Report No. 3922-PO Republic of Portugal COFY Sector Memorandum

Public Disclosure Authorized August 15, 1983 Projects Department Europe, Middle East and North Africa Regional Office FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized

Document of the World Bank Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their officia-l duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

1974 1 US Dollar 25 Escudos 1 Escudo 0.039 US Dollar 1975 1 US Dollar = 26 Escudos 1 Escudo = 0.039 US Dollar 1976 1 US Dollar 30 Escudos 1 Escudo 0.033 US Dollar 1977 1 US Dollar = 38 Escudos 1 Escudo = 0.026 US Dollar 1978 1 US Dollar 44 Escudos 1 Escudo = 0.023 US Dollar 1979 1 US Dollar = 49 Escudos 1 Escudo = 0.020 US Dollar 1980 1 US Dollar = 50 Escudos 1 Escudo = 0.020 US Dollar 1981 (mid-year) 1 US Dollar = 65 Escudos 1 Escudo 0.015 US Dollar 1982 (mid-year) 1 US Dollar = 78 Escudos 1 Escudo = 0.014 US Dollar 1983 (March) 1 US Dollar 96 Escudos 1 Escudo = 0.010 US Dollar

ACRONYMS AND ABBREVIATIONS

ANA Aeroportos e Navegagao Aeria ( Authority) ASEF Acordo de Saneamento Economico-Financeiro (Economic and Financial Restructuring Agreement) CNN Companhia Nacional de Navigagao CP Caminhos de Ferro Portugueses (Portuguese Railways) CTM Companhia Portuguesa de Transportes Maritimos DGTT Direccao Geral de Transportes Terrestres ( Dept.) EEC European Economic Community GDP Gross Domestic Product GEP Gabinete de Estudos e Planeamento (Studies and Planning Unit) GPP Gabinete de Planeamento e Programagao (Planning & Programming Unit) INE Instituto Nacional de Estatistica JAE Junta Autonoma de Estradas (Autonomous Authority) MHPW Ministry of Housing and Public Works (up till Sept. 1981) MHPWT Ministry of Housing, Public Works and Transport (since Sept 1981) MTC Ministry of Transport and Communications (up till Sept. 1981) NTP National Transport Plan RN Rodoviaria Nacional (National Road Services) TAP Transportes Air Portugal, formerly Transportes Aereos Portugueses

FISCAL YEAR

January - December FOR OFFICIAL USE ONLY

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Synopsis

This memorandum reviews developments in the transport sector in Portugal, as background for the Bank's dialogue with the Government on the sector. The major issues it finds recurring in each are; (a) over-age equipment ar,d low productivity; (b) large deficits among almost all the public sector tra,nsport agencies; and (c) investment programs that have allocated too much to large-scale projects with slow and uncertain returns.

The report endorses the policy initiatives taken by the Government in 1982 and 1983 to put road and on an equal competitive footing and to rehabilitate the railway financially. To help in the implementation of this policy change, the report recommends that the railway, as well as other agencies required to provide uneconomic services, should be compensated by the interest groups sponsoring such obligations. Finally, it recommends that investments should be concentrated on fast-yielding eliminatiort of congestion and the modernization of existing facilities.

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its conlients may not otherwise be disclosed without World Bank authorization.

(i)

REPUBLIC OF PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Table of Contents

Page No.

SUMMARY ...... 1

I. TRANSPORT SYSTEM OVERVIEW ...... 6

II. ...... 7

A. The Importance of Road Transportation ...... 7 B. Demand ...... 8 Road Safety ...... 10 C. Road Transport Services ...... 11 ...... 11 Trucking ...... 12 D. Road ...... 13 Diagnosis ...... 13 Organization ...... 14 Expenditure on Roads ...... 15 New Construction ...... 15 Maintenance and Rehabilitation ...... 16 Road Revenues ...... 16 E. Manufacturing Industry ...... 17

III. RAILWAYS ...... 18

Railway Traffic ...... 18 Public Service Obligations and their Financial Consequences3 ...... 19 Operating Efficiency ...... 20 Financial Rehabilitation under 1983 Decree-Law ...... 21 Recommended Investment Strategy ...... 22

IV. AND SHIPPIN( ...... 23

Ports ...... 23 Issues ...... 25 Shipping ...... 26

(Continued)

This report has been written by Mr. Graham Smith (transport economist), drawing an earlier work by Messrs. Slobodan Mitric and Roy Roberts (also transport economists). The information was compiled during project prepara- tion and supervision work in 1980, 1981 and 1982. Table of Contents (Contd.)

Page No.

V. CIVIL ...... 27

Airports ...... 27 Air Services ...... 28

VI. LISBON REGION TRANSPORT ...... 29

VII. GOVERNMENT INVOLVEMENT IN THE TRANSPORT SECTOR ...... 30

Transport Policy ...... 30 Transport Planning ...... 31

VIII. SECTOR-WIDE ISSUES ...... 32

Reducing Public-Sector Transport Deficits ...... 32 Raising the Operational Efficiency of Transport Services ...... 34 Too Many Large-Scale Prestige Projects ...... 34 Underinvestment in Replacement and Renewal of Existing Assets ...... 35 Energy Conservation ...... 36

IX. RECOMMENDED GOVERNMENT STRATEGY IN TRANSPORTATION ...... 37

ANNEXES

1 Action Plan Adopted by MOT to follow up on National Transport Plan Recommendations ...... 39 2 List of Recent Consultants' Reports on Portuguese Transport Sector ...... 41

TABLES

1 Breakdown of the Mainland Transport Market by Mode (1979) 42 2 Aggregate Measures of Road Transport ...... 43 3 New Registrations of Road ...... 44 4 Annual Mileage by ...... 45 5 Road Traffic Accidents in Portugal ...... 46 6 Road User Charges and Expenditures for Highways in Portugal 1972-1978 ...... 47 7 Breakdown of Capital Expenditures on Highways, 1981 ...... 48

(Continued) Table of Contents (Contd.)

TABLES Page No.

8 Structure of Fuel Prices, Effective December 1980 ...... 49 9 Passenger Traffic on Portuguese Railroads (1973-1979) .... 50 10 Freight Traffic oni Portuguese Railroads (1973-1979) ...... 51 11 Deficits of Portuguese Railways 1973-80 ...... 52 12 CP Tentative Investment Program 1979-1984 ...... 53 13 Port Traffic .54 14 Container Traffic Through Ports .57 15 Port Finances ...... 58 16 Portuguese Air Traffic .59 17 Deficits of Enterprises in Portugal (1973-1979) .60 18 Operating SubsidiE!s and Investment Grants to Portuguese Transport Enterprises, 1973-1978 .61

GRAPH

1 Comparison of Official Fuel Pump Prices and Border Prices, 1973-82

MAP S

IBRD 12035R Portugal: System IBRD 14625 Portugal: Lisbon Region Transport System

REPUBLIC OF PORTUGAL

TRANSPORT SECTOR MEMORANDUM

SUMMARY

(i) This Memorandum is intended to provide the basis for discussions between the Bank and the Portuguese Government on issues in the transport sector of the Portuguese economy. The Memorandum concentrates on the three major modes: roads, railways, and ports and shipping. Most of the information used was either collected directly by Bank transport missions to Portugal or was drawn from the reports of four consultant studies carried out between 1978 and 1981 under the Bank's First Highway Project: National Transport Planning, Railways Rehabilitation, Highway Master Plan, and Highways Administration and Maintenance. The most recent data quoted are therefore generally for [979. While specific issues have evolved since then - notably as regards the railway and energy, where the analysis has been updated to 1982 - the general conclusions remain valid.

(ii) Portugal's transport system is relatively well developed, but much of the infrastructure and equipment is overdue for renewal or modernization. The key issues for the future are: (a) how to modernize the capital stock while avoiding massive and slow-yielding investments; and (b) how to correct the distortions created by the underpricing and oversupply of public trans- port services that are draining public finances.

Roads

(iii) Roads are the dominant mode of transport for both passengers and freight. Expenditures orn road transport by users reached an estimated 130 billion escudos (US$2.6 billion) in 1979, while only about one twentieth of that was spent on road construction and maintenance (para. 2.02). More attention should therefore be paid to ways to save on new vehicle purchases and on fuel. Additional expenditures on roads, even if large relative to recent levels, are likely to yield high returns if they can reduce user costs by even a few percentage points.

(iv) It is recommended that the Ministry of Housing, Public Works and Transport improve its collection of statistics on the vehicle fleet, particularly as to scrappage, to help in forecasting requirements for new vehicles (para. 2.07). The consistency of such forecasts with the Ministry of Industry's plans to expand vehicle manufacturing in Portugal should also be ascertained (paras. 2.43-2.45).

(v) Restrictions on the licensing of intercity buses on routes compe- titive with the railway should be repealed, as they have no economic justi- fication (para. 2.15). The MHPWT should also assess how it can encourage public transport services in rural areas where the traffic volumes are too low to support regular services by full-size buses (para. 2.17). - 2-

(vi) The unusually low utilization of trucks is a cause for concern; raising productivity offers scope for large savings. A study is required to analyse the causes of this low productivity. Regulations designed to direct traffic to the railway are thought to contribute to this problem, as they instead have encouraged reliance on own-account trucking to a wasteful degree. Among such regulations, licenses discriminating against long-haul operations should be abolished, as they have no economic justifi- cation. The opportunities for raising load factors and reducing empty back-hauls by better marketing and dispatching systems deserve to be studied. The compatibility of Portuguese transport regulations with practices in the EEC should also be reviewed (paras. 2.18-2.25).

(vii) The principal deficiency of the road network is that roads are too narrow, too winding, and too cluttered by uncontrolled access for fast, safe . The accident rate is three times as high as in France and West Germany and one-and-a-half times as high as in Spain and Greece (para. 2.12). In the more densely populated areas, where the opportunities for building completely new alignments are limited, this points to the need for a sub- stantially expanded program of improvements in width and intersection lay-out to relieve congestion and reduce accidents (paras. 2.26- 2.33). Completion of the Lisbon-Porto freeway is probably justified economically, though there should be closer collaboration on this question between the freeway concessionnaire and the highway authority (paras. 2.26-2.35).

(viii) Road maintenance could be made more cost-effective by greater mechanization, more systematic management, and the use of appropriate surfacing techniques. The recommendations of the recent highway administra- tion and maintenance study provide the basis for such improvements, but risk being ignored because of institutional inertia, staffing restrictions and shortage of funds (paras. 2.36-2.38).

(ix) Road users provide revenues to the Government well in excess of public expenditures on roads. If the Government adopts a policy of treating road operators and the railway on an equal competitive footing, as the Bank recommends, taxes on road vehicles should be devised specifically to reflect the wear and tear that each category of vehicle inflicts on the network (paras. 2.39-2.42).

Railways

(x) The Portuguese railway, CP, is primarily a passenger railroad. Demand is high on suburban lines in the Lisbon and Porto regions and on the Lisbon-Porto line, but low elsewhere. Freight traffic is limited, because of the predominance of short hauls in domestic freight flows. It is doubtful whether many services other than Lisbon-Porto line and certain Lisbon and Porto suburban services can compete economically with road transport (paras. 3.01-3.03).

(xi) The Government requires CP to operate numerous lightly used lines and stations. Passengers are considerably undercharged. Despite sizeable increases in rates and fares in the past 2-3 years, they remain so far below - 3 -

costs that CP's revenues do not even cover its wage bill, and cover less than half of its total Expenses. In consequence, CP's deficit reached 12.5 billion escudos (US$175 million) in 1982, more than the entire expenditures, capital and current, on the national road network, and out of all proportion with the railway's role in the economy. Shortfalls in Government subsidies to compensate for the provision of uneconomic services have pushed CP into unsustainable short-term commercial borrowing at high interest rates. Only an integrated program of fare increases, service improvements and cost reductions will guarantee improvement in CP's financial situation (paras. 3.04-07).

(xii) Cost reductions should be sought by continued efforts to redeploy surplus manpower and replace rolling stock that can no longer be operated and maintained economically. condition is generally satisfactory, thanks to intensive maintenance (paras. 3.08-10).

(xiii) The decree law issued on February 1983 constitutes, in the Bank's view, the only viable solution for the long-term, in so far as it redefines the role of the railway as a commercial operator in competition with the other modes of transport, and grants CP the managerial autonomy to conduct its business accordingly. It therefore has the Bank's strong support. The action programs to implement the new policy should focus on the education of the public as to the justification for fare increases, negotiations with labor on manning cutbacks and negotiations with public sector creditors on the rescheduling of CP's debt (paras. 3.12-13).

(xiv) To generate public support for its new policy, the Government should make explicit the objectives of the public service obligations that it imposes on CP, and make full compensation for the cost of those it decides to maintain, valued in advance., Responsibility for negotiating and funding the necessary ccmpensatory payments should be devolved to the local authorities or other branches of Government that stand to gain or lose most from the services in question. To this end CP should develop better cost accounting and marketing (paras. 3.14-18).

(xv) Consistent with the above strategy, CP's investment program should concentrate on upgrading its high-density services, including strengthening of and renewal of rolling stock, while keeping capital outlays on low-density lines to the minimum required to ensure public safety (paras. 3.19-20).

Ports and Shipping

(xvi) High-level decisions are required on the options of intensifying the use of the existing port facilities at Lisbon and Leixoes (Porto), making large investments at the entirely new port of Sines (so far used exclusively for oil and products), or expanding minor ports (para. 4.09).

(xvii) Efforts to raise port productivity by organizational reforms and improved technologies (palletization and ) should be pursued - 4 - vigorously, as they will reduce the need for costly new infrastructure. Success in this direction will reduce the urgency of developing new facilities at Aveiro and Viana do Castelo (paras. 4.04-06, 4.12).

(xviii) The main problem in selecting a new national container terminal in the Lisbon area is the lack of good road access. The options should therefore be studied in close collaboration with the municipal authorities and JAE (para. 4.10).

(xix) Facilities for importation of coal are urgently needed at Sines for electricity-generating plants. However, funds should not be committed for large-scale facilities to serve other future industrial plants at Sines until firm decisions to proceed with construction of the particular plants have been reached (paras. 4.08, 4.11).

(xx) The Portuguese ocean-going merchant fleet is in need of moderniza- tion and better management. A clear distinction needs to be drawn between the socially essential services to the Azores and Madeira, which qualify for government financial support, and the international services, which should be allowed full managerial and financial autonomy to operate competitively in the rapidly-changing international environment (paras. 4.14-18).

Civil Aviation

(xxi) Portugal's five international airports serve the country's needs adequately. It is doubtful that traffic in the near future will be enough to justify either a new at Lisbon or the planned extension of the runway at Madeira. A shift in the traffic patterns of the national , TAP, since the former African colonies gained independence, requires a restructuring of the fleet (Chapter 5).

Lisbon Region Transport

(xxii) Although Lisbon suffers from severe , proposed new transport facilities in the region should not be allowed to reach an excessive level of investment per person served, relative to the rest of the country. This applies in particular to the building of both new subway links and a freeway to Cascais. Priority should be given instead to improving traffic flows by more forceful traffic management, staggering work hours and discouraging on-street parking (Chapter 6).

Transport Policy and Planning

(xxiii) Until September 1981, the division of responsibility for the transport sector between two ministries inhibited the development of con- sistent regulatory policies and investment plans. Maximum advantage should now be taken of their amalgamation into a single ministry. Policies and procedures to alleviate the financial problems of the public sector trans- port agencies should be applied more widely and more systematically. The multi-modal planning unit of the former Ministry of Transport and Communica- tions should be strengthened and priority given to implementing the action - 5 - plan that emerged from the recently completed National Transport Plan study (Chapter 7).

Sector-Wide Issues

(xxiv) Decision-making at higher levels is very slow throughout the transport sector. To reduce the deficits of public sector transport agencies, which receive 4-6% of the public budget, action is required on several points: (a) tariffs must be raised to cover costs and provision made for more flexible adjustment to keep in step with costs in the future; (b) restrictions on hiring and firing labor should be eased; (c) discounts to special interest groups should be systematically compensated for by the "sponsoring" branch of Government; and (d) the financial structure of many of the agencies needs to be radically altered (paras. 8.03-8.11).

(xxv) More attention needs to be paid to the interpretation of performance statistics, to focus on the problem of low productivity (paras. 8.12-8.13).

(xxvi) Large-scale projects offering slow and uncertain paybacks should be shelved in favor of the replacement and renewal of existing assets, and the adoption of more cost-effective maintenance (paras. 8.15-8.19).

(xxvii) Energy prices are appropriate for indicating the relative scarcity of fuels. Conservatioin efforts in transport should focus on eliminating road traffic congestion and low-traffic rail services (paras. 8.20-8.25).

Recommended Government Strategy in Transportation

(xxviii) Improved investment planning and better operational management in transport can enhance t:he competitiveness of Portuguese agriculture and industry as the countrv prepares for entry into the EEC. They can do so both directly, by lowering the cost of transport, and indirectly, by freeing up Government funds for alternative uses. Chapter 9 recapitulates recom- mendations on strategy for railways, ports and roads, giving priority to measures to reduce deficits and to investments with high and quick returns (paras. 9.04-9.09).

(xxix) There is a need for explicit policies to guide investment and subsidies affecting the poorer regions of the country (para. 9.03). - 6 -

I. TRANSPORT SYSTEM OVERVIEW

1.01 Portugal's transport system is relatively well developed, includ- ing three major ports at Lisbon, Leixoes (serving Porto) and Sines, six smaller commercial ports, about 3,500 km of railways, some 42,000 km of paved roads and, on the mainland, three international airports. Generally, economic development has been well served by the transport system, but much of the infrastructure and equipment is fully depreciated and overdue for renewal or modernization. The key issues for the future are: (a) how to modernize the capital stock to meet the needs of the economy while avoiding massive and slow-yielding investments that the economy cannot afford; and (b) how to correct the distortions created by the underpricing and oversupply of public transport services that are draining public finances.

1.02 The concentration of agricultural and industrial activity in the western coastal belt, the traditional seaward orientation of Portugal, and its continuing dependence on international trade and have combined to form a dense transport corridor extending the 350 km or so from Lisbon to Porto. The road and rail links in this corridor carry about half of all domestic traffic. In the rest of the country where the level of economic activity is lower and cities are smaller, both the network and traffic are more sparse.

1.03 Although total land traffic expanded rapidly in the 1960's and early 1970's, the transport network remained virtually unchanged. There were no additions to the basic rail network in the last decade, and the national highway network has also stayed essentially the same. Nevertheless, the road network provides a reasonable degree of access to all parts of the country. Some of the railway lines now.carry very little traffic.

1.04 Road is the dominant mode in domestic transport, both for passen- gers and freight. The railways' principal contribution is to serve passenger traffic in the Lisbon-Porto corridor and commuter traffic in the Lisbon and Porto areas; goods transport by rail is much less important, because of the generally short distances involved. Air transport and coastal shipping play a minor role, except to and between the islands of the Azores and Madeira, where it is crucial. No firm statistics are available on total road trans- port, but rough estimates indicate that road passenger transport accounts for about 84 percent of all mainland passenger-km and rail 16 percent, while in freight transportation, road accounts for about 92 percent of all ton-km and rail 8 percent (Table 1).

1.05 As in most of Western Europe, transport services are operated partly by the private sector, partly by the public sector. Public sector involvement grew substantially after the 1974 revolution, with the nation- alization of interurban buses in the south, a part of the common-carrier trucking fleet, TAP, the national airline, and the biggest shipping companies. This duality in ownership implies the need for consistent policies to govern competition between operators in both sectors. The rapid changes in the political environment during the 1970's have entailed equally rapid shifts in transport policies, forcing those responsible for transport planning, policy and regulation to act largely on an ad-hoc basis, with only limited coordination between modes.

1.06 Until 1981, infrastructure planning had to cope with the division of authority between the Ministry of Housing and Public Works, which was responsible for the national road network, and the Ministry of Transport and Communications, which was responsible for the remainder of the sector. Furthermore, freeways were, and still are, built and operated by an autonomous, partly private concessionaire. In September 1981 a single Ministry of Housing, Public Works and Transport (MHPWT) was formed, making it easier to apply policies consistently across the whole sector.

1.07 The Government of Portugal has now completed a National Transport Plan Study (NTP) with the aid of Bank-financed consultants Kampsax (Denmark) and Systan (USA). The :study, substantially completed late in 1981: (a) analysed the different national policies that impinge on the transport sector; (b) made specific recommendations for or against certain proposed investments in major transport facilities; and (c) provided a computerized multi-modal model for use by the MHPWT. The emphasis was on equipping the Portuguese transport authorities with the means to explore the impact of alternative policy options on the sector and to propose investment programs on a continuous rather -han a once-off basis. The NTP study's policy recommendations are set out in Annex 1. During 1982 the Government reviewed the investment and policy recommendations with a view to preparing appropriate budgetary, Legal and organizational changes.

1.08 The major questions on which the NTP study has made recommenda- tions and on which the Government is now preparing action are as follows: (i) Is Portugal allocating too little investment to the road network, particularly maintenance and rehabilitation of existing roads? (ii) What parts of its railway system should Portugal improve, and what parts close? (iii) Should the Governrnent be improving so many small ports, or should more goods be shipped through the main ports of Lisbon, Leixoes (Porto) and Sines, with land transport between there and the origin/destination in Portugal? and (iv) Should Portugal reequip its international airline? In exploring these questions, this report will devote a chapter to each mode, then draw together the threads common to the whole transport sector.

II. ROADS

A. The Importance of Rcoad Transportation

2.01 Road transportation in 1979 was estimated to total about 30 billion passenger-km and 9-12 billion ton-km of freight. A rough estimate of the corresponding expenses by road users is about 130 billion escudos (US$2.6 billion) net of taxes (Table 2). In addition, users paid an estimated 26-27 billion escudos (US$0.5 billion) in taxes and customs duties. - 8 -

These two types of expenditures far exceed railway operating expenses of about 8 billion escudos (US$165 million), while the revenue inflow contrasts sharply with the subsidies paid out to the railway of nearly 6 billion escudos (US$120 million). The roads subsector is therefore clearly a major consumer of resources (GNP was about 1,000 billion escudos, or US$21 billion), as well as a major contributor (10 percent) to Government revenues.

2.02 The principal items of expenditure by road users (net of tax) were new vehicle purchases (about US$0.5 billion), fuel (about US$0.4 billion) and spare parts and maintenance labor (also about US$0.4 billion). Because of the difficult economic situation, vehicle purchases were at a level about one half of normal replacement. Increases in the price of crude oil helped push the fuel bill up to about US$0.7 billion in 1980. By contrast, expend- itures on road construction and maintenance in 1979 totalled an estimated 7-8 billion escudos (US$140-160 million), equivalent to about 5 percent of user expenses and only 28 percent of user taxes. As will be discussed below, this expenditure was well below a normal replacement level.

2.03 This comparison has two important implications. Firstly, since one of the sector's objectives is to reduce transport costs, attention should be focussed as a priority on the largest components, that is, new vehicle purchases and fuel consumption. It appears likely that there are indeed opportunities for increasing the productivity of the commercial vehicle fleet substantially, thus reducing the future need for new vehicles. Potential savings in fuel consumption are less obvious, fuel having been priced high for many years, but they deserve attention nonetheless, since even a small relative reduction constitutes a large saving in absolute terms.

2.04 The second implication is that additional expenditures by the Government to improve the road network, even if large relative to the outlays of recent years, are nonetheless likely to yield a high return if they can reduce road user costs by even a few percentage points. Both these points will be elaborated below.

B. Road Transport Demand

2.05 Published statistics put the vehicle fleet at over 1.5 million vehicles. The National Transport Plan consultants consider that this includes many scrapped vehicles and estimate the operational fleet in 1979 at 1.15 million. The uncertainty regarding the statistics makes precise comparisons with other countries unreliable but the NTP figure suggests that the level of vehicle ownership is well below Spain, and similar to Greece and Yugoslavia.

2.06 Although the following table suggests that the number of vehicles in Portugal is on the high side relative to per capita income, the degree of mobility may in fact be less, as many vehicles are old and used only lightly. As of 1979, half the fleet was more than seven years old, whereas in conditions of moderate steady growth one might expect the median age to be 4 to 4.5 years. - 9 -

Vehicles per Per Capita Income 1000 persons, 1979 1979 (US$)

Portugal 120 2,160 Spain 220 4,340 Greece 130 3,890 Yugoslavia 120 2,430

Source: International Road Federation "Road and Motor Vehicle Statistics for 1979", and World Bank Atlas, 1980.

2.07 New vehicle purchases have been dampened in recent years by the rapid rise in fuel prices, restrictions on availability of credit and high interest rates. From a level of 70,000-80,000 new and per year in the early and mid-1970's, the market has shrunk to about 50,000 per year (Table 3), a rate which if sustained without increases in utilization would mean replacing the fleet once every 19 years, and no growth. A more normal 8 to 10-year replacement cycle, together with 3-4 percent annual growth, would imply annual sales of 120,000-150,000 units. Truck sales in contrast have more than doubled from about 3,000 per year before 1977 to about 7,000 in 1979. The latter is abcout the right level for replacement and growth of a fleet with a more customary age distribution, but not necessarily enough to reduce the backlog of over-due replacement, unless the new trucks are utilized much more intensively.

2.08 The indications are that there is considerable scope for raising vehicle utilization. Using data on gasoline consumption, it has been estimated that cars averaged just under 12,000 km in 1979, down from 14,000-15,000 km per year, the more normal European average, in the early 1970's. The high price of gasoline is the most likely cause. A survey of common-carrier and own-account trucking by the former MTC's Land Transport Department ("Direcgao Geral de Transportes Terrestres" - DGTT) in 1979 showed that light goods vehicles (vans and pickups) are also lightly used; the average was 23,600 km per year. In many countries these vehicles do 40,000-50,000 km per year. Finally, the same survey found that trucks were averaging only 30,000-32,000 km annually, with the smallest trucks (3-8 tons gross vehicle weight) averaging only 20,200 km and the largest (32-38 tons) 55,000 km (Table 4). In most countries of Western Europe, common-carrier truckers expect to do 80,000-100,000 km per year to be profitable, and fleet-wide averages of 50,000-60,000 km are common.

2.09 The above inferences must remain tentative, as they are based on incomplete and sometimes inconsistent statistics. However, two important issues are at stake here, which do not appear to have received much Govern- ment attention so far: (a) low fleet productivity; and (b) the viability of a domestic vehicle manufaci:uring industry. Each of these will be discussed below. As an essential first step to a clearer perception of the issues, the Traffic Department of the MHPWT should review its procedures for documenting vehicle scrappage. It should also take care to separate agricultural - 10 - and trailers from road -trailers, and establish clear and consistent definitions for vans and pickups. As will be seen below, their dual passenger/freight use takes on significance in connection with fuel pricing policy.

2.10 Country-wide traffic data are gathered every five years. The latest campaign was in 1980; at the time this part of the report was written the full country-wide results were not yet available. The 1975 survey showed a considerable concentration of traffic on a small part of the network, which is normal; 11 percent of the primary network carried over 3,000 vehicles per day, while 67 percent carried less than 1,000. This survey appears to have over-stated countrywide volumes by relying in part on cordon surveys taken close to major towns, but the degree of over-estimate can only be guessed at. The primary (so-called "national") network is two-fifths of the total network, and estimated to carry 80-90 percent of interurban traffic. Municipal roads, which make up the remainder, are lightly trafficked, probably under 500 vehicles per day. On a country-wide scale the density of the network therefore appears appropriate to the size of the fleet and its rather low utilization level. All the high-volume links (over 8,000 vehicles per day in 1975) are located in the Lisbon-Porto corridor.

2.11 Selected traffic counts from the 1980 campaign show some growth since 1975 but no clear trend, probably due to the vicissitudes of the economic and political situation and fuel prices and supplies. For the 1980's, it is reasonable to expect traffic growth slightly faster than growth in GDP, that is, 4-6 percent per year (doubling in 12-18 years).

Road Safety

2.12 The risk of road accidents in,Portugal is one of the highest in Europe. The number of accidents exceeded 50,000 in 1979, and between 2,100 and 2,700 people were killed each year from 1975 through 1979 (Table 5). This was three times as many, relative to the amount of traffic, as in Italy, France or West Germany: about 13 fatalities per 100 million vehicle-kms compared to 4-5; Spain and Greece had about 8. Although views vary widely on the valuation of accidents, one estimate puts their cost to the economy at about US$250 million per year.

2.13 The proximate cause for such a high rate is probably poor habits, in particular excessive speed, relative to the roads' design. Most of the network, constructed in the first half of the century, predated the rapid growth and technological development of the motor vehicle fleet. Curvature, roadside trees and masonry signs all constitute hazards, which take time to correct. The large influx of motorized tourists in the summer months adds to the problem.

2.14 There are indications of a growing awareness of road safety, such as the recent publicity activities of the Traffic Department and Prevencao Rodoviaria Portuguesa, a road safety organization. Many highway districts are now replacing masonry and concrete signs by metal ones that cause vehicles less damage on impact, though this practice is not yet general. A - 11 - collaborative effort is needed between the police Road Traffic Brigade and the Highway Authority to process accident data in order to identify "black spots", establish the most common causes of accidents, and assess the cost-effectiveness of alternative preventive measures. There remains ample scope for improved lane and side-line marking, as well as small-scale modification of intersections and limitation of frontage access in urban and suburban areas.

C. Road Transport Services

Buses

2.15 services on intercity routes throughout most of the country are provided by Rodoviaria Nacional (RN), a public enterprise operating about 3,000 buses. In the North, private bus companies predominate. Until 1982, scheduled bus routes were regulated so as not to compete with the railway, resulting in a short average haul of 30 km. Chartered buses were supposed to provide services only oni an occasional basis. However, bus companies extended unscheduled bus operations well beyond the letter of regulation, de facto competing with the railway on longer routes by offering lower fares, increased comfort, and sometimes shorter travel times as well. A decree repealing these restrictive regulations, which had little or no economic justification, is now being implemented.

2.16 RN was formed in 1976 from numerous private bus and some trucking companies, many of which had been operating on the brink of bankruptcy for some years. RN inherited a bad financial situation and an over-age and uneconomic fleet, operating at a low level of service. Subsequently, RN has made substantial purchases of new buses and generally improved services, while maintaining the level oi employment and improving working conditions. However, fares have not been allowed to rise to the full extent of operating cost increases. This has contributed to large annual deficits, which have been only partly covered by governmental subsidies. In July 1978, the Government and RN signed an economic and financial restructuring agreement for the period 1978-82, covering their respective obligations for bringing about a financial recovery. This agreement provided for adequate maintenance. Modernization of the fleet is expected to help RN increase productivity, and to improve services.

2.17 The load factors on interurban buses are generally low (averaging 45-48 percent). These could be raised on routes operating into the larger urban areas by measures to smooth traffic peaks, such as staggered working hours. On low-density routes savings could be made by introducing smaller vehicles as the existing buses come due for replacement. There are surprisingly few small buses or in operation, even though there would seem to be a promising market for their services in rural areas. In the North-East they could provide low-cost substitutes for the railway (para. 3.06). The National Transport Plan includes a recommendation to study whether regulations may be impeding development of bus services in general and services in particular (Annex I). - 12 -

Trucking

2.18 Trucking in Portugal is distinctive on two counts: own-account vehicles make up an exceptionally high proportion of the fleet (90 percent) and annual mileage is unusually low (about 31,000 km - see Table 4). Both phenomena are probably related to government regulations designed to protect railway traffic that were in effect until 1980. Progress towards utilization levels achieved in many other countries could yield savings to the economy of US$90-180 million per year.

2.19 RN is the largest common-carrier operator in Portugal with 450 trucks, while most companies operate 1 to 2 vehicles each. All trucks are licensed to operate within a radius of either 50 km, 100 km or without limit, the greater radii commanding considerably higher fees. Only 30 percent of own-account and 31 percent of common-carrier trucks were in the unlimited category. This discrimination by distance has no economic justification. We do not know whether the fees alone deterred more operators from taking out the "unlimited" licenses, or whether municipalities adopted an overly restrictive definition of need in deciding how many new licenses to issue. It also remains to be determined how far the distance restrictions are actually enforced.

2.20 The factors determining the strong preferenc' for own-account vehicles also deserve to be studied. In France, for example, where until recently trucking was also restricted in favor of rail transport, own-account trucks are about 70 percent of the total, whereas in Brazil, an essentially unregulated market, they are only 15 percent. As ancillary assets to the owner's factory or business, own-account trucks are not subject to the same profitability incentives as common-carrier trucks. As evidence of this, their annual utilization in Portugal is less than that of common-carrier trucks by one-quarter and their load factors are lower by one-third. Under a law introduced in 1980, a large number of truck owners were allowed to register as common carriers who previously had held own-account licenses and were hiring out their trucks illegally. This shows that the quantity restrictions on common-carrier licenses had failed to satisfy the demand.

2.21 Load factors are generally high, in the sense of the ratio of load to capacity on loaded trips. In the DGTT survey of 1979, the average load for different commodity groups varied from 64 percent of capacity to 112 percent. Indeed overloading is widespread; 14 percent of respondents in that survey reported overloading their trucks, 2 percent even acknowledging carrying double their authorized load. It appears that little effort is made to enforce the loading limits. To what extent this also means that axle load limits are exceeded has not been systematically studied, nor has the damage that axle overloading may be doing to road pavements. As to back-hauls, the other main indicator of truck productivity, a national origin-destination survey in 1979 showed that only 55 percent of trips were loaded. The DGTT could help improve this performance by encouraging the establishment of freight-forwarding bureaux to provide marketing services and terminals for the consolidation of small loads. - 13 -

2.22 It is not clear how far the low mileage is due to the poor mechanical condition of over-aged vehicles, and how far to weak management and excessive reliance on own-account vehicles. If the main problem is a decrepit fleet, an infusion of new trucks will be needed in the short-term to restore a more normal age distribution. This would yield large savings, however, in avoided maintenance and repair. If on the other hand weak management, taxes and quantity restrictior,s on common-carriers are the main problem, the MHPWT should review the regulaitions and incentives under its authority that could be influencing trucker performance. In the latter case the direct savings from more intensive utilization would be in lower overhead costs per ton-km performed and a reduced need for new vehicles. How many new purchases could be avoided depends on how far total lifetime mileage per truck can be raised, but a very rough estimate of the potential savings is as follows.

2.23 From the information available, we estimate annual expenditures on new heavy goods vehicles in 1979 at about 10.8 billion escudos (US$240 million) in economic costs. This is consistent with 9 percent of the fleet being replaced each year and growth of 3 percent. If deregulation and operating improvements could be introduced that raised annual utilization to a more normal 50,000 km over a period of 5 to 10 years, without substantially reducing vehicle life, the requirements for new trucks would be cut by US$90-180 million per year initially, and more as demand grew. About half of the savings would be in foreign currency.

2.24 To make the same point another way, the NTP consultants have estimated that raising truck utilization to an average of 50,000 km per year would lower total user costs on the interurban network by about 7 percent, the same order of savings as would accrue from a highway construction program costing some 70 billion escudos (US$1.4 billion). Since such a productivity improvement can probably be achieved at only a fraction of this cost, the DGTT should give high priority to analysing the causes for the present situation and the potential impact of removing restrictive regulations. This is part of the NTP Action Plan (Annex 1). The availability of credit to small-scale operators for purchasing new trucks should also be reviewed.

2.25 In this connection, the compatibility of transport regulations with EEC requirements also needs review. It is believed that EEC directives on public service obligations will exempt the subsidies being paid to the railway, but Portugal is likely to be considerably more restrictive in its truck licensing than other members, and to that extent uncompetitive in intra-community trade.

D. Road Infrastructure

Diagnosis

2.26 The Portuguese road network consists of 50,900 km of road, of which some 34,400 km, or 67 percent, are paved. As mentioned in connection with the high accident rate, most roads have inadequate geometric and structural dimensions. Excepting a few short sections of limited-access, 4-lane highways in the Lisbon and Porto regions, the national network is of a 2-lane standard, - 14 - with 90 percent of the roads inventoried in the recent studies being between 5 and 6 meters wide. Most paved roads have a thin bituminous surface. As evident from their poor condition, they are not strong enough to carry present-day volumes and loads.

2.27 The principal deficiencies of the national network are that, by the requirements of today's traffic volumes, speeds and truck sizes and weights, most roads are too narrow, too winding, and too cluttered by uncontrolled access for fast, safe travel. Shoulders wide enough to allow passing traffic a margin of safety are rare, as are bypasses and climbing lanes for slow vehicles. This points to the need for improvements in width and intersection layout to relieve congestion and reduce accidents on roads with traffic in the range 3,000-8,000 vehicles per day.

2.28 Many roads have inadequate drainage, causing pavement deteriora- tion to accelerate. Maintenance has relied on labor-intensive methods, with only limited mechanization. Productivity is low, and attention to the pave- ment has been given priority over drainage. On lower-trafficked roads, pavements are often patchwork quilts of small-scale repairs, well beyond the point at which, for the same cost, the whole road width could have been surface-dressed. The reasons why surface dressing has not been widely used are not clear. Given Portugal's fairly high rainfall, surface dressing is undoubtedly an effective means of preserving the pavement structure.

Organization

2.29 The 20,360 km of national roads are administered by the Junta Autonoma de Estradas (JAE), an agency of the MHPWT. Its main administrative and technical departments are in Lisbon, but the authority for execution and, as from 1978, the design of civil works'is vested in the regional offices. It is short of supervisory field staff and mechanics, due to a lengthy hiring process and salary scales not competitive with the private sector.

2.30 Feasibility studies for individual highway projects are prepared by the JAE's planning unit, Gabinete de Planeamento e Programagao (GPP). In 1973 Dorsch Consult (Federal Republic of Germany) assisted the JAE in preparing a 10-year highway investment plan which has provided the basis for rehabilitation and construction operations over the past decade. A new national highway master plan was prepared by the JAE and Freeman Fox/Halcrow Fox and Partners (UK) in 1980-81, with financing provided by the Bank's First Highway Loan, concurrently with the National Transport Plan. The final report was issued in May-1982. A third consultant, Roy Jorgensen Associates (USA), has simultaneously assisted the JAE in improving its administrative and maintenance activities, also financed under the Bank's First Highway Loan.

2.31 A concession was awarded to a private firm, BRISA, in 1972 for constructing and operating a total of about 400 km of toll expressway. Infusions of public funds in 1975 and 1981 have now given the Government 87 percent of BRISA's capital. By the end of 1982, 158 km had been completed, south and north of Lisbon, south of Porto and bypassing Coimbra. BRISA hopes to complete the Lisbon-Porto section (297 km) by 1985, at a cost of some 20 - 15 - billion escudos (US$400 million) in 1979 prices. It is not certain that such a program will in fact be fully funded,-as BRISA is dependent on government subsidies, and will continue to be so unless tolls are raised substantially.

Expenditure on Roads

2.32 In the past decade Portugal has spent less on its roads, relative to national income, than many other European countries. In the 1970-1980 period, total highway appropriations, shown in Table 6, were 0.3-0.6 percent of the GDP, compared to 1-2 percent in the major countries of the European community. Total highway expenditure as a percent of the government budget has been in the range 1-2 percent. This is probably also lower than the EEC countries, but differences in the size of the public sector and definitional problems as to what is included in the government budget make precise compa- risons unreliable. The insufficiency of funds applies across the board; the breakdown between new construction, rehabilitation and maintenance (Table 7) is reasonable, with the lion's share allocated to "modernization", i.e. rehabilitation and minor improvements.

New Construction

2.33 In the corridors where the most congested roads are located, the scope for widening and realigning is restricted by the dense use of land. A question of particular interest, therefore, is the extent to which entirely or substantially new alignments are economically preferable to minor upgrading of "black spots" in the Po:rtuguese context, and the circumstances which tip the balance in favor of one solution or the other. Regrettably, the Highway Master Plan study did not address this question.

2.34 Congested roads in the Lisbon-Porto corridor are likely to be relieved in the next few years by the completion of the Lisbon-Porto freeway. However, the National Transport Plan consultants argue that the existing Lisbon-Porto highway (ENl) will need to be widened to four lanes. The Bank has not seen feasibility studies for the various sections of the freeway, so that it is difficult to pass judgment on their economic justification or the optimal spacing of interchanges. What can be said is that the traffic volumes on ENI are high enough t:o cause severe congestion, and the almost uninterrupted ribbon development along it, both residential and industrial, make continuous widening to four lanes impracticable. The autoestrada is an effective means of separating through traffic, particularly trucks, from traffic requiring access to the fronting properties. It is therefore esential that JAE and BRISA coordinate closely on this question.

2.35 The scale of new construction needs nationwide is large. The NTP consultants have identiiied various alternative construction programs for the years 1985-2000 averaging 4.2-4.8 billion escudos (US$85-95 million) per year. JAE's construction budget in recent years, in contrast, has been 1.5-2.0 billion escudos (US$30-40 million). The NTP programs show a return of over 12 percent. In this connection, it may be useful to bear in mind that every one percent reduct:ion in total economic road user costs on the interurban network is worth about US$13 million per year, or, capitalized over - 16 -

20 years at 12 percent, about US$110 million in total. The NTP 15-year program would reduce total road user costs in the year 2000 by about 10 percent compared to the pre-1985 situation.

Maintenance and Rehabilitation

2.36 There is also a need throughout the network for periodic mainte- nance and pavement strengthening to forestall deterioration of the pavement structure, reduce vehicle wear and tear and lessen the risk of skidding. Despite the existing surplus of unskilled labor, mechanization offers the possibility of substantially increasing the cost-effectiveness of highway maintenance, even if one uses shadow prices for labor and capital. Moreover, many roads require substantial improvement works such as constructing ditches, widening shoulders and installing cross-drains, in addition to regular routine maintenance.

2.37 The JAE has been trying since 1973 to reorganize and otherwise improve its maintenance operations. The Bank's First Highway Loan has been used in part to purchase maintenance equipment and pay for the Jorgensen maintenance study. Mechanized units are not yet functioning, due to the low level of qualifications of much of the existing staff and the hiring restrictions on operators and mechanics, while existing workshops cannot maintain the new fleet of road equipment. On the other hand, the lack of performance standards for output makes it hard to define manpower needs with confidence, and there is no joint accounting of fleet and manpower. As a result, the lion's share of the maintenance budget is automatically committed to meeting a large and inflexible payroll while the mechanization effort is starved of funds and new equipment stands idle. The vicious circle perpetuated by the excess of unskilled manpower and the shortage of skilled personnel should be urgently broken.

2.38 The needs in terms of routine and periodic maintenance have been estimated by the Jorgensen team at 2.1-2.2 billion escudos (US$32-34 million) per year in 1981 prices This is one-third to one half more than the amounts actually budgeted in 1981.

Road Revenues

2.39 Road users provide revenue well in excess of the public expendi- tures on highways. Table 6 shows that direct user charges and taxes between 1975 and 1979 totalled about 54 billion escucos. Road expenditures over the same period totalled about 25 billion escudos. Although all vehicle types pay taxes, these do not reflect the concept of levying taxes in proportion to the wear each vehicle imposes on the road. A substantial part of the revenues raised from automobile operators are conceived as a form of luxury tax for funding various social subsidies. A major (but variable) share of gasoline taxes goes into a Commodities Supply Fund that helps subsidize the retail price of basic foodstuffs and fertilizer. The next largest beneficiary is the Fundo Especial de Transportes Terrestres, which has been used to pay railroad and urban transport subsidies to finance the construction of bus terminals and railroad crossings aad support transport research and planning efforts. - 17 -

2.40 Over three quarters of all revenues from road users come from fuel tax, sales tax and annual licenses. The tax component of fuel prices is not fixed. Instead, it is a residual between the import or ex-refinery cost, which varies continuously, and standardized pump prices that are adjusted once or twice a year according to political priorities and judgments of what the market can bear. The structure of fuel prices as of December 1980 is shown in Table 8. It will be seen that the tax on diesel fuel is small relative to that on gasoline; this is a matter of policy to avoid distorting the cost of transport as an intermeliate input for industry and commerce. To equalize treatment of diesel- and gasoline-fueled private cars, the former are charged a fixed annual tax (about US$300) equivalent to the total gasoline tax paid by an average car driving i:he average annual mileage of all cars (about 11,000 km).

2.41 The Highway Master Plan consultants have estimated that revenues from cars cover their share of road costs by a ratio of 12:1, and light commercial vehicles by about 3:1. In contrast, heavy trucks, even those paying the "over-100 km" license fee, have barely covered their imputed costs (estimated at 4 escudos, or 8c per veh-km for the largest trucks). In 1979 they fell short by reascin of the tax on diesel fuel. During that year, the CIF cost of diesel more than doubled (Graph 1) and for the better part of a year the tax element was negative until the pump price was raised correspondingly.

2.42 In the interests of optimizing the allocation of resources, users should perceive the economic costs of the alternative modes open to them, so that traffic is encouraged to use the mode which in each case consumes the least resources. To ensure that heavy trucks continue to meet their fair share of the cost of using the roads, the retail price of diesel fuel has to be adjusted promptly in step with crude oil prices. This would occur automa- tically if the user charge component of the price were fixed. Alternatively, part of the cost could b, recovered from a tire tax or a periodic license fee which took account of the axle configuration and hence the damaging effect of the vehicle.

E. Vehicle Manufacturing Industry

2.43 In the 1970's t:he overwhelming majority of Portuguese road vehicles were imported, either in finished form or as knocked-down kits. The latter were assembled in some 20-22 plants on an inefficiently small scale, their total output varying between 65,000 and 100,000 units per year. Domestic value added was about 20 percent of market prices. They were served by about 100 mostly small companies manufacturing components.

2.44 The is likely to be substantially restructured and expanded as a result of a decree law enacted in 1979 designed to facilitate the transition to EEC membership by the mid-1980's. Import quotas are being progressively liberalized and local value added requirements eased, on condition that producers increase exports. Renault is to expand its output to 80,000 passenger and mixed vehicles a year by 1988, with over 60,000 for the Portuguese market and the remainder for export to the EEC. Other - 18 - international manufacturers, notably Ford, are also exploring the market. The main advantage to the manufacturers lies in Portugal's relatively skilled but low-wage labor force. The advantages to the Portuguese economy are the move to a more efficient scale of operations and hence lower-cost vehicle supply, the creation of some 10,000 new jobs, and access to technical assistance to raise skill levels and economic activity in the mechanical industry sub-sector and other downstream areas.

2.45 Expansion of this sort will require the Government to clarify its policy towards private car ownership. Implicitly at least the Government has sought to discourage car ownership by high taxes and import quotas, and to protect the railway's market by subsidies and road vehicle licensing. A continuation of this policy may be argued on various grounds: energy conser- vation, road safety, air quality and/or income distribution. Whatever the merits of these arguments, the absorption of such a major new industry will call for close collaboration between the Ministry of Industry and the Ministry of Housing, Public Works and Transport to ensure a balance on their respective policy issues.

III. RAILWAYS

3.01 The Portuguese railways (Caminhos de Ferro Portugueses, or CP) play an important but limited role in the transport system. CP is primarily a passenger railroad. It has about 3,600 route-km, four-fifths of which is broad gauge (5 ft 6 in) and the remainder one-meter gauge. Some 400 route-km in the Lisbon-Porto corridor are double-track and electrified. The cumulative effect of many years of under-pricing and the uneconomic operation of lightly used lines and stations has placed a financial burden on the government budget out of all proportion to the railway's transportation role. A decree-law issued in February 1983 constitutes a significant change in policy and a critical step towards resolution of this problem.

Railway Traffic

3.02 Passengers account for seven eighths of all traffic units and passenger services earn three quarters of traffic revenue. Suburban lines in the Lisbon, Porto and Coimbra regions account for 88 percent of total passengers; the Cascais and Sintra lines each carry nearly 60 million passengers per year. Of the intercity corridors, Lisbon-Porto is the most important, carrying about 6 million passengers per year. Most inland lines and stations, in contrast, are only lightly used, so that the average traffic density for the network as a whole is only 1.6 million passenger-km per route-km. Despite the effect of the oil crisis on road transport, passenger traffic grew only slowly during the 1970's (Table 9). In fact, it is doubtful whether many services other than Lisbon-Porto and the high-density commuter lines can compete economically with road transport.

3.03 CP's freight traffic is limited to bagged fertilizers and bulk commodities: manufactured goods, mineral ores, cement, grain and flour. Only - 19 - small quantities of oil and oil products are carried, since refineries are located in the ports, which are near major markets. Traffic density is low at 0.25 million net ton-km per route-km. During the five years preceding 1974, traffic grew at 4-5 percent per year, but then took a dip due to the political and economic upheavals in Portugal (Table 10). In 1979, traffic in tons was still well below the 1974 level, but a shift to longer average hauls kept the traffic in ton-km terms more or less static at the 1970 level. CP forecasts 7 percent growth in ton-kmi; this sharp departure from past experience hinges on the development of a number of new bulk traffic flows which are subject to considerable uncertainty: the distribution of imported coal for power plants, iron ore from Moncorvo, pyrite from the Alentejo region, and various traffics generated by the industrial complex planned at Sines. Little if any of this is likely for the time being.

Public Service Obligations and their Financial Consequences

3.04 The Government: allows CP to operate numerous lightly used lines and stations, where the existing transport demand could be served at a lower cost by highways. This is true of both passenger and freight lines. For example, 90 percent of freight originated in 40 percent of stations in 1971, and the traffic has hardly increased since that time. CP closed down some stations in the north of the country, substituting buses and trucks. However, rail services had to be reinstated following violent protests from the affected population. In 1978, CP reduced freight services at some 80 stations; these stations accept and deliver cargo, but freight do not stop there any more, RN trucks being used for transfer to and from fully active stations. In spite of CP proposals tc, the Government in the early 1970s, no lines have as yet been closed down.

3.05 Passengers are considerably undercharged. According to a study by Transmark in 1973 and a Bank-financed study by Canadian Pacific in 1978-79, only Lisbon-Porto passenger services and the Cascais and Sintra commuter lines cover their long-run variable costs, whereas some low-density rural lines in the Alentejo region covered as little as one-tenth of their long-run variable cost. The cost per passenger on the Cascais and Sintra lines is low because of the very high traffic density, but all suburban services in the Lisbon area are adversely affected by low-priced "social passes" good for transport on all forms of urban transport. CP's rates and fares remained unchanged from 1969 to 1975, while its deficit rose from over 700 million escudos to 3.1 billion escudos (Table 11). There have been annual increases since 1975, but fares remain so far below costs that CP's revenues have failed to cover even its wage bills since 1974.

3.06 Since the Government's subsidies to cover these deficits have fallen considerably short, CP has been pushed into short-term borrowing at high interest rates. By the end of 1981, CP's net short-term liabilities (i.e. net of short-term assets) had snowballed to 28.1 billion escudos (almost US$400 million).

3.07 CP now represents the largest burden on Government finances in the transport sector. This calls for a financial restructuring of the railway to increase revenues, reduce costs, and eliminate its debt. Rates and fares would - 20 - have to be increased 60 percent in real terms to eliminate CP's working loss (loss before depreciation and interest), if all other things remained equal. Such a large increase, unaccompanied by service improvements, is not feasible from a marketing standpoint, so that only a coordinated program of measures in various fields of management (cost reduction, more aggressive marketing, etc.) will guarantee significant improvement in CP's financial situation.

Operating Efficiency

3.08 Of the three main aspects of operations, manpower, rolling stock and track, it is manpower that offers the greatest potential for cost reductions. CP has been run inefficiently by European standards, with low staff productivity (253,000 traffic units per employee in 1979), high car turnaround time (about 6 days throughout the 1970's) and low average loads (between 130 and 160 net tons in the 1970's). It employs about 25,000 people. Although reduced from over 27,000 since 1977, this may still be 35 percent too large, due mainly to overstaffing in administrative services, track maintenance, station personnel and crossing guards. A hiring freeze is in effect, and staff is being reduced through attrition at a rate of about 6 percent per annum. Strong resistance from labor has prevented any faster cut-backs.

3.09 The situation regarding traction and rolling stock is mixed, the main problem being the lack of financing for renewing the fleet. Four-fifths of CP's 177 diesel-electric are less than 20 years old and in good condition. Some 50 all-electric locomotives operate on the Lisbon-Porto line, while the last steam were recently withdrawn from the narrow- gauge lines in the north. On the other hand a large proportion of the car fleet is old: two out of every five passenger and baggage cars are over 30 years old, while more than a half of freight cars are more than 40 years of age. A freight car renewal program was started in 1977, with a goal of replacing nearly 3,000 cars by 1981, but far less than this has been achieved. Maintenance practices have been improved over the last 10 years, but the availability of locomotives is still poor, mainly due to the shortage of parts.

3.10 As for track and other infrastructure, thanks to a maintenance program, more than half of the broad-gauge network is in good condition, although subject to some restrictions due to signals and equipment. Except for about 25 bridges, structures are in a reasonable condition. Freight and marshalling yards, on the other hand, are generally small and inadequate for modern freight operations.

3.11 Changes in CP operating procedures are being gradually made, principally with faster main line passenger services (as track, bridges, etc., are improved), elimination of mixed trains (by use of railbuses), increased frequency of suburban rail services, and increased use of bulk and unit trains for freight traffic. Other, more important changes that would involve political decisions, such as elimination of uneconomic lines and services, and major cuts in manpower, have not yet been made. - 21 -

Financial Rehabilitation under 1983 Decree-Law

3.12 Plans for CP's financial rehabilitation have been under preparation since 1977, but CP and the Government were unable to reach agreement on the allocation of responsibilities for pricing, capital expenditures and the amortization of CP's debt. In February 1983 the Government issued a decree-law which breaks the deadlock. It unambiguously devolves to CP responsibility for capital expenditures, to be guided by criteria of economic profitability, and requires that prices be set to reflect operating costs, with guidance as to how to incorporate depreciation into those costs. The decree also gives CP a stronger mandate than before to refuse to provide services at a loss, unless they are covered by compensatory payments from the beneficiary groups. CP's debts to other public sector agencies are to be consolidated and paid off over ten years by allocations from the State budget, and the Minister of Transport is empowered to waive labor legislation that would obstruct the redepLoyment of surplus manpower. The decree requires that CP's statutes be revised so that it can function as a commercial operator, and calls for the reform of rcoad transport taxation to put road and rail services on an equal competitive Footing.

3.13 This constitutes a comprehensive and courageous set of reforms. The decree-law is of course only a statement of intentions; the action programs to implement the new policy remain to be prepared and carried out, and will have to contend with strong resistance to be expected from three quarters: users objecting to fare increases and service cuts, labor objecting to manpower reductions, and creditors objecting to the rescheduling of debt. Nevertheless, it is a very promising beginning, and has the Bank's strong support.

3.14 The political will to cut back public service obligations might be strengthened if they werE defined more precisely in relation to the objectives sought. Most are motivated by one or more of the following five arguments: (a) all users should pay the same for the same service (the equity argument); (b) pollution and congestion caused by road traffic, which cannot readily be charged directly to road users, should be discouraged by subsidies to competing rail services (the externality argument); (c) CP as the sole supplier of rail services should not be allowed to set prices substantially above its costs (the moncpoly argument); (d) the poor should not be deprived of transport because of inability to pay (the income distribution argument); and (e) economically backward regions would catch up with the rest of the country if transport were subsidized (the regional policy argument).

3.15 The reasoning behind the latter three objectives is questionable. The monopoly argument has been rendered an anachronism in Portugal by the competition from road transport on all but a few links of the network. As for the income distribution and regional policy arguments, it is doubtful whether most rail services can be considered "merit" goods like education or public health, or that lower transport costs are a necessary or sufficient condition for economic take-off in the less industrialized parts of the country; in an economy of Portugal's maturity more direct payments to target population groups would be more cost-effective. - 22 -

3.16 The equity argument requires careful analysis of what is meant by the "same" service; for example, an overcrowded rush-hour service and a nearly empty weekend service, though they run between the same locations and possibly even use the same train, are by no means the same to CP in terms of marginal cost per passenger, nor are they the same to the passenger in terms of quality of service. Should a uniform fare be charged for both? Many European railways would not do so, interpreting the equity principle much more narrowly than CP is required to. Ultimately, however, such questions of principle have to be decided by the community within which the railway operates. The same applies to the externalities argument, since quantified costing of pollution and congestion by third parties is virtually impossible.

3.17 The community can only make sound choices between continuing low-density rail services, subsidizing alternative road services, or allocating government funds to other needs if the relevant costs are fully known and the responsibility for decisions on the competing uses of resources are devolved to the local authorities or other branches of Government that stand to gain or lose most from the services in question.

3.18 It is therefore urgent that the cost accounting system recommended by Canadian Pacific be implemented to allow decision-makers for the first time to identify the subsidies required for specific branch lines and services. CP's marketing staff should also be strengthened so that it can enhance the competitiveness of the core services on high-density lines that can be expected to become and remain viable in the long term. Fares could be deregulated progressively by allowing CP a growing degree of freedom within agreed limits, to be monitored by a governmental review process. Fare increases will obviously be more acceptable to the public when timed to coincide with the introduction of service improvements.

Recommended Investment Strategy

3.19 Railways are most economic in handling bulk commodities over long distances and in handling high-density commuter traffic. Given Portugal's small size and relatively small bulk handling needs, this argues against any expansion of the railway system except to meet specialized needs. The appropriate strategy, therefore, must be to make the best possible use of Portugal's railway infrastructure to handle bulk long-distance freight and high-volume passenger traffic in order to minimize new investment in high- ways and highway vehicles. It is important, therefore, for CP and the Government to persist with closing uneconomic lines because, where volumes are low and the corridor is also served by road, better service can be provided at lower cost by road. In addition, CP should continue to keep capital expenditures on the narrow-gauge system, where most of its uneconomic lines are, to the absolute minimum. The principal objective of railway investment should be to reduce CP's operating costs, and, thereby, its operating deficit. The potential exists for profitable operation of high-speed passenger trains on the Lisbon-Porto route. The main freight routes could also be profitable if their reliability were improved. Elsewhere projects for capacity expansion, which are riskier than cost reduction projects and can lead to a less intensive utilization of assets, should be avoided as far as possible. - 23 -

3.20 CP's tentative investment program for the period 1980-84 totals 17.6 billion escudos and is summarized in Table 12. Within this total the Bank in its report "Portugal, Priorities for Public Sector Investment," issued in July 1980, identified a recommended program of 8 billion escudos which is shown as the first category in Table 12. It focusses on track maintenance and renewal and the strengthening of bridges. Track maintenance ard renewal are high priority items because they improve operating efficiency and reduce operating costs and because deferring them can result in higher operating costs and much more costly reconstruction. However, the rehabilitation and improvement program should be confined to routes with adequate traffic to justify the expenditure. Railway bridges have to be strengthened because they have become bottlenecks in the system. The Douro (near Porto) is high priority because it is 10 years old and unsafe, and this results in very costly operating restrictions on a high-volume and potentially profitable section of line. Similar reasoning applies in the case of 15 other bridges which are to be strengthened by 1984, and which are also high priority. Other priority items include the strengthening of CP's freight carrying capacity. Level crossing automation is seen to be important in reducing operating costs. Finally, equipmerLt modernization and repair is more economic than buying new cars and, as ~such, warrants high priority.

IV. PORTS AND SHIPPING

Ports

4.01 The major Portuguese ports are Lisbon, Leixoes (Porto) and Sines. Lisbon has a natural located in the estuary of the Tejo , whereas Leixoes and Sines are artificial ports. The breakwater at Sines, while still under construction, suffered severe damage during storms in 1978 and early 1979. Almost half of the damaged breakwater has been repaired and technical studies are underway to clesign repair works for the remaining section. Ports on the Azores and Madeira have little natural protection and require costly breakwaters to provide reliable shipping services. Still, the ports of both the mainland and the islands are the country's major, and in some cases only, link with the outside world.

4.02 A total of 37 mtillion tons of cargo were handled in 1979: 21 million tons of oil (crude and products) and 16 million tons of non-oil cargo (Table 13). Lisbon and Leixoes are multipurpose ports, while existing facilities at Sines serve exclusively oil traffic and petrochemical products. Lisbon, the largest port, handled nearly 8 million tons of non-oil cargo in 1979 and nearly 6 million tons of petroleum; Leixoes handled just over half that amount in both categories. Six million tons of crude oil were imported at Sines for refining there and subsequent distribution, mostly by coastal shipping, to other parts of the country. Containers now account for about one-tenth of the non-oil cargo at Lisbon and Leixoes (Table 14).

4.03 Ports receive no operating subsidies, but the Government provides capital needed for expansion and arranges loans with foreign banks, e.g., the - 24 -

European Investment Bank. The profit-and-loss situation of Lisbon and Leixoes over the past few years, as interpreted by the NTP consultants, is shown on Table 15. The consultants argue that depreciation at replacement rather than historical cost would convert the apparently healthy profits into substantial losses.

4.04 Low port productivity and resulting high cargo-handling costs are a serious problem at all Portuguese ports. Some of the specific problems are: a lack of coordination between the port administration, workers handling cargo on , and workers handling cargo on wharves and in sheds; misuse of transit sheds for long-term storage, encouraged by low tariffs; a high proportion of direct delivery trucks-to- (due to the high cost of labor), resulting in poor utilization of trucks, ships and port facilities; careless handling of cargo, including in storage; and conflicts between port operators and labor unions.

4.05 The Government is well aware of this problem, but its hands are tied by the shortage of funds for introducing new technologies and by labor resistance. Containerization, nonetheless, is making substantial in-roads into traditional handling methods, and organizational reforms of the longshoreman/stevedoring and freight agent services are being considered.

4.06 These reforms should be pursued vigorously, as they would reduce the need for additional berths and other costly infrastructure. At the same time it is realistic to plan for the renovation and expansion of facilities for specific traffics, particularly containers. With the completion of on-going expansion in Leixoes, the port will have reached the physical limits of development within the present breakwater, and an alternative location to serve the Porto area will be needed from about the early 1990s, to serve the needs of the northern half of the country. To this end, investments in new general cargo wharves are already being undertaken at Aveiro (about US$40 million) and Viana do Castelo (about US$22 million). A master plan study for the further development of these three ports is being prepared (early 1983) by Portuguese consultants, Organizacao de Consultores.

4.07 As for the South, the Government is seeking to rationalize the operations of the ports at Lisbon, Setubal and Sines, which are within a radius of about 50 miles of each other, to permit them to specialize in handling different types of cargoes. The General Directorate for Ports, assisted by the US consultants, TAMS, has prepared a master plan for these three ports (mid-1981 to mid-1982), with particular attention to the problem of relieving congestion at the Lisbon container terminal.

4.08 Furthermore, the Sines Area Development Authority has hired its own consultants, PRC-Harris (USA) to prepare a master plan of port facilities required for industries planned at Sines. The coal-fired electricity- generating plant under construction there is expected to start operations in 1984. Moreover, the cement factory operating in the region is to be converted from oil to coal. To serve these projects and provide transshipment facilities for coal imported for power plants elsewhere in the country, the Government plans to build a coal terminal with a capacity of 5 to 6 million tons per year and a potential to handle up to 12 million tons per year in the future. - 25 -

Port Issues

4.09 The basic issues in the ports sub-sector concern the choice between using the existing ports of Lisbon and Leixoes for meeting Portugal's future needs, making large investments at Sines, or expanding the minor ports. (These options may not be mutually exclusive, if the planned construction of certain major industrial plants goes ahead). There are substantial potential economies of scale in the provision of port facilities, which make it generally desirable to concentrate at selected locations where adequate water depth and protection are available without additional expensive breakwaters or dredging. Similarly, the economies of scale in concentrating services at particular locations, as well as the marketing advantages, should not be overlooked. The savings in infrastructure and cargo-handling cost per ton handled may be offset somewhat by longer journeys in-land, but distances within Portugal are short enough that for most traffics it is the port costs and ocean rates that are the dominant consideration.

4.10 The south bank of the Tejo opposite Lisbon and the north bank of the Sado River upstream from Setubal appear to have substantial development potential at comparatively modest cost in terms of dredging and filling. The demand for extra capacity to handle container traffic for the domestic market can probably be satisfied, for the country as a whole, by a single new terminal in the Lisbon-Setubal area. (The high onward distribution costs make it unlikely that Lisbon can attract a significant share of container traffic destined to the EEC countries). The Southern Ports Master Plan consultants have studied three alternative locations, but all suffer from serious problems of land access by road, and no clear winner has emerged. Further analysis of the study's recommendatioas will therefore have to pay particular attention to both the capital costs of access roads and the operational difficulties of routing semi-trailer trucks through congested city streets, in close collaboration with the municipal authorities and JAE.

4.11 At Sines the Government's plans raise two major issues, which the current studies are addressing. The first, basically a technical question, is how best to reconstruct the unrepaired section of the damaged west breakwater. The safe operation of the existing oil berths - no other Portuguese port can accomrmodate very large tankers requiring a draft of 18 to 20 m - requires the complete repair of the west breakwater, regardless of any other development at Sines. The second issue, a complex interaction of economic and considerations, concerns the design and layout of port facilities required to serve both the power plant and other industrial enterprises that may locate at Sines in the future. We endorse the generally accepted view that Sines is not suitable for development as a general cargo port for southern Portugal. The considerable uncertainty attached to plans for various industries at Sines, as well as the possibility that part of these industries' import and export traffic could use Setubal, make it important to postpone decisions that would commit large sums of money on port facilities whose justification depends on such traffics, until firm decisions to proceed with construction of the particular plants have been reached.

4.12 Given the ability of Lisbon and Leixoes to meet most of the - 26 -

country's port needs for handling general cargo (whether containerized or not) until the early 1990s and given, also, the modest present volume of traffic through Aveiro and Viana do Castelo, the development of major facilities at the latter two locations does not appear urgent.

4.13 The position is substantially different as regards the proposed projects in the Azores and Madeira. Improvements are needed for a number of ports in the islands, estimated to cost 4.1 billion escudos (US$68 million) with some 3.3 billion escudos (US$55 million) to be spent during 1980-84. These ports form an essential means of communication with other islands in the group. At least one adequate port in each island is a basic requirement, even though these small ports are costly to construct because of a lack of natural protection, the rapid shelving of the seabed and the rough seas. While detailed examination of the plans for these island ports may reveal ways of reducing the proposed expenditure, a priori they do not appear unreasonable.

Shipping

4.14 Portuguese shipping is almost exclusively turned towards inter- national routes and connections with the Azores and Madeira. Crude oil and grains account for 60 percent of all imports, followed by food products and metals. Coastal shipping is almost entirely restricted to liquid fuels. The shipping industry operates about 100 ships with a total of 2 million dwt, 99 percent of which belongs to three public companies: two provide general cargo services (CTM and CNN), while the third (SOPONATA) specializes in oil transport. Chartered vessels are often used. The oil fleet is new and, although it already has excess capacity, SOPONATA has been required to take delivery of an additional VLCC tanker, in order to sustain employment in Portuguese shipyards.

4.15 The productivity of the Portuguese fleet is low. The general cargo fleet is old, with inefficient cargo hold designs and a lack of container- handling capability. The age of vessels and inadequate maintenance lead to frequent breakdowns. Another factor is the poor matching of ship type with route and cargo characteristics. A lack of on-board cargo-handling devices has created a dependence on shore-based equipment, yet many of their ports of call are poorly equipped. Finally, there are manpower problems: the fleet is overmanned, partially due to the outdated technology of the ships being used; organization on board is not tight; the percent of crew on shore relative to the percent on board is too high; and there have been frequent strikes. In 1978, general cargo ships spent only 20-30 percent of time at sea. In that same year, the fleet lost 4,900 ship-days due to strikes.

4.16 While SOPONATA (Sociedade Portuguesa de Navios Tanques) operates at a profit (because it is allowed to pass on cost increases to the government-owned oil company, Petrogal), CNN and CTM are heavy losers, because they operate in a competitive international market. In 1979, they were expected to have a deficit of 2.9 billion escudos (US$60 million), of which CTM was responsible for two-thirds. Government aid covers only a part of the deficit (since 1973, only 27 percent has been covered). CTM (Companhia Portuguesa de Transportes Maritimos) loses on all operations, but especially - 27 -

on services to and between the Azores and Madeira, where ships are old, poorly maintained, and not suitably designed for cargo storage and handLing. Its container services to Western Europe suffer from low utilization and too few days at sea. CNN (Companhia Nacional de Navigagao)'s largest losses are its liner services between the US and Angola, and between Western Europe and Mozambique. Both companies have a large proportion of their vessels chartered in bulk operations, which make only a small contribution to their net revenue. In short, Portuguese liner services are in crisis. Shippers complain of overbooked vessels, schedules not adhered to, tariffs not clear, careless cargo handling, and a high incidence of pilferage. Furthermore, CTM and CNN has been requirisd to buy three bulk carrier ships produced in Portuguese shipyards at uncompetitive prices.

4.17 Two general points of policy emerge. Firstly, the distinction between commercial international services on the one hand and the socially essential services to the islands on the other should be reflected in the organization, management: and financing of the subsector. This probably entails splitting CTM, as has been proposed, into two separate companies. Since traffic to and among the islands is unlikely ever to be commercially profitable, the Government will need to define a concession-type agreement with the operator(s) specifying expected levels of service, rates and compensation payments (set in advance). The 1977-78 study by the Norwegian consultants, Shipping REsearch Services, provides sound recommendations for this purpose. The international services, in contrast, need a maximum of commercial autonomy and flexibility to respond to the rapidly fluctuating competitive environment in which they operate.

4.18 The second policy issue is whether, for either category of service, the State budget should assume responsibility for the capital outlays required to renew the fleets. Replacing the outdated, technically inappropriate vessels is an urgent priority in both categories, yet neither is able to generate the necessary financing, despite the low prices prevailing in the second-hand market in 1982 and early 1983. The argument for State financing of new vessels for the islands services through equity seems strong; debt financing for the international services might be more appropriate.

V. CIVIL AVIATION

Airports

5.01 Portuguese air transport is oriented towards international travel. But in the 1970s, the pattern of air traffic followed political and economic happenings at home and in the former colonies. After high rates of growth in the 1970-1973 period, pa:3senger traffic dipped and recovered slowly, regaining 1973 levels by 1977 (TabLe 16). Current projections for the period 1980-1985 vary between 6 percent and 8 percent annual growth for major airports.

5.02 Portugal seven international airports: Lisbon, Porto and Faro on the - 28 - mainland; Funchal and Porto Santo on Madeira and Santa Maria and Lages in the Azores. The runways in Faro and Funchal need extending, while at other airports they are satisfactory. However, taxiways and terminal buildings are currently constraining capacity at both Lisbon and Porto, while Faro needs a better traffic control system.

5.03 Since 1978 a new airport authority, Aeroportos e Navega,ao Aeria (ANA), has been administering the Portuguese airports and air traffic control facilities. For the Madeira and Azores airports these responsibilities were subsequently devolved to regional authorities. In its first year of operation, ANA's costs exceeded revenues by 14 percent, with Lisbon showing a profit, Faro breaking even, and all other airports losing money. Smaller island airports are the major losers.

5.04 A study was launched in late 1980 to recommend a location for a new Lisbon airport. However, the present airport is far from reaching its capacity limit, provided that appropriate smaller-scale investments are made in air navigation equipment and terminal facilities. ANA has d17)tped its preliminary plans to build a new passenger terminal at Lisbon airport in a location that would have precluded later expansion and has opted in favor of an alternative location recommended by the NTP consultants. The latter location will allow staged expansion of the terminal sufficient to accommo- date forecast passenger traffic through 1995.

5.05 The Madeira airport runway is to be extended to 9,000 feet (2,720 m), large enougih to accommodate Boeing 747s on intercontinental flights. This will be very costly, given the need to construct a reinforced concrete superstructure (deck), and it is questionable whether there will be sufficient traffic in the foreseeable future to justify the incremental construction cost over the requirements of B727-size planes (2,000 m).

Air Services

5.06 Transportes Air Portugal (TAP) operates 24 aircraft on domestic routes both on the mainland and to the islands, and on international routes to Europe, the Americas, and Africa. Most of TAP's aircraft are old, noisy and fuel-inefficient (B 707, B 727-100). Its two B-747's became too large to be economic when traffic to Africa dropped after the colonies became independent. A major fleet restructuring is planned, which provides for purchases of newer short-distance aircraft and replacing the B-747's with smaller, more flexible wide-bodied jets (LlOlls).

5.07 TAP's traffic was 2.1 million passengers and 40,300 tons of cargo in 1979, thus substantially exceeding prerevolutionary levels. TAP operates at a loss because of low profit margins on the trans-Atlantic market, the drop of traffic on the ex-colonial routes, a freeze on TAP funds in Angola, Zaire and Mozambique, and TAP's general overstaffing and low productivity. By 1978 the accumulated deficit totalled 2,100 million escudos (US$48 million). In 1980 TAP signed an economic and financial restructuring agreement with the Government, but by 1982 it had been suspended. - 29 -

5.08 TAP's future depends on whether it will be able to increase the proportion of full-farE' travelers, and achieve a more intensive use of aircraft by restructuring its fleet. It also depends on the Government's efforts to improve TAP's financial situation.

VI. LISBON REGION TRANSPORT

6.01 The population of the greater Lisbon urban area, including the suburbs on the south bank of the Tejo, is now about 2.5 million. It has grown since 1970 at an average rate of nearly 4 percent per annum, and is expected to reach 3 million by 1985-1990. The population density in the adminis- trative district of Lisbon reached 730 per km2 in 1979. Population growth in some of the suburbs has been much more rapid than in the city center, at 10 or more percent per year. The suburbs are largely dependent for employment on Central Lisbon, generating heavy daily flows into and out of the city center. The trend towards living in the suburbs and working in the city center is likely to continue.

6.02 The 1975-78 period witnessed a rapid growth in passenger demand for public transport. CP (t:he railway enterprise) provides high-capacity services from Cascais and Sintra to terminals in Cais do Sodre and Rossio. Both lines carry heavy traffic and play a key role in the daily movement between the city and the suburbs. Other suburban services are provided by RN, with buses, and Trans-tejo with to the south bank of the river Tejo. Metro provides city subway services ancl carries about 25 percent of the city passengers in a pattern which is well-balanced, even at peak periods. Carris operates , city buses and street .

6.03 The Land Transportation Department (DGTT), assisted by the Swiss consultants, Institut de Technique des , recently completed transport studies for the urban regions of Porto and Lisbon. Planned investments for the period 1980-84 for Lisbon Region public transport total 7.4 billion escudos (US$124 million) or about US$10 per inhabitant per year. Buses and street-cars for Carris, cars for Metro, railcars for CP's Cascais line, and ferries for Trans-tejo account for 4.3 billion escudos (US$72 million) of the total. Metro's investment program consists of two parts: remodeling of the network, which started in 1974, and construction of a new link (yet to be started) from Rotunda (Marques de Pombal Square) via Rato to the railway terminal at Cais do Sodre, to facilitate the transfer of the large and fast-growing volume of passengers between the Metro and the Cascais railway line. This Metro program is part of a major long-term expansion of the system estimated to cost around 30 billion escudos (US$600 million) in 1980 prices.

6.04 The adequate provision of public transport in the Lisbon Region is a high priority. While it would undoubtedly satisfy a pressing demand, the proposed Metro link from to Cais do Sodre should be analysed carefully, because of its high cost.. At present, transfers over the 1.5 km separating the two systems (between Cais do Sodre and Rossio) are by , bus, taxi or - 30 - on foot in the most congested area of the city. In the long run, Metro provides the most effective way of handling the volumes involved and reducing traffic congestion in the area. The company has carried out a demand survey which has confirmed that the proposed link would attract mere traffic than any other section of the network. It is estimated to cost about 1.0 billion escudos or roughly US$14 million per km (including the station cost) for the 3.0 km contemplated.

6.05 The proposed Lisbon-Cascais toll freeway (26 km) to serve middle- and upper-income commuter traffic, should definitely be reconsidered. It would be built at the same time that major capacity improvements are to be made on the parallel commuter railway. If successful in attracting the volume of traffic required to justify the investment, the freeway would burden the city street network that is already seriously inadequate to cope with the present level of private car traffic. And by encouraging private car ownership for commuting and drawing resources away from public transportation, it would conflict with the Government's objective of energy conservation, protection of the environment, and improvement of the living standards of the lower-income population. It should openly be considered in conjunction with a comprehensive program to: (a) smooth out the peakiness of home-to-work travel; and (b) reserve street space for moving vehicles rather than for parking. This could be achieved by making wider use of parking meters and by strict enforcement of parking restrictions, accompanied by the construction of off-street parking garages.

6.06 As a general consideration, the level of transport investment in the Lisbon region should be monitored on the basis of expenditure per person, to ensure that it is not out of proportion with the level in other parts of the country.

VII. GOVERNMENT INVOLVEMENT IN THE TRANSPORT SECTOR

Transport Policy

7.01 Like many countries, Portugal does not yet have a formal national transport policy in the sense of explicit objectives and criteria for the sector as a whole, and consistent investment priorities and strategies. In one important aspect, however, policy has been spelled out. In April 1976, a law was passed which states the government's policy vis-a-vis all public enterprises, including those in the area of transport. Its main features are as follows:

(i) enterprises are expected to cover their operating costs and debt services, to provide their own working capital, and to provide an "adequate level" of self-financing. The Government will help finance expansion projects; - 31 -

(ii) while the MHPWT has authority for approving tariffs, the Council of Ministers may impose tariffs that are lower than what the goals listed under (i) would require. Similarly, the Council may require an enterprise to provide an uneconomic level of service, to keep a certain level of employment, to buy certain products, and otherwise behave in a way inconsistent with its economic goals, but justifiable on the basis of national politico-economic considerations; and

(iii) the Government will compensate an enterprise for the increase in cost or net loss in revenues resulting from its intervention.

7.02 In practice, as we have seen, the above policy has led to deficit financing on a large scale, widespread subsidies and, in cases where the subsidies were not fully paid as promised, to the near bankruptcy of some enterprises. In August 1977, enabling legislation was passed for Acordos de Saneamento Economico-Financeiro (ASEF's) to be concluded between the Govern- ment and each enterprise, with the former expected to take on more respon- sibilities, such as provision of infrastructure, and restructuring of loans. So far ASEF's have been signed with RN (para. 2.16), Transtejo, Carris (the Lisbon bus and tram company) and TAP. A similar agreement for CP is being drawn up in early 1983 (para. 3.12). The issues with which such financial restructuring agreements have to contend are discussed in the next chapter.

Transport Planning

7.03 The organizational structure of the MHPWT makes ample provision for transport planning. DGT'T is the central planning entity for land transportation in Portugal, responsible for the administrative supervision of road and railway services, both intercity and urban. The planning of the main intercity roads and their access to the metropolitan areas of Lisbon and Porto, meanwhile, is in the hands of JAE. The other modal agencies within the MHPWT also have their own planning units. Furthermore, since 1977, there is a planning unit specifically concerned with multi-modal transport planning, which has already been rEferred to: the Gabinete de Estudos e Planeamento (GEP/TC). Its orientation is to develop general planning strategies for the transport sector, which are then taken up by the modal planning units for detailed technical work. The unit is currently examining ways to internalize the output of the NTP, which it will continue to up-date in the future.

7.04 The GEP has an important role to play in programming non-highway sectoral investments. Modal agencies submit their investment proposals to GEP/TC, which then applies screening criteria to bring the total requested investment within annual sectoral ceilings. The ceilings are established by the Minister of Finance and Planning subject to the Council of Ministers' approval. The screening criteria are simple, giving preference to conti- nuing projects, and those that are expected to decrease deficits of trans- port enterprises or to maintain employment in the sector.

7.05 In the past the:re appears to have been no overall coordination of policies and investments between the highway mode (infrastructure and traffic - 32 - operations) and the rest of the transport sector. The JAE budget has been processed under the Ministry of Housing and Public Works umbrella rather than the Ministry of Transport. Large-scale transport projects are sometimes referred for technical advice to a joint council (Conselho Superior de Obras Publicas e Transporte), while for other large projects that have transport repercussions (e.g. the Sines petro-chemical complex or the Moncorvo mines), interministerial task forces are regularly established. Some projects, however, seem to have escaped scrutiny (paras. 8.14-17). It is therefore important that the Government take maximum advantage of the opportunity provided by the amalgamation of the two ministries to strengthen the procedures and refine the criteria for coordination among the modal agencies.

VIII. SECTOR-WIDE ISSUES

8.01 The main issues affecting each mode have been identified in the modal chapters above. This chapter endeavors to trace the patterns which can be seen recurring in all modes, as the basis for the conclusions on policy requirements and recommendations for investment strategy set out in Chapter IX.

8.02 The first thing to be said is that many of the problems identified above have already been extensively studied by both consultants and the transport agencies themselves, who have many highly qualified technical staff. Even where the latest data published are two or three years old (which is often the case), the nature of the problems change oniy gradually, if at all. The bigger problem is slow decision-making at higher levels, which further studies alone seem unlikely to accelerate.

Reducing Public-Sector Transport Deficits

8.03 Public expenditures for transport come in the form of operating subsidies and capital grants to transport enterprises through the MHPWT, plus current and capital expenditures of the JAE. Table 17 shows that in 1978, the latest year for which substantially complete data are available, the total estimated deficit of the revenue-earning public-sector transport agencies reached 12.3 billion escudos, then equivalent to about US$280 million or as much as 5 percent of the consolidated public sector current expenditures. Operating subsidies paid out against these deficits had exploded from about 630 million escudos in 1973 to nearly 9.6 billion escudos or US$220 million (Table 18), still without catching up with the deficits. In 1979 subsidies are thought to have come close to 12 billion escudos (US$245 million), or 4% of the consolidated public sector expenditures. CP received about half of all these payments, out of all proportion to its role in the economy. The subsidies paid directly to the enterprises may decrease as a result of the ASEF's currently being considered. However, the shifting of responsibi- lities from the enterprises to the State, e.g. for provision of infrastruc- ture and for assuming prior debt service responsibilities, will not in itself reduce the total drain on state resources.

8.04 In addition to operating subsidies, public transport enterprises have received capital investment grants, normally involving about 20 percent - 33 - of the expenditure to be financed. Grants made by the MTC increased from about 300 million escudos in 1973 to nearly 3,1 billion escudos (US$70 million) in 1978 (Table 18). These figures do not include investment grants to ports, since the data are not available; the ports are known to have requested about 2.7 bilLion escudos (USt55 million) in 1979.

8.05 One of the most prevalent factors accounting for the operating deficits is the Government's reluctance to increase transport tariffs as rapidly as costs are increasing. This is due, in part, to the belief that raising fares only adds to inflationary pressures and to demands by orga- nized labor for larger wage increases. However, there is growing Government awareness of the drawbacks of such a policy: over-age bus fleets and essen- tial infrastructure cannot be renewed, qualified labor cannot be hired or retained so long as the agencies remain ham-strung by their lack of funds, and the growing public sector financing requirement becomes increasingly inflationary and deprives the private sector of needed finance.

8.06 Undercharging for services has not only created financial problems for enterprises, but it has had various other ripple effects in the trans- port sector and the economy:

(i) profitable (or potentially profitable) services subsidize losing services; and

(ii) there are distortions in criteria for evaluating operational efficiency, which further distort allocation of funds. Without a tighter connection between achievement and reward, funds gravitate towards the largest deficits.

8.07 A second major factor is the freezing of the labor market. A large number of employees were hired by the public sector during the years immediately following the revolution, to reduce unemployment and absorb those returning from the former colonies, and subsequently, those returning from "guest-worker" jobs in the EEC countries. These numbers could not be productively absorbed, blut neither could they be fired. The greater job security in the public sector has discouraged moves to the private sector, despite the higher wages available there. The mobility of labor even within modes has been low, all of which adds up to a two-edged problem: Portuguese transport enterprises ares overstaffed in total, but they also suffer from acute shortages of staff in certain categories.

8.08 A third factor is the granting of numerous discounts and special rates to particular groups: students, parents of large families, military personnel, etc., unrelated to economies of scale in transport, and without any compensation being paid l:o the transport agencies by the "sponsoring" branch of government. Although defended on the grounds that these are simply transfers within the public sector, they nonetheless contribute to poor management by falsifying financial results that could otherwise be used as indicators of performance.

8.09 Progress on th:is issue is urgently needed but likely to be slow. A - 34 - considerable educational and public relations effort is required to gain public acceptance that holding prices artificially low does as much indirectly to fuel inflation as allowing prices to rise to cover costs would appear to do directly. The objectives underlying the public service obligations and the alternative uses of the public funds currently going to cover the deficits need to be discussed in public fora (see paras. 3.14-16). At the same time, better information is required on the costs of specific services, including railway costs by line and by passenger category or major commodity type. It is to be welcomed that this is among the tasks of the MHPWT's action plan to follow up on the National Transport Plan Study.

8.10 A fourth factor is the inappropriate financial structure of many of the agencies. Since 1976, escalating debt service has been the major factor in the rise of deficits, particularly the short-term debt, for which interest rates have been in the range 20-25 percent per year.

8.11 The Government is therefore to a large degree responsible for the pervasive deficits, since it requires that sector employment be maintained, that extensive services be offered and that uneconomic fares be charged in a vain attempt to retard inflation. Furthermore, instead of promptly compen- sating for losses due to its regulations, the Government has made only partial payments, pushing enterprises into short-term borrowing at high interest rates to meet their deficits. Thereby a vicious circle has been created, leading from the financial starvation of transport companies, via decreased productivity and aging plant, to the build-up of higher deficits. Escape from this vicious cycle requires the central government either to assume authority and responsibility for transport services, or to delegate both.

Raising the Operational Efficiency of Transport Services

8.12 Intimately connected with the financial plight of the public-sector transport agencies is their low productivity. For instance, as we have seen, the ships of the Merchant Marine spend an exceptionally high proportion of the time in port, and employ twice the manpower of comparable North-European vessels (para. 4.15). The railway is overstaffed and the average freight train is uneconomically small (para. 3.08). The private sector is not exempt, as shown by the unusually low annual mileage of trucks; large savings could be achieved by bringing it up to a level achieved in many other countries (para. 2.23).

8.13 One step in the right direction would be to give more focus to the collection and timely interpretation of performance statistics. In many areas an indigestible surfeit of data is collected but it is not interpreted in ways that could be useful to managers and decision-makers.

Too Many Large-Scale Prestige Projects

8.14 The investment programs of the public sector transport entities contain a number of large-scale projects whose economic justification has not been rigorously demonstrated and appears indeed to be questionable. The risks and uncertainties have not been adequately assessed nor lower-cost alternatives adequately explored. - 35 -

8.15 An example is the proposed Lisbon-Cascais freeway (para. 6.05). In this case the decision-makers should give particular attention to: (a) the opportunities for relieving congestion in the short- and medium-term by low-cost works such as climbing lanes or redesign of bottleneck inter sections; (b) the nature of the benefits; and (c) the identity of the bene- ficiaries. Fuel savings and accident reductions, properly documented, would warrant a greater weight than time savings, whose economic value is rendered particularly questionable by the high level of unemployment and the low level of commercial vehicle productivity. Other things being equal, benefits accruing to high- and middle-income urban dwellers should be given less weight in establishing priorities than those accruing to lower-income urban dwellers or the rural population generally.

8.16 The new high-level bridge at Figueira da Foz is another example of over-designed infrastructure. It was designed to permit use of the estuary by shipping on a scale considerably in excess of the realistic potential for such trade. The same applies to port infrastructure. The NTP consultants estimate that even under the assumption of no improvements in port operations, only minor expansions of port capacity are needed to accommodate forecast growth of traffic. The master plan studies for the southern and northern ports (paras. 4.06-07) should provide the necessary framework for analysing the options of concentrating port activity geographically, so as to take advantage of potential economies of scale, or dispersing it to several locations.

8.17 In civil aviation, again, plans are under study for large-scale infrastructure expansion that presume unrealistically rapid traffic growth (paras. 5.04-5.05). Each of the above cases demonstrates the need for a more open view in the early stage of project definition as regards alternative solutions, simultaneous developments in related facilities, and the prefer- ences of actual or poteni:ial users. To help meet this requirement, the MHPWT's planning office is proposing to involve the various modal agencies in testing and using the NTP'model.

Underinvestment in Replacement and Renewal of Existing Assets

8.18 The corollary to the excessive interest in large-scale projects with long-term uncertain pay-offs is that insufficient attention has been paid to the more mundane question of maintaining and replacing existing assets, both vehicles and trucks. Throughout the sector one finds over-age vehicle fleets: the buses and trucks of RN, the trams of Carris, the freight wagons of CP, and the ships on the Azores route. The proximate cause is generally the poor financial situation of the enterprises, which leaves them without internally generated resources for renewing assets. A secondary probable cause is lack of cost accounting data cr performance standards by which to assess the cost of delaying replacement, in terms of excessive downtime and low productivity.

8.19 Akin to this problem is the low cost-effectiveness of present maintenance activities. Officials show ample theoretical awareness of the importance of maintenance, including preventive maintenance, but have been unable to overcome the inertia of the existing system. The same or better results could be achieved at less cost by mechanization and improved proce- - 36 - dures, but the justification for these improvements first needs to be demonstrated by cost studies and the analysis of productivity standards.

Energy Conservation

8.20 With the nation's oil bill in 1980 equal to about 45 percent of export earnings, a high priority is attached to finding ways to reduce consumption and/or direct it to productive use in export promotion or import substitution. Surface transport accounts for about 32 percent of oil con- sumption (road 31 and rail 1 percent), which is not unusual. The policy that has been in effect for many years of taxing gasoline highly and not subsidizing diesel fuel limits opportunities for additional conservation, but even small relative savings are large in absolute terms. At 1982 prices, a 5% cut in fuel consumption by road and rail transport would save US$20-35 million per year.

8.21 Many cars in Lisbon sport bumper stickers declaring that they consume the highest-priced gasoline in Europe. The pump price in 1981 and 1982 was between 80 and 90 USc per liter (Graph 1). The import price was 25-30 USc per liter. The impact on the passenger car fleet has been to encourage the purchase of small- cars (80 percent are under 1500 cc, 30 percent under 1000 cc).

8.22 The pump price of diesel fuel, at 35-40 USc per liter in 1981 and 1982, exceeded the import price by a considerably smaller margin, for reasons explained in para. 2.40. Farmers are allowed to buy a ration of diesel fuel at subsidized prices for on-farm use. It is possible that some tax evasion is occurring by the use for passenger transport of diesel-powered vans licensed as freight vehicles.

8.23 Oil is also the principal fuel for the railway system. The Lisbon-Porto line and the suburban services in each city are electrified using current from oil-powered generating stations. Heavy fuel oil was subsidized until 1981 (Table 8). The remainder of the network uses diesel traction. No data are available on the railways' energy efficiency: consumption per passenger-km or ton-km is probably below competing road transport on the high-density Lisbon-Porto and suburban lines, but above road transport elsewhere, because of the much lower traffic density on the rest of the rail network.

8.24 The interval between price increases has depended largely on the ofsqueeze" effect that rising import prices have had on fuel tax revenues accruing to the Commodities Supplies Fund. A procedure for adjustments that was less vulnerable to political pressures would be desirable from the economic view point. The standardized pump price applied throughout the country implies some regional cross-subsidization. This does not entail any serious distortion of transport demand, however, as haul distances and hence fuel transportation costs are not great.

8.25 In summary, motor vehicle fuel is not being underpriced. The right signals are being given to make consumers aware of oil's scarcity and to - 37 - direct consumption toward productive, economically justified uses. Nonetheless, large savings in fuel could be made at relatively little cost to public welfare by such mteasures as staggering work hours to reduce urban congestion, running fewer trains, and closing low-density rail lines.

IX. RECOMMENDED GOVERNMENT STRATEGY IN TRANSPORTATION

9.01 The National Transport Plan consultants have provided comprehen- sive yet succinct recommendations on transport policy and planning, for each of rail, sea, road and air transport. The policy recommendations have been incorporated in large measure in the MHPWT's proposed Action Plan as regards: (a) the objective of increasing public knowledge of transport costs and productivity as the principal basis for pricing; (b) the essential process of coordination between the various agencies concerned; and (c) the access of transport agencies to the NTP model for exploring policy questions as well as investment options. ThE Action Plan does not explicitly address the question of socio-political obligations; whether subsidies are reaching the intended beneficiaries in a cost-effective way, or whether they should be borne by other branches of Government with specific responsibility for the various target groups. Initiatives on these issues have to come from the Cabinet. This should not prevent the modal agencies, in the meantime, refining their understanding of their cost structures and markets, with attention to the socioeconomic characteristics of their main users.

9.02 The Bank endorses the priorities for resource allocation recommen- ded by the NTP consultants, which in order of decreasing priority are:

lst: measures to reduce the burden on the transport enterprises of socio-political obligations;

2nd: measures to encourage enterprises to make better use of resources (including maintenance);

3rd: investments in renewal and replacement of assets;

4th: smaller projects with high and certain benefits that can be implemented without delay; and

5th: bigger projects, the benefits of which are less certain and will take longer to materialize.

9.03 In addition to the above, there is a need for explicit policies to guide investment and subsidy decisions that affect the poorer regions of the country, namely the North-East and the islands. The current planning docu- ment of the highway authority, for example, makes no mention of the role that road investments should c,r should not play in offsetting regional income differences or encouraging employment creation in particular areas.

9.04 Improved investment planning and better operational management in - 38 -

the transport sector can affect the competitiveness of Portuguese agricul- ture and industry directly by helping to reduce the cost and increase the speed and reliability of transportation of goods by road and rail and through the ports. Indirectly, they can contribute by reducing the severe and pervasive deficits of the public sector transport agencies, thus freeing scarce public funds for alternative uses, including high and quick-yielding expenditures on maintenance and modernization. And they can help by making the provision and pricing of infrastructure and publicly-provided services more responsive to evolving demand. All these objectives will require continued attention to the strengthening of the institutions responsible for the transportation infrastructure and services, as they continue the trans- formation process from the relatively protected and centrally administered system prevailing before the 1974 revolution, to the more market-oriented and decentralized decision-making that will be essential under EEC membership.

9.05 This transformation to higher productivity, more flexible pricing and greater decentralization will not be easy, as it has to contend with the pressing need to reduce the present high level of unemployment, curb the equally disturbing rate of inflation, and address the needs of the low-income population, issues which are vigorously defended by the interest groups concerned. should therefore encompass not only changes in infrastructure and equipment, but also policy, regulatory and organizational changes.

9.06 The deficit of the CP is of such major proportions that it commands priority attention. The Minister of Transport's proposals for reform, embodied in the February 1983 decree-law (paras. 3.12-13), provide the essential policy framework and deserve strong support. The next step will be to prepare operational, financial and investment programs contsistent with the new orientation.

9.07 Close attention to ports and shipping is desirable, focusing on the subsector's productivity problems. This should cover not only mainland ports and international shipping, but also the transportation needs of the Azores. Lowering the cost and increasing the reliability of transportation to and from the mainland is probably a cost-effective means of raising agricultural incomes and living standards in one of Portugal's poorer regions. Appropriate investments to address this need should therefore be encouraged.

9.08 Road transport remains underfinanced, relying on obsolete roads and vehicles. Useful studies have been completed by the three consultant teams under the First Highway Project directed at: (a) demonstrating the high returns to be obtained from increased spending on road improvements; (b) making road maintenance more cost-effective; and (c) promoting a more rational regulatory climate. Continued effort is important to ensure effective implementation of these studies, as well as to make a determined start with a program to improve road safety. Attention needs to be focussed in particular on the major savings that could be made if the very low utilization rates of trucks could be raised to more normal European levels. - 39 -

ANNEX 1

ACTION PLAN ADOPTED BY THE MINISTRY OF HOUSING, PUBLIC WORKS AND TRANSPORT TO FOLLOW UP ON NATIONAL TRANSPORT PLAN RECOMMENDATIONS

Action 1. Steering Comnittee

Participants: The present members of the Steering Committee.

Objective: Establish the Steering Committee as a permanent body to ensure that the National Transport Plan is brought up to date periodically and improved, a prerequisite for sustaining a continuous and coordinated planning process involving all the transport agencies.

Action 2. Road Network

Participants: JAE (Highway Authority) and GEP (Ministry of Transport Planning Department).

Objective: Ensure an up-to-date exchange of information on infrastruc- ture investment programs, taking account of the studies carried out in the two organizations.

Action 3. Port Policy and Planning

Participants: Lisbon, Porto and Sines Port Authorities, Ports Dept., GEP

Objective: Establish an organizational structure for defining national level port policies and continuous planning.

Action 4. Road Taxes

Participants: Ministry of Finance and Planning, Special Fund for Land Transport, Land Transport Dept., Vehicles Dept., JAE, GEP.

Objective: Rationalize the system of road transport taxes, taking into account economic criteria and with a view to simplifying them.

Action 5. Market Studies; of Road Transport

Participants: Land Transport Dept., GEP

Objective: Assess the effects of regulations on the working of the market for road passenger and . - 40 -

ANNEX 1

Action 6. Pricing Policies

Participants: Land Transport Dept., GEP, CP, RN, associations of private bus companies.

Objective: Institutionalize colaboration in the sense of having the Land Transport Department and surface transport operators utilize and test the NTP models to establish pricing policies.

Action 7. Rail Network

Participants: CP, Land Transport Dept., GEP

Objective: Institutionalize cooperation in the sense of having CP use the NTP model to define the characteristics of its network and operations.

Action 8. Port Management

Participants: Lisbon, Porto, Sines Port Authorities, Port Dept., GEP, Merchant Marine Dept.

Objective: Institutionalize cooperation in the sense of refining cost accounting systems and productivity indicators.

Action 9. Allocation of Infrastructure User Charges

Participants: JAE, Land Transport Dept., Vehicle Dept., GEP

Objective: Assess road user charges by vehicle type and analyse the impact on the tax system of applying the results. - 41 -

ANNEX 2

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

List of Recent Consultants' Reports on Portuguese Transport Sector

A. Kampsax/Systan, National Transport Study

(1) Inception Report, June-November 1978 (2) Short-Term Imoeratives and Progress Report No. 7, July-August 1979 (3) Outline of Transport Model and Progress Report No. 8, September- October 1979 (4) National Transportation Policy Issues, Special Report No. 2, June 1979 (5) CP Costing and Accounting, Special Report No. 3, June 1979 (6) CPCS Reports and CP Accounts, Special Report No. 4, June 1979 (7) Financial Evaluation of the Port Sector and Progress Report No. 12, June 1980 (8) Interim Report., 4 volumes, June 1980 (9) Draft Fiscal Report, 7 volumes, June 1981

B. Canadian Pacific Cor,sulting Services, Railway Rehabilitation Study

(10) Plano de Reabilitacao Ferroviaria, Phase I, Diagnostic Report, Parts 1 and 2, September 1978 (11) Plano de Reabilitagao Ferroviaria, Phase II, Draft Final Report, Parts 1-4, December 1979 (12) Plano de Reabilitagao Ferroviaria, Costing Report, January 1979

C. Freeman Fox and Partners/Halcrow Fox and Associates, Highway Master Plan Study

(13) Draft Interim Report and associated Working Papers, February 1981 (14) Draft Final Reoort, August 1981 (15) Final Report, May 1982

D. Roy Jorgensen Associates, Inc., Highway Administration and Maintenance Study

(16) Final Report, Phase I (Diagnosis), March 1980 (17) Economic Analysis, August 1981 (18) Final Report, January 1982 - 42 -

Table 1

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Breakdown of the Mainland Transport Market by Mode (1979)

Pass-km % of Ton-km % of (billion) Total (billion) Total

Road Cars 22.2 62 - - Light goods vehicles (vans) 2.0 6 1.3 11 Buses 5.9 16 - - Trucks - - 9.2 81

Subtotal 30.1 84 10.5 92

Rail 5.6 16 0.9 8

Domestic aviation 0.1 0 0.0 0

Inland waterways and coastal shipping 0.1 0 0 0

TOTAL 35.9 100 11.4 100

Sources: Road - Bank estimates (see Table 2). Rail, Aviation and Shipping - Instituto Nacional de Estatistica, Estatisticas dos Transportes et Communicagoes, 1979.

May 1981 - 43 - Table 2

P0R1UGAL

1EANP6R SECIOR M)UWIMA4

Aggregate Measures of Road Transport

%of 1979 1979 1979 Annual Veh-l(m total Average Annual Avg.Econ. Vehicle Amual Total Inter-urban Inter- inter- Occupancy/ Pass-bn/ Cost per FleetI/ Mileage2/ Network as %of urban urban_/ Inad_ ton-kn veh-k7L/ 1979 Expeitures (°°°) (000 km) (b-n) Nt*/ (bn) (ps-n/ (bn) (Esc.) (Esc. bn) (US$ bn) (I x 2) (3 x 4) (torr-kn) (3 x 7) (8 x 9)

Cars 939 11.8 11.1 50-60 5.5-6.7 71-72 2.0 22.2 5.5 90 1.2

Vans 75 23.6 1.8 20-30 0.4-0.5 5-5 1.1 2.0 6.6 15 0.3

Buses 7 42.4 0.3 60-70 0.2 3-2 20.0 5.9 18.9 6 0.1

Pass. 1,021 13.2 6.1-7.4 30.1 79 1.6

Vans 75 23.6 1.8 20-30 0.4-0.5 5-5 0.6-0.9 1.1-1.6 9.6 17 0.3

Trucks 57 30.6 1.7 70-80 1.2-1.4 16-15 4.8-6.0 8.2-10.2 18.9 32 0.7

Freight 132 3.5 1.6-1.9 9.3-11.8 49 1.0

ITAL 1,153 16,7 46-56 7.7-9.3t4/ 100 128 2.6

Note: US$l = Esc. 50

Source: 1) Operational vehicle fleet: Freeman Fox/Halcrow Fcoc Highway Master Plan HMP Interim Report. Bank Staff estimate that use split 50/50 between passenger and freight transportation. 2) Anmual mileage: Freeman Fox 4P Working Paper No. 13 (Vehicle Operating Costs). 3) Interurban %: Bank staff eistimate. 4) Total interurban veh-im: Caisistency check against JAE traffic data, Table 8. 5) %breakdown of interurban traffic: Consistency check against JAE traffic data. 6) Average occupancy: Freeman Fox; Average load: KaTsax/Systan. 7) Cost per Ion: Freeman FOx RIP Working Paper No. 13

April 1981 - 44 -

Table 3

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

New Registrations of Road Vehicles (000's)

Average Annual Growth Rate 1975 1976 1977 1978 1979 1975-1979

Cars 64.7 58.6 17.9 22.8 26.5 -20%

Vans!/ 19.6 39.8 58.5 30.2 25.5 7%

Pick-ups2/ 15.0 18.2 26.9 20.7 25.2 14%

Buses 0.5 0.5 0.6 0.4 0.7 7%

Trucks3/ 2.7 2.8 5.0 7.3 6.7 25%

Total 102.6 119.9 108.9 81.6 84.7 - 5%

Of which Assembled in Portugal 82.1 87.9 99.4 65.6 68.9

(% of total) (80) (73) (91) (80) (81)

1/ Described in source as "light mixed-traffic vehicles".

2/ Described in source as "light freight vehicles".

3/ Excludes "tractors" (8,200 in 1979) and "trailers and semi-trailers" (11,000), which are understood to include agricultural tractors and trailers.

Source: INE, Estatisticas dos Transportes e Communicacoes, 1976-79.

September 1981 - 45 -

Table 4

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Annual Mileage by Trucks (as of mid-1979)

% of % in No. of Total Truck Annual Gross Veh. Weight Veh. Licensed Fleet Traffic Average km (tons) (000) (000)

3.5 - 8.0 23.8 42 28 20.2

8.0 - 11.5 10.3 18 16 26.5

11.5 - 16.0 13.9 24 32 41.5

16.0 - 22.0 6.0 11 15 41.5

32.0 - 38.0 3.0 5 9 55.0

57.0 100 100 30.6

Source; Direcgao-Geral de Transportes Terrestres, Inquerito-Pilote do Transporte Rodovario de Mercadorias, December 1979

May 1981 - 46 -

Table 5

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Road Traffic Accidents in Portugal

Fatalities per million Year Traffic Accidents Fatalities Injured inhabitants

1970 31,082 1,417 28,657 168

1973 39,521 2,086 32,357 247

1974 38,942 1,961 30,557 226

1975 45,985 2,676 40,576 294

1976 42,398 2,520 35,605 275

1977 44,018 2,198 36,454 233

1978 47,412 2,227 37,247 227

1979 50,710 2,241 38,982 227

Source: For accident data: INE, Estatisticas dos Transportes e Communicagoes

September 1981 - 47 - Table 6

EORTUGAL

UTANSPORT SECIOR MEJDRANDUM

Road User Charges and Expenditures for Highways in Portugal 1972-1978 (in million escudos)

Receipts fran Road Contributions Expenditures on National Highways, 1970-1980 (current prices) Year User Cha!ge- tc, Flo Current Capital Total Total Total as % (million escudos) - (US$ n) of GDai/

1972 4,716 905 254 538 792 29 0.3

1973 5,570 1,001 291 445 736 30 0.3

1974 6,195 1,120 400 694 1,094 44 0.3

1975 7,472 1,199 566 1,154 1,720 66 0.5

1976 8,561 1,210 720 1,421 2,141 71 0.5

1977 10,925 1,605 1,357 1,417 2,774 73 0.4

1978 12,134 1,697 1,245 2,482 3,727 85 0.5

1979 14,500-14,800Y/ 1,887 952 3,306 4,258 87 0.4

1980 n.a. n.a. 1,691 5,115 6,807 136 0.6

1/ GDP at current market prices. a! Import duties on vehicles and spare parts not included. b/ Fundo Especial de Transportes Terrestres. c/ To get the total spent for roads, expenditures for local roads and city streets should be added at a level of about 10% of fundls spent for national roads, and about 70000 millicn escudos per year for the Lisbor-Porto freeway (BRSA) from 1974 on. d/ Data not available for certain items which in 1978 accounted for 13% of total. Lwer limit assumes these items remined at same Level in 1979, and upper limit assumes they grew in saw proportion as total of other items.

Sources: INE, Estatisticas dos Transportes e Ccinnnicacoes for road user revenues, JAE for expenditures on roads, and IBRD for ecchange rates and G)P data.

April 1982 - 48 -

Table 7

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Breakdown of Capital Expenditures on Highways, 1981 (Budgeted)

Rehabilitation and minor improvements ("modernization") 58

Maintenance equipment, etc. 19

Urban access highways 12

New construction of inter-urban highways 8

Road Safety 2

Productivity increases 1

100%

Source: JAE

April 1982 - 49 -

Table 8

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Structur,s of Fuel Prices, Effective December 1980 (Escudos)

Gasoline Heavy Premium Regular Diesel Fuel Oil …------(per liter) ------(per kg)

Ex-refinery price 16.9 15.9 16.2 11.9 (% of total) (34) (35) (72) (133)

Distribution margin 2.1 2.2 1.5 0.4 (% of total) (4) (5) (7) (4)

Taxes & duties 31.0 27.9 4.8 -3.4 (% of total) (62) (61) (21) (-37)

Selling price 50.0 46.0 22.5 9.0 (% of total) (100) (100) (100) (100)

Source; IBRD Appraisal of Petroleum Exploration Project

May 1981 PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Passenger Traffic on Portuguese Railroads (1973-1979)

Passengers (million) Passenger-km (million) Year Suburban Intercity International Total Suburban Intercity International Total

1973 - 18.9 - 117.3 - 1,853 - 3,225

1974 - 21.3 - 126.8 - 2,134 - 3,618

1975 - 23.1 - 128.4 - 2,116 - 3,848

1976 168.3a/ 22.8 0.6 191.7a/ 2,967 2,147 121 5,235

1977 172.8a/ 23.3 0.6 196.7a/ 3,069 2,063 112 5,243 o

1978 166.7a/ 23.3 0.5 190.5a/ 3,016 2,044 101 5,161

1979 184.9 25.2 0.6 210.7 3,282 2,239 113 5,635 Growth Rate 1976-79 3 3 -4 3 3 1 -2 2

a/ Includes traffic from the Cascais Line taken over by CP in January 1977; in 1977, this line carried 58 million passengers (1,084 million passenger-km).

Sources; 1973-1975 data: CP Gabinete de Planeamento e Estudos Economico. 1976-1977 data: Estatisticas dos Transportes e Communicagoes.

September 1981 0 Table 10

PORTUGAL

TRANSPORT SECTOR MEMORANDUM4

Freight Traffic on Portuguese Railroads (1973-1979

Tonsa/ vaillion) Ton-km/ (million.) Averae Year CT hCL$I2 Total _ ;_ L_ Total haulIAt(kr)

1973 - - 4.7 - - 864 184

1974 - - 4.5 - - 919 204

1975 - - 3.3 - - ;754 228

1976 3.1 0.4 3.4 764 90 854 251

1977 3.4 0.3 3.7 813 72 885 242

1978 3.6 0.3 3.9 865 67 932 242

1979 3.2 0.2 3.4 812 59 872 258

Growth Rate 1976-79 1 -15 U .2 -13 1

a/ Including company freights. bY CL car-load traffic. c/ LCL less than-carload traffic.

Source; 1973-1975 data: CP Gabinete de Planeamento e Estudos Economico.

1976-1979 data. INE, Estatisticas dos Transportes e Communica;oes

September 1981 - 52 -

Table 11

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Deficits of Portuguese Railways 1973-80 (million escudos)

1973 1974 1975 1976 1977 1978 1979 1980a

CP deficit 717 1,280 3,132 4,116 5,394 5,596 6,057 7,755

Government compensation 608 766 2,367 3,402 4,733 5,955 5,850 6,131

Shortfall 109 514 765 714 661 359 207 1,624

Accumulated shortfall 109 623 1,388 2,102 2,763 2,404 2,611 4,235

Source: CP a/ Estimated

September 1981 - 53 -

Table 12

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

CP Tentative Investment Program 1979-1984 (Escudos million 1978 Prices)

Project Prior to After Cost 1979 1979 1980-84 1984

Recommended Program 23,323 9,945 1,511 7,956 3,910

Track renewal 14,539 8,839 1,010 4,690 - Douro Bridge 815 14 51 750 - Strengthening of bridges 4,500 60 190 1,380 2,870 Spare parts and equipment modernizing and repair 336 - 50 286 - Level crossing-automat:ion 1,531 31 60 400 1,040

500 Wagons 1,601 1,001 150 450 -

Remainder of CP Program 4,610 630 739 3,240 -

Improvement of fixed installations 1,245 302 271 672 - 30 Locomotives 1,315 200 369 745 - 55 Railcars 1,388 - - 1,388 - Improvement of rolling stock 346 119 50 177 - Provoa line 315 9 49 257 -

Special Purpose Projects 9,988 547 995 6,025 2,421

Moncorvo Line 5,208 28 302 4,878 - Sines Line 2,995 508 660 700 1,127 Aljustrel Line 1,344 - 3 47 1,294 Sexal Line 441 11 30 400 -

TOTAL 37,921 11,122 3,245 17,622 5,931

Source: "Portugal, Prio:rities for Public Sector Investment", Table VI.2, IBRI), July 1980.

September 1981 - 54 -

Table 13

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Port Traffic, 1976-79 (000 tons)

Average Annual Growth 1976 1977 1978 1979 Rate (%)

Lisbon Unloaded 9,546 9,822 9,917 11,653 7 incl. petroleum (4,999) (4,478) (4,358) (5,261) 2 containers ( 391) ( 412) ( 335) ( 364) -2

Loaded 1,644 1,462 1,461 2,127 9 incl. petroleum ( 299) ( 300) ( 260) ( 604) 26 containers ( 323) ( 336) ( 309) ( 382) 6

Total 11,190 11,284 11,378 13,780 7 incl. petroleum (8,298) (4,778) (4,618) (5,865) 3 containers ( 714) ( 748) ( 644) ( 746) 2

Leixoes and Douro Unloaded 6,296 6,985 6,293 5,557 -4 incl. petroleum (4,092) (4,347) (3,850) (2,898) n.a. containers ( 175) ( 216) ( 219) ( 212) 7

Loaded 2,867 3,080 3,285 1,771 -15 incl. petroleum (1,874) (1,977) (2,180) ( 246) n.a. containers ( 189) ( 204) ( 240) ( 280) 14

Total 9,163 10,065 9,578 7,328 -7 incl. petroleum (5,966) (6,324) (6,030) (3,144) n.a. containers ( 364) ( 420) ( 459) ( 492) 11

Sines Unloaded (petroleum) - - - 6,195 n.a. Loaded (petroleum) - - - 5,432 n.a. Total 11,627 - 55 -

Table 13 (Contd)

Average Annual Growth 1976 1977 1978 1979 Rate (%)

Setubal Unloaded 581 785 856 887 15 incl. petroleum ( 1) - ( 45) ( 385) n.a.

Loaded 465 412 556 837 22 incl. petroleum - ( 1) ( 20) ( 28) n.a.

Total 1,046 1,197 1,412 1,724 18 incl. petroleum ( 1) ( 1) ( 65) ( 413)

6 Other Mainland Ports!.! Unloaded 308 286 380 318 1 Loaded 538 503 669 538 0

Total 846 789 1,049 856 0

Azores (7 ports) Unloaded 331 363 438 n.a. 152/ Loaded 102 104 149 n.a. 212/

Total 433 467 587 n.a. 162/

Madeira (Funchal) Unloaded 289 339 354 n.a. 112/ Loaded 39 41 39 n.a. o2/

Total 328 380 393 n.a. 92/

GRAND TOTAL Unloaded 17,351 18,580 18,238 25,5243/ 14 incl. petroleum (9,092) (8,825) (8,253) (14,734) 17 containers C 566) ( 628) ( 554) ( 576) 1

Loaded 5,655 5,602 6,159 11,0833/ 25 incl. petroleum (2,173) (2,278) (2,460) (6,310) 43 containers ( 512) ( 540) ( 549) ( 663) 9

Total 23,006 24,182 24,397 36,6073/ 17 incl. petroleum (11,265) (11,103) (10,713) (21,049) 23 containers (1,078) (1,168) (1,103) (1,238) 5 - 56 -

Table 13 (contd.) n.a. not applicable/not available

1/ Viano do Castelo, Aveiro, Figueira da Faz, Portimao, Faro Olhao and Vila Real de Sto. Antonio.

2/ Average growth rate 1976-78.

3/ Incorporating Bank estimates for Azores and Madeira calculated by extrapolation.

Source: INE, Estatisticas des Transportes e Comunicagoes

August 1981 - 57 -

Table 14

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Container Traffic Through Ports, 1976-80 (000 containers/000 tons)

1976 1977 1978 1979 1980

Lisbon No. unloaded 36 35 29 37 42 loaded 23 33 29 35 41 total 43 68 58 72 83

Weight unloaded 391 412 335 364 408 loaded 323 336 309 382 460 total 714 748 644 746 868

Leixoeb No. unloadea 13 20 23 24 28 loaded 16 20 22 26 30 total 29 40 45 50 58

Weight unloaded 1751/ 216 219 212 279 loaded 1891/ 204 240 280 205 total 364 420 459 492 584

1/ Derived from data on gross container weight assuming 2.6t tare.

Source: INE, Estatisticas dos Transportes e Comunicagoes

August 1981 - 58 -

Table 15

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Port Finances (million escudos)

1976 1977 1978 19791/

Lisbon Income 705 878 1,083 1,260 Expenses (-) -655 -808 -908 -1,070 Non-operating income + expenses (-), net 5 -12 2 -7

Profit/Loss (-) 55 58 177 183

Leixoes Income 513 756 781 870 Expenses (-) -404 -539 -567 -675 Transfers, non-operating income + expenses (-), net 33 61 32 50

Profit/Loss (-) 142 278 246 245

1/ Estimate based on incomplete data.

Source: Kampsax/Systan, National Transport Plan, Financial Evaluation of the Port Sector, June 1980

September 1981 - 59 -

Table 16

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Portuguese Air Traffic (1970-1979)

Aircraft Average Passengers Average Freight Average Lanlings Growth Embarking Growth Loaded Growth (Z) (1,000) -T3(t) (Z)

1970 17,910 812 6,268 + 8.4 + 16.2 + 29.5 International 1973 22,803 1,273 13,543 - 0.5 + 3.7 + 8.5 1977 22,359 1,471 18,729 + 5.2 + 13.3 + 25.0 1979 24,2'52 1,888 29,268

1970 2,eq43 194 2,148 + 18.8 + 19.5 + 30.1 Territorial 1973 4,094 331 4,684 + 1.2 + 0.7 + 8.1 1977 -4,300 341 6,411 + 3.1 + 8.2 + 3.4 1979 4,569 399 6,849

1970 7,'71 380 2,986 + 12.4 + 11.8 + 23.0 1973 10,756 531 5,535 Interior + 4.l + 0.7 + 6.7 1977 12,465 546 7,167 - 7.3 - 5.1 + 11.1 1979 10,713 492 8,854

1970 27,924 1)386 11,402 + 10.5 + 15.5 + 28.0 1973 37,653 2,135 23,762 Total + 1.1 + 2.5 + 8.0 1977 39,124 2,358 32,307 + 1.2 # 8.6 + 18.0 1979 40,034 2,779 44,971

Source: INE, Portugal ArLuario Estatistico, 1977 and Estatisticas dos Transportes e Ccmmunicagoes, 1979.

September 1981 - 60 -

Table 17

PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Deficits of Public Transport Enterprises in Portugal (1973-1978)

1973 1974 1975 1976 1977 1978 ------million escudos ------

CP (Railways) 717 1,280 3,132 4,116 5,394 5,596

RN (Road Transport) - - - 682b/ 1,127 1,671

ANA (Airports) - - - - 173

TAP (Airline) 146.a/ 242 448 1,148 738 823

Maritime 174 783 1,241 2,012 2,467 2,773

Urban TransportJ 152 436 806 1,019 1,211 1,311

TOTAL 897 2,741 5,627 8,977 10,896 12,347

a/ Gain b/ June-December 1976 only. c/ Lisbon and Porto

Source: 1973-1977 data, MTC (November 1978) 1978 data, Kampsax/Systan & GEP/MTC Draft Interim Report for the National Transport Study, December 1979.

September 1981 - 61 -

Table 18 PORTUGAL

TRANSPORT SECTOR MEMORANDUM

Operating Subsidies and Investment Grants to Portuguesa Transport Enterprises, 1973-1978 (Million Escudos)

1973 1974 1975 1976 1977 1978 CP (Railway) Operating 608 766 2,367 3,402 4,733 5,955 Investment-a/ 305 457 1,237 1,228 17 800

RN (Road Transport) Operating - - - - 760 950 Investmenta/ - - - 300 415 800

ANA (Airports) Operating ------Investment - - - - - 84

TAP (Airline) Operating - - - 800 500 173 Investment - - - - - 40

Maritime Transportb/ Operating 8 13 9 9 1,025 1,200 Investment - - - - - 385

Urban Transport Operating 15 20 185 169 900 1,293 Investment - - - - - 965

Subtotal: Operating Subsidies 631 799 2,561 4,380 7,918 9,571

Subtotal: Investment Grants 305 457 1,237 1,528 432 3,074

JAE (highways) Current 276 407 484 720 1,367 1,484 Capital 543 694 1,169 1,421 1,416 2,400

Sector Totalb/ 1,755 2,357 5,451 8,049 11,133 16,529 a/ Includes equity. b/ Ports data not availabLe.

Source: Kampsax/Systan & MTC/GEP Draft. Interim Report for the National Transport Study, December 1979. September 1981 PORTUGAL GRAPH 1 TRANSPORT SECTOR MEMORANDUM

Comparison of Official Motor Vehicle Fuel Pump Prices and Border Prices_ 1973-81

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