 15.94 650 175 100 375 80 4.73 -10.21 1997 1.00 675 100 125 450 88 10.09 675 240 125 310 79 8.82 -0.27 1998 1.00 700 100 150 450 90 3.04 700 300 150 250 78 12.60 10.56 1999 1.00 725 100 150 475 94 1.00 725 400 150 175 75 18.90 18.90 2000 1.00 750 100 150 500 98 1.00 750 525 150 75 71 26.78 26.78 2001 1.00 750 100 150 500 98 1.00 750 525 150 75 71 26.78 26.78 2002 1 00 750 100 150 500 98 1.00 750 525 150 75 71 26.78 26.78 2003 1.00 750 100 150 500 98 1.00 750 525 150 75 71 26.78 26.78 2004 1.00 750 100 150 500 98 1.00 750 525 150 75 71 26.78 26.78 2005 1.00 750 100 150 500 98 1.00 750 525 150 75 71 26.78 26.78
ERR 0.88
Trriff/Tonne (US5/Tonne) Road 0 0 60 s Rail 52 68 73 Port 18 18 15 Cabotage 15 15 0 O Total tariff 85 101 148
Year 1996 means IY 199.Y96(I April1995 - 31 March 1996) and soon
-64 - Annex 4.4 Page 1 of I
REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Key Indicators of Success
Item Target 1994/95 1995196 1996/97 1997/98 1998/99 1999/2000
A. RESTRUCTURINGOF MR
1 Incorporationof new companies CompletionDate 01/31/95 2. Transfer of assets to new companies CompletionDate 03/31/95 3. Retrenchmentof surplus staff CompletionDate 06130/95 4. Disposal of surplus assets % 50 100 6. Revisionof Railway-relatedLegislation CompletionDate 03/31/96
S. REVITALIZATION OF NACALA RAIL ROUTE
1 OverseasTraffic Tons (000) 145 175 240 300 400 525 2. DomesticTraffic Tons (000) 210 210 210 210 210 210 3. Total Traffic Tons (000) 355 385 450 510 610 735 4. OperatingRatio % 138 110 98 89 94 61 5. Returnon Assets % -2.9 -1.0 0.3 1.7 5.0 9.0
C. COMMERCIALIZATION/ PRIVATIZATION OF LS
1. FreightTraffic Tons (000) 20 25 30 40 60 70 2. PassengerTraffic passengerKms 9,600 10,000 10,500 11,000 12,000 12,500 3 Working Ratio % 140 100 90 80 70 60
D. POLICY FORMULATION
1. Revised TransportPolicy Completion Date 03/31/96 2 Use of softwarefor policy analysis Completion Date 03/31/97
- 65 - Annex 4.5 REPUBLIC OF MALAWI Page I of 1 RAILWAYS RESTRUCTURING PROJECT
Envirommental Mitigation Plan
Action Responsibility T'imeframe
Identify surface water discharges from workshops. Malawi Railways. First 2 months after initiation of donor-supported project.
Correct oil separation system defects. Malawi Railways. First 3 months.
Identify sources of groundwater contamination from Malawi Railways. First 4 months. workshops.
Channel all oil-contaminated water into corrected separation Malawi Railways. First 5 months. system.
Develop plan for intercepting groundwater contamination. Malawi Railways. First 6 months.
Improve monitoring and enforcement of local environmental Local Government First 6 months to I year. impacts. authorities supported by national Government.
Identify high priority environmental impacts from rail Malawi Railways. First 6 months to I year operations, which may require: * review of smoke emissions, * review of hazardous material handling and transport, * review of waste oil uses, and * review of human waste discharges from passenger services.
Implement plan for intercepting groundwater contamination. Malawi Railways. First year to two years.
Develop and implement plan for addressing high-priority Malawi Railways. First year to three years. environmental impacts from rail operations.
Acquire necessary protective equipment. Malawi Railways. First 2 months after initiation of donor-supported project.
Replace missing and defective fire extinguishers and first aid Malawi Railways. First 2 months. boxes. Repair leaky roof in diesel overhaul building. Malawi Railways. First 3 months.
Clear drainage system to make pits operable. Malawi Railways. First 4 months.
Initiate analysis of experience with workshop accidents. Malawi Railways. First 6 months to I year.
Conduct safety inspections more regularly. Government of Malawi. First 6 months.
Conduct audit of safety needs in workshops. Malawi Railways. First 6 months to I year.
Increase the comprehensiveness of inspections under the Government of Malawi. First year. Factories Act.
Establish more effective enforcement mechanisms for Govemment of Malawi. First year. inspections under the Factories Act.
Design and implement a workshop safety improvement plan. Malawi Railways. First year.
Establish priorities for new safety investment program. Malawi Railways. First Year
Upgrade port facilities and vessels to improve the operating Lake Services First two years. policies regarding control of pollutant discharges in the ports.
- 66 - Annex 5.1 Page 1 of 1 REPUBLIC OF MALAWI RAILWAYS RESTRUCTURING PROJECT
Documents in Project Working Files
1. Processing Documents (Black Book)
1.1 IEPS 1.2 FEPS 1.3 Authorization memoranda 1.4 Peer and Other Comments
2. Strategy and Historic Documents
2.1 Country Strategy 2.2 Transport Sector Strategy 2.3 RRP SAR
3. Standard Procurement Documents (To be obtained)
4. Feasibility and Detailed Design Studies
4.1 Malawi Railways Restructuring Project, Draft: Financial Analysis Technical Working Paper by Abt Associates, Inc dated May 29, 1994 4.2 Malawi Railways Restructuring Project, Preliminary Draft: Valuation of Railway Assets Paper by Abt Associates, Inc (undated) 4.3 Malawi Railways Restructuring Project, Preliminary Draft: Valuation of Lake Services Assets Paper by Abt Associates, Inc (undated) 4.4 Malawi Railways Restructuring Project, Preliminary Draft: Housing Assessment Paper by Abt Associates, Inc (undated) 4.5 Malawi Railways Restructuring Project, Preliminary Draft: Organizational Analysis Paper by Abt Associates, Inc (undated) 4.6 Agreement of Cooperation entered into between The Direccao Nacional Dos Nacional Dos Portos E Caminhos de Ferro and The Malawi Railways Limited 4. 7 Malawi Railways Restructuring Project (8/16) Memorandum of Understanding between The Government and Republic of Malawi 4.8 Malawi Transport Sector Review Selected Issues (Two Volumes) Report No. 9909-MAI dated August 10, 1992 4.9 Transmark Draft Report -- Investment Plan for Malawi Railways (Three Volumes) 4.10 Malawi Railways Restructuring Project -- Draft Report dated 8/16/94 prepared by E.C. Harrell Associates.
5. Policy Studies Completed
5.1 The Malawi Railway Restructuring Project, Preliminary Draft -- Transport Policy Analysis Report prepared by Abt Associates, Inc (undated)
6. MR Statistics
6.1 Malawi Railways Limited, 1989/90-- Compendium 6.2 Malawi Railways Limited, 1992/93 -- Compendium 6.3 Malawi Railways Limited, Accounts and Statistics December 1993
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