ReportNo. 9908-MAI TransportSector Review Selected Issues Public Disclosure Authorized (In Two Volumes) Volume 1:Main Report

August10 1992 MICROFICHE COPY lnfrastructureOperations Division Report No, SouthernAfrica Department Title: rt ANoSO9R8MAI Type ( SEC) Author: BURNS, J. Ext. :35550 Room:J11125 Dept.:AF61A FOR OFFICIAL USE ONLY G 2 V. Public Disclosure Authorized Public Disclosure Authorized

'. -.

Public Disclosure Authorized DocumentOf the World Bank

Thisdocument has a restricteddistribution and may be used by recipients orMyin theperformance of theirofficial duties. Its contents may not otherwise fdisowdwitho Woru d Bankauthorization. CURRENCY EQUIVALENT (as of November l, 1991)

Currency Unit - Malavi Kwacha (MK) US$1.00 MK 2.86 MK1.00l US$0.38 MK 1.00 - 100 Tambala

GOVERNMENTOF MALAWIFISCAL YEAR

April 1 to March 31

WEIGHTSAND MEASURES

1 kilogram (kg) - 2.2 lb I metric too (mt) - 2,204.6 lb 1 liter (1) - 2.116 US pints 1 hectare (ha) - 2.471 acres 1 cubic meter (cm3) * 35.3 cubic feet 1 kilometer (km) - 0.621 miles

GLOSSARY OF ABBREVIATIONS

ABA - African Ruitineesmen'sAssociation ADMARC - Agriculture Development Marketing Board AFRAA - African Airlines Association AfDB - African Development Bank APRAA - African Airlines Association BA - British Airways CFH-t! - Caminho de Perro-Norte. Hozambique DCA - Department of Civil Aviation DSS - Decision Support System DEMATT - Developmentof Malawi Traders Trust DTM - Directed Track Maintenance EPD - Economic Planningand Development Department GOM - Government of Halawi GSA - General Sales Agent IATA - International Air TransportAssociation INDEBANRK - Investmentand Development Bank of Malawi INDEFUND - Investmentand DevelopmentFund of Malawi KRA KRamazu International Airport KLM - Royal Dutch Airlines LAM - Airlines LPC Leasing and Finance Company of Malawi LS - Lake Services MMS - Material Management Systems MOP - Ministry of Finance MOTC - Ministry of Transport and Communications MOU - Memorandum of Understanding MOW - Ministry of Works MPF - Monthly Payment Factor MR MMalawi Railways MTIT - Mlnistry of Trade, Industry and Tourism NTC - Northern TransportCorridor NRZ - National Railways of OAS - Operations Audit System OPC - Office of the Presidentand Cabinet PCC - PetroleumControl Commission PR - Passenger Kilometers PRP - Prime Route Policy pVHO - Plant and Vehicle Hire Organization QAS - Quality Assurance System QM - Air Malawi RAP - Restructuring Action Plan ROC - Return on Capital Employed RSP - Road Service Permit RTA - Road Traffic Act RTC - Road Traf.ic Conmission RTD - Road Traffic Department RTOA - Road Transport OperatorsAssociation SM - South African Airwkys TEU - Twenty Foot Equivalent Unit (containers) SM - Stagecoach Malawi. Ltd. TR - Railways UNHCR - United Nations High Commissionerfor Refugees ZR - Railways FOR OFFICIALUSE ONLY

MALAWl

TRANSPORT SECTOR REVIEW - SELECTED ISSUES

VOLUME I

Table of Contents

Page No.

EXECUTIVE SUMMARY ......

I. INTRODUCTION AND OVERVIEW ...... 1

A. Purpose and Scope of Study ...... 1 B. Geographic Setting and Transport System ...... 1 C. Economic Development and Transport Policy ...... 3

II. STRUCTURE OF DEMAND FOR TRANSPORT ...... 6

A. International Plows ...... 6 B. Transport Cost Savings ...... 11 C. Future Demand ...... 12 D. Domestic Flows ...... 13

III. - STRATEGY FOR RECOVERY ...... 15

A. Background ...... 15 B. Corporate Objectives and Strategy ...... 16 C. Framework for Financial Viability ...... 17 D. Restructuring Plan ...... 18 E. Tariff Restructuring ...... 22 F. Management Effectiveness ...... 22 G. Railway-Goveroment Relationship ...... 23 H. Projections and Action Plan ...... 24

IV. LAKE SERVICES ...... 30

A. Introduction .30 B. Objective and Strategy ...... 31 C. Restructuring ...... 31 D. Operations Improvement .34 E. Financial Projections ...... 35

V. AIR MAIAWI ...... 36

A. Background ...... 36 B. QM's Current Operations and Competitive Position . . . . 36 C. QH's Financial Position ...... 40 D. Current 'issues ...... 44

VI. PRIORITY ISSUES FOR ROAD FREIGHT TRANSPORT ...... 51

A. Background ...... 51 B. Industry Structure ...... 52

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. C. Institutional Constraints...... 57 D. Recommendations...... 60

VII. PRIORITY ISSUES FOR PASSENGER TRANSPORT ...... 62

A. Overview ...... 62 B. industry Structure ...... 62 C. Regulatory Issues ...... 66 D. Other Constraints ...... 69 S. Rural Passenger Transport ...... 71 F. RecommendedActions ...... 72

VIII. STRATEGY AND ACTION PLAN ...... 76

ANNEXES

1. Transport Costs (Land, Port and Sea) as Percentage of the Commodity Value in Two Scenarios 2. Forecast of Exports and Imports of Malawi, 1990-2010, in Four Scenarios 3. Malawi Railwayst Basic Data and Key PerformanceIndicators for the Malawi and Some NeighboringRailways 4. Malawi Railways: Current Estimates of MR Assets and Depreciation 5. Malawi Railways (IncludingLake Services): Cost Structure and Trend (1985/86-1989/90) 6. Malawi Railways: Operational PerformanceTargets 7. Malawi Railways: Current Estimates of MR's Usable Assets and Depreciation 8. Air Malawi: Financial Projectionsof Jet Aircraft Purchase Scenarios

MAPS

IBRD No. 23293 IBRD No. 23294

This report is based on the findings of a mission that visited Malawi in October/November,1990. Mission members were Imogene Burns (Mission Leader, AF6IN), Yash Pal Kedia (AFTIN), Mats Gustavsson (AF6IN), Maria Kiwanuka, Made Kofod, Erik Ostergaard,Edward Ramsdell, Gary Roberts, Harold Shenton and Vim Spit, Consultants. The mission was also joined by Steve Siwande, Ministry of Transport and Communications,during the course of the review. The report was discussed with the government in Malawi in March 1991. Ms. Sonia Ainsworth provided graphics and secretarial support in the preparation of the report. MALAWI

TRANSPORTSECTOR REVIEW - SELECTEDISSUES

VOLUME1

Executive Suvnary

Purpose and Scope of Study

1. The Malawi transport sector review focuses on modes of transport under the auspices of the Ministry of Transport and Communications (MOTC). Accordingly,the review covers key issues pertaining to Malawi Railways (MR) and its subsidiaryLake Services (LS), Air Malawi (QM), the road freight transport industry, and road passenger transport services. Roads, which fall under the Ministry of Works, have been covered elsewhere and are not addressed in this review.

2. The aim of the review is to identify the most.pervasive and pressing issues facing these transport subsectors. To a large extent these issues pertain to the efficient and effective allocationof resources,with specific emphasis on creation of a policy environment that can facilitatethe necessary supply response from the private sector. The Government of Malawi (GOM) also is approaching a number of investmentdecisions throughoutthe transport sector, and the transport sector review aims to establish a context and sound principles for making such decisions. Of particular concern is the effective use of existing assets, improved financial performance of +-4 sector, cost reduction and, to the extent possible given the unce tain environment, minimization of risk.

Background

3. As a landlockedcountry that depends on neighboring countries' overland routes and seaports for regional and international traffic, Malawi faces a range of difficult transport problems that have adversely affected prospects for growth and development. Foremost among these has been the insurgent activity in Mozambique,which by 1985 had effectively severed Malawi's traditionalaccess to rail routes for imports and exports through the ports of Nacala and Beira. This same external unrest caused an influx of Mozambican refugees totaling one million, more than 10 percent of Malawi's population. The refugees continue to place additionalstrain on Malawi's economy, and food aid and services for the refugees further aggravate the shortage of domestic transport supply.

4. The alternative routes available for handling Malawi's external trade to and from InO Ocean ports vary greatly in length and reliability. The major tra':I ersion, from the Mozambican routes to the port of Durban in South *t-1 has not only increased transport distances by 200 to 300 percenu, but also the number of countries transited. This has had important implicationsfor reliability,loss and damage, time in transit, as well as out-of-pocketcost. Recent - ii - disturbancesin the Tete Province in Mozambique, through which trucks following the fastest and most direct route to Durban have to pass, have exacerbated the problem. During periods of closure, trucks must instead travel via and at significantlyhigher cost. An alternative route through Tanzania, the Northern Transport Corridor (NTC), is being developed to provide a less costly alternative to the various routes to Durban, and although behind schedule, is expected to become fully operationalby late 1992. In addition, the route to Nacala reopened in December 1989 with one train a week, later increased to two. However, disruptionsstill occur along the line, which carried less than five percent of Malawi's external trade in 1990.

5. The cost savings anticipated from the NTC and unhampered operation of the Nacala line are critical, as the economic burden associated with the closure of the Mozambican routes has been great. Prior to 1983, nearly 95 percent of all import and export traffic, in value terms, went through the Mozambique ports of Beira and Nacala. The shift via road/rail to Durban caused the overall c.i.f. margin to increase from about 20 percent in the 1970s to 40 percent by 1987. Expansion of Y-lawian-licensedinternational road hauliers led to modest foreign excha&ne savings and a reduction in the c.i.f. margin to about 38 percent in 1989 and 1990, but the disruption of the Tete corridor in 1991 increased the margin to an estimatedhigh of 41 percent. In 1992 the corridor has again reopened and is being used for grain imports.

6. The end result of the uncertainty and efforts to keep as many transport options open as possible has been a dramatic decline in the efficiency of the sector. For example, MR has been kept going at full capacity in anticipationof the reopening of the Nacala line, but at considerablecost. LS also has been operatingwith excess capacity in anticipationof NTC traffic. Conversely, the position of internationaltruckers has improved,and these truckers are capturing a substantial portion of Malawi's external trade. These hauliers generally offer service that is reasonably efficient and reliable and have the advantage of being able to provide door-to-doorservice. As shippers typicallymake their transport decisions based on the minimum "generalized"cost, such factors as reliability,and low frequency of loss and damage, can overshadow out-of-pocketcost, especially for higher value commodities. There is a valid concern that it will be difficult for the alternativemodes, e.g., the NTC or Nacala line, to provide service of sufficient quality to win back the full complement of traffic.

7. This underscores the importanceof developing efficient and reliable transport options, which are properly scaled to the nature and level of demand and thereby direct resources to their most efficient use. Once achieved, the potential savings could be considerable. The total transport burden to the economy at present is in the order of US$120 million. It is estimated that savings of up to US$28 million, or 24 percent, could be realized if securitywere no longer a problem and all corridors were operating optimally. These estimates assume that all services are priced to reflect their economic cost, i.e., to lncludethe cost of road investment and maintenance in the trucking costs, and an increase in rail tariffs and decrease in lake services tariffs to - iii -

reflect long run marginal costs. Specific issues that pertain to each subsector are as follows.

Malawi Railways

8. As indicated, the strategic role for MR lies in its ability to provide, through its link with the Mozambican railway network, the shortest and most economical routes for Malawi's internationaltraffic. While the reopening of the route to Beira is a long way off, the resumption of full traffic on the Nacala line could occur as early as 1994. However, the shift of internationaltraffic to Nacala could be less than expected, i.e., about 300,000 tonnes or one-third of the peak traffic level of 1975. Contributoryfactors include changes in Malawi's trading patterns, GOM's policy to keep all corridors active, and the expanded capacity and efficiency of the road sector. In addition, there is little economic or financial justificationfor MR to continue in the local transport sector alone, given the low volume and short hauls of the local freight traffic. lf present operations and investment trends continue, losses as high as MK 60-70 million per year, equal to six percent of the government budget, could be incurred. With the drought, these losses could be even more. This underscores the need for a major restructuringof MR to direct scarce resources to those areas where MR has the comparative advantage and thereby rationalizethe allocation of resources overall.

Lake Sarvices

9. For many years, LS was the dominant mode of transport between southern Malawi and much of the central and northern regions of the country. However, the developmentof the road network during the past 30 years has reduced LS' relative importance,regional trade among the three countries sharing the coastal line of the lake remains limited, and LS presently serves mostly local freight and passenger traffic. This limited role is about to change, as LS is a critical link in the multi-modal NTC. LS also continues to be an important and, in some cases, the only link for certain communities. However, LS' current overall operating and financial performance is not satisfactoryand its future role as a provider of services, either on its own or as a part of the NTC, will depend upon the capacity of LS to restructureand operate at a substantiallyenhanced level of efficiency and productivity. Of particular concern is the passenger service, which continues to sustain heavy losses. The passenger service needs to be restructuredto focus on the otherwise inaccessibleareas at the least cost, mainly through use of vessels of appropriatedesign and optimizing frequency of service.

Air Halawi

10. Air Halawi (QM) is one of the smallest airlines and one of the few that has avoided the heavy losses and fiscal subsidies of many carriers in the region. However, there are a number of reasons for concern. QH only breaks even after taking into account the revenues derived from ancillary activities,depreciation charges that are insufficientto cover capital replacementneeds, and a range of hidden - iv -

subsidies that, while not a cost to the airline, represent a cost to the economy. Further, QM took delivery of a new Boeing 737-300 aircraft in May 1991, with a second aircraft due for delivery in 1992.1/ An analysis of this two-jet aircraft purchase indicates a substantialcash deficit and a return on capital employed in the year 2t0'nof less than two percent. QM also is in the difficult position of being instructed to operate on commercial principles,while its authority to make sajor investment or operationaldecisions is limited. Fundamental issues that must be addressed include clarificationof the respective roles of the government and airline management, regulation and ov3rsight, operational autonomy, and the appropriateaircraft replacementplan based on sound economic and finarnial principles.

Road Freight Transport

11. Road freight transport presently accounts for about 95 percent of Malawi's import and export traffic, and an estimated 70 percent of domestic traffic. The industry functions competitivelyand there is no trucking parastatal. The Road Traffic Act (RTA), which provides the legal framework for the road transport subsector, in principle accords GOM the right to regulate all aspects of freight and passenger transport. Although the Act as presently administeredis less constrainingthan in most neighboring countries, there are a number of issues to be resolved. These include the setting of maximum rates for domestic cargo; restrictionson joint haulage of passengers and freight or of for-hire and own-account cargo, which segment the market and reduce the density of demand in any given area;2/ confusion over regulatory requirementsand procedures, as changes in requirementsare frequentlynot gazetted and updated copies of the Act are unavailable; and inadequate enforcementof safety requirements. Safety aspects of the RTA are, however, being addressed under a current program. In addition, poor access to credit, the unavailabilityof used vehicles due to many years of import restrictions,and the high cost of new vehicles continue to represent significantconstraints.

Road Passenger Transport

12. The bus industry is composed of an intercity bus sector dominated, but now exclusivelyoperated, by one large-bus carrier, Stagecoach Malawi, Ltd., urban services in four cities dominated by that same carrier, and a small minibus industry. The rural areas of the country, where the majority of the population lives, receive only minimal transportationservices, and there is evidence of a pervasive shortage of supply, even in the more densely populated areas. Along with road freight transport, the road passenger transport industry is directly regulatedunder the RTA, and vritten requirementsand

IJQM also recently procured an ATR-42 turbo-prop aircraft for domestic services.

2/GOM intends to implementa rural motorized transport project that would demonstrate the feasibilityof operating combined goods/passenger vehicles in rural areas. l - ~~~~~~~~~~~v- proceduvesare largelyunavailable. However, unlike road freight,GOM is exercisingits authorityto controlentry. exit, routes and fares for passengertransport. Bus fares are regulatedthrough a country-wide uniformfare system. Controlover entry and exit is limitedprimarily to makingthe award of the so-called prime rcutesto operatorsof largebuses contingentupon acceptanceof non-primeroutes, typically on unpavedsurfaces in rural areas. GOM is consideringchanging the prime route system,as it has been difficultto enforce,and resultedin limitedservice coverage in ruralareas and the proliferationof illegal,potentially unsafe alternatives. 14inibuses, which were tightly regulateduntil recently,are now free to enter and exit any marketupon receipt of a certificateof fitness. 13. Passengert_ansportation in the rural areas is besetwith a numberof specialproblems, as roads typicallyare unpavedand may be impassablein the rainyseason, operating costs are high, demandis cyclical,and the shortageof cash incomeplaces a significant constrainton the abilityof peopleto pay. In many areas,improved non-motorizedtranslortation may be bettersuited to the demandpatterns and cost structureof ruralareas. What is requiredis an intermediate levelof transportbetween head-loading, which is expensivein time and energy,and smalltrucks. Such non-motorizedvehicles could include bicyclesand bicycle-trailersthat can be hookedto bicyclesor pushed separately,or farm vehiclessuitable for use on bush tracksthat have a wheel at the centerto supportthe weightof the load. Barriersto use of non-motorizedvehicles include lack of finance,import duties, and absenceof localmanufacturing facilities for both the vehiclesand spareparts, as well as socialresistance. Lack of suitabletracks and roads can also presenta barrier,but this generallyis not the case in Malawiwith its excellentsystem of earthand gravelroads. To determinewhat optionsare best for Malawi,the Ministryof Local Government,with the assistanceof ILO, has a non-motorizedtransport projectunder way. Strategyand ActionPlan

14. To a large extentthe issuesfacing the Malawi transport sectorare policy-related,and as such can be addressedeffectively throughregulatory reform and restructuringof transportenterprises. This will entailmaking effective use of existingcapacity, encouraging the privatesector to expandits levelof operationsin freightand passengertransport, and takingthe necessarysteps for all parastat;als to attaincommercial viability within a reasonableperiod of time. A matrix that identifiesthe recommendedactione types of reformand purpose,priority, and agencyresponsible follo%'s. Key recommendations are summarizedbelow. 15. The restructuringplan proposedfor MR is directedtowards enablingthe railwayto becomefully commercially viable, defined as an adequatereturn on capitalemployed after meeting all variableand fixed costs and providingfor depreciationadequate to financeall future replacementof assets. A plan is proposedthat providesinitiallr for MR to break even and subsequentlyto generatean adequatereturn to the economy. Althoughthere would be some latitudefor increasingtariffs - vi - once efficient and reliable operationswere provided, much of the gain must come from enhanced productivity*nd * scaling down of MR's asset base. The strategic plan to do so would involve a reetructuringo! products and operations, organizationand staff, physical resources, tariffs and capital in line with realistic traffic forecasts and organinationalgoalo. In so doing, difficult decisions will be required, including the phasing out of mized trains, gradual elimination of passenger services once appropriatealternatives are provided for, relegation of uneconomic sections of the network to siding status, and a substantial reduction in staff. MR recently reduced the frequency of mixed trains from daily to twice-weeklyservice. The Government is currently studying additional optlons and preparationof a restructuring plan is under way.

16. Some restructuringwill also be required for LS to become commerciallyviable, in particular to provide for greater autonomy with respect to tariffs, routes, marketing and management now that the NTC is about to become operational. Immediate action is 'equiredto stem the large losses accruing to the passenger services. As a first step, the Chauncy Maples should be retired for reasons of both cost and safety, and service eliminated along the north-south leg where passengers could be served at less cost by road transport. The Ilala and Htendere could then be used to service the islands and those villages without alternative transport in the north and south, re,spectively.This would yield considerableoperating cost savings, particularlywith respect to fuel. The Government expressedwillingness to consider operational changes, but only after further study to work out operational details. As a second step, suitable replacementvessels, such as landing craft, should be acqusired. Such vessels, if sized and scheduled correctly, could potentiLllyprovide more frequent and safer service than the present vesseLs which are no longer suitable for the type of service and areas served.

17. The overall objective for QM, as for all the other transport parastatale,is commercial viability. Although there are a range of important issues that pertain to management autonomy and the ability to operate according to commercial principles, the most immediate issue for QM is the equipment replacementplan. Given that delivery has already been taken of one new Boeing 737-300, it is recommended that QM maintain the jet fleet on a one-aircraftbasis, with, as has been done, replacementof the BAe 748 with another turboprop aircraft. Although there would be some operational inconvenienceassociated with the one jet-aircraftfleet, the severe financialpenalty associated with the second aircraft would far outweigh the benefits. The purchase of the second aircraft should be deferred until a sufficientvolume of additional traffic is assured on existing or new routes to support en economicallyviable operation. However, the Government uoes not consider this recommendationfeasible at this time, partly because substantialpayments have been made on the second aircraft.

18. The key issues with respect to road transport are institutionaland regulatory. Although road transport has generally been managed well and without excessive control, there is an urgent need to replace the increasinglyoutdated and cumbersome RTA with a clear, - vii -

transparentset of regulationsthat provide for a safe and efficient industry,without economic restraints. For road freight transport, key actions would be to replace the current domestic road service permit with a commercial operating permit granted to all owners of Malawi- registered goods vehicles, and eliminate all controls on domestic transport rates. The same actions would pertain to road passenger transport, although given the present lack of competition in the industry, the eliminatlonof non-safety related regulation would need to be in a phased manner. The Government concurs with these recommendations,subject to further analysis, again to address implementationaspects. Consistent with the redefinitionof activities away from economic control, MOTC also would need to be reorgauizedto strengthen its management, planning and monitoring capacity.

19. In view of the range of policy reforms required, IDA's future strategy for transportwould be to provide the donor coordination and assistance needed to effect such reforms. As there are few pressing investment needs, the central policy '1ssues could appropriatelybe addressed under a possible new adjustment credit, with a parallel technical assistance effort to help formulate and implement the policy reforms and institutionalchanges. This technical assistance could also help to determine a multi-year program of investmentsand technical assistanceneeds for the transport sector. Such investmentsand technical assistance could then be aggregated in a future project for which IDA would assist GOM in mobilizing funds from the donor community. MALAWIRAILWAYS ACTION PLAN

Completion Area of Reform RecommendedActio, Content/Purpose Schedule BusinessRestructuring i. Discontinuepassenger services To avoid lossesas average FY 1992/93 from routes where parallel bus passengerjourney is short and services are available in Phase I. cost/pk is much higher than of the road mode. ii. Take immediateaction on FY 1993194 E providingaltematives and discontinuepassenger services from remainingroutes in Phase 11. iii. Stops acceptingsmall loads from . To avoid losses from the FY 1991J92 0tal other than main originatingand uneconomicoperation of snall sxa-1 destinationstations. loads. g 5a iv. Discontinueregular serviceson . To eliminatesections with very FY 1992)93 Border-Limbesection and run poor traffic density. e trains only on demand. v. Discontinueservices on - . To eliminatesections with very FY 1992/93 Mchinjisection and run trains only poor traffic density. on demand. 0 t" vi. Discontinuewagon-load service To avoidhigh cost of servicing FY 1991/92 . t. from/to private sidingsthat are private sidingson a singlewagon v,l unprofitableto service. basis. ti '4 BusinessDevelopment and i. Concentrateon: bulk traffic, . To improveaverage freighthaul FY 1991/92 MarketingStrategy clients with private sidings, and and obtain more NTKs with block train operations. less/sane tonnage. ii. Offer incentivesfor faster . To improvewagon tumaround. FY 1991/92 loading/mloadingof trains and loading of wagons to full capacity. Completion Area of Reform RecommendedAction Content/Purpose Schedule OperationsRestructuring i. Gradually increasethe share of To increaseproductivity of FY 1993/94 block, throughand dedicated locomotivesand other assets. trains. ii. Terminatetrains in the users' . To avoid freight train delays. FY 1991/92 premisesinstead of railway yards as far as possible. iii. Switchover to Directed Track . To enable staff reductionand FY 1992/93 |4 Maintenance. improvetrack quality. iv. Maintenanceof locomotivesto be . To reducemaintenance cost and FY 1991/92 basedon kms and not hours. improvelocomotive reliability. l 0

Resource Rationalization i. Restrictthe assets on MR to those . To reducemaintenance and FY 1992/93 0 required for efficientoperation. operatingcost and improve l0 utilizationof assets. W o ii. Operate the fleet of locomotives Is." and wagonsas requiredand sell/hireout/mothball. iii. Restrictinvestment to the . To reduce depreciationcharges FY 1994/95 l minimumrequired. and improvereturn on capital Ol employed. 9 c iv. Close commerciallyinviable . To reduce operatingcosts. FY 1994/95 l stions. l e v. Consolidatemaintenance . To attain advantagesof increased FY 1994/95 l A workshopsand facilities. scale of operat;onsand reduce l: H costs. Ca

OrganizationRestructuring i. Conducta detailed reorganization . To define the positionsto be FY 1991/92 and redesignstudy. abolished/merged. ii. Implementreconunended . To reduce costs and improve FY 1992/93 .______organization design. managementeffectiveness. Staff Reduction i. Graduallyreduce staff to 1,000. To reduce cost and improve FY 1994/95 l ______productivity. Completion Area of Reform RecommendedAction Content/Purpose Schedule

Financial Restructuring i. Tariff restructuringafter internal . To improve revenues. FY 1992193 study. ii. Revaluationof assets employedon . To ensure adequacyof FY 1991/92 MR. depreciationfor replacementof assets. iii. Improvedcosting system to enable . To improve profitabilityand FY 1991/92 1E better control of assets utilization operatingratio. |! and other importantratios. l SystemsImprovement i. Designand implementthe . To improve managementand FY 1992193 M following: effectivenessin all aspectsof - DecisionSupport System management. - MaterialManagement System 0 - OperatingAudit - QualityAssurance System.

OperationsImprovement i. AchieveOperation Improvement . To increaseassets and manpower FY 1992/93

Targets as per Annex6.1. productivity. _ O P-fA Staff Developmentand i. Conductmanpower study. . To improvestaff productivity. FY 1992/93 o " Motivation ii. Implementan appropriatehuman tq resourcesdevelopmnent package. e 4 iii. Implementincentive scheme. 0 N Railway-Government i. MR and GOM to sign a . To clarify long-termobjectives of FY 1991/92 S Understanding Memorandumof Understanding MR and facilitatetheir i achievement.

ImplemientationStrategy i. Constitutea high-levelcommittee . To avoid slippagein the FY 1991/92 for coordinatingthe implementationof the implementationof the RestructuringAction Plan. RestructuringAction Plan. ii. Constitutea cell for managingstaff . To enable reductionof staff and FY 1994/95 and assets reductionprogram. assets in an efficientmanner. AIR MALAWIACTION PLAN

Nature of Implementing Reform RecommendedAction Purpose Priority Agency o Regulatory i. Air Malawi to continueto be given Improvecommercial orientation A MOTC, : completeautonomy with regard to and accountability. Treasury 1 r tariffs, routes and aircraft leasing. 6: Organizational ii. Postponepurchase of the secondnew . Avoid a near zero return on A MOTC Vs 737-300. capitalemployed. iii. Implementa revised systemof . Effect better controlon both A QM accountingto enable costs of airline& operationsand improve rt~ agency operationsto be segregated. profitability. F.. iv. Review the current systemof . Reducecash outflowdue to A QM 0 scrutinizingbilling by other airlines. erfors and differencein X t interpretation. n r v. Developan improvedmarketing . Improveprofitability from A QM "3 strategy. better utilization. ti N to LAKESERVICES ACTION PLAN '6

Nature of Implementing r Reform RecommendedAction Purpose Priority Agency S ______al___ ". Regulatory i. Lake Servicesto be given complete . Improvecommercial orientation A MOTC pio autonomywith regard to tariffs, routes and accountability. 0 0

and management. , d Organizational ii. Passengerservices to be restructured . Prevent heavydrain on the A LS n to serviceonly those passengersand economy. X areas inaccessibleby other modes. il iii. Evaluatefeasibility Of low.c'zst . Provideessential servicesat the B LS I. alternatives,e.g., landingcraft. least cost. 0C iv. Consider all ships and ports as . Improvecontrol and profitability A LS N separateprofit centers. and decision-makingprocess. C v. Set norms of operationalefficiency . Cost reductionand improved A LS I N and reduce staff accordingly. profitability. ' vi. MothballChauncy Maples . Cut losses by not operatingan A LS immediately. inefficientvessel. ROADFREIGHT ACTION PLAN lature of Implenmting Reform RecommendedAction Purpose Priority Agency ulatory i. Replace the current domesticRSP with a . Improvedomestic freight A MOTC commercialoperating permit granted to transportcapacity with minimal all Malawianregistered vehicles. investment. ii. Removeall controlson domestic . Enable rate setting in accordance A MOTC e transportrates after proper notification. with operatingcircumstances. 0 iii. Eliminatethe differential in duty and . Encouragebetter and more A MOTC and MOF seo surtax betweenvehicles and spare parts. timely maintenance. 0 C iv. RegularizeMatola operation with . Improvepassenger service in A MOTC v minimumsafety-related regulation. rural areas. n o -itutional v. Undertakeorganizational study of . Strengthenmanagement, A MOTC MOTC and of organizational,functional planningand monitoringability cr5i and legislativerestructuring of RTD. of MOTCand RTD. rr .4I ^ vi. Implementrural transportpilot project . Improvepassenger service in B MOTC (joint-usepassenger/cargo vehicle). rural areas. " I vii. Reduce duty and surtax burden in a . Reducetransportation cost and B MOF u phased manner consistentwith GOM's facilitateentry of trucks and program. tractors. Cn viii. Support the continueddirect importation . Reduceoperating costs. A Reserve Bank t of vehicles, parts and tires. ti ix. Establisha development-orientedpilot . Provideaccess to credit for A MOF and CA revolvingMK credit program. equipmentand spare parts. Operators a -anizational x. Training and staff developmentof . Improvecompetitiveness of all A MOTC u operators in areas of fare setting, operators and improve Operators marketingand trip scheduling. utilization. xi. Investigatemaintenance and operating . Reducecost of transportation. A MOTC practicesand generate guidelinesfor Operators efficiencyimprovement and cost reduction. xii. Plan and implementa procedure for data . Facilitateassessing the health of A MOTC collectionand constructionof a road transportsector and transport Operators transport data base. planning. IpA $SSENGERACFION PLAN

Nature of Impleting Reform RecommendedAction Purpose Priority Agency Regulatory i. Update and rewrite the RTA with Overallderegulation, clarity and A MOTC minimumof non-safety-related emphasison safetyand regulation. enforceability. ii. Implementa phased reductionof fare- . Removedistortions in fare-setting B MOTC makingregulations except those and permit market to function. 0 deemedanti-competitive. ! iii. Abolish the Prime Route Policy. . Eliminatediscrimination in fare A MOTC > and servicea!location. c0. iv. RegularizeMatola operation with the . Improvepassenger service in A MOTC e minimumrequired safety-related rural areas. s regulation. :: Institutional v. Implementrural transportpilot project . Improvepassenger service in B MOTC ° F (joint-usepassenger/cargo vehicle) rural areas. n vi. Reduceduty and surtax burden in a . Reducetransportation cost and B MOF phased manner consistentwith GOM's facilitateentry of more passenger co program. vehicles. 0Oii, r vii. Investigatethe potential for a pilot . Supplementprograms to increase B Ministryof Local to credit scheme for use of'non-motor zed passengerservice in rural areas. Government vehicles. % viii. Continueto permit importationof used . Quick road passengertransport A ReserveBank H Ca and reconditionedvehicles. expansion. (a Organizational ix. Training and stiff developmentof . Improvecompetitiveness of all A MOTC 09 operators in famesetting, marketingand operators and improved Operators trip scheduling. utilization. x. Investigatemaintenance and operating . Roducecost of tranwportation. A MOTC practices, and generateguidelines for Operators efficiencyimprovement and cost reduction. MALAWI

TRANSPORTSECTOR REVIEW - SELECTED ISSUES

VOLUMEI

I. INTRODUCTIONAND OVERVIEW

A. Purpose and Scope of Study

1.1 The Malawi transport sector review focuses on modes of transport under the auspices of the Ministry of Transport and Communications (HOTC). Accordingly,the review covers key issues pertaining to Malawi Railways (MR) and its subsidiary Lake Services (LS), Air Malawi (QH), the road freight transport industry, and road passenger transport services. Roads, which fall under the Ministry of Works (MOW), have been covered elsewhere and are not addressed in this review.

1.2 The aim of the transport sector review is to identify the most pervasive and pressing issues facing these transport subsectors. To a large extent these issues pertain to the efficient and effective allocatio&.of resources,with specific emphasis on creation of a policy environment that will facilitate the necessary supply response from the private sector. The Government of Malawi (GOM) also is approaching a number of investment decisions throughout the transport sector, and the transport sector review aims to establish a context and sound principles for making such decisions. Of particular concern is the effective use of existing assets, improved financialperformance of the sector, cost reduction and, to the extent possible given the uncertain environment, minimizationof risk.

B. Geographic Setting and Transport System

1.3 Malawi is one of the smallest countries in Southern Africa, meaouring some 120,000 kin, of which some 20 percent (24,200 kin) is covered by Lake Malawi (IBRD Map No. 23294). The aerial distance between the northernmostpoint at the border with Tanzania and the southernmostpoint at the border with Mozambique is some 900 km; the longest east-west distance is about 250 km. The major cities are the capital, Lilongwe, located in the central region, and in the south. The distance between the two cities is about 300 km by road and 370 km by rail. Other major population centers are Zomba, the former capital, in the south (70 km northeast of Blantyre) and Mzuzu, the capital of the northern region, some 360 km north of Lilongwe. The population, presently about 8 million, resides primarily in rural areas and is growing rapidly, at about 3.4 percent p.a.

1.4 The transport system includes an infrastructureof about 2,700 km of main roads and 8,100 km of secondary and district roads, 797 km of railway track, 4 major lake harbors and 4 commercial airports. The main road network, of which 1,900 km are bitumen, 100 km are gravel and 700 km are earth, is concentratedin the south, but with an important spinal link to the north. Road density is about 2 km per 1,000 inhabitants,above average for southern and eastern Africa. The road coverage is considered adequate for the country's present needs, and various initiativesaimed at improvingmaintenance practices and upgrading programs are under way.

1.5 The main railway line lies entirely in the south, extending from the southern border northward through Blantyre to Lake Malawi and then west through Lilongwe to the Zambian border. At the southern border, this line is connected to the Mozambique rail line (Sena Line) serving Beira port. An eastern extension of MR connects to the Mozambique rail line serving Nacala port. There is no rail connection to Zambia Railways (ZR), other than a 24-km extension from Hchinji to , which is under constructionand would be operated by ZR. A link with the main ZR network would require a costly 390 km track constructionproject, which is unlikely in the foreseeablefuture. At present, lake transport on Lake Malawi plays a relativelyminor role in both freight and passenger transport (about 30,000 tonnes and 200,000 passengers p.a.), although this is expected to change before the end of 1992 with the opening of the Northern Transport Corridor (NTC). Air transport, another minor player, operates on a limited route network, presently consisting of five regional and four domestic destinations.

1.7 Malawi, a landlocked country, must depend on neighboring countries for all imports or exports to the sea (Table 1.1 and IBRD Map No. 23293). The most direct routes to Beira and Nacala require transit through only one country. These two routes were fully operationaluntil 1981, after which the worsening security situation in Mozambique forced their gradual closure by 1985. The route to Beira remains closed, but the route to Nacala reopened in December 1989 with one train a week, later increased to two. Durban, the predominantcorridor in use at present, involves three countries regardless of route selected and much longer distances. Some of the routes to require transit through one country, but except for the all-road case, one or more transshipmentsbetween modes.

1.8 In varying degrees, then, Malawi is vulnerable to changes in security and any restrictionsin the transport policies of these neighboring countries. The closure of the rail routes through Mozambique greatly exacerbatedMalawi's transport logistics and cost problems,with implicationsfor many aspects of economic activity. Further, in the past year alone, Malawi's freight movements have been interrupted for both types of reasons, e.g., by security problems in the Tete corridor, and by changes in licensingand pricing policies within Zimbabwe. - 3 -

Table 1.1 TransportRoutes from Blantvr.for Malawi'sExternal Trade Key Points Countries Length Port Served Mode (s) En Route transited (km)

Beira Rail - MOZ 640 Nacala RLil MOZ 815

Durban Rail/Road Tete,Mararo MOZ, ZIH, RSA 2,667 Durban Rail/Road Lusaka,Harare ZAM, ZIM, RSA 3,467 Durban Rail/Road Lusaka,Gaborone ZAM, BOT, RSA 3,806 Durban Road Lusaka,Harare ZAM, ZIM, RSA 3,500 Dar es Salaam Rail/Lake/ Chipoka,Chilumba TAN 1,728 Road Mgeya Dar es Salaam Rail/Road Mbeya TAN 1,770 Dar es Salaam Road Mbeya TAN 1,789 Dar es Salaam Road Lusaka,Mbeya ZAM, TAN 3,030 Dar es salaam Rail/Road Lusaka,Mbeya ZAM, TAN 3,100 Source: MalawiNTC Project,World Bank StaffAppraisal Report No. 6022-MAI,January 27, 1988

C. EconomicDevelopment and TransportPolicy

1.9 Malawi,with a per capitaincome of only US$200 in 1990, is one of the poorestcountries in the world. The economyis fragile,as it dependson a limited range of exportsand small domestic markets, the populationgrowth rate is high, and socialindicators are low. Agricultureis the mainstayof the Malawieconomy, accounting for more than 35 percentof GDP, 90 percentof exports,and 85 percentof labor utilized. Foreigntrade is important,as exportsand importsaccount for approximately50 percentof GDP overall.

1.10 Theseconditions render Halawi's economy vulnerable to internaland externalshocks, and in particularto fluctuationsin terms of trade. Indeed,after one and a half decadesof economicgrowth, Halawi'seconomic performance faltered between 1981 and 1987 due in part to a numberof exogenousfactors. These includeda seriesof declines in termsof trade,a prolongeddrought, an influxof 700,000Mozambican refugees,and increasedtransport costs largelyattributable to the insurgentactivity in Mozambique(paras. 1.7-1.8). However,a broad- based recoverybegan in 1988, aidedby relaxationof importcontrols, with increasedimports of intermediateand capitalgoods financed by a combination of higher export prices and increased external inflows. The reformprogram has been effective,as evidenced by an increase in real GDP growthfrom 0.5 percentin 1987 to 4.8 percentin 1990.

1.11 The Government'spresent development strategy focus..s on growththrough poverty reduction while perseveringwith adjustment.A four-prongedapproach has been developedthat providesfor: (i) expansionof employmsntopportunities; (ii) programsand policies -4- enhancing smallholderproductivityg (iii) social sector expendituresfor human resource development;and (iv) income transfers. Successful implementationof the development strategy will depend, among other things, upon increasedmobility for persons seeking employment and new markets for agriculturalproduce, and improved access (both monetary and non-cash) to inputs and availabilityof government services.

1.12 Given the limited GOH resources available, future emphasis will have to be placed on directing funds to those areas where maximum value can be obtained. This would entail efficient and effective allocation of resourceswithin a policy environmentthat would facilitate optimum response from the private sector and require parastatals to operate and compete on a commercial basis. Within this context, several implicationsbegin to emerge for the transport sector. These includes (a) making effective use of existing capacity; (b) encouraging the private sector to expand its level of operations in freight and passenger transport,with the attendant implications for employment as well as capacity enhancement;and (c) attainment of commercial viability by all parastatalswithin a reasonable period of time. These are essential if the subsidy drain on the Government's limited resources is to be eliminated.

1.13 To some extent, these principles are recognized in the Government's 'Statementof Development Policies, 1987-1996',which for transport stresses the importance of providing external transport links that are not too costly; providing the necessary infrastructureto reduce the existing regional imbalances in economic activity and income; improving utilization of existing transport infrastructure;and ensuring that investment and tariff policies bear in mind the relative economic cost and service characteristicsof each mode so as to promote rational choice among consumers.

1.14 However, with respect to internationaltransport, the uncertainty over the availabilityand timing of the various transport options has overshadowedother concerns, and sector strategy has concentratedon keeping as many routes open as possible. While a rational policy under the circumstances,the cost implicationsare such that it is becoming increasinglyimportant to look for ways to reduce these costs and minimize the risk of alternative investments. In the case of internationalroad haulage, GOM has actively promoted a competitive and efficient industry,but the policy framework for MR and its subsidiaryLS, as well as for QM, has not been conducive to sustained commercial viability.

1.15 For domestic transport, GOM has avoided many of the pitfalls of excessive government control and bureaucraticprocedures that inhibit operating flexibility,management efficiency and incentives to increased productivity. Nonetheless,there are a number of areas in which improvementscould be made, especiallywith respect to the pricing of domestic transport services,both passenger and freight. Further removal of regulatory and licensing impediments,price liberalization, and improved access to finance are all examples of policy-related changes that could have a substantialpositive impact. It is against - 5 - this general background that major issues are discussed in each of the subsectors covered in the course of this review.

Government Expenditures

1.16 Transport infrastructurehas dominated development expendituressince Independence,often absorbing one-third or more of the total development budget. In 1990/91, transport development expendituresaccounted for about one-third percent of the total in all sectors, down slightly from the previous year (Table 1.2). Expenditures on roads continued to dominate, in 1990/91 accounting for two-thirds of total transport developmentexpenditure and about the same in 1991/92. Due to the lumpiness of transport investments,there is considerable variation from year to year.

Table 1.2 DevelopmentExpenditure by Subsector (MK million)

Subsector 1988/89 1989/90 1990/91 1991/92*

Total Transport** 93.69 105.97 105.10 85.23 of which: Roads 34.44 45.47 71.39 66.29 Rail/Lake 1.38 21.21 8.88 5.80 *CivilAviation 1.15 3.51 7.78 9.44

All Sectors 342.07 295.29 320.43 405.00 Percentage Share 271 36Z 33Z 212

*estimate **excludes NTC expendituresoutside of Malawi

Source: Government of Malawi, Economic Report 1991 and Ministry of Finance.

1.17 These figures do not reflect tota. government spending on transport, as they do not include either implicit or explicit subsidies to the transport parastatals. For example, in 1990/91, MR received a budgetary subvention totaling MR 6 million in that year. In 1991/92, GOM will require MR to finance all losses by a commercial bank overdraft with a government guarantee. - 6 -

I1. STRUCTURE OF DEMAND FOR TRANSPORT

A. InternationalFlows

2.1 In 1989 and 1990, importz and exports combined totaled some 850,000 and 950,000 tonnes, respectivoly,of which over 75 percent were imports. As shown in Table 2.1, the overall level of international trade has increased only slightly from 1985 to the present. However, the structure of that trade has changed, as exemplified in the growing imbalance of exports and imports and the shifting percentagesmoving through the main border posts. Imports through Kaporo, on the road to Dar es Salaam in the north, have increased dramatically,while exports via this route have remained relatively constant. Both exports and imports via have declined, as alternativesto shipping via Lusaka and Durban have been used more often. Exports via Mwanza, on the road to Harare and ,have declined,while imports via this route have nearly doubled. It is probable, however, that more current figures will show a decline in use of Mwanza, due to the recent deteriorationof the security situationalong the Tete corridor in Mozambique. Further, with the reopeningof the Nacala line in 1989 (para. 1.7), traffic via Nacala is once again being recorded; however, in 1990, Nacala traffic comprised less than five percent of imports and exports.

Table 2.1 InternationalTrade by Border Post, 1985-90* (tonnes '000)

Border post 1985 1986 1987 1988 1989 1990

EXPORTS: Kaporo 13.3 15.2 15.3 15.7 9.8 23.9 Mchinji 153.2 91.1 67.4 42.7 24.7 27.8 Mwanza 186.2 156.4 169.8 189.8 149.4 144.1 Nacala 0.1 9.6

Sub-total 352.7 262.7 252.5 248.2 183.9 205.4

IMPORTS: Kaporo 12.4 7.8 22.3 59.2 82.5 116.8 Mchinji 228.4 161.7 143.6 181.6 163.2 150.3 Mwanza 222.8 198.7 230.4 435.8 424.4 457.6 Nacala 0.7 26.4

Sub-total 463.7 368.2 396.4 676.6 670.8 751.1

Total 816.4 630.9 648.9 924.8 854.7 956.5

*includes both regional and overseas trade. - 7 -

2.2 Also reflected in these numbers are imports of fuel, the distributionof which his changed overtim in accordance with GOM's policy to spread such imports more evenly among the alternatives (Figure 2.1). In 1985 the Mchinji share exceeded 80 percent, but by 1990 had declined to less than 40 percent. Concurrentlythe shares imported via Kaporo and Mwanza were increased to around 30 percent in order to reduce the vulnerabilityof the economy to supply disruptions.

2.3 As previouslydiscussed, traffic diversion from the Mozambican routes to those serving the port of Durban has not only increased transport distances by 200 to 300 percent, but also the number of countries transited (Table 1.1). This has important implicationsfor reliability,loss and damage, time in transit, as well as out-of-pocket cost. At present the southern routtesare preferred by most shippers despite their length due to their characteristicallyshorter transit time, reliabilityand transshipmentefficiency, including higher frequencies of ship calls and competitive sea freight rates at the port of Durban. Present route characteristicsfor the four main routes, Blantyre to port, are shown in Table 2.2.

Table 2.2 Route Characteristics,Blantyre to Port

Route Mode(s) Distance Average Min-Max Tariff Tariff Transit Transit Imports Exports Time Time per TEU per TEU (km) (days) (days) (US$) (US$)"

Durband rail/ 2,667 6 5-8 4,400 2,875 road

Dar es road 1,789 7 4-15 3,100 2,700 Salaam NTC 1,728 14b 6-30' 2,870 2,800

Nacala rail 815 4c 2-30 2,700 2,560

' Total tariff includes land transport of an *average*container and maritime freight rate to Western Europe. i Estimated, as the route is just now becoming operational. ' An average of 4 days could be reached once fully operations are achieved; however, present transit time is about 15 days on average. If traffic levels remain low, the transit time could increase to 7 days, to account for the difference in maritime transit times. d Via the Tete Corridor; traffic routed via Lusaka, would have transit times and tariffs 40-50 percent higher. Figure 2.1 Routing of Halawi Imnorts, Non-fuel and Fuel

Graph 4.3: Routingof Fuel imports 1986-1990

Percent 100%

80% ...

60%....

40%.....

20%....

0% 1985 1988 1987 1988 1989 1990 Border post

_ Kaporo 3 MOhinji EJ Mwanza

Souroc:MOTO

Graph 4.2: Routing of Non-Fuel imports 1986-1990

Percent 100%

8 0 51 ...... I......

60%20% -;;0. .. .

1986 1988 1987 1988 1989 1990 Border post

Kaporo E Mchinji El Mwanzs

Source:MOTO - 9 -

2.4 In part the differences in import and export tariffs (surface and maritime) reflect the structural imbalance in traffic. This imbalance is especially strong for traffic via Durban, which in 1990 comprised 458,000 tonnes inbound but only 144,000 tonnes outbound. Accordingly,competition for the available freight in the outbound direction is strong, and this in turn places considerablepressure on the other modes. Further, although Nacala is the cheapest corridor when compared on the basis of surface tariffs, present maritime rates are unfavorable, in part due to the low level of traffic at the port. As long as a feeder service to Durban must be used, the average maritime transit time will be significantlylonger for Nacala than for Durban or Dar es Salaam.

2.5 Thus, while the Durban routes are longest and most expensive, they also are the fastest and most reliable. Furthermore, for exports from Malawi to Western Europe, the cost differentialwith other corridors appears to be surprisiniglysmall (3-15 percent) if maritime freight rates are taken into account. Conversely, for overseas imports, the difference is considerable (40-60 percent). Transport costs for containers to and from Western Europe are shown in Figure 2.2.

2.6 In order to capture the difference in quality as well as out of pocket cost, a "value of time" can be estimated relative to the time in transit and the value of the commodity. -his in turn can be used to estimate the future distributionof traffic among corridors and modes, should the "generalizedcost" change. For example, although the average transit time does not differ much between Durban and Dar es Salaam, a penalty results from the lower reliabilityand quality of the Dar es Salaam route. Based on the current choices being made by shippers, this penalty is estimated to amount to 5-7 percent of the value of the comnodity, on average. - 10 -

Figure 2.2 Transport Costs for Containers Between Europe and Malawi

USS per TEJ !,000

2.0o0 _......

3, 000

Exports MaIawi

CD Lam sa Tom

USS per TEU_

......

1.0CC ....

NW our - r Inrnorts Ma1lawI Lm C gm Tota - 11 -

2.7 To illustrate the impact of total generalized cost on the distributionof traffic among corridors, Table 2.3 presents four scenarios: i) existing situationwith only Durban or Dar es Salaam via road available; (ii) NTC operating but with delays; (iii) NTC functioni, optimally; and (iv) all corridors, includingNacala, functioning optimally.

Table 2. Estimated Distributie of Ovhern Flomh dwr FoerScerier se_ YoerTrattle

Tranit Valueot Tim Timt Shae ef Exports (X) Corridor (days) (1/100 permit) SoearleI Sserrlo2 Scenario8 Sceneri. 4 Durban 6 6 89 89 48 20 Dar Road 7 100 11 11 86 1S NTC (Prnsent) 14 100 O NTC(Optiml) 14 16 22 C Nacala (Optiml) 11 6 so

Transit Value of Tim Time Share of Impors (X) Corridor (days) CI/laO pereant) Senario 1 Senario t Scenario S Scearieo 4 Durban 6 6 69 sO 84 17 Dar Road 7 100 81 12 18 it NTC (Present) 14 100 89 NTC (Optiml) 14 18 s0 14 Nacals (Optimal) 11 6 so

Scenario 1: Existingsituation, Durban and Dar (road)only functioning Scenario2: Introductionof NTC In presentsituation Scenario8: Optimalfunctioning of Durban,Dar (road)and NTC ScenrIo 4: Optiml functioningof all corridors Source: Economist0sWorking Paper, November 1990.

2.8 As shown, significantshifts in the use of transport corridors can be brought about by a change in the transport situation. The transport potential of the two corridors that will become fully operational in the near future (NTC and Nacala) is considerablein both cases (20-60 percent of overseas trade). However, further simulations show the Nacala share to be sensitive to price, as a 30 percent tariff increase could result in a 20 percent drop in demand. Exports are considerablymore sensitive to price (elasticityof -1.2) than imports (elasticityof -0.4).

B. Transport Cost Savings

2.9 The potential savings from efficient and reliable transport options could be considerable. As indicated in Table 2.4, the total - 12 -

transport burden to the economy at present is in the order of US$120 million. It is estimated that savings of up to US$28 million, or 24 percent, could be realized if all corridors were operating optimally. These estimates assume that all services are priced to reflect their economic cost, i.e., to include the cost of road investment and maintenance in the trucking costs, and an increase in rail tariffs and decrease in lake services tariffs to reflect long run marginal costs (Annex 1).

Table 2.4 Transport Cost for Overseas Traffic Selected Scenarios, Base Year Traffic*

Scenario Imports Exports Total Savings (USS million) (S)

present situation 76 42 118 Dur, Dar-rd optimal 68 40 108 -82 Dur, Dar-rd, NTC optimal 63 41 104 -12S Dur, Dar-rd, Nac optimal 54 38 92 -22S all corridors optimal 52 38 90 -242

*Base year is 1990 traffic, adjusted for unusual circumstances.

Source: Economist'sWorking Paper, November 1990.

C. Future Demand

2.10 In order to project future demand, and thereby the capacity and level of investment required, low and high scenarioswere developed, with the former based on continued economic growth of 2.5 percent per annum, and the latter on growth of 4 percent including re-establishment of the former transport situation and gradual repatriationof all refugees over the next 10 to 15 years. In 2010, the resultant levels of internationalfreight demand (overseasonly) range from 580,000 to 720,000 tonnes for the low and high growth scenarios, respectively (Table 2.5 and Annex 2). The probable corridor split, assuming the all corridors optimal scenario, is 55 percent Nacala, 19 percent Durban, 14 percent Dar es Salaam via road, and 12 percent NTC. - 13 -

Table 2.5 Overseas Traffic by Corridor, All Corridors Optimal (tonnes '000)

i Optimal Ontimal. 2010 Optimal. 2010 Corridor Base Year Low Growth High Growth (1990, adj.) (2.5Z p.a.) (4Z p.a.)

Nacalas

Imports 165 197 247 Exports 89 123 145

Total 254 320 392

Durban:

Imports 48 74 93 Exports 30 37 42

Total 78 111 135

Dar (road):

Imports 30 47 63 Exports 27 36 42

Total 57 83 105

NTC:

Imports 41 59 75 Exports 7 10 10

Total 48 69 85

D. Domestic Flows

2.11 Statistics giving the present demand for freight transport services within Halawi are limited. Detailed statistics on rail and lake transport are kept by MR, but informationon road transport is scarce. Thus, total domestic demand can only be approximated. During 1989/90, MR carried 321,000 tonnes within Malawi, amounting to 62 million tonne-km. Both total tonnage and production were below the five year average of 381,000 tonnes and 91 million tonne-km. The same year LS carried 26,000 tonnes of local goods, amounting to nearly 9 million tonne-km.

2.12 Only the AgriculturalDevelopment and Marketing Board (ADMARC),which is the parastatal responsiblefor the marketing of agriculturalproducts, keeps records of road freight shipmentswithin - 14 - Malavi. Given this lack of data, an estimateof domesticroad freight transportwas made from data on road transportprovided by major shipperson the one hand, and from the presentproduction capacity constitutedby small,medium and largevehicles employed in local transporton the other. Combiningthese data, road transportproduction has been estimatedat some 200 milliontonne-km. Major flows are the movementof agriculturalproducts by ADMARC (some55 milliontonne-km), cement (approximately25 milliontonne-km), sugar (some 15 million tonne-km),and food aid cargo movementsof 10-15million tonne-km in total. - 15 -

III. MALAWI RAILWAYS - STRATEGY FOR RECOVERY

A. Background

3.1 The strategic role for MR lies in its ability to provide, through its linkage with the Mozambican railway network, the shortest and most economical routes for Malawi's internationaltraffic. While the reopening of the route to Beira is a long way off, the resumption of full traffic on the Nacala line could occur as early as 1994, and both GOM and MR expect the savings to the economy to be considerable. The decision by MR and GOM to maintain full capacity, despite the decline in traffic since 1981, reflects the view that resumption of traffic to the ports in Mozambique would return MR to a sound financial position. However, the expected gains are likely to be much less than anticipated. This is because the shift of internationaltraffic to Nacala is expected to be much less than projected by MR (para 3.3), and even those gains would be eroded unless MR's productivityand efficiency were considerablyimproved (para 3.4), and MR is radically restructured (para 3.5).

3.2 From a competitive standpoint,as far as local traffic is concerned,MR suffers from considerabledisadvantages of location, size, and the level and pattern of traffic demand. With a route length of only 797 km, MR is one of the smallest railway systems in Africa. MR's comparativeadvantage is for traffic that originates or terminates along the railway network, which by virtue of MR's location limits its principal market to the southern part of the country. All other traffic must be transshipped,and the accompanyingdelay, cost, and wastage reduce the rail mode's attractivenessto shippers. Moreover, the majority of the origin/destinationpoints lie between Lilongwe and Limbe, a distance of 380 km. As a result, the average freight haul is around 200 km, and the average passenger journey is less than 70 km (Annex 3). Given the low volume of local freight traffic and short hauls, there is little economic or financial justificationfor MR to continue in the local transport sector alone.

3.3 The shift of int*rnationaltraffic to Nacala is expected to be below the peak level or 1975 by about one third for various reasons. First, Malawi's trading pattern has changed. The percentage of overseas traffic in total exports/importsis estimated to be just over 50 percent, and the balance, composed of regional traffic, would still move by road. Second, even for the reduced overseas traffic, GOM's policy to keep all routes active would result in the Nacala share being further reduced. Third, since 1975, considerableinvestment has been committed to creating a new corridor, NTC, in direct competition to Nacala. Finally, the road sector has been expanded and efficiency has greatly improved. Thus, despite the alternativeroutes being longer, road transport can be expected to capture a significant share of the internationaloverseas traffic into the future. With the international traffic unlikely to exceed 300,000 tonnes, the gains from opening of the Nacala route could be limited. - 16 -

3.4 MR's financial performancehas always been lower than would be acceptable for a commerciallyviable entity. Until 1981 and the disruption of railway operations in Mozambique, the operating ratio of KR was below 100. Based on this criterion, the financial performance was considered satisfactoryby MR and by its shareholder,GOM, even though the nominal charge on depreciationbased on the book value of assets was the main cause of the operating ratio being less than 100. Even so, the surpluswas inadequate to represent an adequate return on capital employed (ROC). Since then the operating ratio has become worse, reaching 132 in 1989/90. If computed using a replacement-value- based depreciation,the operating ratio would be around 240, i.e., the Malawian economy is expending MK 29 million to keep MR alive. The major reasons for the continuing poor performance are the low outputtcapital ratio of only 4 percent based on the asset value after revaluation,and staff productivity less than 20 percent of that on the railways in Tanzania, Zambia and Zimbabwe. MR will have to achieve much stricter standards of efficiency and reliabilitythan before to capture the estimated share of the internationaltraffic and to be in a position to contribute to the national economy.

3.5 At present there is a serious imbalance in the patterns of demand and supply. This is demonstratedby an analysis of MR's operations for 1989/90, which shows: (a) 52 percent of the rail track carries only 8 percent of the traffic; (b) 60 out of 77 commercially relevant stations handle only 7 percent of the total freight traffic; .c) 50 percent of the 23 commoditiescarried on MR are moved in quantities less than 10,000 tonnes per year, and these comprise only 20 percent of the total freight traffic; and (d) the passenger services, vhich contribute only 25 percent of revenue, require more than 50 percent of the available locomotivesand other resources. As a consequence,efficiency characteristicssuch as locomotive and wagon availability, reliabilityand utilization,trailing loads, wagon payloads, etc., are far below accepted productivityand efficiency norms for railway operations. Hence, MR's current holding of locomotivesand wagons is much higher than required.

B. Corporate Objectives and Strategy

3.6 The corporate objectives listed in MR's latest corporate plan emphasize: (a) assessing at all times the total rail-borne transport demand; (b) meeting the demand with the best use of available human and material resources; (c) providing approved nationally- subsidized services; (d) developing these services so as to meet the development needs of Halawi; and (e) strengtheninginternal systems for business development,responsibility budgeting, computerizedplanning and control of locomotiveand rolling stock maintenance, and staff development. Missing from these objectives is a central guiding objective against which to appraise the other sub-objectivesand individual strategies,and statement of these objectives in quantitative terms for use as a means to direct or control departmentaleffort within the organization.

3.7 The Malawian economy cannot afford a sub-optimalallocation of scarce capital resources to activities and projects that do not yield - 17 - an adequate return to the economy. The central objective for MR to strive for, therefore,must be to generate an adequate return on capital employed. The current value of MR's fixed assets is estimated to be MK 575 million (Annex 4), compared with a book value of about MK 100 million. As a normal commercial entity, MR must be sufficientlycash- generative so as to meet all genuine claims on its surplus, i.e., net of operating expenses. These claims would normally be fors (a) future replacementand rehabilitationof assets; (b) debt service obligations on all future loans taken for expansion/upgradingof the system; and (c) a fair return on the capital employed.3/ Against the current need for MR to generate an annual cash surplus of about MK 65 million to meet such claims, MR's actual cash generation in 1989/90 was negative and is likely to continue to be much below the requirementthrough the mid- 1990s.4/

3.8 Measured against this objective, the MR Corporate Plan will lead to continued losses requiring subsidizationof MR to the extent of MK 60-70 million per year, which is equivalent to about six percent of Malawi's public annual expenditureand 25 percent of Malawi's projected fiscal deficit for FY 1990/91. This subsidy would comprise: (a) up to MK 15-20 million per year as interest on the cumulative loans for expansion and upgrading of assets being requested as a free grant during the next five years; (b) MK 10 million to cover the operating deficit that would be unavoidable if the revenues were adjusted for a realistic traffic forecast and the expenditure for the replacement-value-based depreciation;and (c) MK 35-40 million representingthe return on the capital employed after revaluationof assets. Offsetting this magnitude of deficit will necessitate a major restructuring,including a drastic reduction in the assets employed (to reduce the capital base) and in fixed and operating costs. The alternative is closure, as this level of subsidy would far exceed the incrementalcost of using alternative routes for the internationaltraffic or switching over to the road mode for the local traffic.

C. Framework for Financial Viability

3.9 A strategic framework for achieving commercial viability by MR would require:

(i) committingMR to the objective of achieving commercial viability, with 'commercialviability" clearly defined as an adequate return on capital employed after meeting all variable and fixed costs and providing for

3/ This rate would be the long-term return on capital in Malawi. This analysis has assumed a minimum rate of 6 percent for the return on capital employed and 10 percent as interest on outstanding loans.

4/ The MK 65 million requirement reflects the high cost of capital employed at the present time. This underscores the importance of reducing the capital employed, e.g., locomotives,wagons, track, stations and maintenance infrastructure. - 18 -

depreciationadequate to finance all future replacementsof assets;

(ii) formulatingand implementinga strategic plan involving appropriate restructuringof products and operations,organization and staff, physical resources, tariffs, and capital in line with realistic traffic forecasts and organizationalgoals;

(iii) improving overall management, systems and procedures, and enhancing productivity;and

(iv) developing a clear understandingof the respective obligations and authority of and between MR and GOM.

D. RestructuringPlan

3.10 Given the financialobjectives establishedabove, a thorough restructuringof MR's services,operations, human and physical resources, organizationand tariffs must be undertaken. The services currently offered by MR includes (a) freight service for small, wagon or block loads between any station or siding on MR; (b) freight service for wagon and block loads from/to all private sidings; (c) all internationaltraffic; (d) passenger service between all stations in first, second and third classes; and (e) departmentalservices for transportationof its own constructionmaterials, fuel and spare parts.

3.11 An appropriate and detailed cost-benefitanalysis of these services has not been made by MR. It is, however, possible to assess the resources and operating and maintenance costs that could be avoided if a particular service were discontinued. Based on this analysis, the following candidates for discontinuationwere identified:

* all passenger services; * small loads from a majority of the way-side stations; * all services to/from stations on Border-Limbeand Lilongwe-Mchinjisections; and * wagon loads to/from private sidings.

Commensuratewith these reductions, it should also be possible to improve the efficiency of use of existing resources, and thereby reduce:

* the holding of locomotivesand wagons; and * large numbers of staff.

Business Portfolio

3.12 Passenger Services. Currently,MR is operating only mixed trains, which combine passenger and freight traffic in one train, and an occasional block or through freight train. During 1989/90, nearly 95 percent of a total 750,000 locomotivekilometers for commercial traffic were logged against mixed trains. Since mixed trains must meet the requirementsof both passenger and freight traffic, they follow scheduleswith long idle periods for locomotivesat the terminals, stops - 19 - at almost every station to pick up or drop off passengers, and long dwell times at some stations for dropping and attachingwagons. The resulting operating statistics are extremely poor, e.g., average net train load of 105 tonnes (equivalentto. say, three large-sized or four medium-sized trucks), gross train load of 334 tonnes, and utilization of locomotive hours of only 33 percent.

3.13 With mixed trains, the normal economies of scale favoring trains over trucks are completely lost. It is estimated that MR's passenger services are costing about MR 0.3/passenger-kilometeragainst the cost of road transport of MK 0.05/passenger-kilometer.If passenger services were discontinued,60 marginal stations could be closed and freight services could be structuredmuch more efficiently.

3.14 Small Loads. An analysis of freight handled by different stations on MR shows that 16 percent of MR's total of 77 stations handled 82 percent of the total traffic, and another 8 percent of the stations handled an additional 12 percent of the traffic. The railway has to commit a disproportionatelyhigh percentage of resources to handle 6 percent of the traffic from about 60 remaining stations. The traffic, generally in *smalls" (less than wagon load), is costly to MR and should be discontinued.

3.15 Border-Limbeand Lilongwe-MchiniiSections. The traffic density on these two sections,which comprise 52 percent of the network, is currently very low. According to the traffic forecasts, traffic density will not improve on these sections, and traffic density on the Lilongwe-Mchinjisection will decline further once traffic on the Nacala line resumes. The cost of maintaining the track cannot be recovered from this low level of traffic, and consequentlythese sections should be operated as sidings with the sole objective of facilitatingexport of sugar from Bangula and transfer of petroleum, oil and lubricants (POL) from Mchinji. Operation as a siding would imply: (a) suspension of all scheduled freight and passenger services in these sections; (b) despatch of empty rakes only on demand from the users; (c) formation of train lengths strictly in accordance with the users' requirementand selection of locomotivesto match capacity; (d) operation of trains only as block trains; (e) insistence on prompt loading of wagons to enable the locomotives to return with an equivalent load; (f) managing the sidings with the minimum level of operating and maintenance staff, maintenance expenditure,operating stations and other facilities;and (g) refusal of all traffic in small loads or occasional wagon loads.

3.16 Wagon Loads from/to Private Sidings. The rail users should be persuaded to shift gradually from single wagon loads to full block rakes, or at least to 5 or 10 wagon block loads to reduce the heavy cost of shunting and wagon marshalling.

Operations Restructuring

3.17 Block Trains. Almost all internationaltraffic and a major portion of the local freight traffic is amenable to being moved in block trains. A train of 20 fully loaded wagons per day in each direction over the Nacala route, hauled by one locomotive except in sections with - 20 - steep gradientswhere two locomotiveswould be required,would generate a transportcapacity of 300,000tonnes in each directionand requirea total of 10 or 12 block rakes. Similarlyall domesticcommodities with an annualquantity of 10,000tonnes or more per year, such as coal, fertilizer,tobacco, clinker, maize, beer and minerals,cement, cotton lint and seeds,could be consideredfor block rake movementwith one train per specificuser every two weeks. 3 18 Yard Operations.Block rake operationwould permitMR to place trainsdirectly in the users'premises, without detention in the intermediateyards. The introductionof block rakes and wagon load operationthus would entailchanges in operatingprocedures that would lead to a numberof yards becomingredundant.

3.19 Track Maintenance.Directed track maintenance should be introducedand the numberof trackmaintenance gangs reducedto about 10. Given the trafficdensity and the facilityof gang trolleys,the qualityof trackmaintenance could be maintainedby this level of staff. 3.20 Locomotiveand Wagon Maintenance.The locomotiveand wagon maintenancepolicy should emphasize kilometers operated and condition insteadof time-basedmaintenance. Train examinationrules would also need to be modifiedin linewith the introductionof more through trains. 3.21 Rationalizationof MaintenanceFacilities. The existing sevento eight maintenanceand manufacturingfacilities should be combinedinto one facilityto enablereduced levels of investmentin equipmentand increasedutilization.

OrganizationRestructuring

3.22 A restructuringof MR's organizationis requiredto improve decision-makingprocesses and organizationalbehavior, and thereby reducethe overallcost of staff. This restructuringneeds to focus on: (a) divisionalizationat the headquarterswith four main divisions- rail services,lake services,engineering and supplies,and financeand administration- with no furtherdepartments and minimalstaff in each divisionfor monitoringand coordinatingoperations; (b) continuationof operationson a departmentalbasis at the operatinglevel, but with the numberof departmentsreduced and staff trainedto dischargemore than one function;and (c) establishingrevised systems and procedures. 3.23 Staff Reduction. The commercialviability of MR depends upon a substantialincrease in staff productivity,which would not be possiblewithout a drasticreduction in the staff levels. Staff costs presentlycomprise 50 percentof the total cost, includingdepreciation, as shown in Annex 5. This would entailan overallstaff reductionfrom the currentlevel of 4000 to about 1000,which is the level estimatedto be commensuratewith the restructuredsize of operations.The reduction in staff requirementwould be achievedthrough the range of organizationaland operationalimprovements discussed above. These includeorganizational restructuring at the headquarterslevel, introductionof a systemof directedtrack maintenance, adoption of an - 21 - appropriatemaintenance policy for locomotivesand wagons, rationalizationand consolidationof maintenanceworkshops and facilities,withdrawal of staff from closedstations, sections, yards and other facilities,and reductionin crew and trainingstaff made possibleby improvementsin operationalefficiency and productivity.2/ AssetsRestructuring 3.24 Once the businessportfolio has been identifiedand operationsrestructured, the utilizationof locomotivesand wagons is expectedto increase. Improvedmanagement should lead to further enhancementof locomotiveand wagon utilizationlevels, as well as averagewagon payloads,locomotive trailing loads, and reliabilityof operations.Achievable targets are given in Annex 6. The numberof locomotivesand wagons requiredfor trafficuse, based on the expected enhancednorms of efficiencyand productivity,and for the estimated forecastsis estimatedto be:

Locomotives (Main Line) - 8 Locomotives (Shunting) - 8 Tank wagons - 117 Covered wagons - 225 Open wagons - 145 Containerwagons - 80 This assessmentis also based on the assumptionthat all the wagone for the Malawiantraffic, even while in Mozambique,would be made available by MR. 3.25 As the currentholding of locomotivesand wagonsexceeds the numberrequired, MR will not need to investin any new procurementof locomotivesand wagonsover the next 10 years. The rationalizationof the locomotiveand rollingstock fleetwould require: (a) premature retiringof all old, inefficient,obsolete wagons, particularly the shortand plain-bearingwagons; (b) designationof wagonsaccording to their capacitiesand designfor specificstreams of traffic;(c) hiring out of wagons and locomotivesto other railwaysystems if possible;and (d) holdingof surpluswagons and locomotivesin good order by rotation until the surplusis adjustedagainst retired assets or requiredfor additionaltraffic. 3.26 Fresh investmentswould be requiredfort (a) rehabilitation and upgradingof locomotivesand rollingstock; (b) rehabilitationand upgradingof some portionof the track;(c) procurementof gang trolleys;(d) replacementof machineryand plant for maintenanceof railwayequipment; and (e) procurementof computersand covmunication equipment. After restructuring,the value of the usableassets would declinefrom MR 575 millionto MK 350 million(Annex 7).

2/ Staff reductionis discussedfurther in WorkingPaper 1. - 22 -

E. Tariff Restructuring

3.27 The competitiveenvironment in which MR operates necessitatesthat much of the increase in profit arise from enhanced productivityrather than higher tariffs. For .omesticfreight traffic, intense competition from road transport could preclude a substantial increase in tariffs, but a 15 to 20 percent increase would most likely be possible if accompaniedby significant improvementsin efficiency and reliability. Thus for domestic traffic the analysis has assumed an average tariff of 21t/ntk in FY 1994/95 (in current prices), as compared to the current average of 18t/ntk. For internationaltraffic, tariffs could be much higher, particularlyin the import direction. Howeve., the magnitude of the increase would depend on the reliabilityof operations over the entire Nacala corridor, includingMozambique railways (CFM-N) and the port of Nacala, and the agreement reached among the three entities regarding the tariffs to be charged. The commercial viability ar.alysisestimates that an average tariff of 30t/ntk would be required.

F. Management Effectiveness

3.28 Systems for direction and control of MR would have to be redesignedand significantlyimproved for the benefits of restructuring to be achieved. High priority for redesign should be given to MR's decision support system, materials management system, and quality assurance system. In addition, Improved performance indicators and operational targets must be set in accordancewith the restructuring plan. Such targets pertain to locomotiveand rolling stock availability,reliability and utilization,wagon payloads, locomotive trailing loads, yard detention,percentage empty running, gross:net ratio, and percentageof block train operation.

3.29 Decision Support System. MR has been regularly issuing a compendium of statistics for the last 20 years or more and these statisticshave served a useful purpose in facilitatinganalysis of trends of operational performance. However, the information is not being used to facilitateoptimal decision-making,direction or control. An appropriatedecision support system design must recognize that: (a) the same set of informationneeds to be recast for decision-mak'ngat different levels; (b) the timeliness,accuracy, comprehensiveness,and level of detail must be tailored to the needs of different levels of management; and (c) daily decisions,generally taken by lower-level staff, need to be programmed,while the long-term decisions need a more analytical approach.

3.30 Materials Management System. The inadequatesupply of spares, a direct result of lack of funds, has been the main cause of delayed, infrequent and unsatisfactorylocomotive maintenance. At the same time, inventory turnover has steadily deczeased, indicatingthat many obsolete or slow-movingitems are being kept in stock. Accurate assessment of the spare parts requirements,timely procurement, controlleduse, and frequent material variance analysis, are some of the important aspects of the materials management system that need to be - 23 - developedto ensurethat the maintenanceof locomotivesremains cost- effective. 3.31 OperationsAudit System. Becauseof the small scale of operations,the break-eventraffic level is high and any slippagein the levelof operatingefficiency would adverselyaffect performance. A regularsystem of operationsaudits is necessaryfor analyzingcosts, utilizationof assets,and the effectivenessof maintenance.The audit would also be aimed at identifyingthe causesof variance. 3.32 QualityAssurance System. Poor reliabilityof locomotives and rollingstock is one of the main causesof their low utilization, which in turn leads to a considerableincrease in the requirementof these assetsfor the currentoperations. An effectivequality assurance systemis essentialto avoid the frequentfailures that resultin increasedcost of maintenanceand over-commitmentof maintenance facilitiesand staff. 3.33 StaffDevelopment and Motivation. Staffmotivation, commitmentand involvementare centralto MR's turnaround.After the rationalizationof staff strengthand organization,intensive and effectiveprograms aimed at staff developmentand motivationneed to be implemented.This would require: (a) staff trainingin all disciplines;(b) appropriateincentive schemes; (c) delegationof decision-makingauthority; (d) establishmentof performancetargets and correspbndingrewards; (e) more attractiveremuneration packages; and (f) a less bureaucraticand more informalgroup-based organization structure. G. Railway-GovernmentRelationship 3.34 MR's turnaroundwill only be possibleif both MR and GOM are fully conmmittedto achievingthe commercialviability objective, implementingrestructuring and managementimprovement plans, and recognizingand honoringeach other'srights and obligations.The responsibilityof GOH, both in its capacityas the governmentand as the sole shareholderof MR, would be to providea healthycompetitive environmentaimed at improvingthe overallefficiency and productivity of the sector. GOM, as shareholder,also must ensurethat (i) MR's Board of Directorsconsists of professionalswith commercialexperience, and (ii) the Boardhas the autonomyto make all importantdecisions regardinginvestments, pricing, business and operationalactivities and staff,as well as to selectits businessportfolio, cancel uneconomic services,dispose of uneconomicassets, and operateon the basis of acceptedcriteria of economicand financialfeasibility. In return,MR would be responsiblefor providingan efficientand effectivetransport serviceas well as meet its agreedoverall commercial objectives. - 24 -

H. Prolections and Action Plan

3.35 Financial Projections. The financial projections for FY 1990/91 to FY 1994/95 are given in Table 3.1. The assumptionsmade while assessing the future financial performance ares (a) FY 1990/91 is *lready over, and as no specific action was taken by the management towards staff reduction or any other change, the financial results are assumed to be similar to FY 1989/90, but with depreciationcharged on the basis of the replacementvalue of the fixed assets; (b) For FY 1991/92, it is assumed that some minor improvementin operationswould be made and some cost reductions are reflected in the projections; and (c) the restructuringplan would be implemented in three years starting FY 1992/93, and all improvementswould be in place by FY 1994/95. For comparative purposes, financialprojections have also been made for FY 1994/95 in case the restructuringplan is not implementedand management action follows along the existing Corporate Plan lines. All costs and income projections are in FY 1989/90 prices. Assumptions and adjustmentsmade for different elements of income and expenditure are included in the addendum to Table 3.1.

3.36 With restructuringand after providing for replacement- value-based depreciation,the net operating surplus in FY 1994/95 would be about MK 7 million. Interest on the proposed future loans and provision for return on the capital currently employed would mount to MK 26 million, thus showing a net deficit of MK 9 million. ,he correspondingoperating surplus for the option without restructuring would be MK (-) 14 million, which with interest on the proposed future loans and provision for ROC of 54 million, would yield a net gap of MK 68 million. Thus, despite the objective of a six percent ROC, the proposed restructuringplan would only enable MR to reach a break-even level, not to reach its full commercialviability objective by FY 1994/95. The ROC objectivewould require that the strategy be further deepened and intensified,particularly in the areas of business development and asset utilization,in a subsequent phase of restructuring.

3.37 Restructur:npAction Plan. The restructuringaction plan is presented in Table 3.2. The implementationschedule is only indicative and more detailed work would need to be undertaken by the MR divisions, and by outside consultants in some cases, to establish a detailed implementationplan. Nonetheless,to meet its objectives, the plan must be ready by the end of FY 1991/92 and implementationmust start by the beginning of FY 1992/93. Many actions that pertain to operating improvementsand restructuringcould be initiated during the current financial year. Although the financialprojections in Table 3.1 must be refined, the order of magnitude is such that without the proposed restructuringan annual subsidy of MK 60-70 million, almost 120 percent of total MR revenues (and six percent of the government budget), would be unavoidable. MALAWIRAILWAYS INCOMEAND EXPENDITUREPROJECTIONS (un_ _tooo0 unless statec ______Actual Adjusted MR Corporate Plan" With Restructuring Units Shar 1S891S0 1989/90 191`91 1991192 1994/95- 1992/93 1993194 1994195 1 1 2 3 4 5 6 A. INCOME (UK

Freight Traffli

FreightTrfi (Iocal-Tannes 321 321 321 321 334 325.3333 329.6666 334 P A FreightTraff (Inter)-Tortes 14 14 14 14 351 215 283 351 n FrelghtTrafc (Towl)-Tonnes 335 535 335 335 685 540 612 685 _ 8 : NMK(Loca 62219 62219 63575 64931 69000 66288 67644 69000 s NTKOntemaonalq 2829 2829 2829 2829 100000 61132 80566 100000 0) NTKR Tot 65048 65048 68404 67760 16900 127419 148210 169000 t nC RatefiNTK(L) MK E 0.t8 0.18 021 0.21 0.21 0.21 0.21 0.21 RateNTK () Ml< 0.11 0.11 0.25 0.3 0.3 0.3 0.3 0.3 $ t . S IncomeFrol ht(L) 11316 11318 13174 13455 14299 13736 14017 14299 Incomefreight (O 307 307 707 849 30000 18339 24170 30000 P t IncomeFreight (M) 11623 11623 13882 14304 44299 32076 38187 44299 6 1 MIF

Pasenger Traffic S:.. Pass KM 115469 115469 115469 115469 115469 46188 23094 0 * o U) RatelPK MK 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 IncomePass. 4470 4470 4470 4470 4470 1788 894 0 0tO

Other Income 3091 3891 3000 3000 3000 3000 3000 3000

Ttal Income 19984 19984 21352 21774 51769 36864 42081 47299 P q

S- S ,. S. EXPENDITURE, .

Si*StrengIh Titeponiatlon No. 86f 881 861 774 8o1 541 378 215 -CtI Engineering No. 1510 1510 1510 1359 1510 951 665 250 - Mach.Engheetng No. 646 646 646 581 646 406 284 220 -TelbcomunIcaton No. 91 91 S1 81 91 56 39 45 Admnistrallon No. 890 890 890 801 890 560 392 230 Tola staf No. 399 3998 3998 3598 3998 2514 17568 960 Stall-relatedExp 12942 12942 12942 17461 19413 12207 8536 4661 Tkm Lkm Q Fuel ConsumptIon Shle Share e.4

TotleLo' o kms 1.00 998 998 1005 1013 1573 707 582 457 r P 1 Oter Loco kms . 0.14 144 144 145 146 227 102 84 66 _ TotalTrtlahLkts 0.86 854 854 860 867 1346 605 498 391 Po FreightTrain Lkms 0.51 0.44 439 439 443 446 692 417 389 360 Pass.Train Lkms 0.43 0.31 372 372 375 378 587 149 74 0 _ o l?X DOepart.Train Lkms 0.04 0.04 42 42 42 43 66 38 35 31 Fuelcost/Locokm MK 5.20 5.20 5.20 5.20 5.20 8.34 8.75 9.38 FuelCost 5193 5193 5232 5271 8184 5893 5090 4289 C

Maintenance o

LocomotveHolding No. 45 45 40 35 45 30 25 20 t o0 WagonHoklng No. 875 875 814 757 875 704 655 624 o a o CoachHolding No. 30 30 30 30 30 12 6 0 _. o EquivalentHolding No. 1925 1925 1764 1607 1925 1364 1185 1024 . g MaintenanceExp. 2551 2551 3038 4258 5102 2349 2041 1765 p Overheads o to AdminisktatIon 865 865 1001 1001 2214 1001 1001 1001 wagonInterchange 0 0 0 0 0 0 0 0 AncflaryVehkcles 591 591 684 684 1963 684 684 684 Total 1456 1456 1685 1685 4177 1685 1685 1685

Oter Expenditure 1259 1259 1384 1523 3765 1675 1843 2027 _ o Tolal Operating Expenditre I I__ 23400 23400 24282 30198 40640 23809 19194 14427 - 27 -

Table 3.1 (Coat d.)

MALAWI TRANSPORTSECTOR REVIEW . SELECTEDISSUES Malawi Railways Income and Expenditure Proiections (unit (000) unless stated)

I

| || W |8~ag 8.; g

| % lm l8fi00 ws8

v-N~~~~~~~~~~~~~~Q 8g~~~~~g

# |§E §8 ~EW ooI it

- . ,

Z CC 0~~~~* cr,~~~0 ZW1i - 28 -

TABLE 3.2 MALAVIRAILWAYS RESTRUCTURING ACTION PLAN 4

Armof Rbm ReconmendedA_lon C.Qn09MPos Completion _ 0 _ ~~~~~~~~~~~~~~~~~SdhaA

1. Busns 1. Diontinu pangr svke . To avoidlos as average fY 19293i Reruct frommutes whe parlll bus pasenge ourey is shortand servi are avilable in Phs I. cotpk is muchhighwr tn of te road mode. Ui. Discontinuepassge svie FY 1993/04 frm reming rte in Ph II.

Illi. Stop aocepin erail loas from . To avoid bae from ft FY 1991/92 other hn main or'ginating and uneoonomic operations of emal doestnation stati . lv. DiOonoue all normal services on . To liminates sectins with very FY 1992/03 Border-Umbe section. poor rafc desy. v. Dicontnue all sericon . To lilmie section with very FY 19993 UlogwMchinjl sectn. poor traff dernity. vi. Disontinue wagon-oad svce . To avoid high cost of sevc FY 1991/92 from/to prvme sidings. private sidirns on a sne wagons basis.

2. Bines i. Concentae on buik traffc; u . To Improve average freight haul FY 1991/92 Development and having private sidings and block and obtain more NTK. with Marketing Strtegy train operati. lessame tonnage. ii. Offer incv for fater . To improve wagn turnrund FY 1991/92 loading/unloading of tras and loading of wagons to tihs fuU capacity.

3. Operaft i. Gradually incrsem sha of . To increase productivity d FY 1993/94 Rearuct block, trough and dediated locomotv and all otr assets trains. II. Terminate trais in th users' . To avoid freight train delays. FY 1991/92 premises instead of raiway yards as far as poible. li. Switch over to Directed Track . To enable st reduction and FY 1992/93 Maintenance. improve track qualiy. iv. Maintenance of locomotives to be based on kms and not hou . To reduce maintenance and FY 1991/92 improve locomotiverlIability.

4. Resouce I. Restrict the uable asms on MR to . To reduce mantenace and FY 1992/93 Rationalization tihose in Anex 7. operating cost and Improve assts' utiization. ii. Opea tem flee d lcmotve and wagons as requird and sell)hire ourpthbail. ii. Restict iwnesm to mt . To reduce depreciaon charges FY 1994/95 minimum. andImprove return on capital employed. iv. Close commerciallyiviable . To reduce oprating costs. FY 1994/96 statons. v. Coneolidate maintenance . To atain advantages of incresed FY 1904/96 worishops and faciitie scaleod opeatio and reduce _ _ _ _ ~~~~~~~~~~cost__ - 29 -

Am d midwi RwemmeN AUtn Compl Schedul . Orprgatlon I. Conducta dealed reorganzation To definethe posiorn to be FY 1991/92 Rtruclurng and redlgn study. abolished/r.aged. U. Implem reocommended To reducecoos and Impew FY 1002/93 Orgwation deWgn. managementeffectvenee

6. StaffReducton 1. Graduallyreduce staffas per . Coa reductionad productivfty FY 1994/06 Annex6, finaly to 1000. Improvement 7. Fnancial I.L Tarit retuctring afterirea . To Improverevenues, FY 192/93 Restru_tst "dy. UI Revustion da mets employed . To enre adequacyd FY 1991192 MR. cdepreclationfhr replacementof

L. Improvedcoosg system to na* . To improveproftbiy nd FY 1991192 better oold d ames utlizadon opeating ratio. and coherImportant ratna a per Annex6.

6. Systom L. DOesignand implmentthe . To Improvemanagemen and FY 1992/93 Improvent following: effectivenessIn all aspes of - OecsionSuppon System, managemenL - MaterialManagement System, * Oprting Audit * Quaiy AsuranceSystem.

09. Operations L AchieveOpertons Improvement . To Increas ses and man. FY 193 Impvement Targetsas perAnnex 6 powerproductivity.

10. Staff Developme L Organizea Manpowertdy. . To Improvestaff producty FY 1992/93 and Motation il. Implementan approporateHRD package. OL scheme.Implemefnan appropriateIncentive

I1. Rallway4overment L MRand GOMto signa . To Improveundertanding of the FY 1991/92 Undesanding iemorandum of Undestanding long-termobiectives of MR and facDie theirachievement

12. Implemntaton I. Constiut a high4evelcommttee . To avoidslippage In the FY 1991/92 Stategy for coordiatng the Implmnttion Implmentationof the of te RestructuringAction Plan. Restrhing ActionPlan. IL Contue a cell for managig staff and assetsreduction program. . To enablereducion of staffand FY 1994196 assetsIn an effient nne. - 30 -

IV. LAKE SERVICES

A. Introductioni

4.1 For many years, LS was the dominant mode of transport between southern Malawi and much of the central and northern regions of the country. However, the development of the road network during the past 30 years has reduced its relative importance, regional trade among the three countries sharing the coastal line of the lake remains limited, and LS' operationsare mostly restrictedto local freight and passenger traffic. This limited role is about to change, as LS is a critical link in the multi-modal NTC. LS also continues to be an important and, in some cases, the only link for certain communities. The current overall operating as well as financialperformance of LS is not satisfactoryand its future role as a provider of services either on its own or as a part of the NTC will very much depend upon the capacity of LS to restructure itself and operate at a substantiallyenhanced level of efficiencyand productivity.

4.2 The transport services provided by LS include passengers and parcels, and cargo comprisingdry cargo, oil products and containers. Although passenger service is provided the full length of Lake Malawi, growth in passenger traffic has been limited to services for which (i) no road alternative is available,or (ii) where access by road is very difficult. The former include Likoma and Chizumulu Islands located mid- lake near the eastern shore, and villages without roads between and Mlowe in the north. The latter include cross lake services in the south, with traffic between Makanjila and Chilinda on the eastern shore connecting to Chipoka and . The main dry cargo flows are between the major ports of Chilumba, Chipoka and Nkhata Bay. For internationaltraffic in oil products and containersvia Dar es Salaam, lake services would be a part of the multi-modal NTC.

4.3 OrganizationallyLS is a part of MR, but the assets and staff of LS are separate and only a relatively small amount of input is provided to LS by the general management and finance departmentsof MR. The need for LS to obtain approval from MR headquarters for all operating decisions has contributed to the poor performance of LS. While it would be an oversimplificationto assume that total autonomy would solve all LS, current problems and lead to its profitability,LS autonomy is crucial to any turnaroundstrategy. Under the proposed revised organizationstructure of MR, LS would be one of the four autonomous divisions under the full control of a divisionalmanager. This manager would have three sub-divisionsunder him controlledby independentmanagers, includingport operationsand port development, shipping operationsand dockyard operations. A total of 500 staff is employed in the LS division, including 20 for central administration. The shipping operationsaccount for 50 percent of the staff, port operations for 27, and dockyard operations for 17.

4.4 LS has a total of 21 sailing units: 3 cargo carrying passenger vessels, 5 self-propellingcargo vessels, 5 tugs, 7 cargo barges and 1 dredger. Out of the three passenger vessels, the capacity - 31 - of 'ChauncyMaples is 180 passengers,while of the other two, aIlalaw and *Mten-ere",is 420 each. The cargovessels comprise three dry cargo vessels,"Nkwazi', 'Karongaw and "Viphyal,one oil tankerand one containervessel. The vesselshave a considerableamount of surplus capacitycompared with the trafficforecast even in the high growth scenario. The "Raronga*alone, for example,has a capacityof 15,000 tonnes,the totaldry cargo forecastin the high scenario,and the containervessel has a total capacityof 70,000tonnes in one direction or 5833 THUs at 12 tonnes/TEU. 4.5 The LS share of the freightand passengertraffic within Malawiis very small,about two percentand less than one percentof the total,respectively. Capacity utilization of all the assetsis very low, and as such LS operationsin FY 1989190yielded a net operating loss of MK 1.14 million (excludingrevenues from non-operational activities,but includingdepreciation), a net cash loss of MK 0.78 million,and an operatingratio of 137. This poor performanceis understated,with depreciationbased on the book ratherthan replacement value of the assets. Correctedfor the real value of depreciation, about five times that currentlycharged, the operatingratio would be around184 percent. 4.6 With depreciationbased on book value,the freightservices appearquite profitablewith an operatingratio of 54 percent. Even with depreciationbased on replacementvalue, the freightservices remainviable with an operatingratio of 83. However,the operating ratio for the passengerservices, currently calculated as 238 percent, would become331 percentafter correctingfor depreciation. B. Objectiveand Strategy

4.7 As transportpolicy permits greater competition among the variousmodes and corridors,only commerciallyviable modes will be in a positionto survive. LS has, therefore,to becomecommercially viable, and aim for an acceptablereturn on capitalemployed after meeting all operatingexpenses and providingadequately for futurereplacement of its assets. Since the tariffrates will be subjectto increasing competitivepressure, commercial viability will requirea basic restructuringand reductionof costs throughincreased operational efficiencyand productivity. C. Restructuring Organizationand Staffing

4.8 As a first step in becomingan autonomousentity, LS should be made an autonomousdivision of MR with well definedobjectives and authority. Internally,LS needsto reviewits organizationstructure so as to be compactand cost-effective.In so doing it would be important to avoid a multi-layeredstructure that would not permiteffective delegationof powerand an increasedsense of staff involvementin LS's performance.In addition,while restructuringof operationswould naturallylead to some reductionin staff,a major reductionin staff - 32 - strengthwould need to ensue from productivityenhancement through introductionof efficientsystems, staff trainingand motivation. BusinessPortfolio

4.9 PassenaerService. Table 4.1 presentsthe financial projectionsfor low, base and high scenariosof forecasttraffic, with depreciationcalculated on the basis of the approximatereplacement value of the currentassets. Under all scenariosand even with a revisedschedule of ship operation(para. 4.10), the passengerservice is shown to resultin heavy losses. In 1998/99the operatingratio would be around278. Thus there appearsto be no commercial justificationfor the passengerservices to continue. However,LS is facedwith the socialobjective of providingservice to a numberof areas that are not accessibleby land or accessibleonly with difficulty (para.4.2). In 1989/90,70 percentof the 211,000passengers served were travelingin inaccessibleareas. This indicatesthat LS should focus on theme areas,and in particularavoid the costlynorth-south trafficthat could be servedby bus at an estimatedsavings of MK 0.08 per passenger-km. 4.10 For the remainingareas to be served,financial performance could be improvedthrough a strategyof curtailedservice coverage and increasedtariffs in the shortrun, and replacementof the existing vesselswith smallervessels in the mediumterm. First,eliminating the north-southleg would yield savingsof about MK 500,000p.a. In the short run, the Ilalam and *ltenderelcould then be operatedin the north and south regions,respectively, and therebyreduce sailed kilometersby 50 percent. Servicefrequencies also could be increased, dependingupon the natureof the demand. Lossescould be further reducedby a tariffincrease, although to break even this would require an increaseof about 180 percentwith currentoperations or 140 percent with the curtailedservice alternative.41 4.11 As tariffincreases of this magnitudemay be excessive, furthercost reductionis required. Given that the existingvessels are old and will requiremajor rehabilitation/replacementwithin the next three to five years,smaller vessels should be considered,e.g., of the landingcraft type currentlyoperated on Lake Victoriaand proposedfor TRC-Marineoperations on Lake Tanganyika.Safety also would be improved,as vesselsdesigned for beach landingwould be more suitable for the small lake communitieswithout docking facilities. Currently passengersmust be transportedto and from these landingstages in life boats,an unsafepractice as shownlast year when a life boat capsized and severallives were lost. Selectionof the size and capacityof any new vesselsshould only be made after a full assessmentof the costs and benefitsto the economy.

4/ A recentSATCC studycalculated that a 50 percentrise in tariffs would yield a 16 percentfall in passengertrips and 20 percentrevenue gain. - 33 -

Table 4.1. Malawi Lake Services Financial Performanceand Proiections (MK '000) In

:45 -w - x-§ i X- r-

T~~~~~~~~~ol $ % 8 1z$ f 4

w~~~m L X Xj po - ti os

p *s sN -Wti U|

U)183 |0 § |

X j],, |X X ] ]

ffiX}~~~~~~~~ 0}3TIlsX - 34 -

4.12 FreightServices Most of the variableand fixed costs of operationsof shippingvessels are ship-specific,with the sharedcosts being very small. Bence the oil tanker,the containervessel and the groupof bulk-breakcargo shouldbe treatedas three separateprofit centers. The break-eventraffic levels should be separatelydetermined for each groupof ships. Decisionspe,taining to tariffs,frequency of operation,etc. shouldbe based on the specificcharacteristics and the degreeof competitionof the differentcommodities. Once the break-even traffichas been reached,incremntal-cost-based tariffs could be used to advantagefor differentstreams of traffic. As a part of the NTC there is an opportunityfor LS to capturea substantialshare of the containerand oil traffic.

4.13 Port and DockyardServices. The port and dockyard operationsalso need to be made separateprofit centers to enable carefulmonitoring of the costs of differentactivities. In case the activitiesand operationsare unprofitable,alternatives to be consideredcould includes (a) privatizationof those activities;(b) makingthose activitiesmore efficientthrough application of work study/costreduction techniques; (c) rationalization/consolidationof activitiesof differentports at one port to take advantageof the increasedscale of operation;and (d) using other workshopsand maintenanceand manufacturingfacilities such as belongingto MR. AssetsRestructuring 4.14 The currentassets of LS need to be revaluedto enable correctcomputation of depreciationcharges and the returnon the capitalemployed. The MR CorporatePlan has also proposedinvestments of MK 30-40million in the next five years in the LS sector. The proposedinvestment needs to be re-evaluatedin terms of the revised objectivesand the need to providefor adequatedepreciation and return on capitalemployed, as well as the trafficforecasts and the restructuringof the servicesportfolio. Assets identifiedas redundant need to be scrappedor moth-balledfor futuredecision. Maintenance expenditureon these redundantassets should be totallyavoided. D. OperationsImprovement 4.15 Market-orientation.In the competitiveenvironment facing LS, reliabilityand efficiencyof operationsare crucialfor attaininga fair shareof the freighttraffic. In particular,since almost all the freighttraffic on LS would originateand terminateaway from the ports, transshipmentof the freighttraffic would be an unavoidablepart of the operations.This increasesthe possibilitiesof delay,wastage, damage and additicnalcost, which could resultin trafficbeing divertedto the road. Transshipmenthas to be arrangedon efficientand cost-effective linesto retainthe confidenceand the preferenceof the user for lake services. The otherimportant systems that need to be in place for improvingthe reliabilityof the systamand ensuringan enhancedshare of the freightmarket would comprises (a) voyageplanning and scheduling;(b) goodstracking; and (c) coordinationwith MR for a - 35 - scheduled and planned transshipment of goods at Chipoka and with the road transport agencies for transshipment at Chilumba. 4.16 DecisionSupport Systems. Effectivecost reduction and tariffsetting would require appropriate decision support systems to providemanagers at differentlevels vith correctand timely information.These would defineappropriate coso centersand identify variableand fixed costs relevantto each cost centers. For example, currentinformation on the break-eventraffic levels for different vesselsand the extentof variablecosts would enablethe managersto negotiatetariffs to theirbest advantage. S. FinancialProlections 4.15 The financialresults for PY 1989/90and the projectionsfor FY 1998/99in Table 4.1 indicatethat In both the low end base case scenarios,the operatingratio for overalloperations, assuming that the passengerservices continue to operateto revisedschedules, would be above 100. This Impliesthat LS would not have the full capacityto replaceits assetsand the returnon capitalemployed would be negative. Only in the high demandscenario would the operatingratio be less than 100. Withoutpassenger services, the operatingratio in all cases would be much below 100 (para.4.9). 4.16 However,the financialprojections in Table 4.1 do not take into considerationspecific gains expectedfrom the implementationof the restructuringatd operationsimprovement plans. The projectionsfor all scenartoswould show betterresults once the restructuringproposals are implemented.The high case scenario,based on capturingabout 100,000tonnes of containertraffic from/to Dar es Salaam,appears quite improbable.With a clearmarketing strategy and improvedoperations, it is likelythat the forecastsincluded in the base case scenariocan be realized(See Action Plan, ChapterVIII). With the implementationof the restructuringand operationsimprovement plans, LS has reasonably good prospectsof becomingcommercially viable. As a first step, LS shouldprepare a revisedcorporate plan incorporatingthe recommended strategies and actions after a more detailed analysis. - 36 - V. AIR MALAWI

A. Background 5.1 Air Malavi (QM) is one of the smallestairlines and one of the few not showingheavy loosesin the region. QM is operatinga regionaland domesticroute networkvith two BAC-illjet aircraft(74 seatsand 94 seats),one BA (HI) 748 turbopropaircraft (44 seats),and a Boeing737-300 jet aircraft(:29 seats)delivered in May 1991.5/ The airlinealso acts as a genera: .sles agent (GSA) for foreign airlinesthat serveMalawi, does al* irport handling for other airlines and, through a wholly owned subsidiary,conducts cargo businessby charteringspace on other airlines.

5.2 In recent years the airline has been operating approximately on a break-even basis, and in the 15 months ending March 31, 1990, QM made a net profit of MK 1.1 million. However, further analysis reveals a number of matters that give rise to considerable concern. First, the profitabilityof the airlinehas been made possiblethrough its earnings from sourcesother than its own air services,namely its earningsas GSA, royaltiescollected from other airlinesas paymentfor the exercise of trafficrights, and groundhandling of foreignairlines at Kamuzu InternationalAirport (KIA)in Lilongwe. Second, QM's existingfleet was almostfully depreciated,so that costs of ownershipwere minimal, resulting in an inadequate provision for capitalreplacement and an effectiveoverstatement of profitability.Other concernsare that QM is accumulating debts which result from its failure to pay the KIA Authority for variousairport services and facilities,and that QM is financing some of its activities through a long-term government loan payable beginning 1992. In effect, QM's financial situation is precarious, and QM is dependent for its financiai viability on non- flightoperations.

B. QM's CurrentOperations and CompetitivePosition 5.3 QM presentlyoperates regional services from Lilongweto Johannesburg,Harare, Lusaka, and Gaborone(IBRD Map No. 23293). Since its deliveryin May 1991, the Boeing737-300 has replacedthe BAC aircraftin the Johannesburg,Harare and Nairobimarkets. Domestic citiesserved out of Lilongweare Blantyre,Mzuzu, Karonga, and starting recently,Monkey Bay. QM offersno intercontinentalservices. In 1989, the averageutilization of the QM fleet over its existingroutes was 5.3 hours daily for the BAC fleet,and 3.7 hours daily for the BAe 748. The comparableutilization in internationalservice is 6.8 hours for a BAC- 111 and 5.8 hours for a turboprop aircraft.

5/ The financialaccounts reviewed herein reflect QM's financial positionprior to deliveryof the new aircraft. As the purchasewas anticipated,the analysisof alternativeinvestment plans includes, among other options,purchase of a Boeing737-300. - 37 -

The InternationalMarket

5.4 Since 1985, internationaltraffic in and out of Malawi has been growing slowly. Regional traffic increased from 92,000 passengers in 1985 to an estimated 123,000 passengers in 1990, an average growth rate of six percent. The growth has not been uniform for all destinations, since traffic volume has been influenced by the flight frequenciesoffered. The two largest markets are Johannesburgand Harare, with about 43,000 passengers each in 1990. The next largest, Nairobi, with 16,000 passengers annually, comprises less than 40 percent of each of the two largest markets.

5.5 Intercontinentalservices are provided by British Airways (BA) to via Harare, by UTA nonstop to France, and by Royal Dutch Airlines (KLM) to Amsterdam via Tanzania. Intercontinentaltraffic increased from 16,000 passengers in 1985 to an estimated 29,000 in 1990, an annual growth rate of 12 percent. This growth rate, however, is not indicative of a long term trend, as it has been heavily influenced by the addition of intercontinentalservices by KLM. A significant proportion of KLM traffic consists of passengers between Harare and Europe who arrive at Lilongwe from Harare on QM and connect to KLM's European service. In 1990, one such QM connecting flights was eliminated,which contributedto a decline in QM's Harare traffic and KLM's Amsterdam traffic. In the future, should KLM receive authority to serve Harare, its frequency and traffic at Lilongwe would be reduced.

5.6 In total about 152,000 revenue passengers flew in and out of Lilongwe in 1990. Over 80 percent of the passengers were carried on regional flights, and the ualance on intercontinentalflights. Connecting passengers from regional flights to intercontinentalflights accounted for about 20,000 passengers; the balance represents passengers with Malawi as their trip origin or destination. Future prospects for traffic growth in internationalmarkets are for the continuationof historical growth trends in regional markets, with perhaps a slight slowdown reflecting recent increases in fuel prices, and unstable world economic and political situations.

5.7 QM faces competition from national carriers on all the routes it operates, except for Gaborone,where it is currently the only airline. In the aggregate, QM carries half the traffic over the routes that it serves (Table 5.1). - 36 -

Table 5.1 MeIawlbuilmel _WZate'.etla l Aie Passemer Traffie mot& Dreetlee.

Air Malaw Remtbe. 1ism lUS 1ow 11 to" I Avers" Li loop. Tt

Harare Alr Malawl 26,46W 25,419 21,986 28,642 25,761 24,187 -2.18X Air Zimbabwe 14,010 16,779 16,72S 20,117 20,512 13,964 6.24X Tot I 40,560 401206 41,061 48*,69 46,273 48,101 l.OX Alr Malawi Share OOX so 58X U4X g6 UX Joiannoeburg Air Malawi 1,960 20,057 15,152 1,559 21,516 22",3 6.97X South African 15,946 16,490 19,410 16,464 21,578 21,461 8.12X Total 81,896 86,547 ",n9 87,079 46,091 48,797 6.55X

Air MalawiShre, 50X 66X 453 sx sx 6X51 Nairobi Air Valawl 6,850 59,40 O6,56 7,332 3,321 7,789 4.173 KenyaAirlines 4,464 6,478 7,534 6,99 7,759 7,788 11.67X Total 10,O4 12,413 14,108 14,325 16,076 15,577 7.Z6X Air MalawiShare -9X 48X 473 51X 62X 503 Lusaka Air Malawi 2,946 21967 8,294 8,804 2,588 3,551 8.1x3 ZamblaAirways 2,567 2,959 4,491' 8,549 7,153 7,092 22.54X Total 6,518 5,92 7,798 6,us 9,686 10,643 14.06X Air MalawiShare 5ax 50 42X 4*X 20X 833 Gaborone Air Malawi 0 0 0 1,74 1,490 1,286 -14.66x Air Botswana 0 0 0 0 0 0 o.oox Total 0 0 0 1,"4 1,490 1,286 -14.66o Air Malawi Share as 0 0ox 1003 100X 100X Air MalawiTotal 52,192 62,403 46,954 54,347 59,628 59,099 2.62X OtherCarriero 87,007 42,091 50,171 49,148 56,995 566,305 6.7X Total 69,199 96,094 97,126 108,914 116,616 114,404 5.1OX

Air Malawi Share 59o 5C 43X 3S3 51X 523

Exclude. Non-revenue Poaengero a Established trom 9 months ot data

Source: Air Malawi

5.8 The internat;konal competitive environment is set within the framework of bilateral agreements between individual countries and in some cases subsequent agreements between individual airlines. In regional markets, the general principle is to maintain government control of the number of flights on the basis of parity between the two countries, with provision for exceptions if mutually agreeable. Within this regulatory framework, there is little room for inter-airline competition, and airlines do not compete intensely for regional traffic. A major reason is that frequencies in individual markets are at most daily, by both airlines combined. A passenger desiring to leave on a specific day typica!ly bas no choice of airline, the only exception - 39 -

being Lilongwe-Harare,where on one day of the week both QM and Air Zimbabwe have a scheduled flight. The airlines also have considerable flexibility in cooperatingwith each other. QM shows the flights of its regional competitors in its own timetable, and the airlines readily transfer passengers to one another in the event of a flight cancellation. Airline cooperationwithin the region also includes cross-charteringof aircraft when an airline is temporarily short of equipment. Such arrangementshave been made between QM and both Air Botswana and Air Zimbabwe on a wet lease basis.

5.9 In the intercontinentalmarkets, GOM is dealing with nations and airlines that can exert strong competitivepressure. Agreements provide generally for parity of traffic rights between QM and the European airlines, with some provision for fifth freedom rights at intermediatepoints. Once GOM decided not to exercise its traffic rights to Europe, it made arrangementsthrough QM to receive payments from European airlines. This arrangement is advantageousboth to Malawi and to the airlines. QM is assured of additional revenue, and the European airlines are assured of a traffic stop in Africa that renders their intercontinentalservice profitable.

5.10 Competition for intercontinentaltraffic is not confined to the three European carriers with direct service to Malawi. The limited scope of the direct flights encourages the movement of intercontinental traffic via other African gateways. Kenya Airways, , and are particularlyactive in this market. The traffic they route to intercontinentaldestinations through their national hubs is of great value to them, and they are understood to be discounting significantlyto obtain this traffic. The three airlines have their own ticket offices in Malawi where such discounts can be arranged. All other airlines ticket only through QM. For example, the BA office saicludke its own management and marketing personnel, but reservations and ticketing are done in that office by QM agents.

The Domestic Market

5.11 Over 90 percent of the domestic traffic is accounted for by the Blantyre-Lilongweroute, where QM currently offers 20 round trips weekly with a mix of BAC-lll and BAe 748 flights. Traffic volume in the market has been declining, but the decline has been arrested in the last two years. About 70 percent of Blantyre-Lilongwepassengers continue on to internationaldestinations on QM or other airlines. Consequently,of the 1989 total of 61,500 one-way passenger trips, 43,000 trips were made as part of internationaljourneys, while only about 18,500 consisted of air journeys with final origin and destination in Malawi. This is equivalent to 25 passengers daily each way. The low volume is not surprising considering the substantiallylower cost of prebookable non- stop bus transportation. The door-to-doortravel time for auto, bus and air is approximatelythe same, consideringthe distance between each airport and its city and the time required for check in. These factors alone would tend to put air transport at a disadvantage,even at a high level of regularity and punctuality. - 40 - C. QM's FinancialPosition

5.12 The Air Malawi Corporationconsists of the airline, and its wholly owned subsidiary,Air Cargo Limited. The latter is responsible for the charter of cargo space on other airlines, primarily National Air Charter of Zambia, and for cargo handling in Malawi. The subsidiary breaks even after the payment of a management fee to the airline. The consolidatedgroup accounts chow a net profit of MK 1.3 million for the 15 months ending March 31, 1990, compared with MK 1.6 million for the 12 months ending December 31, 1988.6/ The comparativeairline results were a net profit of MK 1.1 million on revenue of MK 59.8 million and MK 2.0 million on revenue of MK 48.6 million, respectively.

5.13 As indicated (para. 5.2), this small profit was possible for two reasons. First, QM's aircraft were almost fully depreciated, so the amount of aircraft depreciationchargeable to operating cost was only I'lK 1.1 million. Accordingly,QM is generating insufficientcash to replace its assets, let alone make a reasonable return on capital employed. Second, activitiesother than aircraft operationmade a major contributionto QM revenues. For the 15 months ending March 31, 1990, the key items of this nature were: (i) net commissionsearned on other airlines' passenger and cargo sales (MK 5.0 million); (ii) royalties on intercontinentalairlines' traffic (MK 2.3 million); and (iii) revenue credit for tickets issued but no longer usable or refundable (MK 3.8 million). However, QM's accountingpolicies render it difficult to determinewith accuracy the revenues (net of commissions) it derives from GSA activity, and thus its relative profitabilitygiven the avoidable costs of such activity.

5.14 QM's eftective operating loss arises both out of inadequate revenue on many routes and excessive costs. On the revenue side, only Johannesburgand Harare show high traffic and revenue volume, although Nairobi, at a low frequency, is also close to a break-even situation. Load factors on the Johannesburgand Harare routes are in the order of 70 percent, while the Nairobi route is closer to 50 percent (Table 5.2). A route profitabilityanalysis prepared by QM for 1989 shows that nearly 60 percent of the contributionof various routes to company overhead came from the Johannesburgroute, followed by 20 percent from Blantyre- Lilongwe, and most of the rest from Harare and Nairobi. Both Lusaka and Gaborone failed to produce satisfactoryresults, particularlythe latter which did not cover its out-of-pocketoperating costs.

6/ The latest consolidatedaccounts availablewere for the 15-month period ended March 31, 1990, following the decision to switch from a calendar year to a financial year basis. - 41 -

Table 5.2 Air Malawi Load Fact.rs - 1#96

Katersatioeal LOa Factor Internationl_ Lilongwe-Johannesburg 21,519 80,816 71X Lilongwe-Harare 25,761 86,492 713 Lilongwe-Wairobi 0,121 16,t20 49X Lilongwe-Lusaka 2,588 7,062 86X Lilongw.-Gaborone 1,490 7,227 21X International 59,628 97.017 61X Domstic Llongwo-1lantyre 61,611 106,266 6eX .llongwe-lzuzu 4,640 10,096 46X UlIongwo-Karong 860 6,402 6X Mzuzu-Karonga a6 a.8," 1X Domestic 66,488 129,020 62X AirlineTotal 126,111 227,007 UsX

* In 1989 the posengors were routed ovor Lusaka. Therefore on-board load factor of LLW-LUNflight. was 86X + 21X u 57X Source: Air Malawi

5.15 Overall fare levels are too low, particularly in the domestic market. This problem is exacerbated by the lag in fare increase approvals. In late 1990, for example, approved fare increases were insufficient to offset fuel price increases of approximately 40 percent in a three month period. Although International Air Transport Association (IATA) fare increases were agreed shortly after fuel prices began to escalate, these could be applied only for travel to Malawi; no outbound fare increases, international or domestic, were authorized by the Department of Civil Aviation (DCA) during the period. Clearly, for the airline to remain a conmmerciallyviable entity, it must be given more latitude to set fares to meet its commercial requirements and the demand structure of the marketplace.

5.16 At the same time, operating costs are relatively high, due in part to the absence of scale economies. However, with 830 employees, QM appears to be over-staffed compared with other airlines. This is shown in Figure 5.2, which plots the relationship between airline size and productivity, defined as revenue passenger kilometers per employee. While this poor performance is partly attributable to the airline's small size and low labor productivity, QH requires some staff for GSA functions that normally are outside the organization structure of an airline. These functions generate additional revenue not related to the traffic carried by the airline. To take this into account, a second comparative analysis relates the number of employees to total revenue (Figure 5.3). This comparison shows QM in a somewhat better position relative to other airlines in the region, and slightly more efficient than . However, QM remains less efficient than other small oa I I .I Wd~~~~~~~~~~~~~~~~~I

Z ~* ~ IJz, 0~~~~~Z - 43 -

Figure 5.3

~~~_ t

Eg0 g g o o 0~~~~~ B X}qQ~~~~~~~~~~~~~~~~~~~~5 L SlC j X I - 44 - airlines,such as Lesotho,Botswana and Swaziland. QM reportedlyis aware of the need to reducestaff and is developingplans to do so. D. CurrentIssues 5.17 The above reviewindicates that QM approximatelybreaks even, takinginto accountthe revenuesderived from ancillary activities,depreciation charges that are insufficientto cover capital replacementneeds, and a range of hiddensubsidies that, while not a cost to the airline,represent a cost to the economy. However,with QM's expansionplans, even the appearanceof profitabilitywill not be sustainable.QM is in the difficultposition of being instructedto be commerciallyviable, but at the same time requiredto serve a range of policyobjectives that may or may not be consistentwith its commercial objectives. 5.18 The overridingissue then, is whetheror not the airlinecan be fullyviable without government funds. Given the objectiveof commercialviability, the most immediateconcern is an appropriate investmentstrategy for replacingthe BAC fleet. However,there are also a range of fundamentalissues that must be resolvedto establisha soundbasis for a viablecommercial operation into the future. These includeregulation and oversight,operational and financialobjectives, and operationalautonomy. Clarificationof the respectiveroles of the governmentand airlinemanagement in decision-makingwill be necessary for the objectiveof commercialviability to be met. AirlineAutonomy 5.19 QM is heavilyregulated. As is true of most airlinesin the region,the airlineis directedto operateon commercialprinciples, but the authorityof managementto make major decisionsis limited. With respectto marketsserved, the internationalcompetitive environment is set withinthe frameworkof bilateralagreements that are negotiated largelyby the governmentsinvolved (para 5.10). Governmentpolicy dictatesboth internationaland domesticmarkets to be served,and such determinationsmay reflectpolitical or servicecoverage objectives to the detrimentof commercialones. This is also true of tariffs,which are tightlycontrolled in the domesticmarket. Fare approvallags and constraintshave causedlosses for QM, particularlyin times of high inflation(para. 5.17). Regionaland internationaltariffs are less of a problemthan domestictariffs, as they are structuredon a more economicbasis under the auspicesof IATA and the AfricanAirlines Association(APRAA), both of which providea forum for airlinetariff negotiations. 5.20 The selectionof replacementaircraft has also been made at the governmentlevel, with the financingnegotiations conducted primarilyby GOM (para.5.24). Thus, in most key re3pectspertaining to QH's strategy,service coverage, tariffs and investments,GOM not only sets the overallframework within which the airlinemust operate,but also gets involvedin the specificsof airlinemanagement. This effectivelyrelieves the airlineof the obligationto be profitable, since it can point to governmentdirectives that make profitability - 45 -

impossible. The airline similarlyhas little incentive to take steps, e.g., in marketing or scheduling,that may be profitable, but involve some risk. For the airline to operate according to commercial principles,management requires the freedom to determine fares, routes and schedules,as well as to follow strict business practices with respect to investments,loans, staffing and salary levels.

5.21 Among the steps that might be taken to reduce costs and improve efficiency are: (i) reductions in staff to levels comparable to other airlines in the region; (ii) improved scrutiny of interline billings to increase QH revenue to its entitlement; (iii) development of marketing programs to promote the use of QM; (iv) reductions in frequenciesor withdrawal from routes that are loss-makingand likely to continue to be so; and (v) most important, an investigationof market potential for new routes that could be operated with the existing, underutilized fleet. Among destinationsthat should be evaluated are Haputo, Dar es Salaam, Addis Ababa and Hauritius, where QH used to fly until 1986.

Aircraft Replacement

5.22 A decision to replace the two BAC aircraft was initially made by GOH in June 1989, when an order was placed for two 115-seat Boeing 737-500 aircraft. GOM subsequentlyaccepted the option to upgrade the order to two 129-seat Boeing 737-300 aircraft, the first of which was delivered in May 1991 and the second of which is scheduled for delivery in 1992. The cost of the two aircraft is around US$72 million. It is understood that GOM has secured favorable financing terms for the first aircraft, receiving a loan for US$27 million at five percent for 15 years, including four years' grace; financing for the second aircraft is being sought.

5.23 The 4ustificationfor the purchase of two new aircraft has been given as follows: (i) the BAC aircraft need to be replaced to avoid maintenance problems and increase the passenger appeal of QM's fleet; (ii) larger aircraft are needed to accommodatetraffic growth; (iii) the new fleet will permit the route network to expand, e.g., to extend the Nairobi service to Addis Ababa and begin new services to the Seychelles and Bombay; and (iv) the new aircraft are cheaper to operate. Each of these arguments is discussed below.

5.24 First, although there is general agreement that the BAC aircraft needed to be replaced, there is no a priori reason why the aircraft had to be new. Purchase of a used 737-200, for example, could have provided efficient, reliable service, with no loss of comfort and reliability and few differences discernibleto passengers. Purchase of the 737-200 would not have precluded modernizationof the fleet in 10 years' time, when a used 737-300 could be acquired at prices, in constant dollars, well below current levels.

5.25. Second, even optimistic traffic growth scenariosdo not indicate the need for larger aircraft within a ten-year period. An analysis of current operations indicates that existing frequencies could be successfullyoperated with one jet aircraft of the size proposed, - 46 - provided that a turboprop performs all Blantyre-Lilongweservice, and that the supply of seats would be adequate to meet forecast demand.71 This conclusion is based on an analysis of trends in each of the markets currently served by QM. These trends suggest that a reasonable but possibly optimistic forecast could assume average annual growth of around six percent for regional routes and three percent for domestic routes. These growth rates are higher than past experience (Table 5.1), and consider the tapering off of growth in some markets in 1990 to be a temporary phenomenon. QM also is assumed to capture a 50 percent share in all existing regional markets except Gaborone. Annual growth of 20 percent is forecast for new routes through the year 2000.

5.26 Third, while the new aircraft would permit expansion into new markets, this presupposes the existence of markets and levels of demand that are unrealisticallyhigh. In particular, both the Seychelles and Bombay have been consideredkey destinationsby QM in assessing the re-equipmentplan, and have figured prominently in a draft schedule to be implementedafter new aircraft delivery. The Bombay market was deemed to be an excellent sixth freedom market for QH, with the major source of traffic being the one million-strongIndian community of . Currer.tlythere is no direct air service between South Africa and India, but connecting service is available over Nairobi, Addis Ababa and Lusaka. A routing over Lilongwe would be slightly shorter, but it is likely that by 1994 there will be nonstop wide body air service between South Africa and Bombay, since such service is being held back by political factors rather than lack of market potential. Furthermore,the Indian community is concentrated in Natal province; yet South Africa is unwilling to give QM rights to Durban. It is unlikely, therefore, that traffic to Bombay could attain the forecast levels, while the Seychelles alone provide little traffic potential. The islands are purely a tourist destination,and as such would find few clients in Malawi. Thus, the proposed service is a high risk operation, regardless of the aircraft type employed.

5.27 Fourth, the new technology of the new aircraft makes them cheaper to operate, but the anticipatedutilization rates are too low for the operating cost savings to offset the three-fold higher capital cost of these aircraft. This is related to the pricing of new aircraft, which depends within certain limits more on what airlines are willing to pay than cost of production. Since most new aircraft are sold to airlines in Europe, the United States and national carriers of Asia, the aircraft are priced to allow these high utilization carriers to reap the benefits of the new technology. Given this pricing structure, a low utilization carrier such as QM would have difficultly realizing sufficientbenefits to offset the high capital cost of the new aircraft. Further, new aircraft such as the Boeing 737-300 are compliant with European noise restrictionseffective in 1992. Thus the price of the aircraft reflects a premium for noise compliance,but with little direct benefit to QM.

7/ A specimen schedule is included in Working Paper No. 2, Figure 5, and associated passenger statistics and load factors for 1992-2000 in Tables A-1 and A-2, respectively. - 47 -

Viability of Alternative Scenarios

5.28 The negative impact of the purchase of high capital cost aircraft is demonstratedby an analysis of five alternative scenarios. These scenarios represent purchase of one or two Boeing new 737-300 and used 373-200 aircraft. The scenarios involvingpurchase of 737-200 aircraft assume a 12 percent rate of interest,while those entailing purchase of 737-300 aircraft assume purchase of one Boeing 737-300 at a concessionalinterest rate of 5 percent. Although only the aircraft are varied, each scenario reflects both aircraft operations and other economic activity of QH, including the substantialrevenue derived from its services as GSA for foreign airlines and the income it derives from ground handling services. All scenarios assume that QH will continue to receive services and facilities at lA at nominal cost; that replacement jet aircraft enter service at the beginning of 1992, with flights in 1991 being operated by the existing (BAC) fleet; and that a replacement turboprop aircraft enters service in 1995. For this latter aircraft, an ATR-42 was selected because it is already being flown in the region and has proved both reliable and economical.

5.29 The financial comparison is presented in Table 5.3, which shows, for each scenario and one year, the estimated profit/loss,cash flow and return on capital employed (ROC) in transport operations. The year 2000 was selected for this comparison under the assumption that traffic levels and operationswould have stabilized by then. However, given the sensitivityof the results to traffic levels and hence revenues, and the optimistic nature of the forecast,calculations are also included to reflect a 25 percent reduction in traffic level over the base case scenazio. This reductionwould correspond to the traffic leveling off at about the 1994/95 level. The more detailed financial forecasts for each scenario for the 1990-2000 period are included in Annex S. - 48 -

Table 5.8 FI m*el Parecat of Altentive Jet Aireraft Pursh"e Sosamlie Year 0 0m 1. C__irise for Ve 30

_Two-lat pinaes n e_t Scenrboe 737400 737-300 787400 787400 737-200 S_mrle l~ Scenario 3 Senaeie a Scenario 4" So.. :* , Oprating vnue 19,8070 10,7 18,677 16,377 10,377 OperatingCoot 8,0J9 3,290 7,978 7,970 8,265 Oepreclatlon 4,560 2,328 2,484 2,484 1,410 Ov wrhed 6,80 6,06 0,243 6,268 6,288 Transport Profit 1,104 2,949 2,182 2,102 2,981 Non-transportNov 5,J60 5,860 1,850 6,860 5,860 Net AirlineProfit 6.454 8,299 7.582 7.5U2 8.281 Cash Flow 10,328 10,622 9,066 9,966 9,691 Principal 9,7865 8,076 4,697 5,683 1,787 Intoreet 1,955 1,086 1,428 918 709 Not Cash Flow (917) 6,611 8,946 8,865 7,195 Coot of Capital 76,000 28,000 41,000 41,000 17,000 RCC CTransport)" 1.6X 10.5X 6.8X 5.8% 17.2X

U. Sbailtvi%t Analysis- Obe-fourth LJ Traffic to te Year 3000

t o-jok pieso 1>et Sc n elc __ 78740 787-300 78740 787-400 787-300 ______Sconario Ie* Scenario 2 Scenario 8 Scenario 40" Scenario 5 Operating Revenue 16,896 16,896 16,101 16,101 16,101 Operating Cost 8,089 8,290 7,978 7,978 0,268 Depreciatlon 4,569 2,828 2,484 2,484 1,410 Overhead 6,803 6,803 6,28 6,288 6,283 Transport Profit (2,870) (1,026) (1,594) (1,694) (846) Non-transport Rev 6,860 6,860 6,860 5,860 6,860 Net Airline Protit 2,480 4,825 8,766 3,766 4,50S Cash Flow 6,340 6,643 6,190 6,190 6,915 Principal 9,796 8,076 4,697 6,688 1,707 Interest 1,965 1,086 1,428 918 709 Net Cash Flow (4,691) 2,587 170 (411) 8,419 Coot of Capital 76,000 28,000 41,000 41,000 17,000 OC (Transport)* I -8.6X -8.7X -8.9X -8.9X -6.0X

All scenariosasosum 12X cost of capital unles noted otherwlse; all scenarlos Include purchase of a turboprop aircraft to replacethe NS 748. s C1Xcoot of capitol for the fi rt BSe ng 787-80 and 12X for the scond. *oo SXcoot of capital for the Boeing 787-800. eas Return on capital employed; (for the purposes of this comarlion capital includes aircraft only).

Source: Annex 6 - 49 - 5.30 The first set of scenariosinvolves purchase of two jet aircraft,of which Scenario1, purchaseof two new 737-300s,is the least viable,despite the concessionalinterest rate for one aircraft. In the year 2000, this scenariois estimatedto yielda transport- relatedprofit of about US$1 millionand a returnon capitalemployed of less than 2 percent. As this returnis based on aircraftonly, the total capitalemployed is much larger,especially considering QH's significantaccumulated losses and loans. Thus the ROC for the airline would be much lower than indicated.This also is the only scenariothat even in the optimistictraffic scenario continues to show a negative cash flow afternine years of operationand even after non-transport revenueis included. Cumulativelosses are projectedto totalUS$19 millionover nine years after takinginto accountnon-transport revenue of US$45 million (Annex8). 5.31 Scenario2, purchaseof two used Boeing737-200's, yields more favorableresults. In this scenario,operating revenues remain the same as in Scenario1, operatingcosts are slightlyb 4gher, but ownershipcosts are much less. As a consequencethe cash flow is positive,after takingnon-transport revenue into account,after the first year of operation. However,as shown in 1.ble 5.3 for the year 2000, the returnon capitalemployed is only 10 percentin the high trafficcase, comparedwith interestpayments of 12 percent. Thus, even in this lowercost scenario,there would be no effectivereturn on the government's investment. 5.32 The secondset of scenarios,involving the purchaseof a singlenew or used jet aircraftyields more favorablefinancial results than the purchaseof two comparableaircraft. This is becausethe existingvolume of trafficand requiredflight schedules can be accommodatedwith one jet aircraftplus somewhatmore intensiveuse of a turbopropfor domesticservices. The annualutilization of aircraft under the one-jetscenario is estimatedto be 2,300 hours for the jet aircraftand 2,350 hours for a supplementaryturboprop aircraft; this can be comparedwith a two-jetscenario with 1,250 hours for each of two jets and 1,350 hours for a supplementaryturboprop aircraft. Even under the one-aircraftscenario, the averageutilization rate is very modest by internationalaviation standards. If only one jet aircraftwere purchased,a replacementaircraft would be requiredfor a few weeks each year at the time the singlejet undergoesits scheduledmaintenance check. The cost of such a shiort-termlease is includedin the one- aircraftscenarios. In addition,the one-jetaircraft operation providesno capacityfor possibleschedule expansion; however, within the forecastperiod, existing capacity is adequateto serviceexisting routes,while the marketpotential of new routesis highly speculative. 5.33 Scenario3, purchaseof one Boeing737-300, is less desirablethan Scenario2, as the cost of the one new aircraftexceeds that of two used Boeing737-200's. Purchaseof one new Boeing737-300 at a commercialinterest rate of 12 percent,is projectedto yield transportprofits of US$2 millionand a transport-relatedROC of only 5 percent. This returnwould be negativeif trafficgrowth were to stagnateat the 1994/95level. While passingon the concessional interestrate of 5 percentto QM (a subsidy)does not affectthe ROC, it - 50 - improves the cash flow, which even excluding non-transport revenue, would become positive in year 1994 as opposed to remainingnegative through year 1999 (Annex 8).

5.34 The last scenario, purchase of one used Boeing 737-200 at a commercial interest rate of 12 percent, is the only scenario that appears in this incrementalanalysis to approach commercialviability. This scenario shows transport profits of about US$3 million and a ROC of 17 percent. Given that total capital was understated,in that only the aircraft were included in the estimate of capital employed, even this scenario's return would not be high enough to contribute even a minimum return to the economy. Moreover, if traffic levels and related revenues were to remain at 1994/95 forecast levels, the transport profit would become a loss and the ROC would be negative.

5.35 It is probable that the preferred aircraft purchase plan would have been two used 737-2009,based on the projected ROC, combined with the greater flexibilityand ease of operation of a two jet aircraft fleet. However, given that delivery has already been taken of one Boeing 737-300, the best fall back position would be to maintain the jet fleet on a one-aircraftbasis. Considering the severe financial penalty attached to the purchase of a second new jet aircraft, it would be more advantageousto begin planning for a replacementof the BAe 748 with another turboprop aircraft. In this way QM would possess a modern though small fleet that would permit it to derive maximum profitability from existing routes. The purchase of the second jet aircraft should not be implementeduntil it can be established that a sufficientvolume of additional traffic can be assured on existing or new routes to support an economicallyviable operation. This phased approach would provide an important hedge against the risk of unfavorable economic trends and the resultant absence of traffic growth or even decline. - 51 -

VI. PRIORITY ISSUES FOR ROADFREIGHT TRANSPORT

A. Background

6.1 With the on-going closuze or near closure of Malawi's traditional routes to the sea, road freight continues to play a key role in internationaltransport, and presently accounts for about 95 percent of Malawi's import and export traffic. Road freight also is the predominant mode for internal distribution,carrying an estimated 70 percent of domestic traffic. Rail and lake service are the principal alternatives,and neither can provide the coverage and flexibility required for the majority of domestic transport.

6.2 The road freight transport industry became of particular concern in late 1987, when the aging and unreliable domestic fleet was unable to satisfy the increased demand resulting from an additional 100,000 tonnes of refugee food aid. ADMARC, the road freight industry's traditional major customer, found that it could not secure an adequate supply of freight services, as it could not compete with the rates, prompt payment, efficient loading and unloading, and steady demand offered by the relief agencies. This situation continued into the 1988/89 season, but eased thereafter for four reasons: increase in supply, cost reduction, improved logisticsmanagement, and tariff increase.

6.3 The increase in supply was the result of a HOTC decision to permit foreign-ownedoperators to register and operate in Malawi as Malawian internationaloperators. When the enhanced competitivenessof the internationaloperators made it difficult for Malawian "duals operators,who provide both internationaland domestic transport, to compete in the internationalmarket, these operators shifted capacity to domestic transport. This accounts for much of the improvement in domestic supply since late 1989.

6.4 The decrease in operating costs was largely due to actions taken by MOF to support the industry as a whole, and include:

(a) removal of duty and surtax levied on the importationof vehicles with a gross vehicle weight exceeding ten tonnes; (b) rebate of 80 percent of the duty and surtax paid by internationaloperators for the purchase of parts and tires; (c) liberalizationof foreign exchange, which has improved the availabilityof parts, tires, and new vehicles; and (d) foreign exchange allocationsfor direct importationof vehicles, parts, and tires by Malawi transporters.

6.5 Concurrent with these developments,ADMARC implementednew contracting procedures that guarantee the transportera fixed tonnage amount for specified routes, increased its storage capacity, and improved its logistics management to provide wherever possible a backhaul load. In addition, the maximum transport rate was increased - 52 - from MK 0.3/tonne-kmto MK 0.41tonne-km,which permittedADMA&C to secureadequate transport capacity in most, but not all areas.

6.6 However, the problem with domestic freight haulage is much deeper. The direct cause of short supply remains the very poor mechanical condition and shrinking supply of 7 to 15 tonne vehicles, and the lack of professionaltransport management and operationalskills. The underlyingcauses are the high cost of new vehiclesand the riskinessand lack of profitabilityof the investment,which in turn make credithard to find. HLstoricallythe transportersin this segment obtainedtheir vehiclesin the second-handmarket. At presentthese vehiclesare scarcedue to many years of governmentalprohibition of importationof such vehicles,and the decisionto excludeull but indigenousMalawians, e.g., Asianswith more experienceand resources, from the domestictransport markct. B. IndustryStructure 6.7 Thereis no Malawi road freighttransport parastatal, and the privatesector industry that providesthese services comprises Malawianand foreigntransport operators. The Malawianportion of the industryconsists of three operatingsegments, domestic own-account, domesticfor-hire and internationalfor-hire, and as the descriptions imply carriesboth domesticand internationalcargo. Foreignoperators are only permittedto carry internationalcargo. 6.8 The availabledata concerningvehicle supply are ambiguous. MOTC data indicatethat about 8,000 goodsvehicles were issuedannual licensesin 1988. This numberis not definitive,however, as licenses can be sold for a periodof threemonths or one year,and as each licensesold is countedseparately, some vehiclescould be countedfour times in one year. Furthermore,many of thesevehicles are old and are nearing,if not havingreached, the end of their reliableservice life. An analysisof vehiclereplacements suggests that the numberof new vehiclesentering service is not sufficientto replacethose going out of service,let alone expandthe fleet. In 1989,this shortfallwas estimatedto be at least 24 percentof the runningfleet.8/ 6.9 The distributionof internationaloperators by fleet size is shown in Table6.1. As shown,the fleet of nearly500 power units and 535 trailersincludes approximately 100 additionalhigh capacityunits (30 tonnes)registered and put into serviceby foreigninvestor owned transportcompanies. Average fleet size is 12 units,consisting of six trucksand six trailers,but the averageis not representativebecause over 50 percentof the units are controlledby 13 percentof the operators. Conversely,the domesticroad haulageindustry, shown in Table 6.2, is highlyfragmented. Of the domesticroad hauliers,85 percenthave only one vehicle,and 40 percentof the fleet consistsof vehicleswith a carryingcapacity of less than two tonnes.

8/ See para. 4.2 and Table 6 of WorkingPaper No. 3. - 53 -

Table 6.1 Fleet Distributionfor Internationaland Dual Operatorswith Numberof Operatorsand Units

50

O 34 82 Operators p e 25 1032 Units r 24 a t 0 r 5s 13N 11 operators&527 Units

5 4 3 2 2

0 - - 1- 5 6 -10 11-20 21-30 31-40 41-40 51-80 Numberof Units - 54 -

Table 6.2. Distributionof Domestic Fleet by Operators and Units

300 Operators

300 Capacity Units 256 0-2 Tons 155 0 3-6 Tons 56 p 7-20 Tons 158 e 100 > 20 Tons 18 r a Total 387 t 0 r 50 28

5 5 5

2

1 2 3 4 5 6

Number of Units

Note: Units include trucks, power units and trailers - 55 -

Road Traffic Act

6.10 The Road Traffic Act (RTA) provides the legal framework for the road transport subsector, and it is the responsibilityof MOTC through its Road Traffic Department (RTD) to enforce the regulations set forth in the Act. In principle, the Act accords the Government the right to regulate all aspects of freight and passenger transport. However, in its administrationof the Act, GOH clearly supports the view that road freight transport is best provided in an environmentwhere private enterprise and competitionare encouraged if at all possible. Consequently, the economic regulation in effect is less constraining than in most neighboring countries.

6.11 Entry. For entry, Malawian for-hire road hauliers need only a business license, road service permit (RSP), police clearance and annual certificate of fitness. There are no restrictionson the number of vehicles, routes or areas in which a haulier may operate. Until recently, foreign investor-ownedcompanies registered in Malawi as Malawi companies were restricted to internationaltransport and specific routes. However, since October 1, 1990 these carriers are permitted to engage in domestic transportwithout restriction. Foreign owned and based hauliers have virtually unlimited access to the Halawi internationalcargo business, but may not pick up or deliver cargo at points other than Lilongwe or Blantyre without obtaining an exemption. Short-term permits for foreign hauliers are issued and renewed routinely upon payment of the appropriatefee.

6.12 Own-account operators are not required to have a RSP to transport their own cargo, but are subject to the same safety and registrationrequirements as for-hire operators. Little is known about the own-accountoperators, even though this segment accounts for an estimated 90 percent of goods vehicles licensed in Malawi. As in most countries that prohibit the joint use of vehicles for own-account and for-hire service, this group of vehicles is underutilized. It also is deemed to be larger than would otherwise be required, due to the demand characteristicsof particular products. Manufacturers,traders and other entrepreneurswho operate road transportequipment in their businesses do so partly because they perceive their own operations to be more economical,but more often because the small domestic transporter is so unreliable.

6.13 Although HOTC sets policy, the enforcementand administrationof the RTA is by RTD, which is supposed to handle vehicle registrationand licensing,vehicle safety, operators licenses and RSP. At present RTD has neither the institutionalnor manpower resources to enforce the current regulations,and it reportedly is common practice for Malawi operators without RSP and for foreign operatorswithout exemptions to move illegallywithin Malawi. Malawian road hauliers also are required to registerwith the Ministry of Trade, Industry and Tourism (MTIT),which issues licenses for all Malawi companies, regardless of specific activity. However, many small operators, e.g., operators with a single truck of less than 10 tonnes, apparently do not apply for a business license or permit of any kind. - 56 -

6.14 Rates. There is effectivelyno regulationof rates for internationalfreight haulage, but the maximum rate for domestic freight haulage is more problematic. HistoricallyMOTC set minimum, differentialand maximum transport rates that applied exclusively to ADMARC domestic cargo. When in 1987 ADMARC could not secure enough transport capacity from the private sector to move its cargo, MOTC abandoned the ADMARC transport rate structure and replaced it with a single maximum rate for all domestic road transport.

6.15 While intended as a short-termmeasure, this rate-setting procedure remains in effect. The rate is applied across the board regardlessof vehicle capacity or trip distance, and in spite of the different cost structure of long versus short hauls and operation on different pavement types. There is considerableevidence that the rate is a price setter, in that large shippers such as food aid relief agencies and to some extent ADMARC, do not feel they can pay below the establishedmaximum. Many small operators also consider the rate to be both a maximum and minimum. At the same time, some shippers reportedly have negotiatedmore favorable rates, while others, primarily small remote shippers, have been forced to pay more than the maximum to obtain the necessary services. The result is inefficientprocurement of transport services,with the large shippers paying more than otherwise would be required and others paying marlet rates despite the rate ceiling.

Regulatory Issues

6.16 Thus, despite the relativelyopen regulatory framework, a number of problems remain. First, written requirementsand procedures, as well as updated copies of the RTA, are unavailable. Changes in regulation,such as permitting foreign investor-ownedMalawi registered companies to transport domestic cargo and how the single-rateis to be applied, are not always gazetted in a timely manner, and there is considerableconfusion over regulatoryrequirements and how they are being administered. Second, the regulationsare not enforced. As such, it is not clear to what extent provisionsin the Act are constraining. As indicated above, it is generally acknowledgedthat many operators, especially small operators in rural areas, do not obtain a business license or RSP, or adhere to the maximum rate. Third, despite the relativelyfree entry, provisions in the Act that prohibit the joint haulage of own-accountand for-hire cargo, or of passengers and freight, serve to fragment the market and reduce the density of demand in a given area.8/ This results in inefficientuse of existing capacity, with attendant implicationsfor higher costs.

6.17 There is general agreement that the RTA needs to be reworked to ensure that it encourages a range of safe, efficient, and commercially-orientedtransport operations. In addition, there is a need to eliminate technical inconsistancies. As a first step, the Act

8/ .Matola,the illegal carriage of passengers and freight in the same vehicle, is discussed in Chapter 7. - 57 - shouldbe publishedand made availableto constituentgroups, who at presentexpress confusion over the regulation-that governtheir operations.The Act then shouldbe revisedtu reflectGOM's present policies,and streamlinedto make it more accessibleand transparent. 6.18 Problemsinherent in the RTA are compoundedby an institutionalstructure that is fragmentedand uncoordinated,to the detrimentof overallpolicy planning and implementation.A numberof major participantsin this framework,such as MOTC,MTIT, MOW,Office of the Presidentand Cabinet(OPC) and MOP, are involvedwith policy initiatives,planning and regulationthat eitherdirectly or indirectly influenceroad transport. Others,including ADHARC and the Petroleum ControlCommwission (PCC), have a particularinterest in certainsegments of the road transportmarket. This frameworkneeds first to be simplifiedand then used to defineand strengthenthe institutions responsiblefor the planningand supportof road transport. 6.19 In this process,the role of MOTC must shift from detailed managementand controlof the transportoperating environment, e.g., the setting of maximum rates, to monitoring, planning and olicy review. An operational review of functions and organization is needed to identify and document the actions needed to improve and strengthen the institutionalcapacity of MOTC. Under this reviewparticular attention shouldbe paid to the organizationand operationof RTD, and to its abilityto deal effectivelywith transporters'requirements and enforce proceduraland safety-relatedrequirements of the Act. C. InstitutionalConstraints 6.20 Despitethe problemsinherent in the RTA, there is evidence to suggestthat regulationsimposed by Treasuryhave also been a significantconstraint to adequatemaintenance and replacementof vehicles,let alone expansicn. The many years of tight foreignexchange controland high levelsof duty and surtaxon importedvehicles, tires and spares,limited the industry'sability to replacedepreciated assets. The recentremoval of duty and surtaxon certainclasses of vehiclesand types of service,as well as the generalliberalization of foreignexchange (para. 6.4), have reducedsome of these constraints. However,for many operators,particularly smaller carriers or even largercarriers operating in the domesticmarket, these changesdo not go far enough. The partialremoval of duty and surtax,e.g., only for vehiplesover ten tonnesand not for spareparts and tires,can have distortionaryeffects. These could includepurchase of vehiclestoo large to be economicin some marketsand deferralof maintenance requiringpremature replacement of vehicles. InternationalTransport 6.21 The major constraintsfacing Malawi international transportersrange from the difficultyin gainingaccess to more lucrativecargo to variouscauses of Malawitransporters' higher costs. 6.22 Accessto High Value Cargo. Of particularconcern to international transporters are structural problems associated with - 58 - marketing and gaining access to high value cargo. The practice of importing on a c.i.f. basis puts the control of road transport planning and cost in the hands of the seller and not the buyer. Thus foreign operators, located in the country of origin for imports, have the advantage of placement for the inbound trip. These operators can charge high rates for transportingrelatively high value import cargo, and much lower rates on the outbound backhaul leg. This points out a structural problem that could have important implicationsnot only for trucking, but also for the NTC and Nacala lines. To the extent that there has been a substitutionof country of origin for imports from Europe to South Africa, Malawi could find itself paying the "fronthaul rate for imports via road/rail from South Africa and the fronthaul" rate for exports via the NTC and Nacala line.

6.23 High Capital and Operating Costs. The high initial cost of vehicles can be another significantconstraint for the international transporter. Direct importationof vehicles, parts and tires by Malawi transporterswill continue to be necessary if Malawi transportersare to remain competitivewith foreign operatorswho have access to these commoditieson a factory direct basis. The prices charged by local vehicle suppliers continue to be high in spite of the removal of duty and surtax from most goods vehicles. This does not present a problem for the few transporterswho have the personnel and financial resources for the direct importationof vehicles and parts. Unfortunatelythe majority of Malawi transportersdo not have the resources for direct importation. The practice of importing used and reconditionedheavy goods vehicles to lower fixed costs has been approved in principle by the Reserve Bank and could lead to reduced cost of vehicles, but has not yet been successfullyimplemented.

6.24 A related constraint is the high cost of spare parts and tires. Parts and tires purchasedwithin Malawi have a heavy duty, surtax and supplier markup. It is not uncommon for the c.i.f. cost of parts and tires to be increasedby 150 percent before the end user receives them. Internationaltransporters receive 80 percent relief from the duty and surtax, and if they import directly, they also avoid the local suppliers'markup. However, here again, most of the Malawian operators do not have the resources for direct importation,and no mechanism for avoiding duty and surtax.

6.25 Local insurance rates also are high, typically in the order of 15 percent of replacementvalue. Recently a pool was formed by some members of the Road Transport Operators Association (RTOA),which was successful in negotiatinga rate for comprehensiveinsurance that is 50 percent below the going rate. This is a trial arrangement that could be expanded if the claim experience is positive for all parties.

6.26 Access to Credit. One financial institution,the Leasing and Finance Company of Halawi (LFC), has successfullychanneled funds to the road transport sector by adapting to fit the circumstances,e.g., offering such innovationsas repayment schedules geared to the client's cash flow patterns, stipulatingmaintenance contract clauses aimed at safeguardingthe investment or insertingdouble declining depreciation methods for vehicles destinee for dirt-road operations. However, - 59 - approximately50 percent of the LPC portfolio now consists of road transport vehicles, and hence LFC is reluctant to extend its lending in that market segment.

6.27 With the current limits on credit available from LFC, no other financial institutionsare exhibiting any interest in providing credit to road transporters. Despite the availabilityof vehicles and operators' strong interest in both replacing old fleet and expanding fleet size, they are constrainedby the lack of credit. In part this is due to the perception on the part of financial institutionsthat road transport is a high risk business. It also is due to a lack of professionalexpertise. Discussionswith operators and a review of operating and financial records indicate an unprofessionalapproach to transportmanagement and operations. Basic concepts such as proper costing, depreciationand replacement reserves, fixed cost recovery, calculationof profitable rates, operational support and equipment maintenance are not well understood.

6.28 Opening of the Nacala Line. Once the Nacala line is fully operational,a shift of up to one-third of the freight traffic from road to rail could reduce the internationalroad haulage capacity required.

6.29 Excess Capacity of Petroleum Transport Equipment. In 1989 Malawi registered vehicles moved 39 percent of petroleum imports, and preliminary data indicate that during the first three quarters of 1990 this figure rose to 60 percent. Even with this high market share, indigenousMalawi operators are still planning to purchase additional vehicles for petroleum transport. Such action could result in excess capacity, given the already large Malawi market share and the potential for retaliatoryaction by other countrieswhose transportersmay feel they are not receiving a fair share of the traffic originating in their country.

Domestic Transport

6.30 Many of the issues facing domestic transportersare shared with internationaltransporters, such as high costs of insurance, local vehicles and local parts and tires, as well as access to credit and lack of professionalexpertise. Other issues that pertain specificallyto domestic transport include the inadequate supply of vehicles (para. 6.6) and inefficientuse of existing capacity, and the on-going regulation of transport rates.

6.31 Supply Constraints. The number of goods vehicles imported during the last 10 years has not kept pace with the normal vehicle replacement requirements(para 6.8). By all accounts this has resulted in an aging and unreliable domestic for-hire fleet. The replacement of aging vehicles. although necessary, is constrainedby the current lack of credit facilities, and the many other factors discussed above. However, if additional capacity is necessary in the short run, a possible solution rests in the large number of goods vehicles registered and underutilizedby own-account operators. - 60 -

6.32 The high fixed costs experiencedby Malawi domestic operators requires them to keep the vehicle engaged in revenue service as much as possible. This means correct operationalplanning, vehicle scheduling and the maximizationof return loads. These operators spend a large portion of their time marketing, looking for a backhaul, or queuing for work given on a first-come first-servebasis. Unlike internationaltransporters who have a network of forwarding agents and brokers to solicit business from, there is no clearing house for domestic transport requirements.

6.33 Transport rates. The current maximum domestic road freight transport rate is set at MK 0.4/ton-km. This rate is problematic, because a single ton-km rate, when applied across the board to vehicles of different capacity used on various routes, must overcompensatesome and under-compensateothers. Shippers and tz"nsportersmust have the ability to negotiate rates that are fair to both parties. Controlling rates in an effort to perpetuate the business life of marginal transportersor provide preferentialtreatment for selected shippers helps neither the transportersnor the shippers in the long run.

D. Recommendations

6.34 These recommendationsare presented for the considerationof GOH and reflect actions that should be undertaken by MOTC and other agencies as follows:

(a) Develop terms of reference for an independent organizationalstudy of MOTC. The primary objective of the study should be to identify and implement actions designed to strengthen the management, planning and monitoring ability of MOTC, consistent with the redefinitionof activities away from economic control. Particular attention should be focused on the organizational,functional and legislative restructuringof RTD;

(b) Replace the current dorestic RSP with a commercial operating permit granted to all owners of Malawi registered goods vehicles. This permit would enable all such vehicle owners to engage in for-hire transport. Since all goods vehicles would be subject to the same Certificateof Fitness regulations,road safety should not be affected;

(c) Plan and implement a procedure for an ongoing, focused data collection effort based on a well-constructed small sample to develop a road transport database, at a minimum covering the followings

(i) Origin, destinationand commodity type of domestic cargo; (ii) Fleet, operating and performance characteristice of own-accounttransport operations; and - 61 -

(iii) Fleet, operating and performance characteristics of domestic for-hire transporters;

Ensure that the border station cargo data collection effort also records the carriers' name, address and any empty hauls. This will provide additional data useful in assessing the operating health of Malawi internationaltransporters;

(d) Support the continued direct importationof vehicles, parts and tires by Malawi transporters;

(e) Undertake, with the assistance and cooperation of MOF, to establishwithin the private sector a development- oriented pilot revolvingkwacha credit program. The administrationand operation of the credit program should be the responsibilityof a recognized private sector financial institution,and the funds should be available for use by Malawi transportersto purchase transport equipment and provide working capital. Possible sources of funding could be existing counterpart funds lodged in several donor-financed transport-relatedspecial accounts or future donor funding containedwithin yet to be developed projects designed to improve the professionalexpertise of Malawi transporters;

(f) In conjunctionwith MOF, Reserve Bank, shippers, clearing and forwarding agents, brokers ani Malawi internationaltransporters, investigate the structural constraints inherent in c.i.f. importing, e.g., supplier-negotiatedinland transportation,that are restricting the access of Malawi transportersto high value import cargo;

(g) In conjunctionwith MOF, reduce the duty and surtax on parts and tires used by domestic transportersin a phased manner consistentwith the government'soverall program to reduce domestic protection;

(h) Eliminate the differentialin duty and surtax between vehicles and spare parts, to encourage better and more timely maintenance.

(i) Remove all controls on domestic transport rates after proper notificationto the industry and sufficient time to allow shippers and transportersto adjust contract terms. - 62 -

VII. PRIORITY ISSUES FOR PASSENGER TRANSPORT

A. Overview

7.1 Road passenger transport continues to assume an increasingly significant role in the transportationinfrastructure of Malawi. The expansion and improvementof the road network provides the possibility of access to road passenger transport for an increasing share of the population. Bus service, perceived as a relatively cheap and convenient transportmode, is providing effective competition to the passenger services of the rail, lake and domestic air modes. There are relatively few automobiles,estimated in 1988 to be not more than one licensed passenger car per 570 population. Taxi services are scarce, and the vehicles are in poor condition and too expensive for most Malawians.

7.2 The commercial passenger consists of bus, rail, lake service and air in descending order of importance,with 91, 8, 0.8, and 0.2 percent, respectively,of legally carried domestic passengers. Matola, the illegal practice of providing transport in vehicles not licensed for passenger service, is widespread and may carry nearly as many passengers as bus in Malawi. Only bus and matola provide service in all areas of the country. The bus industry transported an estimated 23 million passengers in 1989.

B. Industry Structure

7.3 Despite the bus industry'sdominance in passenger transport, the existing industry is unable to meet the transportationdemands imposed upon it. Although specific informationon the demand for road passenger transport is limited, each day large numbers of passengers are observed to wait at busy stops, sometimes for hours while bypassed by full buses. Also indicative of the shortage of legal supply is the flourishing system of matola. Operators of large buses and government officials have said that they believe demand currently exists to support a bus fleet of triple the current size.

7.4 The bus industry is composed of an intercity bus sector dominated, but not exclusivelyoperated, by one large-bus carrier, Stagecoach Malawi, Ltd. (SM), urban services in four cities dominated by that same carrier, and a small minibus industry. The rural areas of the country, where the majority of the population lives, receive only minimal transportationservices.

Large Buses

7.5 The major types of services operated with "large" buses include: (i) rural operations,primarily on earth roads; (ii) a variety of intercity operations covering most of the tarmac road network; and (iii) urban/peri-urbanservices in the four main cities. The commercial fleet of large buses consists of about 450 buses operated by approximately12 companies. SM operates a fleet of 370 buses across all service types. SM is 51 percent owned by Stagecoach Holdings Ltd. of Perth, Scotland, UK. Since the late 19709, the remaining 49 percent has _ 63 - been held by GOM, with 35 percentcontrolled through ADMARC and 14 percentheld directly. StagecoachHoldings acquired its ownershipin the companyin 1989 from UnitedTransport International, a subsidiaryof BritishElectric Traction. 7.6 After SM, the next two largestcompanies are TuwicheBus ServiceLimited with 18 buses and Yanu Yanu Bus Companywith 22 buses; both primarilyoperate paved road intercityservice. It is estimated that another10 to 12 bus companiesoperate paved road countryservice with one to four buses each. This is approximatelyone bus per 18,000 population. Only SM and matolaare activein all three servicemarkets indicatedabove. Figure7.1 showsthe bus routenetwork and approximate servicefrequencies as of October1990. 7.7 The supplyof commercialroad passengertransportation in the rural areas is extremelylimited. Rural serviceover the unpaved roads by operatorsof largebuses seldomexceeds one or two trips-per- day and many areas are unserved. A numberof factors,including high operatingcosts, wide seasonaldemand fluctuations and low revenues, providelittle incentive for the operatorsof road passenger transportationservices to operateover the unpavedroads in the rural areas. SM is attemptingto withdrawservice in these areas.

Minibuses 7.8 The size of the currentlyoperating minibus fleet is unknown althoughthere is generalagreement that it is old, in poor mechanical conditionanl decliningin size. Minibusestend to operateonly to and from urban areas and in head-to-headcompetition with the large buses. Nationallythere are estimatedto be not more than 50 minibusoperators, of which some 14 are in the Blantyre/Limbearea, with an averageof two vehiclesin serviceper operator. 7.9 Existingminibus operators typically do not ventureinto rural areas where less competitionexists. In part this is du to the high cost of servingthese areas,and in part becauseminibus gners are primarilyin other businessesin the urban areas and the minibuseshave graduallybecome less importantparts of their businessactivities. Further,route and fare constraintshave reducedtheir abilityto competewith the large buses for passengers.Most minibusowners state that they are using up their existingstock of equipment,with no plans for replacement.This is reflectedin the steadilydeclining number of minibuses. In 1986, 65 minibuseswere registeredin Blantyre/Limbe, whereastoday the estimatednumber is 28.

Matola 7.10 Althoughspecific data are unavailable,matola reportedly providesthe majorityof all road passengertransportation in many rural - -k

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Pl2et2t: ocoba 1990.u/to , 4__0 - 66 - areas and is a rajor source of transport even in urban areas and on primary tarmac roads. There is a well developed system of pick-up points and routes in most.areas. One bus operator estimated that 55 percent of the pickup trucks in Malawi were obtained for the specific purpose of operatingmatola. Traffic surveys conducted in 1986 support this estimate in that between 48 and 56 percent of all pickup and larger trucks observed at various survey locationscarried passengers. Private passenger cars, trucks of up to two tonnes and even some closed vans with seats are all used by exclusivematola operators. Matola also is provided by vehicles in use for other purposes, e.g., cargo, mixed use or private passenger transport, at the same time.

7.11 The cost structure of matola is well suited to the operating and demand characteristicsfound in many areas of Malawi. A pickup truck costs approximatelyMK 50,000 to MK 60,000, while a minibus, depending upon capacity, is MK 80,000 to MK 130,000, and a full size bus some MK 300,000. A truck's cost, handling characteristicsand carrying capacity are well suited to rural road conditions and the limited demand present at any given time. Although matola is illegal, removes profits from the reach of legitimate taxation, and is claimed by many to be inherently unsafe, it fills a large void in the provision of passenger transportationin Halawi.

C. Regulatory Issues

7.12 As in road freight transport, the road passenger transport industry is directly regulatedunder the RTA. However, unlike road freight, the government is exercising its authority to control entry, exit, routes and fares for passenger transport, although even here not to the excessive levels of many neighboring countries. As in freight transport, the RTA is administeredby RTD under the authority of MOTC, although in recent years MOTC has begun to review rate applications directly. Also in recent years the disseminationof requirementsfor the submission of rate and route applicationsand other administrative procedures has been primarily oral in nature; written requirementsand procedures, as well as updated copies of the Act itself, are generally unavailable.

7.13 Entry. Control over entry and exit is limited primarily to restrictionspertaining to minibuses and making the award of the so- called *prime" routes contingent upon acceptance of non-prime routes, typically on unpaved surfacee in rural areas. The Prime Route Policy (PRP) dates back to 1982 and initially required at least 50 percent non- tarmac operation, later reduced to 40 percent, and a 30 percent level has been discussed during the past several years. In return, certain lucrative routes would be protected from competition. The elimination of the PRP is under consideration,as it has proven difficult to administer and enforce and has contributedlittle to the goal of improved transportationin rural areas.

7.14 Until recently minibuses were restricted to operating on specified routes of no more than 25 kilometers in length from the four urban centers of Blantyre/Limbe,Lilongwxi Hzuzu and Zomba. However, in early 1990 the Road Traffic Commissionerliberalized minibus regulations - 67 -

to permit operations from any urban center over specified routes not to exceed 40 kilometers,but still excluding internal distributionin urban areas.9/ Although not embodied in statute or regulation. it also was reported that applicationswould not be approved if the maximum number of minibuses under single ownership exceeded somewhere between 5 and 15. Both these restrictionsapparently reflect the concern that the quality of service would deteriorate if minibus operatorswere to conduct operationsnot overseen personallyby the owner.

7.15 There do not appear to be significanteconomies of scale in the bus industry. The smaller operators tend to perform maintenance in a more labor-intensivemanner, e.g., less use of pits in favor of jacks and simply sliding under the bus, than the large firm. However, the generally lower cost structure due to greater market selectivityand lower labor costs of the small operatorsmore than offsets the disadvantageof limited maintenance facilities. The relative lack of independentmaintenance facilitiesdoes favor the operator who can institute sufficient service in an area to justify establishing maintenance depots. While not a structuralconstraint, the lack of a trained management pool also inhibits expansion of the smaller carriers and to some extent even that of SM, as do the institutionalconstraints discussed below.

7.16 Fares. Bus fares are regulated through a country-wide uniform fare system. GOM has relied on a combination of this system and the PRP to encourage bus operations in rural areas where operating conditions Imply loss-makingactivities. The cross-subsidiesimplicit in this arrangementmean that the bun operators (and ultimately the travellingpublic) carry the costs of loss-makingoperations and GOM avoids having to provide direct subsidies to rural bus operations. However, the end result has been limited service coverage and proliferationof illegal, potentiallyunsafe alternatives. Without enforcement,this is the logical outcome of a clash between GOM's social objectives and the operators' financialconcerns.

7.17 The present fare approval system takes cost into account to the extent that fares are determinedaccording to distance traveled (on non-urban routes) and class of service. The current fare levels are 6.7t/km (express),5.5t/km (country),and flat rates of around MK 42.0 for the various coachline services. Fares for urban services must fall within a recently expanded zone of rate freedom. Minibus fares are customarily required to be lOt/trip higher than those approved for the large buses in intercity and country service, as an arbitrary premium on what is presently supposed to be a more frequent and less crowded service. The fares are set to include an allowance for loss-making operations in the rural areas plus a profit margin.

7.18 In addition to the obvious distortions associatedwith cross-subsidies,regulated fare systems have inherent inflexibilities that inhibit developmentof efficient services:

9/ As of October 1990, few minibus operatorswere aware of these changes, as they had not been published. - 68 -

(a) Most financial criteria used for determining fare levels have drawbackswhich may affect industry efficiency. For nstance, a criterion such as rate of return on investment,encourages operators to increase their capital base (includingnon-vehicular assets) so as to justify larger profits; alternatively,rate of return as a percentage of total revenue discourages cost minimization. This contrasts with a competitive situationwhere fares are decided by the balance of supply and demand, as well as the operational efficiency of individual operators.

(b) Available capacity is often not put to best use, e.g., minibuses in Malawi suffer many empty backhauls and are not fully utilized outside the rush hours, because they are not allowed to charge a lower off-peak fare.

(c) Economic rents may be captured by some operators, because bus operators who have no obligation to provide rural services, or avoid doing so due to lack of enforcement,have lower costs on average than the major carrier, SM.

7.19 When evaluating applicationsfor tariff revision, authoritiesalso face inherent difficultiesin trying to keep up with changes in the cost structure of the industry in general, and with incorporatingthe cost differentialsof various operating circumstances faced by competing operators. Average operating costs vary by bus size and age, route characteristicsand demand patterns, e.g., a 12-year old country bus operating on poor surface roads in a sparsely populated area will have a higher cost profile than an express bus on a tarmac road in a high demand area. Average load factors, which vary from 40 percent to 80 percent, also affect the cost per seat. Annual kilometers per bus (quoted between 60,000-150,000km per year) also affects the impact of fixed costs. The range in costs quoted by the bus industry, e.g., from MK 3.0/bus-km to MK 9.0/bus-km, could be attributed to such differences in operating costs, although inefficientmanagement could also be an important contributoryfactor.

7.20 A further problem reported by bus operators is regulatory lag. The delay in tariff approvals has increased steadily, from an average of two months in 1986 to four or five months in 1988/8f. Tariff increases cannot be retroactiveand frequently are less than required for full compensation. Between 1985 and 1988, the cumulative domestic inflation rate amounted to almost 90 percent, compared with cumulative bus tariff increases of 70 percent. Overall, the industry asserts that the delays and uncertaintiesinherent in the present system, coupled with inflation,have had a serious negative effect on internally generated cash flow with subsequent implicationsfor asset replacement and expansion. Howzever,these claims could not be verified, the financial accounts of private owners being confidential.

7.21 The fare regulation system is based on the submission of tariff revision applicationsby bus operators, individuallyor - 69 -

collectively,to RTD. Although each operator has the opportunity to submit rate applications,in practice most rely on the submissions made by SM. Operators report considerableconfusion over the principles to be used in establishingthe appropriate fare.

D. Other Constraints

Duties and Surtaxes

7.22 The bus industry, along with many other transport operators, considers the level of duties and surtaxes to be one of their biggest problems, contributingto the high cost of equipment and operation. As in the case of road freight haulage, almost all transport inputs are imported (apart from local labor costs). Thus the impact of import duties and surcharges on bus operationalcosts is significant,estimated as ranging up to 40 percent of recurrent costs and 10-15 percent of operating costs. The present level of duties and surcharges can effectivelydouble the c.i.f. cost of equipment and parts and thus increase the fixed cost component to be covered by operational revenues. Tires carry duties of 35 percent on c.i.f. cost and a tax of 35 percent on c.i.f. and duty combined;most parts carry duty and surcharge of 45 percent and 35 percent, respectively;and vehicles, incluling buses, carry 40 percent and 35 percent, respectively.

7.23 Given the incentive structure,one outcome has been the preference to import chassis and have them 'bodied' locally. This results in duties and surcharges of about 10 percent on the chassis and 35 percent on cost of bodying, compared with charges of about 90 percent on c.i.f. cost to import a complete bus.101 Another impact has been the importationof reconditionedvehicles by the major operator, and similar demand by other operators. A negative outcome of the policy has been deferred maintenance and use of tires that have been retreaded more times than recommended.

Access to Credit

7.24 A first-time entrant into the bus transport industry can expect problems obtaining external financing, but existing operators also indicate that their ability to expand is constrained. The three traditionalchannels, i.e., internal cash generation, loans from the financial sector, and dealer financing, all have problems, and the resultant dependence on equity alone has discouraged entry and contributed to firms quickly going out of business due to under- capitalization. Most lending institutionsare cautious when approaching the transport sector, because buses and trucks, as "moving property' or 'wasting assets", are not considered to be collateral; real estate or gold is preferred. At the same time, signature loan limits are reported as low as MK 5,000, compared to reported capital costs per bus of MK 275,000 and above. Another disadvantage to the transport sector, as far

10/ In the _ase of buses manufactured in PTA countries,duty and surtax ould be considerably less based.on the percentage of total equity manufactured in PTA countries. - 70 -

as financing is concerned,is the seasonal nature of bus revenues and their effect on reliabilityof repayment schedules. The reluctance to finance used or reconditionedvehicles also has meant that entrepreneurs have been unable to explore this potential avenue for cost savings.

7.25 As a result of the perceptionof high risk, some development institutions,Indebank for example, require owner participationas high as 35-50 percent of the amount to be financed. The commercial banks offer only short-term loans (3 years or less, 16-18 percent per annum) and only to preferred clients such as SH and the other big firms. Other institutionsset up to deal especiallywith small businesseshave loan limits below what a bus operator would require. A start-up situation would require at least MK 900,000 for a minimum of three buses. Minibus prices are also relativelyhigh, ranging from about MK 80,000 to MK 90,000 (15-seat),to about HK 130,000 (26-seat). LFC, which has successfullychanneled funds to the road freight transport sector by adapting to fit the circumstances,already has 50 percent of its portfolio in transport and considers that additional lending to transport to be overextensionin that market segment (para 6.26).

High Cost of Vehicles

7.26 The relativelylarge capital outlays required for start-up of a bus company, plus the limited access to affordable financing,has meant that the bus industry in Malawi, unlike in other countries, is not a "first generation"employment opportunity. Aspiring entrepreneurs have to rely on funds obtained from pensions, tobacco farming and other family resources as initial capital, which necessarily limits entry. Further, as far as existing operators are concerned, the combination of limited access to credit, and regulated fare levels reportedly set by GOM to reflect its v4 ew that fleet expansion should not be financed from route revenues,makes it difficult for operators to generate sufficient funds to cover replacementand expansion needs.

7.27 The bus industry is affected by the same dealer markups that affect road freight hauliers. Average dealer markups are relatively high. Although the markups vary widely, a typical margin on faster moving items, e.g., tires or common parts, could be about 35-40 percent on c.i.f. cost, with higher margins for less frequent purchases. For instance, SM estimates that it saves almost half of the c.i.f. cost by directly importing its tire requirements. The dealers cite several factors for the high markups, includingthe diseconomiesof scale given the small market size, the cost of holding inventory and various financial guarantees required by external suppliers. Furthermore, current margins are lower than pre-liberalizationlevels and are expected to reduce further.

E. Rural Passenger Transport

7.28 Passenger transportationin the rural areas is beset with a number of special conditionsin addition to the various industry-wide challenges that have been identifiedbefore. Effectively all transport - 71 - in the rural areas is on unpaved roads that are at various levels of maintenance. Operation of motor vehicles on such roads entails significantlyhigher operating costs and shortened life of the units. Estimates provided by operators for overall operating costs in the rural areas are, on average, at least 50 percent higher than those for tarmac operation. Further, road deteriorationduring the rainy season renders many areas impassible. Demand for service in the rural areas also is significantlymore cyclical than on the intercity and urban routes, and the shortage of cash income in the rural areas places some constraint on the ability of people to pay even the fares charged at the current artificiallysuppressed levels. It is estimated that in 1978 there were 35,400 rural population for each bus allocated to the rural areas, and that by 1985 this had risen to 49,500 rural population per bus.

7.29 Various proposals have been made in the search for methods to lessen the severe shortage of rural passenger transport. The Rural Transport Pilot Project, a component of the Bank's Infrastructure Project (Cr. 2069-MAI), is sponsoring the development and operation of combined goods/passengertransportation in specially adapted vehicles in five areas (Phalombe,Neno, Rumphi, Mitundu and a Central Region location). This UNCDF-financedundertaking, resembling an upgraded and legalizedmatola, required special authorizationunder the specific authority granted to the Minister in Section 81 of the RTA. Although the vehicles and spares of this pilot project are receiving an exemption from the payment of duties and surtaxes, calculationscontained in the appraisal report estimate that the duties and surtaxes on the vehicles and three years' spares would have been the equivalent of from six months to two years projected net income per vehicle, depending on the route considered.ll/

7.30 These and other estimates suggest that operators of motorized transport in rural areas cannot and will not be able to cover their costs at affordable fare levels. In many of these areas, improved non-motorizedtransportation may be better suited to the demand patterns and cost structure of rural areas.12/ What is required is an intermediatelevel of transport between head-loading,which is expensive in time and energy, and small trucks. Such non-motorizedvehicles could include bicycles and bicycle-trailersthat can be hooked to bicycles or pushed separately,or farm vehicles suitable for use on bush tracks that have a wheel at the center to support the weight of the load. Barriers

ll/ Rural Motorized Transport - Malawi, prepared by Sibald International,Ottawa, for United Nations Capital DevelopmentFund, (Project No. MLW/87/C03),July 1990.

12/ See, for example, Kanyhama Dixon-Pyle, 'A New Look at Transport in the Rural Areas of Developing Countries,"International Labour Organisation (ILO), December 1987; and 'Local-LevelTransport in Malawi: The Case for Intervention,"ILO, June 1988. - 72 -

to use of non-motorizedvehicles include lack of finance, import duties, and absence of local manufacturingfacilities for both the vehicles and spare parts, as well as social resistance.13/ Lack of suitable tracks and roads can also present a barrier, but this generally is not the case itnMalawi with its excellent system of earth and gravel roads.

7.31 With respect to motorized vehicles, other, not mutually exclusive,possibilities for assisting bus operators to reach levels of reasonable financial return for rural operations include the relaxation of tariff-pettingrestrictions and/or provision of some type of kilometers-operated-basedaid in the form of a targeted subsidy such as a rebate of some portion of the duty on fuel or some other consumable that can be related directly to a particular operation. However, such schemes are difficult to administerand enforce, and thus should be considered only as a last resort. Easing of entry, route and vehicle type requirementsalso could permit pooling of resources and joint use of vehicles, and thereby encourage voluntary entry into the rural transportationmarketplace. It is probable that no single answer to the rural passenger transportproblem exists and that a collective package of actions will ultimatelybe required.

P. Recommended Actions

7.32 Road passenger transport is a relativelycheap mode that can access communitiesall over the country unlike rail, lake and air transport services. In view of the perceived advantagesof bus transport over other passengermodes in Malawi, as well as the substantialpublic sector subsidies required by the other modes, it is necessary to reduce and ultimately eliminate constraints to the smooth running of the sector. The many claims on available public sector financing and human resources,as well as the Government'swillingness to encourage free market operations,make it timely to encourage private sector participationand introductionof innovativeservices that may be lower-costthan existing alternativesin certain markets.

7.33 Examples of African countries where the private sector operates road transport services with no non-safety related regulation by the authorities include the intercity bus services in Ghana and the minibuses in Nairobi, Kenya. Private bus companies currently also operate alongside the parastatal bus company in Dar es Salaam, Tanzania. Although observers indicate that this has led to better service and wider coverage, there is little prior formal information to provide a fbefore and after* comparison. One better documentedexample is that of Sri Lanka where, in order to alleviate overcrowdingand inadequate service, private operatorswere allowed to enter, largely free of fare and route regulation,alongside the public bus company. As a result, ridership increased significantly,even L: the face of increased fares.

13/ A pilot scheme to develop and finance non-motorizedvehicles is underway in Ghana, as part of the First Transport RehabilitationProject (CR 1858-GH) effective 1988. A similar project is under preparation in Madagascar. - 73 -

This was partly due to the substantial increase in capacity and bus frequency stimulatedby deregulation.

7.34 In the Halawi context, the focus will need 4o be on removal of both direct and indirect barriers to entry, including the dearth of transport administrationskills, the high level of duties and surcharges,and limited access to credit. Any program of deregulation must be well crafted. If, for instance, fares were deregulatedwithout sufficient entry, there would be a high risk of collusion among the major existent firms. When deregulationwas introduced in Santiago, Chile, potential benefits were reduced due to suspected anti-competitive practices of some route associationswho colluded in setting fares much higher (about 100 percent higher) than estimated operating cost increases (about 20 percent). Accordingly,these associationsdid not experience the patronage increase observed in those areas where collusionwas not practiced. In order for deregulationto be effective, there must be competition.

7.35 The development of a policy that would permit the integrationof the economic viability, adaptabilityand responsiveness exhibited by matola, giving due concern to the legitimate issue of safety, into the rural transportationinfrastructure would represent a significanttransportation breakthrough. Such a policy would need to provide legal access into the passenger transportationmarket for services similar to the dedicated' matola operators now functioning throughout the country. The primary concern of such a policy would be safety and financial responsibilityfor injury or damages. The regulationsin this regard should not be so strict as to discourage unduly conformity with the regulations. In the rural areas the vehicle of choice would probably resemble the specializedcargo/passenger vehicles being developed under the Rural Transport Pilot Project. In the urban areas and along the tarmac roads, the vehicle of choice would primarily be the minibus with few mixed vehicles as described above. The general elimination of route and fare controls, along with an improved credit climate for transport vehicle acquisition and a rational policy towards imports of second-handvehicles, could provide the incentives for a rejuvenatedminibus industry.

7.36 The present inability of the road passenger transport industry to respond to the demands being placed upon it are rooted in a number of areas within Halawil'sgovernmental and institutionalfabric. The successful developmentof a responsive road passenger transport system is not a problem soluble by a single ministry or institution. To begin the process, it is recommendedthat HOTC, in conjunctionwith OPC, organize and provide the leadership for the developmentof a coordinated strategy in support of national passenger transportationrequirements. The strategy should be clearly documented with unambiguous assignment of the responsibilityfor action. Among the items to be considered as components of the coordinated strategy are: - 74 -

(a) In the overall reworking of the RTA for road transport, eliminate in a phased manner all non-safety related regulationof the road passenger transport industry regardingentry, exit, routes, vehicle sizes and fares.

(b) Implement a phased reduction of fare-making regulation,e.g., over a two or three year period, to allow small carriers enough time to learn to evaluate their own cost of operation. The use of expanding zones of rate freedom over the transition period is one established approach to this process. This would involve estab_..ishingover the transition period a series of expanding fare ranges based on a percentage of the established fare at promulgationof the regulation. These zones then provide wider and wider zones of fare incrpase or decrease within which changes may not be challenged except as anti- comnetitive. At the end of the transition period the only basis for challenging any fare change would be anti-competitiveness.

(c) Concurrent with (a) and (b) above, officially abolish the PRP so that the existing fare and service allocation discriminationmay be eliminated.

(d) Provide training opportunitiesto assist operators in taking advantage of a competitive and unconstrained operating environment.

(e) Investigateopportunities for cost reduction and revenue enhancement,such as optimal maintenance practices, efficient loadings, appropriate capacity, and disseminateto the industry at large.

(f) Implement the rural transport pilot project as intended using small joint-use cargo/passenger vehicles in rural areas.

(g) Legalize matola operations,with the minimum level of safety-relatedregulation required.

(h) Consistentwith the Ministry of Local Government's program to develop and facilitate use of non-motorized vehicles in rural areas, investigatethe potential for a pilot credit scheme to supplement the current program and assist communities and in acquiring such vehicles.

(i) Reduce the duty and surtax burden on road passenger transport operators in a phased manner consistent with the government'soverall program to reduce domestic protection. - 75 -

(j) Implement the recently announced decision to permit the Importationof used and reconditlonedbuses. This will entail agreement by the responsible agencies of government to verify the road worthiness of previously owned commercial passenger vehicles before their importation into Malawi. Given the cost structure of the industry, the importationof such vehicles is essential to the rejuvenationof minibus operations and general road passenger transport expansion. - 76 -

VIII. STRATEGY AND ACTION PLAN

8.1 The cost to the Malawian economy of disruptions and inefficienciesin the transport sector continues to be high. This is particularlytrue given Malawi's landlocked status and heavy dependence on imports, and it is clear that efforts to broaden and erhance the country's productive capacity have been hampered by the inadequacy of the transport options available. As many of these problems are a product of external forces, the country has been forced to plan for a range of scenarios and to make decisions directed towards minimizing risk as much as cost reduction. As the previous chapters indicate, GOM has managed the sector well given the highly uncertain and constrained environment.

8.2 Initially it appeared that the external disruptionswould soon be resolved, and thus the strategy adopted was to sustain the full capacity of the system until a return to normalcy. However, the disruptions remain and the burden imposed on the economy continues to worsen. Given the limited resources available,it is now time to restructure the sector and in so doing direct funds to those areas where maximum value can be obtained. This will entail making effective use of existing capacity, encouragingthe private sector to expand its level of operations in freight and passenger transport, and taking the necessary steps to attain commercial viability by all parastatalswithin a reasonable period of time. Although some investmentwill be required, to a large extent the changes are policy-related,and best tackled through regulatory reform and enterprise restructuring. A matrix that identifies the recommendedactions, type of reform and purpose, priority, and agency responsible,concludes this chapter. Key issues are summarized below.

8.3 The restructuringplan for MR is directed towards enabling the railway to become fully commerciallyviable, defined as an adequate ROC after meeting all variable and fixed costs and providing for depreciationadequate to finance all future replacement of assets. A plan is proposed that provides initially for MR to break even and subsequentlyto generate an adequate return to the economy. Although there would be some latitude for increasing tariffs once efficient and reliable operations were provided, much of the gain must come from enhanced productivityand a scaling down of MR's assets base. The strategic plan to do so would involve a restructuringof products and operations, organizationand staff, physical resources, tariffs and capital in line with realistic traffic forecasts and organizational goals. In so doing, difficult decisions will be required, including the phasing out of mixed trains, gradual eliminationof passenger services once appropriate alternativesare provided for, relegation of uneconomic sections of the network to siding status, and substantial reduction in staff.

8.4 Some restructuringwill also be required for LS to become commerciallyviable, in particular to provide for greater autonomy with respect to tariffs, routes, marketing and management now that the NTC is - 77 - about to become operational. Immediate action is required to stem the large losses accruing to the passenger services. As a first step, the Chauncy Maples should be retired, and service eliminated along the north-south leg where passengers could be served at less cost by road transport. The Ilala and Mtendere could then be uksd to service the islands and those villages without alternativetransport in the north and south, respectively,with considerableoperating cost savings, particularlyfuel. As a second step, suitable replacementvessels, such as landing craft, should be acquired. Such vessels, if sized and scheduled correctly, could potentiallyprovide more frequent and safer service than the present vessels which are no longer suitable for the type of service and areas served.

8.5 The overall objective for QM, as for all the other transport parastatals, is commercial viability. Although there are a range of important issues that pertain to management autonomy and the ability to operate according to commercial principles, the most immediate issue for QM is the equipment replacementplan. Given that delivery has already been taken of one new Boeing 737-300, it is recommendedthat QM maintain the jet fleet on a one-aircraftbasis and replace the BAe 748 with another turboprop aircraft. Although there would be some operational inconvenienceassociated with the one jet-aircraftfleet, the severe financial penalty associatedwith the second aircraft would far outweigh the benefits. The purchase of the second aircraft should be deferred until a sufficient volume of additional traffic is assured on existing or new routes to support an economicallyviable operation.

8.6 The key issues with respect to road transport are institutionaland regulatory. Although road transport has generally been managed well and without excessive control, there is an urgent need to replace the increasinglyoutdated and cumbersome RTA with a clear, transparent set of regulations that provide for a safe and efficient industry, without economic restraints. For road freight transport key actions would be to replace the current domestic RSP with a commercial operating permit granted to all owners of Malawi-registeredgoods vehicles, and eliminate all controls on domestic transport rates. The same actions would pertain to road passenger transport, although given the present lack of competition in the industry, the elimination of non- safety related regulationwould need to be in a phased manner. Consistent with the redefinitionof activities away from economic control, MOTC also would need to be reorganizedto strengthen its management, planning and monitoring capacity.

8.7 In view of the range of policy reforms required, IDA's future strategy for transportwould be to provide the donor coordination and assistance needed to effect such reforms. As there are few pressing investment needs, the central policy issues could appropriatelybe addressed under a possible new adjustment credit, with a parallel technical assistance effort to help formulate and implement the policy reforms and institutionalchanges. This technical assistance could also help to determine a multi-year program of investments and technical assistance needs for the transport sector. Such investmentsand technical assistance could then be aggregated in a future project for which IDA would assist GOM in mobilizing funds from the donor community. - 88 -

TABLE2.2

Wekly MalawiAir ServiceFrequency From Ulongwe

Air Malawi ForeignFlags Nonstop Onestop Nonstop OneStop TwoStop

Domestic Blantyre 19 1 Karonga 2 MonkeyBay 1 Mzuzu 3

Total 23 3 i 0 0

Regional AddisApAba 2 Dar/eg4Salaam 1 Gaborone 1 Harare 4 3 Johannesburg 4 3 Lusaka 2 2 Nairobi 2 1 1

TotalRegional 12 1 12 1 0

Intercontinental Amsterdam I I Paris 1 London 2

Total Intercontinental 0 0 0 4 1

Total 35 4 12 5 I

Source:Official Airline Guide January 1, 1991 Completion Area of Reform RecommendedAction Content/Purpose Schedule OperationsRestructuring i. Graduallyincrease the share of To increaseproductivity of FY 1993194 block, throt-ghand dedicated locomotivesand other assets. trains. ii. Terminate trains in the users' . To avoid freighttrain delays. FY 1991192 premisesinstead of railway yards z as far as possible. iii. Switchover to Directed Track . To enable staff reductionand FY 1992/93 g Maintenance. improvetrack quality. o iv. Maintenanceof locomotivesto be . To reduce maintenancecost and FY 1991/92

basedon kms and not hours. improve locomotivereliability. __u

Resource Rationalization i. Restrictthe assets on MR to those . To reducemaintenance and FY 1992/93 required for efficientoperation. operatingcost and improve 0 utilizationof assets. , Iz ii. Operate the fleet of locomotives lc and wagons as required and sellAhireout/mothball. iii. Restrictinvestment to the . To reducedepreciation charges FY 1994/95 l- minimumrequired. and improve relum on capital r employed. o iv. Close commerciallyinviable . To reduceoperating costs. FY 1994/95 b0 stations. CO v. Consolidatemaintenance . To attain advantagesof increased FY 1994/95 l workshopsand facilities. scale of operationsand reduce costs.

OrganizationRestructuring i. Conducta detailed reorganization . To define the positionsto be FY 1991/92 and redesignstudy. abolished/merged. ii. Implementrecommended . To reducecosts and improve FY 1992/93 l______organizationdesign. managementeffectiveness.

Staff Reduction i. Graduallyreduce staff to 1,000. . To reducecost and improve FY 1994/95 l ______productivity.tivity. Completion Area of Reform RecommendedAction Content/Purpose Schedule

Financial Restructuring i. Tariff restructuringafter internal . To improve revenues. FY 1992193 study. ii. Revaluationof assets employedon . To ensure adequacyof FY 1991192 MR. depreciationfor replacementof assets. iii. Improvedcosting system to enable . To improveprofitability and FY 1991/92 better controlof assets utilization operatingratio. and other importantratios. 0 Systems Improvement i. Designand implementthe . To improve mnanagementand FY 1992/93 4 following: effectivenessin all aspects of .- DecisionSupport System management. - MaterialManagement System to 0 - OperatingAudit

- QualityAssurance System. _ *

OperalionsImprovement i. AchieveOperation Improvement . To inc'-ou,eassets and manpower FY 1992193 Targets as per Annex 6.1. productivity. l_>__

Staff Developmentand i. Conductmanpower study. . To improvestaff productivity. FY 1992/93 t Motivation ii. Implementan appropriatehuman ltE resourcesdevelopment package. a4 iMi. Implementincentive scheme. v

Railway-Government i. MR and GOM to sign a . To clarify long-tennobjectives of FY 1991/92 Understanding Memorandumof Understanding MR and facilitatetheir achievement. lA

ImplementationStrategy i. Constitutea high-levelcommittee . To avoid slippagein the FY 1991192 for coordinatingthe implementationof the implementationof the RestructuringAction Plan. RestructuringAction Plan. ii. Constitutea cell for managingstaff . To enable reductionof staff and FY 1994/95 and assets reductionprogram. assets in an efficient manner. AIR MALAWIACrION PLAN

Nature of _ Implementing Reform RecommendedAction Purpose Priority Agency 0 ..I Regulatory i. Air Malawito continue to be given Improvecommercial orientation A MOTC, co completeautonoiny with regard to and accountability. Treasury n tariffs, routes and aircraft leasing. oz Organizational ii. Postponepurchase of the secondnew . Avoida near zero return on A MOTC 1-: 737-300. capital employed. iii. Implementa revised systemof . Effect better control on both A QM accountingto enable costs of airline & operationsand improve agency operationsto be segregated. profitability. I I iv. Review the current systemof . Reducecash outflowdue to A QM a CA scrutinizingbilling by other airlines. errors and differencein ' r interpretation. ; ' v. Developan improvedmarketing . Improveprofitability from A QM strategy. better utilization. ._ LAKE SERVICESACTION PLAN

Nature of Implenmenting 1so Reform RecommendedAction Purpose Priority Agency 1

Regulatory i. Lake Servicesto be given complete Improvecommercial orientation A MOTC o i autonomywith regard to tariffs, routes and accountability. l *0 and management. l Organizational ii. Passengerservices to be restructured . Prevent heavydrain on the A LS a to service only those passengersand economy. l l. : areas inaccessible by other modes. > iii. Evaluatefeasibility of low-cost . Provideessential services at the B LS I I alternatives,e.g., landingcraft. least cost. iv. Considerall ships and ports as . Improvecontrol and profitability A LS l separateprofit centers. and decision-makingprocess. v. Set norms of operationalefficiency . Cost reduc:ionand improved A LS l s'i and reduce staff accordingly. profitability. l i vi. MothballChauncy Maples . Cut lossesby not operatingan A LS u immediately. inefficientvessel. ROAD FREIGIIT ACTION PLAN

Natureof Implemnenling Rleform Recommended Action Purpose Priority Agency

Regulatory i. Replace the current domestic RSP with a . Improve domestic freight A MOTC commercialoperating permit grantedto transportcapacity with minimal all Me!awian registered vehicles. investment. '4 ii. Remove aUlcontrols on domestic . Enable rate setting in accordance A MOTC I transport raies after proper notification. wilh operating circumstances. 0 iii. Eliminate ilte differential in duty and . Encourage better and more A MOTC and MOF o surtax between vehiiclesand spare parts. timely maintenance. $_3 iv. lRegularizeMatola operation with . Improve passenger service in A MOTC o j> minimum safety-related regulation. rural areas. Institutional v. Undertake organizational study of . Strengthen management, A MOTC 10 MOTC and of organizational, functional planning and moniloring ability and legislative restructuring of RTD. of MOTC and RTD. c vi. implement rural transport pilot project . Improve passenger service in B MOTC t W (oint-use passeniger/cargovehicle). rural areas. vii. Reduce duty and surtax burden in a . Reduce transportationcost and B MOF phasedmanner consistent with GOM's facilitate entlryof trcks and " r program. tractors. t viii. Support the continued direct importation . Reduceoperating costs. A Reserve Bank n c of vehicles, parta and tires. V ix. Establish a development-oriented pilot . Provide access to credit for A MOF and I- revolving MK credit program. eAluipmentanid sliare parls. Operators U) Organizational x. Training and staff development of . Improve competitiveness of all A MOTC operators in areas of fare settiig, operators and improve Operators marketing and trip scheduling. utilization. xi. Investigate maintenance and operating . Reduce cost of transportation. A MOTC practices and generate guidelines for Operators efficiency improvement and cost reduction. xii. Plan and implement a procedure for data . Facilitate assessing tie health of A MOTC collection and construction of a road transportsector and transport Operators transportdata base. plauning. ROAD PASSENGER ACTION PLAN

Nature of Impking Reform RecommendedAdion Purpose Priority Agency

Regulatory i. Updateand rewrite the P.TAwith . Overall deregulation,clarity and A MOTC minimumof non-safety-related emphasison safetyand regulation. enforceability. ii. Implementa phased reductionof fare- . Removedistortions in fare-sdting B MOTC makingregulations except those and permit marketto function. o deemedanti-competitive. iii. Abolishthe Prime RoutePolicy. . Eliminatediscriminalion in fare A MOTC and serviceallocation. v iv. RegularizeMatola operation with the . Improvepassenger service in A MOTC 8 minimumrequired safety-related rural areas. so regulation.Pifl e Institutional v. Implementrural transportpilot project . Improvepassenger service in B MOTC a as (joinl-usepassengerlcargo vehicle) rural areas. vi. Reduceduty and surtax burden in a . Reduceitansportation cost and B MOF

phased mannerconsistent with GOM's facilitateentry of morepassenger #A. program. vehicles. vii. Investigatethe potentialfor a pilot . Supplementprograms to increase B Ministryof Loal so credit schemefor use of non-motorized passengerservice in rural areas. Covernment p vehicles. viii. Continueto permil importationof used . Quickroad passengertransport A ReserveBank and reconditioned'Vehicles. expansion. to Organizational ix. Trainingand staff developmentof . Improvecompetitiveness of all A MOTC a operators in fare setting, marketingand operatorsand improved Operators trip scheduling. utilization. x. Investigatemaintenance and operating . Reducecost of transportation. A MOTC practices,and generateguidelines for Opeators efficiencyimprovement and cost reduction. . 85 -

Annex 1 Page 1 of 3

MALAWI TRANSPORT SECTOR REVIEW - SELECTED ISSUES

Transport Costs Per Corridor Overseas Imports, Optimal SLtuation (in US$ per tonne)*

Destination Value TONS NAC DUR DAR NTC (US$Itonne) (1990) ROAD

Diesel BLANTYRE BULK 470 35 59 267 197 142 LILONGWE BULK 28 72 267 197 135 MZUZU BULK 7 148 267 197 95

Jet All Paraffin LILONGWE CONT 580 15 89 267 197 137

Petrol BLANTYRE BU.LK 540 17 82 267 197 144 LILONGWE BULK 14 95 267 197 136 NZUZU BULK 3 172 267 197 97

Fertilizer LILONGWE BAGS 270 25 140 251 246 200 !MZUZU BAGS 17 217 251 215 168

Iron & Steel BLANTYRE CONT 1900 2 187 293 233 251

Wheat & Flour LILONGWE CONT 190 7 15 308 226 226 BLANTYRE CONT 10 'J9 308 241 229

Pulp & Paper BLANTYRE CONT 1900 3 187 293 233 251

Salt LILONGWE BAGS 100 7 106 166 245 183 BLANTYRE BAGS 10 97 166 297 191

Maize BLANTYRE BAGS 80 30 137 251 297 203

LILONGWE CONT 2500 11 231 312 241 291 Other BLANTYRE CONT 37 223 352 256 293 MZUZU CONT 5 229 352 222 259

* Including a value of time of 0.06Z of the commodity value per day for Nacala, Durban and Dar as Salaam (road),and 0.182 for NTC.

Sources Economist's Working Paper, November 1990 - 86 -

Annex 1 Page 2 of 3

MALAWI TRANSPORT SECTOR REVIEW - SELECTED ISSUES

Transport Costs Per Corridor Overseas Imports, Optimal Situation (in US$ per tonne)*

Exports Origin Value TONS NAC DUR DAR NTC (US$/tonne) (1990) ROAD

Sugar SALIMA BAGS 490 10 158 181 204 230 CONT 8 167 200 175 187 BANGULA BAGS 15 167 169 217 260 CONT 12 168 184 189 196

Tobacco LILONGWE CONT 2300 30 273 330 313 360 B.B. 30 232 348 313 338

Tea BLANTYRE CONT 1150 34 266 296 287 301

Groundnuts LIWONDE CONT 290 2 158 193 185 207

Coffee BLANTYRE CONT 2300 7 178 200 196 260

Cotton Lint BLANTYRE CONT 1540 2 243 293 286 300

Other LILONGWE CONT 2700 1.5 220 240 219 291 BLANTYRE CONT 4.5 211 240 235 293

* Including a value of time of 0.062 of the commodity value per day for Nacala, Durban and Dar es Salaam (road),and 0.181 for NTC. - 87 -

Annex 1 Page 3 of 3

MALAWI TRANSPORTSECTOR REVIEW - SELECTEDISSUES

Transport Costs (Land, Port and Sea) as Percentage of the Commodity Value in Two Scenarios

Present Situation All Routes Optimal Commodity (Scenario0) (Scenario IV)

Exports:

Sugar 36.0 35.1 Tobacco 14.9 12.2 Tea 24.2 23.2 Groundnuts 67.6 57.9 Coffee 8.7 8.6 Cottcn Lint 19.4 18.1 Produce 14.2 14.2 Other 6.1 6.1

Total Ewports 15.9 14.4

Imports:

POL 50.8 34.9 Fertilizer 64.7 54.5 Iron & Steel 8.2 7.8 Wheat & Flour 116.5 107.4 Pulp & Paper 10.6 8.8 Salt 172.4 116.3 Maize 139.2 111.5 Coal & Cokes 89.0 89.0 Lime/Cement 89.0 89.0 Other 9.2 7.4

Total Imports 23.0 18.2 - 88 -

Annex 2 Page 1 of 3 MALAWI TRANSPORTSECTOR REVIEW - SELECTED ISSt'Uv

Forecast of exports of Malawi, 1990-2010 (tonnes '000) High growth scenario

Commodity Base Year 2000 2010 total overs, total overs. total overs.

Sugar 50 45 46 45 43 43 Tobacco 60 59 81 79 108 107 Tea 40 34 46 40 53 45 Maize 0 0 0 0 15 5 Groundnuts 2 2 10 9 18 16 Pulses a) - - - - - Coffee 4 4 6 6 9 9 Cotton 2 2 2 2 2 2 Produce 8 0 11 0 16 0 Other 27 6 40 9 59 13

Total b) 193 152 242 190 323 240

a: Included in other exports bh Individual figures may not add up to totals due to rounding

Forecast of exports of Malawi, 1990-2010 (tonnes '000) Low growth scenario

Commodity Base Year 2000 2010 total overs. total overs, total overs.

Sugar 50 45 46 45 43 43 Tobacco 60 59 72 71 87 86 Tea 40 34 44 38 48 41 maize 0 0 0 0 15 5 Groundnuts 2 2 10 9 15 13 Pulses a) _ _- - _- Coffee 4 4 5 5 7 7 Cotton 2 2 2 2 2 2 Produce 8 0 10 0 13 0 Other 27 6 35 8 44 10

Total b) 193 152 224 178 272 206 as Included In other exports bi Individual figures may not add up to totals due to rounding - 89 -

Annex 2 Page 2 of S

MALAWI TRANSPORT SECTOR REVIEW - SELECTED ISSUES

Forecast of imports of Malawi, 1990-2010 (tonnes '000) High growth scenario

Commodity Base Year 2000 2010 total overs total overs total overs

POL a) 120 120 164 164 225 223 Fertilizer ?.35 42 178 55 235 73 Coal & coke 13 0 13 0 13 0 Iron & steel 22 2 33 3 48 5 Wheat & flour 22 17 27 21 33 25 Pulp & paper 8 3 13 5 20 8 Salt b) 17 17 21 21 25 25 Lime & cement 22 0 33 0 48 0 Maize 150 30 65 13 0 0 Other 132 53 195 78 289 116

Total c) 641 284 741 361 937 478

a: For practical purposes POL imports have been treated as if originatingall outside the region b: Salt imports originate in South Africa but are treated as overseas because of the (future)possibility of imports via Nacala, by rail and coastal ship Cs Individual figures may not add up to totals due to rounding - 9o -

Annex 2 Page 3 of 3

MALAWI TRANSPORT SECTOR REVIEW - SELECTED ISSUES

Forecast of imports of Malawi, 1990-2010 (tonnes '000) Low growth scenario

Coamodity Base Year 2000 2010 total overs. total overs. total overs

POL a) 120 120 146 146 178 178 Fertilizer 135 42 161 50 191 59 Coal & coke 13 0 13 0 13 0 Iron & steel 22 2 28 3 36 4 Wheat & flour 22 17 25 19 28 22 Pulp & paper 8 3 11 4 14 6 Salt b) 17 17 19 19 22 22 Lime & cement 22 0 28 0 36 0 Maize 150 30 90 18 0 0 Other 132 53 169 68 216 87

Total c) 641 284 690 328 735 377 as For practical purposes POL imports have been treated as if originating all outside the region bt Salt imports originate in South Africa but are treated as overseas because of the (future) possibility of imports via Nacala, by rail and coastal ship ct Individual figures may not add up to totals due to rounding nIN

*ASICDATA MAWI RAILWAYS " " | BAS DATAAM KEYPERfORtLCE UN ATORSFOR THE SLAWI AND SOE NECW48ORING RAILWAYS n

MALAWI Z-MBABWE TANZANIA ZAMBIA fso * UR(tt94) MR(1975) MR(1WO) NR (19751 M (I91 UR 1971SD CA751 S DATNAASIC UR UR NRZ AS% AS % TR AS % AS% ZR AS % AS % £ p N PERFORMANCE INICATOR NOTATION UtTS (-jili (II7519t a OFNRZ OFNR JIOSO9 Of TR Of TfIt 9J OFZR OFZ9 : 0 A SICDATA . t, I. ROUTELENGTI R. KM 789 789 276D 29 29 2584 31 31 1278 62 62 w Z FREIGHTTRAFFIC T,. TONNES T MILLION 0.35 1.318 15 2 9 1.2 29 110 465 8 28 NET-TONNEKM TK MLION 68 200 6750 1 4 1380 6 27 1342 S 22 3 PASSENGER7RAFFIC PK MILtlON 115 88 710 16 12 1200 10 7 422 2J 21 O 4. STAFFSTRENGTH S NUMBER 30M 4054 1600 26 2515000 27 27 8489 47 48

P.ERFORANCE INDICTOR 00 STAFF PRDDICTMTY n0 *NTKS l0ow) 17 71 421 4 17 72 24 99 158 11 45 .-04 (NTK*.PtS (000) 45 93 468 10 20 152 30 61 207 22 45 A S. TRAFFICENSITY NTKL 1000) 0.087 0.368 2.446 4 15 0.418 21 88 1050 8 35 Po 7. V. FREHT HAUL AFh IM ETERS 195 220 450 43 49 900 22 24 289 G8 76 to I 8. AV.PASSENGERJOURINEY APJ KILOMETERS 87 72 228 29 32 392 I? 1- _ 224 __ 32

NOTATIONS: NRZ NATIONALRAILWAYSOFZIMBABWENTK - NET-TONNE-KILOMETEftS zn O ZR - ZAM8ARAILWAYS PK - PASSENGER-KILOMETERS 1 Tfl - TANZANARALWAYS RL - ROUTELENGTH r MR- MALAWIRAILWAYS - 92 -

Annex 4

TRANSPORTSECTOR REVIEW - SELECTEDISSUES Malawi Railways Current Estimatesof MR Assets and Depreciation

X~ ~~. gi Csg

1**8 82. 8

40' Is*1 s sill jX Xz .

ec iii

g a k | I ,j#X# ubti}E.g0j l~~~~ MALAWIRAILWAYS ONCLUODIG LAKE SERVICES) COST STRUCTUREAND TREND (1 95-1989010)

cost AmountsIn UK 000 ElementCostis %of Totll Cost Element igssise 168618? 10|1716 19861ow 108918 05186 10"887 1087188 1988 169801 e.g Staf- Related . I. Salads. Waps andMowanc 6649 7623 8745 8733 11068 29 31 32 33 35 n M. Personnel-Socal 862 839 983 910 1162 4 3 4 3 4 ft iL ieronnel-tndect 331 386 539 530 629 1 2 2 2 2 n b.Accomodatlon 1287 1502 1538 1825 2123 6 6 6 7 7 o Toal 9129 10350 11805 11998 14982 40 42 43 45 48 E. Dlea FueL 5183 5727 5727 5275 6012 22 23 21 20 19 n c c| 1D C. Repaiaand Maintenance 2270 2452 3352 2637 2953 10 10 12 10 9

0. OtherExpendfture 1200 1216 1740 1484 2602 5 5 6 6 8 CD 0,0C) E. Overheads . L Admnbutsraon 683 678 1080 1070 1001 3 3 4 4 3 L Wan lnterchange 1002 869 0 0 0 4 3 0 0 0 I FA ML AndkluyVehlde 602 522 757 909 684 3 2 3 3 2 _ t Total 2267 1869 1837 1979 1685 10 8 7 7 5 F. Tot OperatngCost 20069 21614 24461 23373 28234 G. Depreciaton 2982 3148 3119 3231 3181 13 13 11 12 10 hL Totl Cost 23051 24762 27580 26604 31415 100 100 100 100 100 Source:MR Coporate Plan and Annual Report and Acoounts

CA MALAWI RAILWAY OPERATIONAL PERFORMANCETARGETS

PERFORMANCE Actual Targets INDICATOR UNIT 1989190 1990/91 1991192 1992/93 1993194 1994/95

1 Operating Ratio % 242* 230* 226 108 84 64 2. Staff Productivity NTKStaffc - Staff Strength No. 3998 3998 3596 2514 1758 960 o - NTK 000 65048 66404 67760 127419 148000 169000 tl : - NTKIStaff 000 16 17 19 51 84 176 9) 3. Motive Power Productvity o-. z - Availability % 77 77 77 78 79 80 x -Utilization loco kn/Loco day 82 100 150 200 250 300 t .- W 4. Wagon Productvity - Wagon Availability % 96 92 92 92 92 921 ' -el -Wagon Utlizaflon WkmlWagonday 19 25 40 60 70 75 3 I .- 5. Track Utilization - RouteLength Km 789 789 789 477 477 477 u - Track Density NTI/km (Million) 0.08 0.08 0.09 0.27 0.31 0.35 fam m 6. Operating Efficiency 6si - Av.NetTrailing Load Tonnes 106 112 200 400 600 800 i -3 - Av.GrossTrailing Load Tonnes 335 335 500 600 900 1200 0 0 - Gross To Net Ratio Number 3.16 3.00 2.50 1.50 1.50 1.50 o - U) - AverageWagon Load Tonnes 20 25 26 30 35 38 Ca - Derailments Number 83 60 40 20 10 0 t%

* Adjustedfor repiacementvalue based depreciation MAt AWl RAILWAYS e CURRENTESTIMATES OF MR'SUSABLE ASSETS AND DEPRECIATION rt . Expected Residual Current CurrentYearly Dep. Asset Age of Life of Life of ValueJUnit Valueof at Current U Type Unit Quantty Asset NewAsset Asset NewAsset MR Assets Prices i (Years)_Y__ (Yoars) (Years) (US$Mill.) (USSMill.) (US$ Mill.)

Track Km 477 20 60 40 0.20 63.60 1.59 o w Locomotives x n - MainUne No. 15 14 30 16 2.00 16.00 1.00 i 0 - Shuntng No. 6 20 30 10 1.50 3.00 0.30 Rolling Stock C - Wagons No. 624 20 40 20 0.06 18.73 0.94 - Coaches No. 0 20 40 20 0.30 0.00 0.00 - Misc.*G No. 30 20 40 20 0.06 0.90 0.05 > Maint.Equip. Lumpsum 5 15 10 20.00 2.00 W:M Total I_ I 122.23 5.87 K D CA0 Notes: M 1. Brake vans. AccidentRellef vans, Cattle Wagonsetc. 'f. R. ResidualIlle estimates are very broad and not computedfrom asset inventories CA Ul. Estmatesof newunit asset values are general estimates and not specificto MR n M.' hlw4_____IM__I S1 t 1 tm t t n

PU*W4IRmA JN 1A719im 14.408 15.20.US 185MM 16.9n" 17.650 18.51967 19.42809 20.37.6 F Cup P AM 7J4O5M0 7RUN421 Ms sam 92613 971.13Q 1.018.512 1.06M.436 1.120.82 TedTi tdR _ 14,013. 12,211 S1M.2 16*,7081 n ,Ju 1 ,22 11,, 2114H43 21 t,6 C dudanEmP_ .A1,97,5 *1.15t.612 -1,21815 .1.2845 -1.347.10 -1.412,643 -1.4011.4 -1,514.016 -1163134 F Rd si mumin 134.78,12 l407. 14 7 15,31W1 16417,7 lo"" 18.6Mt 10MA2 3.8M,S1

Uilw Pw D70 7A0 77D 70 700 70 7D0 700 780 7.0 0 MockHo Fbn 2A. 2,55S 2,665 2.555 2.SCS 2.55S 2.565 2,56S 2.555 OildOPu CONNP* *How 24 25 2.58 2548 2,64 2.548 2,48 2.54t 2.54 1hugi_m 84000W 616.000 756Jm 00 7W0 650 812.0W 57200 54000 512.0 coa 7.394.140 7.32.140 7.8140 7.210.140 7.162.40 7.122.140 7.MZ140 7.00140 7.022Z40 0P

MMckHua Fblou 1.351 et351 1.351 1,351 1,35IAI.IS5 1,361 1.5 I:S 0 COUPhhBl kHOhW 91S 918 Oil 713 713 713 713 713 713 0 Pl hisasms 1600 16M0M 1IOW 120.000 116,00 11200 106.00 108.000 104.000 * Cask 1 18 1.256.218 1. s18 1,03.3 1.0793 1.07563 1.07163 1,07 3 1.0673 0P

P ToedEupenses(JsVl8o 9,op) 8,63.358 1182,358 6,522,258 8.29t6241,3 6.197403 815343 6121t6 6.M,0 0 Cst-tdb_e 4.725,764 5,465,097 * ,3069597,262,m 6.fl6,475 9,38,418 9,9032* 10,6134 l.nSM3 :2 CenrapCosa-f S t .l- D lopado 1.935,709 1.935.709 1,095.709 1.90709 1.935,709 1,935.709 1.935.709 1.935.70 1.9.709 5 .Me 1-PIhapt 1.654.572 t,ll3.120 2.075.494 2,324.554 2,.61130 91.s920 35,.831 3.657.730 4.006.656 .Me*1- ff61_51 3.484,278 3.85.726 3.06353 014.294 23534 t222 t,873.017 1.481.117 t.04t190 * bt I-Tal-oOalO4n (Emb Dp.) 6.138,6 6.138.80 5.1386 5311,848 5.138,048 5.131MB 5.138.84 5.13,04 5.138,648 W* Jlit932-OspreD _ln 1,935.709 1,935.709 1,935,709 1.,35,709 1,935,709 1,935.709 1.935,709 1.935.709 1.935,709 t. Al a RPbk °d 4.268.746 4.462.183 4.706,292 4.941,607 5.111.157 1 6sf 82-Mesl 0 0 0 0 1.451,782 1238.345 1.01425 778.921 531.840 n a Jt 2-ToedO salip(Ex. Dap.) 0 5.720.528 5.720.52S 5.72052 8.720,5 5.720.528 U TP -o.pr n 0c_ O0 0 497,754 497.754 497.754 497.754 497.754 497.754 TP-PdndpJ 0 0 0 2S3.641 317.678 355.799 396,495 446.314 499872 F TP-hi et 0 . 0 0 597304 5637 525,148 462450 434.631 381.073 'U (a TP- ToelOuui1 (Ew,Op.) 0 0 0 E80.945 80o.945 80.945 010.945 680,945 60.945 i Tolwli(Etc.O sp) 5,13it4 5.,13114 5.1384 619.793 11,740,321 11,7462 11.740.322 11,740,21 1t,740J1 Con88wIonbabaOvg,t.ad .413.064 326249 1.168.111 1.341.94 4,563,646 -2t721,140 -4,37,039 421*27 40,452 Ovantam 6.022.758 6.02278 6.2758 6,2278 6,022.758 6.022.758 6.022.758 6,022.758 6.022.756 M oastasd 285, 2d,50 D0 2655500 28550G 285,Xo265,500 285,500 2865.5 285.5 6,30B26S 6,30B,2E6 8.306,25,308,258 6 ,308,258 6.303,258 6,308,256 6.308,258 6,308,258 (A TSO C) AN Rum -0,52,761 9,e53,47 4,011,55 4334461 144241,M -13,56 -12,514,466 -11,50,726 -10.6697 : |

Non-T_uiepad_flawumas 4,56W" 4,657,6S7 4.75020 4,945,64, 4,642,753 5,641t,6 5,142,441 5,24*3 5,35D.15 O 4

H dtPWLs.Exu dg 40.47,573 6W13 373.103 1,53,14 2,441,79 333,30 4,28,23 5,316,684 6,4534 in

CubFw a2,155,62 -4*4.342 489,227 -120,437 4,629,351 43.W7,719 4,602,856 -1,64*5 4-17.000 Two 727-200 SeenrlIo 1992 1993 1994 1995 1996 1997 1998 1999 2000 Passegef RevenueJet 13,719.099 14,407,646 15,209,556 16,056,595 16.838,849 17,658.035 18.519,677 19.426.079 20,379,678 CargoRevenueJet 754.550 792,421 836.526 883.113 926,137 971.192 1,018.582 1,068.434 1.120,882 s Tota Tanport Revenue 14,473,649 15,200,067 16,046,082 16,939,706 17,764,986 18,629,227 19,538,259 20,494,513 21.500,560 CommisalonExpenss -1,097.528 -1,152.612 -1,216,764 -1,284,528 -1.347,108 -1.412,643 -1.481,574 -1,554,066 -1,630.374 eITrnMePtRevenu 13.37,6122 14.0J,47S 14,829.317 15,6551,10 1l6417,878 17,21654 1AM056168 1,3940,4278 19,870,106 ExpensJet UWia1onPerDay 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 2 lodk Hows Fkown 2,555 2.5SS 2,555 2,555 2,555 2,555 2,555 2.555 2.555 :0 Direct OperatingCosts Per Mock Hour 2,719 2,719 2.719 2,719 2,719 2,719 2.719 2,719 2,719 n o VA 0 Hul lnsuancs 440,000 416,000 W88.000 368,000 344,000 328,000 312,000 292,000 276,000 0-3

Totab DIreelJet 7,387,0U5 7,363,045 7.335.045 7.315,045 7,291,045 7.275.045 7;lS9,045 7.239.045 7.223&M45 0 t, Expeose Turboprop t0 3 9lack HoumsFwn 1,351 1,351 1,351 1,351 1,351 1,351 1,351 1,351 1.351 0 0 Cost Per OlockHour 918 rt :fl 918 918 713 713 713 713 713 713 1b Hul Insurance 16,000 16,000 16.000 120,000 116,000 112.000 108,000 108,000 104,000 Total Direct Turboprop 1.256,218 1,256,218 1.256,218 1,083,263 1.079%263 1,075,263 1,071,263 1,071,263 1,067;263 o0 Total Expenss (Jotufbcaprop) *.643;263 8,6190263 8,591,263 8,398308 8,370,308 8,350,06 9,330,308 8,310,306 8.290,306 L-4 I Contibulon 4,732M59 5,428,192 8,0,0S4 7,250,872 8,047,570 8,666,76 9,726,377 10,630,119 11,579.878 Owneship Costs rt (A > r- Jet- Dcafaon 1,825,097 1.825,097 1,825,097 1.825,097 1,825.097 1,825.097 1,825.097 1.825,097 1,825,097 H. Jet - Princpal 1,040,016 1,164,818 1,304,597 1,461,148 1,636,486 1,832,864 2,052,808 2,299.145 2,575,042 Jet -Intrest 2,190,117 2,065,315 1,925,536 1,768,985 1,593,647 1,397,269 1,177,325 930.988 655.091 0 U Jset-Tota Ownership(Exc. Dep.) 3,230.133 3,230,133 3,230,133 3,230,133 3,230,133 3.230.133 3,230,133 3,230,133 3.230,133 rt H TP - Depreaton 0 0 0 497,754 497,754 497,754 497.754 497,754 497,754 u t TP - Prinpal 0 0 0 283,641 317,678 355,799 398,495 446,314 499,872 0 TP -lnteres 0 0 0 597,304 563,267 525.146 482.450 434,631 381,073 TP - Total Ownership (E. Dep.) 0 0 0 880,945 880,945 880,945 880,945 880.945 880,945 Total Owrship (Exe. Dep.) 3,230.,33 3,230,133 3,230,133 4,111,078 4,111,078 4.111,078 4,111,078 4,111,078 4,111,078 ContribuIon before Overhead 1,502,726 2,198,059 3,007,921 3,145,794 3,938,491 4,755,198 5,615,299 6,519,041 7,468,800 r Overhead 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 En Malntnance Overhead 285,500 285,500 285,500 285,500 285,500 285,500 285,500 205,500 285,500 (5 Totai Overhead 6,308,258 6,308,258 6,308,258 6,308,258 6,308,258 6,308,258 6,308,258 6,308,258 6,308,258 tp Aiine Result 4,630,630 ,935S,296 45,125,434 4,485,315 -4,694,617 43,875,911 43,015,810 -2,112,068 -1,162,309 0 o m

Non-Transpt Revenue 4,560,340 4,657,667 4,750,820 4,845,837 4,942,753 5,041.608 5,142,441 5,245,289 5,350,195 Co

Nit Pr'flULoss Excluding Capital 1,165,843 1,952,503 2,855,519 3,471,600 4,359,214 5,276,776 6,237,709 7,244,300 5,298,964 Cash Flew -239,192 547,468 1,450,483 1,683,372 2,570,987 3,488,58 4,449,481 5,456,072 6,510,737 One7274o0 Scnerto 1992 1993 1994 1996 1996 1997 1998 1999 2000

PassengerRevenme Jet 13.719,099 14.407.646 15.209.556 16.05S6.59 16,84,),849 17.658.035 18.519.b77 19.426.079 20,379,678 Cao RevenueJet 754.550 792.421 836,526 883.113 926.137 971.192 1,018.582 1.068,434 1.120,882 TotalTinipoul Reonue 14.473,649 15,200,067 16,06,002 16,939,706 17,764,986 18,629,227 19,536,259 20,494,S53 21,500,50 Co_mmisionExpense -1,097.528 -1.152,612 -1.216,764 -1,284,528 -1,347.108 -1.412.643 -1.481.574 -1.554,086 -1.630,374 NotTrwnpoit Revenue 13,376,122 14,047,455 14,629,317 15,655,180 16,417,878 117218,584 18,056,685 18,940,427 19,870,1"8 Expesn Jett 6.30Ds UIizadonPer Day 6.30 6.30 6.30 6.30 8.30 6.30 6.30 6.30 Is, SlockHoua Fbwn 2,300 2,300 2,300 2.300 2,300 2,300 2.300 2.300 2.300 2,577 o rn DirectOperaing Costs Per Bod Hotw 2,577 2.577 2,577 2.577 2.577 2.577 2.577 2,577

Hul Insurance 442.000 408,000 378,000 350,000 326,000 306,000 286,000 270,000 256,000 o rA Total lXrectJet 6,367,812 6,33,812 6,303,812 6,275.812 6,251,812 6,231,812 6%211,812 6,16812 6,1St,S12 m pi ExpensesTurboprop n 0 SBkckHours Flown 2,373 2.373 2,373 2,373 2,373 2,373 2,373 2,373 2,373 713 - CostPeo Bbck Hour 918 918 918 713 713 713 713 713 kiNInsurance 16,000 16,000 16,000 120,000 116,000 112.000 108,0O0 108,000 104,000 8 o Co Tobl Drct T~bopreP 2,194,414 2,194.414 2,194,414 1,811,949 1,807,949 1,803,949 1,799MB 1.799,949 1,795,949

8,562,226 8,528,226 0,498,226 8,087,761 8,059,781 8,035,761 8,011,781 7,951,761 7,977,761 r Totl Expenses(Jet/Turboprop) Le I m Conitlbulon 4,813,896 S,S19229 6331,092 757.420 8,358,117 9,180,824 10.044525 10,944,687 11,892.426 rt to > tLx OwnerehipCosts 1,935.709 1.935.709 " M Jet- Depreciaon 1,935,709 1,935,709 1,935,709 1.935,709 1,935,709 1,935.709 1.935,709 0 n I jet - Prdnpal 1,654.572 1,853.120 2.075.494 2,324,554 2.603,500 2,915,920 3,265,831 3,657,730 4.096,658 1,481,117 1,042.190 p Jet - Interest 3.484,276 3,285,728 3,063,353 2,814,294 2,535,348 2,222,928 1,873.017 a N Jet-TotalOwnershmp.(Exc Dep.) 5,138,848 5,138.848 5,138,848 5,138,848 5,138,848 5,138.848 5,138.848 5,138,848 5,138,848 497.754 497.754 497.754 to TP - DeprecIaton 0 0 0 497,754 497,754 497.754 to 0 0 0 283.641 317,678 355,799 398,495 446,314 499.872 9: TP - PrIndpal n TP -Interest 0 0 0 597,304 563,267 525,146 482.450 434,631 381,073 4 TP -TotalOwnersNp (Exc. Dep.) 0 0 0 880,945 880,945 880,945 880,945 880,945 880,945 Total Ownewhip(Exc. Dep.) 5,138,848 5,138,s48 5,138_848 6,019,793 6,019,7M3 6,019,793 6a019M793 6,019,793 6,019,793 ConWibutdonbekter Overhead -324,952 380,381 1,192.244 1,547,626 2,338,324 3,161,030 4,025,131 4,924,S73 5,872,632 to Overhead 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,022,758 259,950 Oa btLneranoeOverlead 259,950 259.950 259,950 259,950 259,950 259,950 259,950 259s,90 TotalOvehead 6,282,708 6,282,700 6,282,708 6,282,708 6,282,708 6,282.708 6,282,708 6,282,708 6,282,708 o o Alste Reulu -8,543,368 -7,838,036 -7,026,173 -7,168,544 4,377,847 4,555,140 -4,691,039 -3,791,27 -2,843,536 CD Non-*Trnpot Revemnu 4,566,340 4,657,667 4,750,820 4,845,837 4,942,753 5,041,608 5,142,441 5,245,29 5,350,195

NetProHlULosc Excluding Capll 1,161,819 1,958,479 2,63,495 3,697,086 4,584,700 5,506,261 6,471,194 7,473,785 8,526,450

CoshFlow -2,041,320 -1,244,660 -339,644 110,755 998,369 1,919,931 2,884,864 3,887,454 4,940,119 01 o7374300Sc.aulHo@ 5% 1992 19Q3 1994 1996 1996 1997 198 1999 2000

Passenger RevenueJet 13.719,099 14,407,646 15.209.556 16.056,595 16,838,849 17,658,035 18,519,677 19,426.079 20.379.678 CargoRevenueJet 754,550 792,421 836,526 883,113 926,137 971,192 1,018,582 1.068,434 1,120,882 ,- Tout Tren.pouRevenue 14,473,649 15,290,067 16.046,082 16939.,708 17,764,966 18,629,227 19,S36,259 20,494,513 21,500,560M ComnmIssionExpense -1,097.528 -1.152,612 -1,216,764 -1.284.528 -1,347,108 -1,412,643 -1,481.574 -1,554,086 -1.630,374 "* NotTaPapor Revemnw 13,376,122 14,047.455 14.829,317 15t655,180 16,4t7,878 17,216,584 15,056,685 16,940,427 19,170,116# Expenses Jet '1 Ulzalon PerDay 6.30 6.30 6.30 6.30 6.30 6.30 6.30 6.30 6.30 ' 3 BlockHoaus Fklnm 2,300 2,300 2,300 2,300 2,300 2.300 2,300 2,300 2,30 IN Dkeot OpmeaUngCosts Per Block Hour 2,577 2,577 2,577 2,57 2,577 2,577 2577 2,577 2,577 c so 0 HuNlnsurance 442,000 408.000 378,000 350,000 326,000 306,000 286.000 270,000 256,000 E n

Total Direct Jet 6,367,812 6,333,812 6,303,812 6,275,812 6,251,812 6,231,812 6.211,812 6,195SS12 6,1tt12 n Ca Expe Turboprop Block Hours Flwn 2,373 2,373 2,373 2,373 2,373 2,373 2,373 2,373 2.373 n F Cost Per Block Hou 918 918 918 713 713 713 713 713 713 F" :X HuNlInsurance 16,000 16,000 16,000 120.000 116,000 112,000 108,000 108,000 104,000 0 TotadDltTurboprop 2,194,414 2,194A414 2,194,414 1,811,949 1,807,949 1,0*,949 1,799,49 1,799,49 1,.9549 ro C

Total Expen"s(JaVTurbep#op) 8,562,226 8,528,226 8,498,226 8.087,701 8,069,761 8,035,761 8,011,761 7,995,761 7,977,761 'b s: C.. I

Contrbuton 4,313.896 5,519,229 6,331,092 7,567,420 6,358,17 9,180,824 10,044.925 10,944,67 11,t2,426 . toe Ownership Costs C') Jet - Deprecbaon 1,935,709 1,935,709 1,935,709 1,935,709 1,935,709 1.935,709 1,935,709 1,935.709 1.935,709 F w Jetl- PrIncipal 0 0 0 0 4,268,746 4.402,183 4,706.292 4,941,607 5.188,687 ' 03 Jet - Interst 0 0 0 0 1,451,782 1.238,345 1.014,235 778,921 531,840 '1 w Jet - Tot Ownership (ExC. Dep.) 0 0 0 0 5,720,528 5.720,528 5,720,528 5.720,528 5,720,528 TP - Dep'ecalon 0 0 0 497,754 497.754 497,754 497.754 497,754 497.754 r en TP - Prhcoal 0 0 0 283,641 317.678 355,799 398.495 446,314 499,872 "C C( TP - Interct 0 0 0 597,304 563,267 525,146 482,450 434,631 381,073 n TP - Toal Owner p (Exc Dep.) 0 0 0 880,945 880,945 880.945 880.945 880.945 880,945 0. Totld Omwpshlp (Exo. Dsp.) 0 0 0 880,945 6,601,473 6,601,473 6,601,473 6,601,473 6,601,473 Cl)0 Contibutlon before Overhead 4,813,896 5,519,229 6,331,092 6,686,474 1,756,644 2,579,351 3,443,451 4,343,193 5,290,952 * Owerhaad 6,022.758 6,022,758 6.022.758 6,022,758 6,022,758 6,022,759 6,022,758 6,022.758 6.022,758 to) MnW_nanoe Overhead 259,950 259,950 259.950 259,950 259.950 259,950 250,960 259.950 259,950 P TotalOverhead 6,282,708 6,282,708 6,282.708 6,282,708 6.282,708 6,282.708 6,282,708 6,282Z708 6,282,708 P a

Airine Result -3,404,521 -2,699,188 -1,887,326 -2,029,696 -6,959,526 4,136,820 4,272,719 -4,372,977 3,425,216 o

Nen-Trenspon Revenue 4,566,340 4,657,667 4,750,820 4,845,837 4,942,753 5,041,608 5,142,441 5,245,289 5,350,195 uz O

Net ProflULosa Excluding CapIal 1,161,819 1,958,479 2,863,495 3,697,086 4,S84.700 5,506,261 6,471,194 7,473,785 8,526,450

Cash Flow 3,097,528 3,894,188 4,799,204 5,249,603 416,689 1,338,251 2,303,184 3,305,775 4,358,440 Cie 737-200Scenado 1992 199 1994 1996 1996 1997 1998 1999 2000

PassengrReenuve Jet 13,719,099 14,407,646 15.209.556 16.056.595 16,838,849 17,658,035 18,519,677 19,426.079 20.379,678 CargoRevenueJet 754,550 792.421 836.526 883,113 926.137 971,192 1,018.582 1,068,434 1.120,882 TotalTransport Revenue 14,473,649 113200,0171t,046.082 16,939,708 17.7641986 18,629.227 19,S38.259 20,494,513 21,5001560 ConudssonExpens -1.097.528 -1,152,612 -1.216.764 -1,284.528 -1,347.108 -1.412.643 -1,481,574 -1,554.086 -1:630.374 NetTrfnsporl Revene 13,376,122 14,047,45S 14.629,317 15,655,180 16,417878 17,216.514 1S.056.65 1s,940,427 19,870,166 ExpenrmuJet tltkaUon PerDay 6.30 6.30 6.30 6.30 6.30 6.30 6.30 6.30 6.30 P 2 BlockHous Flonr 2,300 2.300 2.300 2,300 2,300 2.300 2.300 2,300 2.300 DirectOperaing Cosst Per Block Hotx 2,748 2,748 2,748 2.748 2,748 2,748 2,748 2,748 2.748 a tn 10 0

Hul Insurance 220,000 206,000 194,000 184,000 172.000 164,000 156,000 146,000 138,000 FO to '1 CA Toal Dlect Jet 6,53902 6,627,026 6,513,026 6,503,026 6,491,026 6,483,026 6,475,026 6,465.026 6,457,026 0 wl Expense Turboprop 0 blockHours Fbown 2.373 2.373 2,373 2,373 2,373 2,373 2,373 2.373 2.373 n Va CostPe BlockHour 918 918 918 713 713 713 713 713 713 Hullnurance 16,000 16,000 16.000 120,000 116,000 112.000 108,000 108,000 104.000 :3 Toa DirectTurboprop 2,194,414 2,194,414 2.194,414 1,811,949 1,807,9 t,803,949 1,799,949 1.799,949 1.79,949 P> o 0 TotalExpess (JefTuwboprop) 8,733,440 68721M 1,707MA4 8,314,975 8,298,975 8,286,975 8,274,975 8,264,975 8,252,975 th : contdbulon 4,642,682 5,326.015 6.121,877 7,340206 8,1118903 8,929609 9,781,710 10,675,452 11,617,211 Ownerhp Costa > rt Jet- Depreciation 912,549 912,549 912,549 912.549 912,549 912.549 912,549 912,549 912.549 . o Jet - Pfncpal 520,006 582,409 652.298 730,574 818,243 916.432 1,026,404 1,149,572 1,287,521 '10 t'1w Jet - Intaeest 1.095,058 1.032.657 962.768 884.492 796,824 698,634 588,663 465,494 327,545 t U Jet-To1aOwnership(Exc. Dep.) 1,615,067 5,615,067 1,615,067 1,615,067 1,615,067 1,615.067 1.615,067 1,615,067 1,615,067 r, H TP - Oeprecaon 0 0 0 497,754 497,754 497,754 497.754 497,754 497,754 , cA TP -Prncipal 0 0 0 283,641 317,678 355,799 398.495 446.314 499.872 r TP - Intetest 0 0 0 597,304 563,267 525,146 482.450 434.631 381,073 tn TP - TolalOwnership (Exc. Dep.) 0 0 0 880,945 880,945 880,945 880,945 8809S 880,945 Total Ownership(Exc. Dep.) 1,615,067 1,615,067 1,615,067 2,498,012 2,496,012 2,496,012 2.498,012 2,496,012 2,496,012 ContlbuUonbefore Overhead 3,027,615 3,710,948 4,506,811 4,844,193 5,622,891 6,433,597 7,265,6f98 ,179,440 9,121,199 m Ovqshd 6,022,758 6,022,758 6,022,758 6.022,758 6,022,758 6,022,758 6,022,758 6,022,758 6,W2,758 a MaintenanceOverhead 259.950 2595 259.950 259.950 259,950 259.950 258,950 259,950 259,950 pOQ TotalOverhead 6,282.708 6,202,708 6,282,708 6,282,708 6,282,708 6,.82,708 6.282.708 6,282,708 6,282,708 0

Arnrw Rsult -4,167,642 3,464,30 -2,618,441 -2,848,617 -2,070,119 -1,259,413 -407,312 486,430 1,428,189 0 01

NonTrnspor Renue 4,5,340 4,657,667 4,750,820 4,845,837 4,942,753 5,041,608 5,142,441 5,245,28 5,350.195

NetProlULoss Excluding Capital 2,013,765 2,788,425 3,677,441 4,493,032 5.368,646 6,278,207 7,231,140 8,227,731 9,274,396

CashFlow 1,311,247 2,065,907 2,974,923 3,407,322 4,282,936 5,192,498 6,145,431 7,142,021 8,188,686 4 N 3

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