Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized /,00V .3 / 49 3 - fdoA

3 / 49 C/ -Z e4 ReportNo. 8431-POL

STAFF APPRAISALREPORT Public Disclosure Authorized POLAND

FIRST TRANSPORTPROJECT

APRIL 5, 1990 Public Disclosure Authorized

Public Disclosure Authorized InfrastructureOperations Division CountryDepartment IV Europe,Middle East and North Africa Region

This documenthas a restricted distributionand may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCYAND EOUIVALENTUNITS

CurrencyUnit - Zloty (ZL)

(Averagerates)

May Dec. Jan. 1986 1987 1988 1989 1989 1990 1 US$ 175 265 430 850 4900 9500

WEIGHTS AND MEASURES

Metric System US System

1 meter (m) 3.2808 feet (ft) 1 kilometer (km) - 0.6214 mile (mi) 2 1 square kilometer (kin) - 0.3861 square mile (Mi) 1 metric ton (m ton) = 0.9842 long ton (lg ton) 1 kilogram (kg) - 2.2046 pounds (lbs)

ABBREVIATIONSAND ACRONYMS

AADT - Annual Average Daily Traffic ABS - AutomaticBlock System COCOM - CoordinatingCommittee for MultilateralExports CTC - CentralizedTraffic Control GDDP - DirectorateGeneral of Public Roads GNP - Gross National Product LOT - Polish Airlines MIS ManagementInformation System MTME - Ministryof Transportand Maritime Economy MY - Marshalling Yard NBP - National Bank of Poland OMIS OperatingManagement Information System PEKAES - InternationalRoad Freight Company PKP - Polish State Railways PKS - NationalRoad TransportEnterprise PMS - PavementManagement System POL - Polish Ocean Lines PSK Polish Domestic FreightForwarders S & T - Signallingand Telecommunications TM - Traffic Management TMIS - TransportManagement Information System UIC - InternationalRailway Union ZNTKS - Enterprisefor the Repair of Rolling Stock at Stargard ZwUS - Signal Equipment Works

POLAND: FISCAL YEAR

January 1 - December 31 FOR OMCIAL UE ONLY

STAFF APPRAISALREPORT

POLAND

FIRST TRANSPORTPROJECT

Table of Contents

Pag-eNo.

Loans and ProjectSummary ...... i-iii

I. THE TRANSPORTSECTOR

A. The TransportSystem ...... 1 B. The Sector in Context...... 2 C. Issues...... 4

II. RAILWAYS AND HIGHWAYS

A. Railways...... 5 B. Highways...... 11

III. THE PROJECT

A. Objectives...... 14 B. Description...... 15 C. Engineering...... 23 D. Cost Estimates...... 23 E. Financing...... 24 F. The Loans, the Borrowersand the Beneficiaries.25 G. Implementation...... 25 H. Procurement...... 26 I. Disbursement...... 29 J. Reportingand Audit...... 29 K. EnvironmentalImpacts ...... 30

IV. ECONOMIC EVALUATION

A. General.32 B Project Costs and Benefits.32 C. EconomicReturns .32 D. Project Risks.34

This report was preparedmainly on the basis of an appraisal mission to Poland in May 1989 by Messrs. E. Vasur (Economist),K. Viswanathan(Railway Engineer),W. Hayden (FinancialAnalyst), and J. Lane (HighwayEngineer).

This documenthas a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contentsmay not otherwisebe disclose withoutWorld Bank authorization. Page No. V. FINANCIAL ANALYSIS

A. Introduction...... 35 B. Accounting ...... 35 C. Tariffs, Subsidiesand TransferPrices ...... 36 D. Past FinancialPerformance ...... 38 E. ForecastFinancial Performance ...... 40

VI. AGREEMENTSTO BE REACHED AND RECOMMENDATIONS.. 47

ANNEES

1 Managementand Performanceof ZWUS...... 48 2 Managementand Performanceof ZNTKS...... 52 3 Reorganizationof PKP Workshop for Increased Specializationand Higher Productivity...... 56 4 Equipmentto be Procuredunder the Project A. PKP Works.ops Equipment...... 60 B. Track MaintenanceMachines to be Financed Under the Project...... 61 C. Machines and Equipmentto be Procured for ZNTKS/Stargard...... 62 D. List of Machines and Equipmentfor ZWUS...... 63 E. Equipmentand Services for GDDP...... 66 5 MIS, Terms of Reference...... 67 6 Lorg-termLocomotive Design and MaintenancePractices Terms of Reference...... 73 7 Rationalizationof Train Formationand Dispatching Terms of Reference...... 75 8 Know-How Transfer to ZWUS and ZNTKS...... 77 9 PKP Operatingand FinancialTargets ...... 81 10 Project Coordinationand Monitoring.82 11 Study of PKP PassengerSubsidies Draft Terms of Reference.84 12 PKP Income Accounts,Cash Flow Statementsand Balance Sheets.87 13 ZWUS Income Accounts, Cash Flow Statementsand Balance Sheets.90 14 ZNTKS Income Accounts,Cash Flow Statementsand Balance Sheets.93 15 DocumentsAvailable in the ProjectFile .96 - iii -

SUPPORTINGTABLES (cont.) Page-No,.

Table 1: FreightTransport According to Mode of Transport...... ,.,. 98 Table 2: PassengerTraffic by Public Transport.99 Table 3: Number ofNotor Vehicles.100 Table 4: FreightTransport by the Polish State Railways.101 Table 5: Length of Public Roads (excludingurban) . 102 Table 6: Length of Public Roads in Poland in 1987. 103 Table 7: Excerpts of Vehicle and Traffic Regulations 104 Table 8: Annual Average Daily Traffic on E-Roads in 1985.105 Table 9: General Directorateof Public Roads Expenditure1986-88 .106 Table 10: Project Costs, Detailedand Summary.107 Table 11: Project ImplementationSchedule .109 Table 12: EstimatedDisbursements ...... 110

CHARTS

1 Organization CErt of PKP .ll 2 OrganizationChart of GDDP.112

IBRD 20327R-POLAND POLAND

FIRST TRANSPORTPROJECT

Loans and Proiect Summary

Borrowers: Republic of Poland and Polish State Railways (PK'P)

Beneficiaries: The beneficiariesof the Loan to the Republicwculd be the Ministryof Transportand Maritime Economy (MTME) and the General Directorateof Public Roads (GDDP). Part of the loan to PKP would be allocatedto Signal EquipmentWorks (ZWUS),and to Enterprisefor the Repair of Rolling Stock at Stazgard (ZNTKS).

Amounts: A total of US$153 million equivalentwith $8 million equivalentfor the Republic of Poland and $145 million equivalentfor the Polish State Railways.

Terms: 17 years, including5 years of grace, at Bank standard variable interevtrate.

AllocationTerms: US$20.00 million and US$7.75 million equivalentwould be allocatedto ZWUS and ZNTKS respectivelyfor a period of 10 years including3 years of grace, at DM LIBOR plus 2X. The allocationswould be made in DM with PKP bearing the cross-currencyrisk between the DM and the Bank pool of currencies.

Prolect Objective: The project'sobjectives are to: (i) supportthe government'sefforts to restructurethe transport sector, eliminatingrigidities, central commands, excessivelyengineering-oriented and capital-intensive solutionsand introducinginstead towardsmodern organizationalforms and managementstrategies that would be more responsiveto the market-basedeconomy currentlybeing developedin Poland; (ii) introduce more efficientinternal management systemsand maintenanceprocedures as well as provide financing for -he equipmentnecessary to support this; (iii) train managers in modern managementtechniques; (iv) increasecompetition in the transportsector; and (v) improvethe economic,financial and operating performanceof Polish State Railways.

Project DescriRtion: The project comprises: (i) repair and modernization of equipmentand facilitiesfor railway rollingstock, track maintenanceand signallingand telecommuni- cations; (ii) measurementand laboratoryequipment for maintenanceand repair of the highway network; (iii) technicalassistance to introducean improved - ii -

managementinformation system in PKP and to investigatelong-term strategic issues in the sector; and (iv) training for senior managers of sector institutions.

Benefits The proposedproject would help the Governmentto and Risks: implementimproved institutional structures and managementtechniques for the transportsector, particularlyfor PKP and GDDP, as well as to establish a monitorableprogram to improveefficiency of railway operations(financial, economic and technical). While the main benefitswill come in the long run through the increasedefficiency of the transportsystem as a whole, such work at the sectoral level will also complementand reinforcethe Government's macroeconomicmanagement efforts by reducing subsidies througha combinationof improvedoperating efficiency,closing down uneconomic lines and raising tariffs,end ensuringthat investmentis allocatedto high return activities. Furthermore,the proposed projectwould also support the high priority export effortswhich would be compromisedif the deteriorationof the transportsystem is not arrested. Finally it would assure that the investmentsrespond to environmentalconcerns.

Economicbenefits from the project would come from: (i) enhancedmaintenance efficiency obtained through the loweringof resource inputs resultingfrom the use of more efficientmachinery and equipmentand appropriatematerial inputs: (ii) improvedoperating efficiencythrough heavier trains and lower turnaround times, and, for the highways,lower road maintenance and vehicle operatingcosts; (iii) saving from the closureof uneconomicrailway lines and stations. Economicrates of return are estimatedat generally not lower than 9.0 for each loan.

A risk pertainingto the centralobjectives of the project is the progress of the overall economic reform. Since the changes in the transportsector are dependenton this progress,any slowdownor reversal would be reflectedin the sector. The specific investmentprojects in plant and equipmentare however not likely to be much affectedby the macroeconomic circumstancessince they are justifiedunder a wide range of scenarios. On a differentlevel, the main risks are those inherent in any first project, i.e., a relativeunfamiliarity on both sides about each other which introducesuncertainties about the implementationof the recommendedpolicies. - iii -

EstimatedCosts:

LQ£AI Fore TotaEl ------US$ millions-

PKP, of which 42.60 165.00 207.60 ZWUS (2.80) (20.00) (22.80) ZNTKS (1.30) (7.75) (9.05) GDDP 0.26 3.20 3.46 MITME Q.6 4.80 5.#A

Total Cost 43.50 173.00 216.50

FinancinfPla:

Lgcal Foreign Total ------US$ millions------

IBRD loans - 153.00 153.00 EIB loan 20.00 20.00 PKP, of which 42.60 - 42.60 zwUS (2.80) - (2.80) ZNTKS (1.30) - (1.30) Government 0.90 - O.90

Total 43.50 173.00 216.50

EstimatedDisbursements: IBRD FY 199 I92 1993 1994 1995 1996 ------US$ millions------Annual 5.50 19.00 41.00 45.00 38.00 4.50 Cumulative 5.50 24.50 65.50 110.50 148.50 153.00

EconomicRate of Return: About 25X for each loan. I. THE TRANSPORTSECTOR'

A. The TransportSystem

'.01 Both in area and populationPoland is among the larger countriesof Europe. Its area, 313,000ka?, is roughlyequal to that of Italy and its population,38 million, is about the same as that of Spain. The economy is large and diversified,ranking among the 20 to 25 largest in the world in terms of GNP, being of roughly the same size as Argentinaor Finland. Its GNP per capita of a little less than US$2,000 is somewhatbelow Hungary and Yugoslavia.

1.02 Transportis an importantsector. It directly employs close to one million people, about 5% of the work force, contributessome 5% to GNP and requiresGovernment subsidiesof about US$1.2 billion annually,which is 2% of GNP. The physical installationsare extensive,comprising about 27,000 km of rail lines, 330,000km of public roads, 3 large and several smallerports, 11 airports for regular scheduledflights of which 3 are internationaland an oil and gas pipeline network of about 2,000 km (see Map).

1.03 In Poland, as in most other socialisteconomies, railways constitute the backbone of the transportsystem. They have a far greater role than in market economies,especially for freight,accounting for about 70% of total traffic, but also for passengertransport where the share is 30%. Polish State Railways is a large organizationeven by internationalstandards, employing about 450,000 staff and transportingas much freightas the French and German railways combined and as many passengersas either one of them.

1.04 The public road network comprises336,000 km, of which about 289,000 are rural, and 47,000 are urban. The national road network includes some 200 km of motorwaysand 260 km of express roads, all with controlledaccess, and most of which have dual carriageways;and 550 km with dual carriagewaysbut unrestrictedaccess.

1.05 The maritime sector, includingports, generallyfunctions well although there are some investmentneeds in port equipment. The modern container facility in Gdynia is not balancedby a correspondinglevel of serviceon the land transportside, due to the insufficientadaptation of both rail and road to operate container traffic.

1.06 Inland water transport,mainly on the Odra and Vistula rivers, plays a limited role. Air transport,which is fairly extensivelydeveloped with regular services by LOT, the national airline, to about 30 internationaland 11 domestic destinations,encounters problems with aircraftobsolescence and the need to modernizesemie ground facilities.

I Chapters I and II are largelybased on "Poland. Transport Sector Memorandum",Report No. 7701-POL,April 4, 1989. - 2 -

1.07 Urban public transportis extensivebut needs continuinglarge scale investmentsto modernizedeteriorating existing facilitiesand to cope with increasingurban populations. During the 70's traffic grew fast. Between 1970 and 1980 freight and passengertraffic increasedannually by 7 and 4% respectively. Freight traffic later declined,while overall passengertraffic has remainedrather stable (Tables1 and 2).

1.08 The number of private passengercars has shown a strong increase;from less than half a million in 1970 to more than 3.5 million in 1985 (Table 3). From 1970 to 1980 there was a fivefold increaseor 17% p.a. Although this has slowed down in the 80's, it has by no means stopped,the 1980 to 1985 increase being above 9% p.a. Even so, the number of vehicles per person is still only about a third of what it is in Western Europe and also generallybelow the levels of other East European countries.

B. The Sector in Context

1.09 The basic issues and problems that affect the transportsector are intractablyl.inked to the functioningof the ecornomicsystem at large. The shortageswhich mark the economyare evident and cause difficultiesfor tte transportenterprises as e.g. shortagesof manpower,machinery, materials, investmentresources, imported goods. The relativeunimportance of pricing, the very pronouncedvertical integrationof enterprises,the high degree of centralizationand the general lack of competitionare economy-wide characteristicswhich have direct reflectionsin the organizationand functioningof the transportsector.

1.10 A striking featureof many enterprisesin the transportsector is their sheer size. PKP, Polish State Railways,has close to 450,000 staff, PKS, the National Road TransportEnterprise, operates about 20,000 trucks and an equal number of buses, GDDP, the GeneralDirectorate of Public Roads, employs 80.000 people, etc. A characteristiccommon in the Polish economy,which contributes to the size of the enterprises,is their high degree of vertical integration. Not only do they provide the primary services for which they were set up and the normal ancillaryactivities such as maintenanceand repair,but they also have their own employeehousing, hospitals, vacatik.. resorts, construction companies,etc. This integracionof a whole spectrumof activitiesis in no way particularto the transportsector but is found in all sectors of the economy.

1.11 As in most other branches of the Polish economy,also in transportthe public sector dominatesheavily. In fact, the only noteworthyexceptions to public sector ownershipand operationare passengercars, of which 98% are privatelyowned, and a small part of the truck fleet. Within the public sector there are basicallyfour differentarrangements. Most directly linked to governmentare those activitieswhich operateas ministerialdepartments, such as GDDP. Another strong but less direct influenceis exercisedthrough governmentowned enterprises,as for PKP, PKS and LOT. There are, primarily in road transport,cooperative arrangements which group enterprisesof the same industry to perform transportfor its members. Finally there is a substantialamount of own account road transport. - 3 -

1.12 In 1987 a major reorganization took place in the Ministry of Transport. Its aim was to consolidatethe responsibilityfor all modes of transportunder one ministry,the Ministry of Transportand Maritime Economy (MTME),while at the same time limiting the ministry'sinvolvement with regard to the enterprisesunder its purview to major policy issues and to monitoringtheir performance. Reportingto the MTME are a dozen enterprisescovering rail, road, water and air transport,about 100 municipaltransport enterprises, the GDDP and a shipbuildingcompany. These enterpriseshave a combined staff of about 1,000,000. MTME has a staff of about 400 and its current functions include: (a) advising the Governmenton transportpolicy; (b) allocationof central governmentinvestment funds; (c) supervisionof public sector transportcompanies; and (d) establishmentof safety regulations. The ministry is also responsiblefor approvingtariff ceilings for private transportcompanies and tariffsfor state owned domestic transportcompanies and the payment of subsidiesfor passengeroperations. It has an economics departmentwhich adviseson investments,tariff setting,organizational questionsas well as on generalpolicy issues. There is also a freestanding Reseas^h Instituteof TransportEconomics.

1.13 The centrallyplanned investmentsin the sector for 1988 and 1989 are as shown in Table 1.1 below.

Table 1.1: TransRortSector Investments ZL billion 1988 (millionUS$):'

1988 1989

Railways 197 (438) 225 (500) Road Transport 58 (129) 82 (182) Ports and Maritime Transport 98 (218) 110 (244) Air Transport 20 ( 44) 31 ( 69) Urban Transport 19 ( 42) 22 ( 49) Public Roads 26 ( 58) 26 ( 58)

Total 418 (931) 495 (1100)

A/ The US$ equivalentsare given for illustrativepurposes only. They are based on the second half 1988 official exchange rate of US$1-ZL450.

Although there are investmentswhich fall outside the centrallyplanned area and which are either locallydecided (somemunicipal roads) or wihichhave specialbudgets, the above table neverthelessgives the order of magnL.ude. There is scarcity of investmentresources. Railway investmentsin Western Europe for lesser networks are 3-5 times higher and the situationfor public roads is even worse. This is a continuationof a situationwhich has prevailedover the last 10 years and which has led to severe problems in the sector. While the distributionof investmentsreflect the present relative importanceand urgency of action between the subsectors,shifts are likely to take place in the future. With an increasingreliance on markets and a freeing up of the economy in general, road transportwill gain in relative importancewhich will have to be reflectedin the investments.

1.14 The financialresults of transportsector companiesare satisfactory, when compared to Western Europe. However, to achieve these results for companiesproviding passenger service, substantial Government subsidies were required,about 324 billion ZL (US$1.22billion) in 1987 which includes subsidiesfor operations,investments and tax rebates (Table 1.2). The subsidiesall pertain to passengertransport with freight transportbeing financiallyself-supporting. To decrease the transportsubsidies is an objectiveof the economicreform.

Table 1.2: Summaryof Subsidies1987

ZL Billion (US$ million)'I

pRerating Investment Tax Rebate Total

PKP 101.0 (381) 27.0 (105) 18.2 (69) 146.2 (555) PKS 46.1 (174) 4.8 ( 18) 6.2 (23) 57.1 (215) Municipal: -CentralGov't 80R1 (302) 28.5 (108) 108.6 (410) -MunicipalGov't - 11.3 ( 43) - 11.3 ( 43)

Total 227.2 (857) 71.6 (273) 24.4 ( 92) 323.2 (1223)

a/ Based on the mid 1987 officialexchange rate of US$1-ZL265.

1.15 The degree to which these numbers reflect economic realitiesare, for reasons inherent in the economic system, limitedand uncertain. As both passengerand freight companiesoperate in a monopoly or semi-monopolymarket, the setting of administrativeprices and subsidieshas a major effect on the companies'financial results. The fact that, during the currenteconomic difficultiesin Poland, all operatingertities earn a profit would indicate that there is a softness in setting the transferprices within the companies and in setting the transporttariff levels in general.

C. Issues

1.16 The constraintsthat exist in the transportsector translateinto decreasingefficiency and capacity shortages. Most of them are not amanable to quick solutions,but require long term actions and investments. They have to do primarilywith a generalresource constraint,managerial and technical obsolescence,and relative isolationfrom modern development. Unless actions aiming at increasedcompetition, realistic pricing, improvedcost recoveryand reductionof financialtransfers from Government,improved maintenance, modernizationof facilities,development of intermodaltransports, closing of uneconomicrailway lines, reorganizationof trucking,etc. are undertaken,the transportsector will come to functionwith increasinglysevere inefficiencies which will impact also the export performanceof Poland. Transport constraintswill appear which will drive up transportcosts at an accelerating rate. Conversely,judicious actions to improve the conditionsof the sector will bring importantrewards. The sector is so large and has implicationsfor the whole economy that even small relativeimprovements translate into substantialabsolute savings. Every percentageimprovement e.g. in locomotive availabilitywill eventuallylead to a saving of approximately50 locomotives. Likewise when the own-accounttrucks will be made to operate on an efficiency level of 60% of that of the for hire trucks (presentlyabout 45%) this will translateinto almost 100,000 fewer trucks needed, etc.

1.17 For individualtransport modes the railwayspresent the clearest list of issues. Apart from the overall questionof their future role, whether they can and should continue to carry such a high proportionof total traffic as they do presently,there is a number of questionsof immediateoperational significance. They concernvarious maintenanceoperations and their organization,moderni7ation of informationsystems, uneconomic lines and the developmentof more efficientbulk, especiallycoal, transport.

1.18 For road and road transport,the organizationof trucking activities must change away from an excessiveamount of own-accounttransport and towards the creationof a larger number of for-hirecompeting companies if greater efficiencyis to be reached. The introductionof modern techniquesfor road maintenance planning is of high priority.

1.19 In the area of investmentanalysis and planning,economic/financial studies are regularlycarried out. To what degree they actually influencethe decision-makingprocess is less clear. Given Poland's economic/financial situation,rigorous economic/financialanalyses and their influenceon decisionsmust be strengthened.

1.20 One question that has a special importancefor foreign trade and which concerns several transportsubsectors is the developmentof modern multimodal transportsystems. These have developedunevenly in Poland but in order to be able to provide adequate transportfacilities to such importantconvertible currency earning activitiesas transitand export traffic,these types of transportshould be developedfaster than hitherto. If not, an important element in the efforts tu increaseexports will be lacking.

II. RAILWAYSAND HIGHWAYS

A. Railways

Background

2.01 PKP is a government owned enterprise under MTMEand governed by the Railways Act of April 27, 1989. It is headed by a Director General, assisted by four deputies and with the network and most operatf-tialmatters divided - 6 - into eight operationalgeographic regions. Although PKP's central function is railway transport,its activitiesgo beyond that and embrace equipment manufacturing,railway construction,etc. It is a large industrial conglomeratewith about 70 differentcompanies under its umbrella. In addition,its role and responsibilitiesto its employeesin the social, health, educational,housing, etc., spheres far exceed that of any present-day western railway.

ManagementStructure

2.02 PKP was transformedin 1987 from a ministry departmentinto a State owned enterprisewith a larger measure of autonomy and clearer lines of responsibility. However, traditionallystrong ties with Govenrmenthave rendered the de facto change in managementstyle somewhatslow. Organizationally,PKP follows standardrailway practice with four Deputy General Directorsfor: (i) economicand social affairs; (ii) operations;(iil) rolling stock and (iv) fixed installations.Also reportingdirectly to the Presidentare the eight regionalmanagers (Chart 1). PKP can be consideredto consist of two major parts: (i) railwaytransport proper; and (ii) the supportingmanufacturing and constructionunits. Rail transporthas 325,000 employeeswith an additional125,000 staff in the affiliatedunits. PKP's developmentplni is approvedby MTME which is responsiblefor general supervisionof PKP. In addition,MTME appoints the General Directorwho in turn appoints the Deputy GeneralDirectors subject to the approval of the Minister.

2.03 ZWUS, Signal EquipmentWorks, was incorporatedas a unit of PKP under Decree No. 72 of the Minister of Transportdated March 25, 1986. ZWUS manufacturessignalling and other safety related equipment. The managementof ZWUS is semi-autonomouswithin the PKP group and is responsiblefor developing its productionplans and the day-to-dayoperations of the enterprisewithin the frameworkdefined by the General Directorof PKP. ZNTKS, Enterprisefor the Repair of Rolling Stock at Stargard,manufactures track maintenance equipmentin addition to being a regularrailway workshop. It was incorporatedas a unit of PKP under Decree No. 55 dated June 26, 1982 by the Minister of Transport. Its organizationand relationswith PKP are similar to those of ZWUS. This type of vertical integrationin large units is prevalent in Poland. It is a reflectionof and contributesto autarkicbehavior and the economic reform will eventuallydecrease the predominanceof such arrangements. However, this is likely to be achieved only over a longer period of time and on an economy-widebasis. The project supports effortsof greaterautonomy of the subsidiaryenterprises and their eventual spin-off. In the meantime they have to functionand care has to be taken that inefficientstructures are not reinforced. The mission analyzed PKP in this context and found that: (i) manufacturingwithin PKP is efficientalthough the efficiencyis constrainedby workingwith partly obsoleteequipment; (ii) they are competitivein Poland with foreigncompanies both in terms of quality and price; and (iii) economiesof scale generallyargue against the existenceof more than one supplierwithin Poland of the railway-specificproducts being manufacturedby these enterprises. ZWUS and ZNTKS are furtherdescribed in Annexes 1 and 2 respectively. 7-

Traffic

2.04 PKP has both importantfreight and passengertraffic. It transports more than 400 million tons of freightper year over an average distanceof almost 300 km which yields some 120 billion ton-km,more than any other network in Europe, save the U.S.S.R. and about as much as Conrail in the USA which carries a third of PKP freightbut over an average distance three times longer. Bulk products make up 70-80% of total with coal and coke accounting for more than 40% of all the freightcarried. Table 4 gives rail freight transportdevelopment and commoditydistribution.

2.05 PKP carries about one billion passengersannually of which some two thirds are commutersto work and school. Rail passengerservice has remained rather constant since the 70's despite the sharp rise in private car ownership. Also, despite some decrease of its relativerole in the public transportpassenger market, rail still accounts for some 30% and 50% of number of passengersand passengers-kmrespectively.

2.06 It is assumed that railway trafficwill remain at present levels in the medium term. This conforms to the broad trends observed in the 1980's for both freight and passengertraffic. In the longer run it is likely that not only will the railwaysmarket share decline,but also the absolutevolume of railway traffic as other modes, primarilyroad transport,develop.

UneconomicLines and Stations

2.07 Uneconomiclines and stations representa problem and challengefor PKP. As in other European railways,there is a legacy of once viable parts of the network which over the years have lost their justification. However, the problem in Poland is larger than in most other railways and the country can ill afford not only the financialloss that this representsbut also the managerialand manpower resourcesthat could be better used elsewherein PKP. The narrow gauge network of 2,500 km, which is as much as in the rest of Europe combined,constitutes about 10% of the networkbut carries no more than 0.11 of the traffic (as expressedin ton km; 1.6% if expressedin tons) -i.e., a traffic density about a hundred times less than the average. About 1,500 km have been identifiedin a study done by the Research Instituteof Transport Economicsin Warsaw as lines that should be closed using various economic, financialand operatingcriteria. To this should be added about 4,500 km of the normal gauge network which hold no prospect for viable future operation and should thereforebe closed or abandoned. The estimatesof the cost to revenue ratio for these 6000 km of lines vary between 20 and 40 and the total financialdeficit is put in a range from ZL 15 to 40 billion (US$30 to 80 million) per year which supposedlytakes into account the cost of providing alternativemeasures of transportfor the localitiesaffected. Actions to reduce the uneconomiclines and stations are included in the project (para. 3.18 (i)).

Track

2.08 The rail network comprisesabout 27,000 km of lines. More than 87% is standardgauge (1453mm) and about 10 is narrow gauge (600-1000mm). Broad gauge (1524 mm) is limited to the ore and sulphur line (Katowicearea - USSR border) and a few other short sectionson the Soviet border. About 9500 km (351) are electrified. The network is one of the most densely used networks I.n the world with an average trafficdensity of about 5 millionnet tkm/km of freight and 2 millionpassenger-km/km. On the electrifiedpart of the network, which carries 75X of the traffic, the average density is more than twice higher, almost 15 million trafficunits/km.

2.09 PKP's track shows signs of deterioration. There are 650 slow-speed orders due to poor track conditionsand 300 due to poor turnouts. This deteriorationis principallydue to (i) unsatisfactoryballast conditionsin 531 of the network, marked by inadequatequantity and qualityas well as coal dust pollution; (ii) lack of good elastic rail fastenings;and (iii) the use of softwood sleepers. Two other contributingfactors are the understaffingof the track maintenanceunits, about 601 in some sections,andthe dependanceon old low-outputtrack maintenancemachines. The latter is the consequenceof little or no major investmentsduring the 80's and the lack of foreign exchange for importingeven emergencysupplies. The present conditioncalls for urgent remedialmeasures consistingof investmentsin track maintenance machines,more intensiveballasting programs and the use of better rails and fastenings. Actions aiming at this is includedin the project (para. 3.07).

Locomotivesand Wagons

2.10 PKP's locomotivefleet consistsof 2600 electric locomotiveswhich carry about 751 of the gross tkms, 2700 dieselshauling about 22% of the traffic and the rest handled by 500 steam locomotives. Out of the 12 types of diesels, 8 are below 1200 HP and are hence suitableonly for branch line and switching work. As the dieselsare of minor significancein traffichandling and the steam locos are being phased out, the main focus is on the electrics. The availabilityof the electricshas steadily declinedfrom 931 in the 70s to 90% in the 80s which is low compared to the target level of 95%. The main reasons for this decline are: (i) lack of spare parts; (ii) a fleet with a high average age of over 16 years without having had the highgrade overhaulsand refurbishingsadopted in other countries;(iii) maintenanceworkshops which are a legacy from the steam age and whose layouts and equipmentare unsuitable for electrics;(iv) tractionmotor design poorly adapted to the ambient conditions,- snow and coal dust; and (v) high failure rates occasionedby low-gradeinsulating materials and lack of impregnatingequipment in the workshops. The problem is aggravatedby a dispersionof the resourcesand facilitiesover five workshopswithout much specialization. The presence of 8 differentloco types compoundsthe spare parts and specializationissues. Rolling stock maintenancefaces similarproblems. The project addressesthese problems throughmodernization and concentration of workshops (para. 3.05).

2.11 The fleet of goods wagons has shown a continuousdecrease and now numbers 161,000,down by 24% from 1978, due in part to the obsolescenceof wagons but also reflectingthe resultsof insufficientmaintenance. Coal wagons constitutemore than half of the total. Maintenancesuffers from outdated equipmentand practicesoften with little protectionfrom weather. On the passenger side there are about 6,000 passengercars as well as 1,000 electric multiple unit (emu)cars and about 1,900 emu trailers,all in a relativelysatisfactory condition except the old ones which need to be replaced. The rolling stock availabilityis proposed to be improvedby concentratingrepairs and modernizingequipment (para. 3.05).

Signallingand Telecommunications(S&T)

2.12 Many of PKP's operatingconstraints stem from inefficientand inadequate S & T equipment. Only 5.5X of its high density lines, with more than 70 pairs of trains per day, are equippedwith any form of automaticblock signalling (ABS). Only 171 of its level crossings,where over 30% of its accidentstake place, are signal protected. Marshallingyards handling up to 5000 wagons per day are working with obsoleteequipment. PKP's S & T investmentplans are rightly directed principallyto its high density lines and only partiallyto medium density lines and practicallynone to the low density lines. The objectivesof the investmentplan are (i) raisingoperating efficiency through improvedutilization of locomotivesand wagons, (ii) removal of bottlenecksby installingABS, (iii) easing the traffic flows near complexnodal points in the network with CTC and computerizeddespatching and (iv) enhancing safety through automatictrain control on high densityroutes and protectionof level crossingswith consequentsavings in damages. Some of these investmentswill result in significantstaff savings,estimated at about 2200 staff per year, during a 10 year program of S & T improvements. However, all these S & T improvementsare contingentupon a reliable supply of high qualityequipment. The projectwill provide the machines and equipmentneeded to upgrade the productionof the signallingmanufacturing unit (para. 3.08).

MarshallingYards (KY)

2.13 The geographicspread of PKP's network and the substantialdependence of national transporton rail result in criss-crossingtraffic streams. However, the delays which wagons suffer in these yards due to outmodedmarshalling methods and equipmentare forcingmanagement to adopt more streamlinedmethods of wagon control and routing. PKP's policy foreseesa reductionof MYs to 27 active ones by 1995, down from 110 in 1970, out of which 17 of interregional importancewill be modernizedand automated,and the remaining10 (all located in cormectionto industrialplants), will be just improvedwithout automation. 36 MYs will be phased out and redesignedas regional distributioncenters with a substantiallyreduced number of tracks and with better telecommunications. In early 1989 PKP introduceda new organizationfor freightmanagetment which improvesthe wagon movementsso as to (i) reduce the transittime of goods (ii) reduce shuntingby heavy main line locomotives,and (iii) improvewagon turn-round. In effect, this strategywill typicallyreduce the average number of interveningKYs in each wagon transitfrom the present 4 to 3.2, thus improvingthe turn round by about 10 to 15% over the present mean of 5.4 days. However, there is scope to rationalizethe trafficmanagement and reduce the need for marshallingfurther. Therefore,the automationof the 17 key yards should be preceded by an in-depthstudy to see whether heavy investmentcan be avoided through operatingimprovements and revisedtrain formationstrategies, where modernizationis essential,and to determinethe degree of modernization that is optimum for a given marshallingpattern. This study, supportedby the - 10 - project, will address the central question of reducing the average wagon detention time in the yards (para. 3.12(iii)). R-rationLs

2.14 Operations are well decentralized under the responsibility of the eight regional managements. The central control in Warsaw handles only the inter- regional coordination and supervisory function. PKP's Traffic Management (TM) is more preoccupied, however, with monitoring of yesterday's operations and generally 'watching" today's operations than with "real time" and forward management. Admittedly there is a lack of the means and the methods needed for: (i) 'real time" TM train performance analyses; and (ii) network simulator for assessing limiting line capacities, optimum re-routings and least cost solutions for capacity enhancement. There is no network-wide wagon control system as is known in the West. The initiative for reducing terminal delays and yard detention is largely in the hands of regional managements which are generally content to assume that present performance, reasonably good as it is, cannot be bettered till the automation of marshalling yards and more sophisticated S & T facilities are available. The study proposed under the project will defir.e ways to obtain higher productivity through more dynamic management and better supervision of the train dispatching procedures and by setting up more stringent targets of efficiency enforced and supervised by regional and central management (para. 3.12(iii).

Investments

2.15 PKP's five year investment program (1986-90) is distributed as follows:

1988 Billion ZL Million US$"

Electrification 89 178 Marshalling yards 62 124 Maintenance workshops 73 146 Repair workshops 68 136 Signalling and telecom. 16 32 New lines 43 86 Staff housing 89 178 Rolling stock and equip 554 1108 Miscellaneous 10 21_

Total 1102 2204

a/ Based on the end 1988 exchange rate of US$1 - ZL503.

The gratifying feature of the investment plan is the emphasis on (i) operating improvements to enhance productivity, and (ii) maintenance of track and rolling stock and the allocation of over 201 of the resources to these two objectives. Fifty percent of the investments are for the renewal of overaged - 11 - locomotivesand rolling stock, which includeslow-capacity, high risk two-axle wagons.

2.16 While recognizingthe need for utmost stringencyin the review of proposed investments,there is obviouslya limit beyond which a railway the size of PKP cannot reduce its investmentswithout jeopardizingits operations. PKP may alreadyhave reached this point as evidencedby the increasing problems with track and rollingstock. Towards this end, it is proposed that the Bank annually review the transportsector investmentprograms in order to ensure that criteria for economic validityof projects are consistently applied (para. 3.18(ii)).

B. Highways

Background

2.17 The administration of public roads is vested in MTMEthrough the General Directorateof Public Roads (GDDP),which supervisesall public roads (except those owned and financedby agriculturaland other enterprises). The General Directorateis divided into five Departments(Chart 2), each headed by a Deputy Director. GDDP employs over 80,000 people, comprisingsome 3400 professionals,of which some 2600 engineers. Maintenanceand constructionis carried out through 17 districtand 194 sub-divisionaloffices.

The Road Network

2.18 Since World War II Poland has constructedsome 80,000 km of roads, and asphaltpaved some 100,000 km. This upgradingpicked up speed particularlyin the 1970's,but at the expense of maintenance. Currentlymaintenance and rehabilitationare given greateremphasis, and new constructionis being limited to main road connectionsand urban by-passes. However, maintenance and rehabilitationis now the major problem of the network. Because of financialdifficulties, little is being done and it is estimatedthat more than 30,000 km of public roads and some 8,000 bridges need rehabilitation.

2.19 For these reasons the rapid upgradingof the network during the 1970's, with the paved road network increasingby some 55X during the decade - from 76,000 km in 1970 to 118,000km in 1980 - has slowed down in the 1980's (Table 5). Road classificationis shown in Table 6.

2.20 The extent and the density of the network is adequate,except for areas in the eastern region,where some extensionis desirable- essentiallythrough constructionof more county roads to serve agriculture. The standard axle load limit is 8 tons for single axles, but 10 tons is permitted on 24,000 km of major roads. The axle load regulationsare shown in Table 7. The 10 ton limitationis the same as in Hungary, Romania and Yugoslavia,but is low by West European standardswhere the trend is to increase the limit to 13 tons.

PavementManagement System (PMS)

2.21 The increasingdemands placed on GDDP's maintenanceservice - rising trafficvolumes and axle loads, togetherwith an ageing of the network and the - 12 - fact that maintenanceand rehabilitationfunds are not currently increasing, means that the choice of correctmaintenance strategy at both network and project level has become of crucial importance. To this end GDDP has embarked on the developmentof a PMS. GDDP and its associatedagencies have most of the necessarytechnical skills to do this. To date a visual/manualinspection system for pavement conditionhas been developedand tested on 7% of the national network, and now GDDP proposes to expand the system to includethe whole 45,000 km of the national network,and to includemeasurements of other parameters,bearing capacity,roughness, etc., in the system. The project includes equipmentnecessary to develop the PMS (para. 3.16).

Ouality Control

2.22 GDDP operates a chain of laboratoriesfor quality control,mix design, pavement design, etc., through its seventeendistrict, and sub-district offices, asphaltplants, etc. These laboratoriesare well staffed, and do routinework plus some research. Some laboratoryequipment is availableon the Polish market, and some is imported. To improveproductivity and speed up quality control testing on constructionsites, GDDP now requiresadditional items of equipmentnot availablelocally. This is provided for under the project (para. 3.17).

Traffic

2.23 The economicexpansion of the 1970's was reflectedin high traffic increase. With the economicbacklash, traffic declined,but then resumed the increase - surpassingthe 1980 AADT in 1985, and attainingan annual growth rate of about 7% for the 1982-86period. Table 8 gives the 1985 traffic breakdown, in terms of AADT for all of Poland'smain roads, which represent about 10X of the total national network. The highest AADT, average for the whole road length,amounted to 6550 vpd on road E-75, Gdansk-Lodz--Katowice- Czech border. Togetherwith the recorded4700 on the parallel route Gdansk- Warsaw-Krakow,this indicatesthe high trafficdemand in this centralnorth- south corridor. Some 12% of the main road network carries traffic less than 500 vpd. About 26% carries 500-1000vpd, and 30% carries 1000-2000vpd. Only 1% of the national network carries trafficabove 10,000 vpd. In the voivodshipswith large urbanizedareas, i.e., Katowice,Warsaw and Lodz, over 30% of the roads had trafficvolumes over 4000 vpd. About 1000 km of road sectionshad trafficvolumes such that speed and freedom to maneuver are severely restrictedwhich will eventuallycall for capacityupgrading.

Road Safety

2.24 The road safety situationis relativelyserious in Poland; in 1986 about 4600 personswere killed on the roads. This representsa decrease in the absolutenumber over the last few years, while at the same time there was a slight increase in accidentsand persons injured. The accident rate is comparableto the rate prevailingin Europe,while the death rate is about double.

2.25 The speed limits (Table 7) do not appear to be seriouslyobserved. In the mixed traffic,horse drawn carts and agriculturaltractors with implements - 13 - representa serioushazard, and the provisionof alternativeroads or paths for these is urgently required on major roads. Highway police is not in evidence and hazardousmaneuvers are plentiful. A seat-beltlaw was introducedin 1984. Part of the reason for the high fatalityrate could be the involvementof pedestrians- 30-40X of those killed are pedestrians,again 1.5-2 times higher than the prevailingfigure in Western Europe. Another main cause of accidentsis hitting fixed obstacles,e.g. parapets,poles, trees, etc. Drunk driving is stated to be a seriousproblem in Poland, in spite of legislationwhich decrees that drunk driving (bloodalcohol percent above 0.05) is a criminal offense. The engineeringaspects of road safety are addressedby Transprojekt,an autonomousbureau under MTME, who after reviewingroad sectionswhose accidentrate is above a threshold,design a program of measures-signs,markings, guardrails, etc. to reduce accidents which is then executed by GDDP.

Road Financing

2.26 National roads are financed from the Governmentcentral budget. Voivodshipsand the larger municipalitiesfinance roads under their jurisdictionsfrom their own revenueswhich showed a slow but fairly steady increaseup to 1979, then droppeddrastically in 1982, since when it has been increasingagain. The maintenanceshare of expendituresincreased substantiallyin 1979, from an averageof 35X in the previous decade, to some 50% since. The 1988 budget (Table 9) allocationfor maintenance,ZL 90 billion,would amount to about ZL 2.12 million (about US$5,600)per km (both routine and recurrent),which is reasonable,while the constructionbudget, ZL 57 billion (aboutUS$150 million) is very low. Implicit in the numbers is an extremelylow allocationfor new equipment,leaving a large proportionof the equipment over-aged.

2.27 The road user chargesconsist of fuel taxes, turnover taxes on the purchase of new and old vehicles and annual vehicle fees. The retail prices for diesel and gasolineare tied to the agreementsfor crude oil imports mainly from the Soviet Union which do not directly reflectworld market prices. Taxes levied in 1989 constitute68 and 531 of gasoline and diesel retail prices respectively. Fuel tax revenuewas estimatedto reach ZL 1622 billion in 1989 and is by far the single most importantsource of revenue from road users. The turnover tax on new and old vehiclesbeginning in March 1990 is 501 of the retail price and contributedin 1989 some ZL 16 billion. The vehicle fees were increasedby 22 times in 1990, and the estimateof these fees for 1990 is ZL 335 billion. All of these taxes go into state or local budgets being no earmarkingfor road purposes. Although the above charges cover by several times the total expendituresof GDDP, the question of road user charges and expenditureshas not really been studiedand some of the above figuresare rather conjectural. The project thereforeincludes a study of this question (para 3.18(iv)(c)). - 14 -

III. THELpJ.ECT

A. Obiectives

3.01 The Bank's overallstrategy is to supiportPoland's central development challengewhich is to reach a sustainablegrowth path which would strengthen the economy'sability to compete in the world markets and improveliving standardsat home while meeting its external debt burden. To achieve this it is fundamentalto: (i) reform the economic system to enable the economy to produce and distributemore efficiently; (ii) restructurethe outmoded and deficientproduction and maintenancefacilities; (iii) arrange substantial foreign assistanceto financethe restructuringefforts.

3.02 The project would support these objectivesand articulatethem in the transportsector. If measures like those included in the project are not undertaken,the transportsystem will deteriorateand constraintswill appear, drive up transportcosts at an acceleratingrate and ultimatelylead to significantcapacity bottlenecks. Althoughprivatization of a large part of the economy is an importantelement of economic reform in Poland,many of the organizationsin the transportsector, such as the railwaysand the highway administration,will remain in the public sphere for the foreseeablefuture and it iF vitally importantthat they too be modernizedand their efficiency be increased. In parallel,competition in the sector has to be increasedand certain activitiesdeveloped so as to become possible to privatize. The Bank also has a vital role as a catalystfor the supportand speedingup of the Government'sreform program as well as a conduit for the introductionof modern institutionalstructures, techniques and capabilities. The project, therefore,aims to: i) help the sector evolve from one characterizedby rigidities,central commands,narrow engineeringconsiderations, and capital- intensivesolutions to modern organizationalforms and managementstrategies adapted to a more open economy includingmeasures which will contributeto introducingcompetition in the transportsystem, such as increasingthe autonor,yof the enterprisesin the PKP group, and changingprocurement and marketingprocedures; ii) introducemore efficientinternal management systems and maintenanceprocedures as well as the equipmentnecessary to support this; and iii) train managers in modern managementtechniques; and (iv) improve physical and financialperformance. The projectwill focus on the maintenance requirementsof those parts of the railwayand highway systems which are deemed to be economicallyviable in the long run. Those parts of the system which do not have prospectsof economicviability should be abandoned,and within the project this objectivewould be pursued for uneconomicrailway lines, marshallingyards and stations. The project would modify the relationshipbetween PKP and two of its major manufacturingunits, ZWUS and ZNTKS. In addition,it would contributeto financialdiscipline in these entities by having the allocationsfrom the PKP loan to them made on commercialmarket terms. The projectwould also develop longer term plans for the restructuringand modernizationof operationsand maintenanceaccording to sound economiccriteria. - 15 -

B. Donsdaignl 3.03 The componentsof the proposedproject cover activitiesneeded to support the Goverrment'stransport sector restructuringprogram as well as componentsfor railways and highways. They are summarizedbelow and subsequentlyjustified in more detail (paras.3.04-18). Data used in the preparationof the project and the source material are listed in the Project File.

Railway Components

(i) Rolling Stock MaintenwAnceand Repair: Modernizationof the maintenanceequipment and facilitiesfor electric locomotives; improvementof freight car repairs;modernization of brake shoe manufacturing;

(ii) Track Mairtenanceand Repair: Productionand installationof more efficientraiz fastenings,improved turnouts on mainlinesand the productionof concretesleepers, setting up facilitiesfor reconditioningof rails; flash-buttwelding of rail joints; and import of track maintenancemachines as well as modernizationof the domesticrepair and constructionfacilities;

(iii) Signallingand Telecommunications(S&T): Modernizationof S&T productionfacilities to improve train operatingefficiency and improveddata processingfacilities;

(iv) OperatingManagement Information System (OMIS) to achievea coordinatedflow of data for managementdecision-making;

(v) Studies: (a) long-termlocomotive design and maintenance;(b) design of a modern managementinformation system (MIS) for train operationsand simulationas well as for generalmanagement purposes;and (c) rationalizationof train formationand dispatching. Other studieswill be identifiedas the sector reformsprogress.

(vi) InstitutionBuilding: Actions and developingconditions to move various ancillaryservices and manufacturingenterprises within PK? towardsbecoming autonomousenterprises including change in procurementand marketingprocedures. Training and professional contacts with Western institutionsand transportagencies for PRP's managers to acquireknow-how about Western methods of strategicplanning, economic analysisof investments,management of transportenterprises etc.

Mihway AdministrationComonents

(i) Developmentof a PavementManagement System includingtechnical assistanceand equipment; - 16 -

(ii) Quality control and testing laboratoryequipment.

Sector Reform Components

(i) TechnicalAssistance, Training and Studies for Sectoral Reform;

(ii) Program to reduce UneconomicRailway Lines and Stations;

(iii) Annual review of TransportSector InvestmentProgram;

(iv) PKP Financialand PhysicalPerformance; and

(v) Sectoral Studies: a) developmentof combined transports;b) road transportdevelopment; and, c) road user charges.

Electric LocomotiveMaintenance and Repair

3.04 This componentaddresses the maintenanceof heavy-haulelectric locomotivesin order to increaseavailability and performance. The focus is on: (i) improvingthe organizationalstructure which is ill-adaptedto the introductionof a modern unit-exchangesystem and thus increasedlocomotive availability; (ii) modernizingthe flow of work in the workshops to reduce the locomotiverepair time; (iii) improvingtraction motor performance throughbetter maintenancemachines; and (iv) introducinga higher level of specializationin the workshops and consequentlyupgrade the efficiencyof locomotivemaintenance (Annex 3). For this purpose the Bank loan will finance machines for workshops (Annex 4A), as well as a study to review long-term electric locomotivedesign and maintenancepractices (para. 3.12(i)).

Rolling Stock Maintenanceand ReRair

3.05 The efficiencyof PKP's fleet of some 80,000 4-axle coal cars is reduced by body damage and brake and brake shoe problems. The project proposes to centralizerolling stock repair in the workshop at Bydgoszczand provide the equipmentneeded for the introductionof a moduler repair system in order to achievehigher productivityand lower down-time. The developmentof this workshop into a specializedwagon repair facility and the down-sizingof its other subsidiaryactivities would be the principalobjective of this component.

3.06 For the maintenanceof operationalsafety, PKP has to ensure a continuoussupply of high qualitybrake shoes. They are at present produced in the Bydgoszczworkshops. The foundrynow in use is obsoletewith ensuing low efficiencyand productivity. The projectwill finance a complete continuouscasting chain with high efficiencyautomatic molding machines.

Track Maintenanceand ReRair

3.07 PKP's track is showing signs of fatiguecaused by the heavy traffic it carries without a commensurateprogram of intensivemaintenance at regular intervals. The present deficienciesin track maintenancestem from: - 17 -

(i) lack of adequate elastic rail fastenings;

(ii) failure to renew turnoutsin time;

(iii) a fleet of track maintenancemachines whose productivityis low because of age and obsolescence;and

(iv) lack of adequate ballast to stabilizethe track geometry since PKP does not have the requisitetamping capacity.

Bank financingis proposed to be applied to the followinghigh priority areas:

(a) SB-3 Elastic Rail FasteningSystem. A good elastic fastening system of the low maintenancetype will yield substantialbenefits through increasedtamping intervals,less rail creep and reduced track maintenancecosts. PKP's research institutehas developeda modern elastic fastenerwhich has alreadybeen tested,proven and is ready for manufacture. Project financingcovers the foreign exchange costs of importedequipment needed for the manufactureof the fasteningsand concrete sleepers.

(b) Imgrovementof Turnouts and Reconditioningof Rails. PKP has about 300 low speed orders due to turnouts in bad conditions. Rails are severelybent at the ends and have frequentwheel burns. Turnouts and rail in good conditionare crucial to safety and good track geometry. PKP's programmerightly concentrateson reconditioningand re-usingthese expensivecomponents. The reconditioningand improvementof turnoutswould require adoption of a new turnoutdesign which needs higher quality steel in line with modern Europeanpractice and which would save some 15,OOOtof steel annually. Cutting off rail ends, straighteningthem out and grinding the rail table are measuresneeded to enable old rails to be re-used; it is also necessaryto set up a line of concrete sleeper fabricationto ensure adequate track repairs. These regenerativenrocedures need machineryand equipmentwhich would be financedfrom the Bank loan.

(c) Fla3ih...B&ttWelding of Heat TreatedUIC-60 Rails. To increaserail life and to decrease track reconstruction,PKP is installingheat- treated rails on its most heavily used routes. To reap the full benefits of this program,modern flash butt welders are necessary. The project will equip two plants with welders and rail grinders.

(d) Track MaintenanceMachines. Due to foreign exchange scarcity,PKP has been unable to renew its machine fleet which is now deficient. This renewal is an urgent need. This will be met partly through direct import of track maintenancemachines (Annex 4B), partly throughmodernizing the PKP owned manufacturingfacility at Stargard (Annex 8). The Stargardworkshop has to be upgraded to meet the demand in volume and qualityof its production. In order to manufacturemodern high productivitymachines, machine tools - 18 -

from hard currency countrieswill be needed (Annex 4C). Modern technologywill be acquiredthrough joint vent-ureagreements giving the foreignpartner a share in the managementof the company. An evaluationof the Stargardworkshop managementand productioncapabilities in given in Annex 2. Signallingand Telecommunications

3.08 PKP has a well-establishedsubsidiary company, ZWUS, under its umbrella to manufacturesignalling equipment. A descriptionof ZWUS is in Annex 1. This company has to be strengthenedin two ways to enable it to meet PKP's signallingprogram during the 90s - (i) increasingproduction capacity of conventionalee'uipment, and (ii) acquiringthe machines and the technology needed to produce the more efficientelectronic microprocessor-based equipment and also introducemanagement partnership with the foreigncollaborator. This support is inescapableand urgent if PKP is to manage its trafficwith greater operatingand financialefficiency. Also the signallingmaintenance is handicappedby lack of tools and instruments. The list of productionmachines and maintenancetools and instrumentsto be financedby the project is in Annex 4D.

3.09 PKP's telecommunicationnetwork, which will be the back-bonefor operationalcontrol systemsand data transmission,is well-designedand has been constructedusing largely indigenouscable. However, network linkingand interfaceequipment is availableonly from the hard currencymarkets. The projectwill finance this data networkingequipment, without which the managementinformation system describedbelow cannot become operative.

ManagementInformation System (MIS)

3.10 PKP has a computer-basedstatistical unit which handles: (i) payroll; (ii) pension fund and (iii) trafficand operatingstatistics. Item (iii) is used for ex-post facto compilationand not as 'real-time"management tool for forward planning of train operations. The most urgent objectiveof the project in the domain of MIS is the creationof an OperatingManagement InformationSystem (OMIS)which would optimizePKP's operationsthrough: (i) improvedwagon and locomotiveutilization; (ii) real-timeoperational decisionsand planning and (iii) more efficientterminal and marshallingyard management. The OMIS would focus, in particular,on: locomotiveand wagon control; yard management;distribution of empty wagons; block train operations;container traffic; customer information;and a traffic costing system of sufficientdepth to providekey data for tariff and marketing decisions,and a system for passengerreservation. Workshopmanagement, track maintenancemonitoring, full cost accountingmodule, etc. will be superimposed on the informationnetwork at a subsequentstage. The design of the OMIS will be compatiblewith the HERMES informationsystem being set up in Europe by the InternationalRailway Union (UIC). The proposed loan would finance the direct foreign exchange cost of the computernetwork hardware and operationsand marketingsoftware. The bid documentswill provide the system performance specificationsand leave the bidders the desired flexibilityto submit alternativecost-effective solutions for the hardware and relatedsystems. The requirementsof the CoordinatingCommittee for MultilateralExports (COCOM)will be considered. It is essentialto completePhase II in order to v 19 v achieve full economicbenefits. However, the compositionof each phase will be based on the results of a study financedwith PPF funds. These arrangementswere discussedand agreed during Loan Negotiations(para. 6.02).

3.11 In order to carry out the detailed engineeringof this component,a study will be undertakenfor (i) elaborationof the system design including both hardware and software;(ii) prioritizingthe actions needed to interface PKP's system with the HERMES system,as soon as possible,at least by 1993, so that PKP will not lose its comparativeadvantage for transit and international traffic. Another significantobjective of this study will be to provide PKP senior managersand informationsystems specialistsan indepthhands-on experienceof the OMIS and trafficcosting systems already in operationin some of the advancedrailway systems in Europe and N. America. This approach integratesa guided learningphase with a participatorydesign and implementationphase. It is deemed to be a key element in ensuring the acceptabilityof the final design to PKP's managementan4 giving it their support. The Terms of Referencefor this Study are in Annex 5. Further technicalassistance needed during the post procurementimplementation phase has been included.

Studies

3.12 While supportingsome of the urgently needed investmentsas outlined above, there is a definiteneed to investigatecloser some of the long-termactivities and practices. A number of studieshave thereforebeen included in the project. During negotiationsagreement was reached that the progress on these studieswill be reviewedfrom time to time and that their findingswill be discussedwith the Bank not later than the end of 1992 (para 6.01).

(i) Review of long-termlocomotive design and maintenancepractices. Draft Terms of Referenceare in Annex 6.

(ii) Design of a modern managementinformation system (MIS) for train operationsas well as for general managementpurposes (para. 3.11 and Annex 5).

(iii) Study for the rationalizationof train formationand dispatching and their impact on the marshallingyard modernizationprogram. Draft Terms of Referenceare in Annex 7.

(iv) Collaborationbetween ZWUS/ZNTKSand foreign industryfor improvingmanagerial and financialperformance. Draft Terms of Referenceare in Annex 8.

3.13 One importantelement in the restructuringof PKP is a change in its relatianshipsto the serviceand manufacturingunits under its purview. The present umbilicalrelationship with essentiallyone supplier,one buyer with little or no competitionshould be replacedby a system where both PKP and the various units are free and capable to compete. In order to move towards that objectivethe units must evolve to become independententerprises. Since the - 20 - about 70 units involved operateunder vastly differentconditions, there is no single receipe that fits them all. The project thereforeincludes a provision for PKP to elaboratea strategynot later than by the end of 1991 on the transformationof its affiliatedunits towardsautonomous enterprises with transparentbusiness relationsto PKP and with the potentialto function in a market-basedsystem (para. 6.01). rte two enterprisesincluded in the project, ZWUS and ZNTKS, will develop their own marketing servicesand markets for their product (para. 5.08).

InstitutionBuilding

3.14 PKP's staff at the technicallevels are competentin their work. Their work is backed up by a substantialbody of supportingmanuals and technical literaturewhich provides them adequateguidance in their field work. The technicalresearch and trainingprograms appear adequate. However, there is a need for training in the use of new equipmentand technologyto be provided under the project. Relevant technicaltraining will be a part of the equipmentsupply contracts.

3.15 In addition,PKP's managers,just emerging from a centrallyplanned environment,are in need of managementtraining pertaining to questionssuch as cost control, tariff structures,and marketing in a competitive environment. They have to be sensitizedto the techniquesof data collection and informationutilization to achieve the above objectives. For this purpose, the project provides for (i) formal and informalcourses/study tours in railway managementtraining centers and in academic institutionsabroad; and (ii) participatorylearning by working with consultantson the studies planned under the project. Exchangeprograms with western transportagencies will also be organized (para. 6.01).

HighwayAdministration Components

3.16 PavementManagement System: In order to assist the Highway Administrationin developinga PavementManagement System (PMS), the project would financenecessary equipment presently lacking and technicalassistance and training. To phase the procurementof the equipmentwith the development of the PNS, GDDP has provided an Action Plan showing an outline of the system developmentprogram, with a timetable. Training in operation,calibration and maintenanceof equipmentwill be provided for under the supply contracts,but all other installationcosts, provisionof vehicles and installationof data logging equipmentfor towed devices, installationof detector loops, etc. in pavementswould be the responsibilityof GDDP. The project also provides for up to 6 man-months of technicalassistance and of overseas visits by GDDP staff in connectionwith developmentof the PMS, or installationand maintenanceof the equipmentitems. Items to be financedunder this component are shown in Annex 4E.

3.17 LaboratoryEguipment. The design of road pavementsand bituminousmixes and the supervisionof productionand laying is carried out by GDDP's 17 district road laboratories. Although these laboratoriesare generallywell staffed and possess the basic equipment,in many cases there is a lack of modern apparatus,especially for the controlof productionand laying of 21 - bituminouspavements. The project would supply the items shown in Annex 4E all of which representa major step forward in precisionand speed of operation.

3.18 Sector Reform Components

(i) ¶echnicalAssistance. Training and Studies for SectoralReform The restructuringof the transportsector in Poland aims at: (a) a decrease of Governmentsubsidies through better cost recovery; (b) improved efficiency;and (c) increasedmarket responsiveness. This process is underway for road transportservices where various measures are being implemented. These include the break-up of PKS into smaller independentcompanies, the creationof joint-venture companieswith foreignpartners, aiming at creating competition and reducingthe amount of own account trucking. For PKP the work on defininga strategy for restructuringis underway. The Governmentaims to maintain rail passengerservices as a social service which will require subsidiesalso in the future. The structureand level of these subsidieswill be reviewed,however, so as to reduce them. Freight serviceswill operate on purely market conditionsand for intercitypassenger services the objective is to radicallycut subsidies. The structureof PKP with its more than 60 subsidiaryunits in construction,industrial production,services, etc. will be changedwith the following objectives: (a) they will be required to operatecommercially; (b) they will become largely independentfrom PKP; (c) they, and PKP, will developnormal marketingarrangements with each other and with the outside, with PKP and the units selectingsuppliers and customerson a normal competitivebasis. The subsidiariesare foreseen to be restructuredin three possible ways: (a) into joint stock companies;(b) privatized;(c) into independentstate owned enterprises. The choice of solution requires studiesand analyses from various points of view. Such studies, in various degree of completion,are underway in the MTME. To support the Government in this restructuringeffort this componentfocuses on enterpriserestructuring and institution-buildingthrough technicalassistance, studies and staff training.

(ii) Closure of UneconomicRailway Lines and Stations Agreementwas reachedduring negotiationsthat not less than 1,000 km of uneconomicrailway lines be closed before June 30, 1995 with about 200 km annually. The 1991 closure programhas been submittedto the Bank and is satisfactory. Thereaftersuch programs would be presentedon an annual basis and followedby a descriptionof actual outcome at year's end, includingthe dispositionstaken in regard to surplus staff. For station closures the status of the ongoingstudies were discussedand the 1991 program agreed upon during negotiations;

(iii) Annual Review of TransportSector InvestmentProgram During negotiationsagreement was reachedthat the Bank would annually review and discuss the investmentprogram for the whole - 22 -

transportsector (para. 6.01). It would furthermorerequire that an increasingproportion of the investmentsbe subjectedto economic analysisaccording to methodologyacceptable to the Bank. The matter has been discussedwith the EconomicResearch Institute and it is proposed that this institutebe made responsiblefor this componentof the project. It is furtherproposed that the percentageof total investmentssubjected to analysisbe raised from 20X at the beginningto 80% at the end of the project in 1995;

(iv) PKP Operatingand FinancialPerformance

Operat.in,g&atigs: To improve its performanceagreement was reachedduring negotiationsthat PKP will reach operating targets as defined and with values as given in Annex 9 (para. 6.01>. The attainmentof the targetswill be monitoredand discussedannually with Bank. The actual values of the targetswere discussedand agreed upon during negotiations. PKP's operatingratios achieved during the previousfour years have been about 105. In order to reduce the demands on the Government'sbudget in future years, during negotiationsagreement was reached that PKP will reduce its operatingratio (operatingexpenditure/operating revenue), excludingsubsidies to not more than: 1991 - 104; 1992 - 102; 1993 onwards - 100 and its operatingratio includingsubsidies: 1991 onwards - not more than 90 (para. 6.01). This would mean a reductionof about 351 in real terms in Governmentsubsidies to PKP from 1993 onwardscompared to the 1988 level. This reduction is equivalentto about 9X of PKP's freight and passengerrevenue or about 66% of passengerrevenue alone. It is expected that PKP would achieve this objectivethrough a combinationof cost reductions,increased labor productivity,less unprofitable passengerservices and higher tariffs.

uhs_Jdy.kay.mant e__hQd. Presentlythe Governmentpays subsidies to cover the deficit in passengerservices based on projectedcost plus 61 profit less projectedrevenue. MTME, Ministry of Finance and PKP will review the method of calculationand payment of subsidiesto developa system based on considerationsoutlined in Annex 11. Agreementwas reachedduring negotiationsthat progress of the study be reviewed from time to time and that the proposed actionsbe discussedwith the Banscnot later than December 31, 1991 (para. 6.01).

Tariffs. The inflationrate in Poland is presentlyvery high. To ensure that PKP's revenue increasesin line with expenditures, agreementwas reachedat negotiationsto adjust tariffs in line with inflation(paras. 5.05, 6.01).

(v) Studes In order to provide the basis for policy decisionsthe following studies are included in the project: - 23 -

(a) neyelogmentof_Combiined Ir&nports. Various aspects of this question are presentlybeing studied in MTME, Departmentof TransportSystems. The study objectivesoutlined in the TransportSector Memorandumare being incorporated. These studieswere discussedduring negotiationsand further actions were agreed upon;

(b) ]opd_TraUsport_D_v&lgp_ent.The EconomicResearch Institute of MTME is carrying out studies on various aspects of road transportdevelopment. A proposal for a study, incorporatingpresently ongoing and planned activitiesas well as the points raised on this issue in the Transport Sector Memorandumhas been discussedand further actions agreed upon; and

(c) Ro_d_UserCharges. The questionof road user charges has importantimplications not only for the road transport sector but for other modes of transportas well. The Ministry of Financehas agreed to participatein a study on this subject. The outlineof such a study was discussed during negotiations;

(d) As the transportsector is reformed further studiesmay become necessary. The projecthas a lump sum allocationfor such future needs.

During negotiationsagreement was reached that progress of the studiesbe reviewed from time to time and that the findingsbe discussedwith the Bank as they are completedand before Governmentdecision based on these findingsare taken and in any case not later than the end of 1992 (para. 6.01).

C. Engineering

3.19 Detailed engineeringfor the track repair and rehabilitationas well as for the S&T componentsis substantiallycomplete and is satisfactoryfor computingoverall project costs. The revisedconceptual redesign of the locomotiveand rolling stock rehabilitationcomponent is based on a Workshop RehabilitationPlan preparedby the PKP. For the Highway Componentan Action Plan for the pavement managementsystem developmenthas been received and found satisfactory(para. 3.16).

D. Cost Estimates

3.20 The total project costs includingcontingencies are shown in Table 10. The project cost includesa foreignexchange component of US$173.00million and a local componentof US$43.50 million equivalent. Cost estimatesare based on PKP's and GDDP's detailedquantity estimates and unit prices updated to January 1989 prices. Most of the civil works relate to refurbishingof old buildings or the constructionof new structureswhich have already been substantiallycompleted. The cost estimatesexclude these costs. The cost of direct importswas estimatedat current internationalprices. Physical - 24 - contingenciesvary from 3X to 5X dependingon the engineeringnature of the project. Price contingenciesin foreign costs are computedbased on cost escalations(X) shown below:

1989 1990 1991 1992 1993 1994 1995 Foreign 7.2 7.2 4.4 4.4 4.4 4.4 4.4

3.21 The proposed Bank loans would finance the direct foreign exchange cost of the railway and highway components,training and technicalassistance. The project cost estimatesare summarizedin Table 3.1 below. The Rolling Stock maintenanceis cofinancedby EIB in respect of the foreignexchange component.

Table 3.1: Prolect Cost Estimate(Fiaures in US$ mitlion)

BASE COST PRICECONTING. PHYSIC.CONTING. TOTAL COST TOTAL OOMPNENT MLOCALFOREIGN TOTAL LOCALFOREIGN LOCAL FOREIGN LOCAL FOREIGNPROJ.COST A. Railways 1. Track achines 0.00 21.10 21.10 0.00 4.32 0.00 0.61 0.00 26.04 26.04 2. Track Maint. 20.77 34.40 55.17 4.78 7.54 .71 1.13 26.26 42.07 69.32 3. Rott.Stokmaint. .68 15.99 16.67 .12 3.54 .02 .48 .82 20.00 20.82 4. SignalLing .10 1.62 1.72 0.02 0.47 0.00 0.05 0.12 2.14 2.26 5. Tetecom.equfp. 2.60 10.40 13.00 0.50 1.61 0.08 0.34 3.18 12.35 15.53 6. MIS 6.00 25.00 31.00 1.02 4.32 0.18 1.25 7.20 30.57 37.77 7. Studies, etc. .79 2.21 3.00 .09 .75 0.05 0.12 0.93 3.08 4.00 B. ZNTKS 1.05 6.50 7.55 0.22 1.05 0.03 0.20 1.30 7.75 9.05 C. ZWUS 2.06 16.88 18.94 0.33 2.52 0.41 0.60 2.80 20.00 22.80 D. CDOP 0.22 2.70 2.92 0.02 0.39 0.02 0.11 0.26 3.20 3.46 E. MTME 0.52 4.45 0.09 WI7 0.03 0.16 0.64 4.80 i GRANDTOTAL 34.79 140.73 175.52 7.19 27.22 1.52 5.04 43.50 173.00 216.50

E. Financing

3.22 The estimatedcosts and financingof the project are summarizedin Table 3.2 below:

Table 3.2: ProjectCost Financing

Project Costs (US$ million) Project Component Local Foreign Total

PKP, of which 42.60 165.00 207.60 ZWUS (2.80) (20.00) (22.80) ZNTKS (1.30) (7.75) (9.05) GDDP 0.26 3.20 3.46 MTME O4 4.80 5.44

TOTAL 43.50 173.00 216.50 - 25 -

3.23 As the proposed Bank loans of $153 million togetherwith the EIB financingof $20 milliouzwould cover all the foreignexchange costs of the project, the additionalfunds requiredwould all be local. These would come from the regular investmentbudgets of the entities involved,i.e. PKP, ZWUS, ZNTKS, GDDP and MTME. During negotiations,the project financingwas reviewed and confirmed. Cross-effectivenessbetween the two Bank loans and the EIB loan apply (para. 6.02 (ii)).

3.24 Concessionalfinancing may be availableto carry out the preparatory work necessaryfor the MIS (para. 3.10). In case such financingshould fail to materialize,provision has been included for retroactivefinancing of this work (maximum$350,000 after April 1, 1990).

F. Tle Loans. the Borrowersand the Beneficiaries

3.25 The Borrowersof the proposed loans would be the Republic of Poland and Polish State Railways (PKP). The beneficiariesof the loan to the Republic would be GDDP, US$3.20 million and MTME, US$4.80 million. The Bank would enter into loan agreementswith the Governmentand PKP and sign a guarantee agreementwith the Governmentfor the PKP loan. US$20 million and US$7.75 million equivalentwould be allocatedfrom the PKP loan to ZWUS and ZNTKS respectivelyfor a period of 10 years including3 years of grace, at DM LIBOR plus 2X. The allocationswould be made in DM with PKP bearing the cross- currency risk between the DM and the Bank pool of currencies. The DM denominationwould minimize the currency risk since both ZWUS and ZNTKS trade predominantlyin the DM area. These arrangementswere confirmedwith the Governmentduring negotiations.

G. Implementation

3.26 Project coordinationand monitoringwill be accomplishedby a setup describedin Annex 10. Essentiallyeach implementingagency/beneficiary of the project will be responsiblefor the implementationof its own component. The coordinationat the apex level will be carried out by the Director of EngineeringPolicies (DEP) in the NTME and a nominee of the Projects wing of the National Bank of Poland (NBP). Inside each implementingagency, a unit coordinatorwill be responsiblefor monitoringphysical progress, disbursementsand project relatedcorrespondence and reportingto the DEP of the MTME. The establishmentof the Coordinationand Monitoringorganization and the appointmentof its officerswill be a conditionof loan effectiveness (para. 6.02).

3.27 Railway Comgonent. PKP has the requisitehuman resourcesand the basic expertiseneeded to undertakeproject monitoring and procurement.PKP's engineershave the technicalcapability to make bid evaluationsfor even complexbids. However, they lack knowledgeof and experiencein the applicationof the Bank's ProcurementGuidelines. It is thereforeproposed to organize a seminar on procurementin Poland during one of the early missions. In addition, it is proposed to provideexternal assistancefor preparationand translationof bidding documentsand for bid evaluationin the early stages to avoid delays. The installationof workshop machines and ancillaryworks will - 26 - be handled by the successfulbidder from among the eight construction companiesunder PKP. This will be the first time that these companieswill function in a competitiveenvironment. The installationof signalling manufacturingequipment will be the responsibilityof ZWUS. The supervision and managementof the overallproject would be entrustedto a Project ManagementGroup to be createdout of the existing staff of PKP and the Economic and TechnicalResearch Instituteand placed under the administrative control of the Deputy Director General (Technical)of PKP (Annex 10).

3.28 Highwav Cogonent. Implementationwill be the responsibilityof GDDP who will coordinatethe activitiesof its own departmentsand operating districtswhere the laboratoriesare located,and the inputs to the projectby the associatedagencies shown on Chart 2, e.g. Road Research Institute, Transprojekt,etc. Good working relationshipsexist between GDDP headquarters and the districts,and with the agencies,with whom informal contactsare possible at any time. GDDP and agency engineersare well trained,but are unfamiliarwith preparingspecifications or the Bank's procedures. They will take responsibilityfor technicaldecisions, but will be able to draw on advice from PKP's procurementunit, and will also attend the proposed procurementseminar.

Project ImolementationSchedule

3.29 The project is designed to be implementedin five years, July 1990 to June 1995. The project completiondate would be June 30, 1995 and the loan closing date would be December 31, 1995. Project implementationschedules are shown in the bar charts in Table 11. Having no civil works, it is consideredthat a five year implementationschedule is realistic.

3.30 Progressmade in the implementationof the policy and institutional reform incorporated in the proposed project would be monitored through the Bank's supervisionmissions and by the apex monitoringunit (para. 3.26) reportingtwice a year to the Minister and to the Bank. These reports will cover all policy and institutionalreforms contained in the Action Plan and will be reviewed and commentedon by the Bank. The format of these reports was discussedand confirmedduring negotiations. Other reportingrequirements are describedin para. 3.38.

H. Prgcurement

3.31 Until now, PKP's foreignequipment procurement has been managed by two state enterprises. For the proposed project PKP will manage directly the procurementprocess. PKP has set up a specializedprocurement unit, FERPOL, which is fully responsiblefor projectprocurement. The projectwill help improve the in-houseprocurement unit to take advantageof the new autonomy grantedby the Governmentfrom January 1989. The compositionof this unit, its role and authoritywill be fine-tunedat negotiations. Agreementon terms of referencefor this unit was be reachedduring negotiations(para 6.01). It would need technicalassistance and trainingfor which funds are available frot the project (para 3.18(iv)(d)). - 27 -

3.32 Procurementof 60X of the total project cost (or 72% of Bank financing) would be through InternationalCompetitive Bidding (ICB) in accordancewith the Bank's guidelinesand about 221 by InternationalShopping. The rest is for consultingservices consistentwith Bank guidelines. PKP's technical specificationstend to be modelled on the equipmentgenerally available in the Easternblock countries. Considerablepreliminary technical work has been done at appraisalto sensitizePKP to the need to prepare broad-based specificationsto take advantageof ICB procedures. PKP is already familiarizingitself with the documentation,technical information etc. needed to prepare specificationswhich incorporaterecent technological advances. The list of equipmentto be procured through ICB is given in Table 3.3 below. Except for some equipmentneeded for the expansionof the section of the facilitycurrently manufacturing Intrinsically Fail-Safe Relays of Swedishdesign, no proprietaryprocurement of any significantmagnitude is expected. Most of PKP procurementwith Bank financingis unavailablefrom local manufacturers. However, should domesticmanufacturers participate in the bidding, they would be accordeda preferenceof 15X or the applicable customs duties, whicheveris lower.

3.33 GDDP is less experiencedin procurementmatters and will use the expertisedeveloping in PKP. In view of the specializednature of the highway componentequipment and the small number of suppliers,ICB is not appropriate. Procurementwill be made on the basis of bids invited from short lists with which the Bank shall have concurred,i.e. Limited InternationalBidding (LIB). All bidding documentsand contractawards will be subject to prior review by the Bank.

3.34 All procurementwould follow Bank's Guidelines. All bid documentsand contractsfor bidding lots of US$200,000or more would be subject to prior review by the Bank. It is estimatedthat about 901 of the number of contracts for goods, amountingto US$138 million of Bank financingwill be capturedby this thresholdfor prior review. Contractsfor lesser amountswould be subject to ex-post review. Procurementof consultingservices and training would follow appropriateBank Guidelines. An estimatedtotal of 36 man months of foreign consultingservices and 50 man months of local consultingservices would be needed for the identifiedstudies and another 65 man months for the studiesnecessary for ZWUS and ZNTKS (para 3.12 (iv) and Annex 8) as well as for studies to be identifiedas the situationevolves. These procurement arrangementshave been agreed with the Governmentand the executingagencies, during negotiations. Table 3.3 below provides a summary of the type of procurementwhich would apply to goods and servicesunder the project. - 28 -

Table 3.3: ProcurementMethod

ProcurementMethod (US$ million)'" Project Element 1. LIB QthbrYe Total

Track MaintenanceMachines -- 26.04 -- 26.04 (26.04) (26.04) Track MaintenanceManufacture 42.67 0.40 26.26 69.33 (42.67) (0.40) -- (43.07)

Signalling 1.89 0.25 0.12 2.26 (1.89) (0.25) -- (2.14)

TelecommunicationsEquipment 12.05 0.30 3.18 15.53 (12.05) (0.30) -- (12.35)

Managing Info. System 29.77 0.80 7.20 37.77 (29.77) (0.80) -- (30.57)

Track EquipmentManufacture3J 6.25 1.50 1.30 9.05 (6.25) (1.50) -- (7.75)

Machines for ZWUS3I 16.85 1.50 2.55 20.90 (16.85) (1.50) - (18.35)

Highways -- 2.00 1.36 3.36 (2.00) (1.10) (3.10)

Studies -- -- 7.59 7.59 (6.60) (6.60)

InstitutionBuilding -- -- 3.85 3.85 (3.03) (3.03)

TOTAL 109.48 32.79 53.41 195.68 (109.48) (32.79)(10.73) (153.0)

Note: Figures in paranthesesare amounts financedby the Bank.

1/ Costs includeestimated price and physical contingencies. 2/ Includes internationalshopping and proprietaryprocurement. 3/ Includes technicaldesign costs of $2.5 million. 4/ Includes consultantsfees and study tours for PKP Managers. - 29 -

I. Disbursement

3.35 Disbursementswill cover:

(a) 100% of foreign (C.I.F.)or 100X of ex-factorycosts of equipment and materials;and

(b) 100% of foreignexpenditures for consultancyservices, training and studies, includingsystems design for informationservices.

With the exceptionof contractsvalued at US$200,000equivalent or less all withdrawal applicationswill be fully documented. Disbursementsagainst contractsvalued at US$200,000or less would be on the basis of Statementof Expenditures(SOE). Documentationto supportexpenditures financed under SOE would be maintainedby the ExecutingAgency/Borrower in one location and made availablefor review by Bank missionsupon request. In addition,the specificsof the audit of SOE's by auditors acceptableto the Bank was discussedand agreed at negotiations.

3.36 To maintain adequateavailability of funds to the executingagencies for eligible expenditureswith minimum delay, the Borrowerswill establishSpecial Accounts (revolvingfunds) in amountsof DM 500,000and DM 4 million (Governmentand PKP loan respectively). Records of the SpecialAccount transactionsshould be availablefor Bank missions and subject to annual audit under conditionsagreed at negotiations. The documentationneeded to be presentedfor replenishmentof the SpecialAccounts will follow standardBank practice.

3.37 Based on the loan becoming effectivein mid 1990, a schedule of estimateddisbursements is shown in Table 12. This schedule,indicates a 5 year disbursementperiod. This schedulewas discussedand confirmedat negotiations.

J. Beportingand Audit

3.38 The format of the quarterlyprogress and financialreports was confirmed at negotiations.

3.39 PKP's Central AccountingDepartment and the operatingdivisions have a staff of internalauditors and inspectorswho are continuouslyauditing PKP's operations. In addition,the accountsof the eight rail operatingregions and the affiliatedunits within PKP are audited annuallyby auditors assignedby PKP's CentralAccounting Department. Most, but not all, of these auditors hold audit qualificationsissued by the Ministry of Finance. The consolidated accounts of PKP are also audited annuallyby auditors appointedand paid by the Ministry of Finance. For the 1987 audit four individualauditors were appointed to undertakethe work. These auditorshold audit qualification issued by the Ministry of Finance and are full time employeesof other companieswho are releasedwith pay to undertakethe audit assignment. The terms of referencefor auditors require them "to verify all entries in the balance sheet based on evidence and documentationto ensure that the entry is - 30 - in accordancewith Polish law". The auditor is also required to verify that the amounts due to the Government'sbudget are correct. The principal objectiveof this audit is to ensure that all taxes due to the Governmentare paid. It thereforedoes not have the depth and scope of a generallyaccepted audit which the Governmentshould have to secure an objectiveevaluation of the resultsof enterprisesthe size of PKP, particularlyin the area of integrityof accounts,transfer pricing and in evaluatingenterprise performanceunder proposed restructuringprograms. In addition, the auditors as individualsdo not have the independence,unity of command, and public liabilityimplied in an audit context. To rapidlyestablish satisfactory audit organizationsand to provide them with adequate staff and support facilitiesto undertakean indepthaudit, the Governmentcould authorize qualifiedauditors to establishaudit companiesor audit institutesalong the lines of the economic or scientificinstitutes. A loan to strengthenPoland's financialsystems, includingthe audit function,is presentlyplanned for 1991. Aside from the above qualification,however, the audit proceduresmeet the generallyaccepted auditing standardof Poland and provide a satisfactory internaland complianceaudit system. These arrangementsshould be accepted by the Bank for an interimperiod of three years to enable the Governmentto implementthe necessaryreorganization and trairingof the audit profession. Audit firms with the necessaryindependence and support facilitiescould be availableby 1994. During negotiationsagreement was reached that the accounts of PKP, ZWUS and ZNTKS and the project accounts of GDDP will be audited annually by independentauditors and under terms of reference satisfactoryto the Bank and that the audit reportsbe submittedto the Bank not later than six months after the end of the fiscalyear except in the case of PKP's consolidatedaccounts for the years 1990 and 1991 when the audited accountswill be submittedwithin nine months.

K. EnvironmentalImnacts

3.40 The environmental screening of the project has been carried out in conformitywith the Bank's OperationalDirective 4.00, Annex A. (The project has been placed in CategoryB which includesprojects which have limited environmentalimpact and do not require an EnvironmentalAssessment.) The sector-wideenvironmental issues related to transportare vainly those having to do with vehicle emissions. Fuel efficiencyof cars and trucks in Poland is low and the gasolineused is leaded. How these factors relate to other environmentalconcerns is being addressedin the overall environmental strategywhich is presentlyunder elaboration. The present project deals with the environmentalconsequences of the project componentswhere it is expected to significantlycontribute to an urgently needed improvement. Those workshops in which investmentsare proposed,will be obliged to eliminate environmentaldamage includingthat of alreadyexisting installations. The coal car repair componentwill reduce,by an estimated80X, the present spillage from defectivewagons of some 500,000 tons annuallyonto the tracks and the consequentcoal contaminationof the environment. The improvedtrack and signallingwill reduce accidents. Road and rail track improvementswill significantlyreduce fuel consumptionby facilitatingnon-stop movement and improvingroad surfaces. The modernizationof the locomotiveworkshops will make for healthier,safer and more productiveworking conditions. The replacementof old mechanical signallingby electric signallingwill reduce - 31 -

the injuries among the polntsmen and field staff. Likewise, the modernization of marshalling yards will eliminate the intrinsically dangerous task of skid porters and brakemen who are engaged in stopping speeding wagons by risky means. The highway component will contribute to maximizing the effectiveness of maintenance funds which will have indirect effects on safety, noise, and drainage. None of the components of the proposed project would contribute to further environmental degradation.

3.41 During appraisal, the waste water treatment plants of the workshops in Bydgoszcz, Gliwice and Katowice were visited. The quality of the effluent is being regularly tested, particularly for heavy metals and the results are regularly monitored by management. Equipment for scrubbing of chimney gases functions in all PKP workshops but its efficiency requires upgrading in some cases. PKP is well aware of this and other environmental problems. Management has taken a serious view of the issues involved and has included in the investment program works which will upgrade the performance of the existing equipment for the scrubbing of flue gases and other effluents. During the project period, these investments will amount to ZL 560 million in Minsk, 30 million in Olesnica, 50 million in Gliwice and 283 million in Bydgosez, totalling US$0.5 million equivalent in improvements. PKP has agreed to carry out these investments. The flue gas and effluent treatments in .tte Stargard workshop need substantial improvements. ZNTKShas confirmed their intention to include appropriate investments as part of their ongoing modernization. An environmental program based on the above was detailed and agreed during negotiations (para. 6.01). - 32 -

IV. ECONOMICEVALUATION

A. Gengeral

4.01 Economic evaluationof projects in Poland is subjectedto systemic difficulties. These stem primarilyfrom the basic characteristicsinherent in the Polish economic system, in particularthe weak relationshipbetween prices and economic costs. In addition,there are difficultiesof assessingthe consequences,financial as well as physical,of various actions in the existing system because of the distortednature of incentives. The economic evaluationhas thereforeproceeded through a number of iterations. Feasibilitystudies were carried out for the main project componentsby appropriatePolish institutions. These studieshave been checked, discussed and, when necessary,modified by Bank staff. Particularly,whenever practicable,border prices have been used. Foreign exchangehas been shadow priced, using differentvalues rangingfrom the official to the parallel market rates.

B. ProjectCosts and Benefits

4.02 The project aims at modernizingthe transportsector to increase its efficiency. It is recognizedthat many of the existing installationsand proceduresare obsolete and operate at a very high cost to the economy. The proposed investmentswould result in more efficientroutines reducing the required amounts of staff, material inputs,and correctiveactions generally. Thus the benefits are those arising from higher availabilityof equipment, less frequent renewals,better use of existing facilitiesand thus ultimately less investments. They will accrue initiallyto the organizationswhere they are implemented,i.e., PKP, ZWUS, ZNtKS and the HighwaysAdministration and will lead to a generalizedimprovement of the quality and a reductionof the cost of transportservices, thus benefittingmost parts of the economy. The feasibilitystudies are detailed in the ProjectFile.

C. EconomicReturns

PKP Cominonents

4.03 It is assumed (para. 2.06) that no trafficgrowth takes place for the railways during the period under consideration. Foreign exchangehas been va'luedat its assumed equilibriumvalue which has been taken to be the mid point between the officialand the parallelmarket rates. ERRs based on the official and on the parallel market rates are given in parenthesis. Overall ERR is 25X (37, 18%)

4.04 Track Maintenance. The componentsyield ERRs between 23 and 15X (42 and 181; 22 and 121). The weighted average ERR for this category is 19% (29;15Z). Below a summary descriptionof the componentsis given:

i) Productionof the SB-3 Rail FasteningSystem. The benefits are, as comparedto the present fastenings, lower costs, less complicatedinstallation procedures, - 33 -

better durability,less maintenanceand longer lifetime. The estimatedERR is 181 (27;13X).

ii) Imorovementof Turnouts. The increasedquality, lifetime and reliabilityof the improvedturnouts would yield benefits due to reductionof slow speed orders and derailmentsas well as a reductionin the demand of turnouts,spare parts and maintenance. ERR is estimatedto 23% (26;22X).

iii) Reconditioningof Rails. This would decrease the amount of new rails needed, offset by the cost of reconditioning. Based on the internationalsteel price of December 1988, this yields an ERR of 21X (42;13X).

iv) Flash Butt Welding of Heat Treated Rails. The savingswill be in the form of lower demand for rails as well as a sizablereduction of track constructioncosts. The estimatedERFR is 15% (18;12X).

v) Constructionand Repair of Track MaintenanceMachines. A large portion of the existingmachines, close to 501, is obsolete and there is a shortageof machineswhich causes unsatisfactorytrack conditions. A more modern fleet of track maintenancemachines would make possible a better maintainedtrack with fewer speed restrictions. It is estimatedthat the number of slow orders would be progressivelyreduced by 31 p.a. to reach 301 in comparisonto what would be the case without the component. In addition,there would be a reductionin the repair and maintenance cost of the machines as well as an increase in their effective life. EstimatedERR is 181 (41;12X). The importedmachines are judged to have a similar ERR.

4.05 Rolling Stock Maintenance. The investmentsin this category all concern basic improvementsto obsolete installationswhich handle expensiveequipment (electriclocomotives and freightcdrs). There is an unquestionableneed to modernizethe installationsso that the rolling stock can be used more efficiently. The investmentsall yield high rates of return.

(i) Modernizationof the ElectricLocomotive WorkshoRs (ZNTK's)in Gliwice. Minsk Mazowieckiand Olesnica. The effects of the modernizationwill be better maintained locomotiveswith fewer breakdownsand improvedavailability and hence a lesser number of locomotivesrequired and reduced train operatingcosts from fewer breakdowns. This translatesinto an ERR of 30% (80; 18%).

(ii) Modular Freight Car Repair System. The projectwill decrease standing time of cars under repair as well as improvingquality of repair, thereby increasingtheir useful life. The higher degree of mechanizationwill lower the number of employeesfor which there are recruitmentproblems. The estimatedERR is 311 (72;19X). . 34 -

(iii) Modernizationof Brake Block Manufacturing. The present productionof brake blocks takes place in outmoded facilitieswith obsoletemachines. This componentwould substitutethese machines for more automaticones which are much more efficient. ERR is estimatedat 21% (68;11%).

4.06 Signallingand Telecommunications.The improvedsignalling and telecommunicationswill increasethe number of electricallyoperated switches, expand the automaticblock signallingand the centralizedand automatictrain control and modernizea reducednumber of marshallingyards. This will lead to more efficienttrain movementswith less waiting times and a reduceddemand for locomotivesas well as wagons, both passengerand freight. The estimated ERR is 272 (36;22%).

4.07 Highway Coimonents. It is not possible to compute an explicit ERR for either highway subcomponent. However,the funds saved by good quality control of constructiondone by an efficientlaboratory bring very high returnsbeyond any dispute. Countrieswhere pavementmanagement systems have been introduced report that the efficiencyof use of maintenancefunds improvesby between 10% and 25%, but the benefits due to timely maintenanceon preventingan increase in vehicle operatingcosts are usuallynearer an ERR of 40%.

4.08 Studies and InstitutionBuilding. The proposed studies are all directly linked to efforts to modernizethe transportsector and concern topics where immediateneeds for further clarificationof options is urgent.

D. Project Risks

4.09 A risk pertainingto the central objectivesof the project is the progress of the overall economicreform. Since the changes in the transport sector are dependenton this progress,any slowdown or reversalwould be reflectedin the sector. The specificinvestment projects in plant and equipmentare, however, not likely to be much affected by the macroeconomic circumstancessince they are justifiedunder a wide range of scenarios. On a differentlevel, the main risks are those inherentin any first project, i.e., a relativeunfamiliarity on both sides about each other which introduces uncertaintiesabout the implementationof the recommendedpolicies. Experiencehas shown that investmentsin Poland,especially those involving civil works, have sufferedconsiderable implementation delays. However, the absenceof major civil works from the project would minimize this risk. With respect to the estimatedERRs, the componentsremain viable under a wide range of assumptionsregarding costs and benefits. In fact, the single most importantfactor influencingthe ERR's is the valuationof foreign exchange. Assuming an increaseof about 50% in foreignexchange cost from its assumed equilibriumvalue, all projectcomponents remain economicallyjustified. - 35 -

V. gINACE

A. Introduetion

5.01 The degree to which financialstatements of enterprisesin Poland reflect economic realitiesare, for reasons inherentin the economicsystem, limited and uncertain. In recent years, the growth of inflation,without the adoption of a current cost accountingsystem, has further exacerbatedthe problem. Hence, the financialstatements do not necessarilyreflect the efficiencyor financialposition of enterprisesand should be interpretedwith caution. As both passengerand freight enterprisesin Poland operate in a monopolisticor semi-monopolisticmarket, the setting of administrativeprice and subsidieshas a major effect on the enterprises'financial results.

B. Accounting

5.02 Accounting regulationsin Poland are establishedby the Ministry of Finance. The basis of the accountingsystem is a Uniform Chart of Accounts which all companiesmust comply with. This Chart was designedprimarily to provide data for economicplanning, tax collectionand Governmentstatistics. Final accounts are prepared annually and interim results are reported semi- annually. This accountingsystem, however, is of little assistancein providinginformation either to the Ministry or management for monitoringand control of the operationsof the enterprises. To provide management information,PKP, ZWUS and ZNTKS operate internalaccounting systems which provide monthly reports on income and expenditure.

5.03 For accountingpurposes, PKP is divided into two major divisions: (i) transportdivision and (ii) supportdivision. The transportdivision consists of eight operatingrail regions and a number of service units and institutes. The support division consistsof 72 affiliatedunits engaged in production, constructionand maintenancework on PKP's rail infrastructure,traction and rolling stock. ZWUS and ZNTKS are two of the service units. Balance sheets and income accounts are preparedannually for the transportdivision and for each of the rail operatingregions but as traffic income is accountedfor separatelyat headquarters,the regionalaccounts are basicallyexpenditure statements. All units within the servicedivision have agreementscovering the price of their work for the transportdivision which are basicallycost plus prices (para. 5.08). This enables them to prepare separatebalance sheets and income accounts annually. All units reported a profit in 1987. PKP's final annual accountsconsist of a consolidatedbalance sheet and income accounts summarizingthe results of PKP transportdivision and the affiliated units. In conjunctionwith the installationof the MIS (para. 3.10) provision has been made in the terms of referencefor the allocationof operating revenueand expendituresto cost centers throughoutthe system which should improve significantlythe accountinginformation available to managementfor cost control, tariff setting and economicanalysis of the rail system. The GDDP accountingsystem is satisfactory. - 36 -

C. Tariffs. Subsidiesand Transfer Prices

5.04 Studies to review tariffsare initiatedby the MTME and undertakenby officialsof PKP. The studieswere undertakenannually but with increasing inflationtwo studieswere undertakenin 1988. Three adjustmentsof passenger tariffs and five adjustmentsin freight tariffswere made during the first eleven months of 1989. The study group consultswith the Ministriesof Finance and Transporton the major assumptionsto be used (e.g., level of inflation,rates of depreciation). Separatecalculations are made for freight and passenger tariffs. Direct costs, e.g., wages of train crews, fuel, etc., are allocateddirectly between freightand passengerservices. Indirector common costs, e.g., depreciationof track, signals,etc., are allocatedon the basis of 35% passengerand 65% freight. This allocationis the result of an in-depth study of costs undertakenin 1987. The study, which is updated every three or four years, is very detailed,and provides an equitableallocation. The tariff recommendationsof the study group are usually acceptedby MTME without a detailed independentreview. As this decision is one of the most critical for the transportsector, the Bank has recommendedin the TSM that the Ministry develop the capacity to review these proposals in detail and from time to time secure the assistanceof independentconsultants to undertakean objectiveevaluation of the tariffs.

5.05 MTME is authorizedto adjust tariffsbut informaldiscussions are held with the Ministry of Financebefore revised tariffs are implemented. MTME and not PKP issues new tariff schedules. Freight tariffsare set to give PKP an 81 profit on costs. PKP is a public carrierand so must accept all traffic offered at the publishedtariffs. However, recentlyPKP has been authorized to negotiate specialdiscounts with customersthat forward the major part of their freight by rail. With the recent accelerationof inflationin Poland, it is essential that tariffsbe adjustedfrequently, in line with inflationto ensure PKP financialviability. During negotiationsagreement was reached with the Governmentand PKP that tariffswill be adjusted in line with inflationplus the necessaryincrease to meet the agreed operatingratios at least four times per annum on the first day of each quarter, in accordance with a formula satisfactoryto the Bank (para 6.01).

5.06 In conjunctionwith the adjustmentof tariffs,the subsidy level for passengerservices is established. The subsidy is establishedto includea 6% profit for PKP based on costs. The standardpassenger tariff level has generallybeen establishedat below cost. In addition,there is a whole series of discounts,authorized in most cases by Parliament,accorded to various groups (civil servants,students, workers, etc.). To compensatePKP for the differencebetween the projectedcost of the servicesincluding the 6% profit and the projectedrevenue based on approved tariffs,a subsidy is paid monthly by the Government.The amount of this subsidy is calculatedas a percentage of PKP's projectedrevenue based on the approvedtariff level. The subsidy level for 1988 was ZL 214 for every ZL 100 collected from passengers which was reduced to ZL 189 for every ZL 100 at the beginningof 1989. The total operatingand capital contributionsfrom the Governmentduring the three years 1986-88 was as follows: - 37 -

Table 5.1: PassengerSubsidies gaid to PKP

1986 1987 1988

(CurrentZL Billion)

OperatingSubsidy for PassengerServices 102.6 101.0 209.8 Contribution/Equityfor Investment 23.7 27.0 18.5 Tax Rebate for Investment 6.7 18.2 39.3

Total 133.0 146.2 267.6

(ConstantDecember 1988 ZL billion)

Total 321.6 279.1 347.1

US$ million equivalentb/ 643 558 694

-4/ Estimate. h/ Based on the mid 1988 rate of exchangeUS$1 - ZL 500.

The operatingsubsidies represented about 15% of PKP's total revenue for 1988 and 1986 and 12% for 1987. Operatingsubsidies as a percentageof passenger revenuewere about 200% in 1988, 170% in 1987 and 240% in 1986. As PKP's debt is marginal,it did not receive a hidden subsidy in the form of debt devaluationunlike most other state enterprises. However, the current level of passengersubsidy is very high, particularlyin view of the Government's financialconstraints. To reduce this burden on the budget, there are provisions in the project (para. 3.18 (iii)) that the Governmentand PKP will take appropriateactions includingadjustment of tariffsto reduce PKP's operatingratio excludingcompensation from the 1988 level of about 105 (para 5.09) to not more than 104 for 1991, 102 for 1992 and 100 for 1993 onwards based on annual revaluationof assets acceptableto the Bank. To ensure that PKP generatessufficient revenue to meet its operatingcosts and investment requirements,the project also provides (para. 3.18 (iii)) that the operating ratio includingcompensation be maintainedat not more than 90 for 1991 onwards. This latter ratio is in line with past performanceand will require the Governmentto contributean operatingsubsidy of about 10% of total revenuecompared to the current rate of about 15%. These requirementsare projectedto reduce the passengeroperating subsidy from ZL272 billion in 1988 to ZL 183 billion in 1993 (December1988 price level).

5.07 The present practice of providinga 6% profit on operatingcosts as part of the passengeroperating subsidy (para 5.04) tends to reward, instead of penalize,the high cost producer. In addition,as the base tariff level is set below cost, all passengerservices operatedby PKP are subsidized. Such across-the-boardsubsidies cannot be justifiedon economic or social grounds. - 38 -

To prepare options for the Governmentto reduce subsidiesand to equitably allocate subsidypayments, a study will be carried out by Ministry of Finance, MTME and PKP (para. 3.18 (iii)).

5.08 The units affiliatedto PKP (para. 2.01) operate as semi-autonomous financialentities. As most of their work is undertakenfor PKP their income is based on mutually agreed transferprices. With the increase in inflation in recent years, these prices are often renegotiatedand have become de facto cost plus prices. To improve the transferpricing in the currentnon-market conditions,and to graduallyincrease the autonomy of these units, the procurementarrangements between the units in th.LPKP group should,where possible,be based on competitivebidding. This aspect is included in the elaborationof a strategy for its relationshipwith the affiliatedurLits that PKP will produce (para. 3.13). Because of current shortages,PKP takes the major part of ZWUS' and ZNTKS' output (paras.5.12 and 5.14). To enhance the efficiencyof these units, agreementwas reachedthat they develop their own marketingservices and markets for their productions.

D. Past FinancialPerformance

PKP

5.09 The financialstatements for PKP for the three years 1986 through 1988 are shown in Annex 12. PKP's operatingresults during this period were satisfactoryin the context of Europeanrailways with an operatingratio includingsubsidies ranging from 86 to 93. The operatingratio, excluding subsidiesfor passengerservices, ranged from 101 to 106. The amount of the operatingsubsidy doubled in current terms from ZL 103 billion in 1986 to ZL 210 billion in 1988 and representedabout 15X of PKP's total revenue in 1988. However, the real increase in subsidyafter taking inflationinto account representsonly an 8% increase over this period. No subsidiesare provided for freight services. PKP's rate of return on averagenet fixed assets was about 4% in 1987 and 7% in 1986 and 1988. Fixed assets were revalued in 1988 (para. 5.10). While PKPs rate of return is low, it is favorablecompared with the results of most European railways.

5.10 During the two year period ending December 31, 1988 PKP traffic increasedby 2.4%. PKP's revenue increasedby about 10% in real terms during the same period, however, this was more than offset by a 12% real increase in working expenses,which would indicatethat the railwaycosts were rising more rapidly than the generalproducer price index. Material costs rose by about 5% but wage costs rose by 13% and maintenancecosts by 18%, all in real terms. Assets were revaluedby 88% as of December 31, 1988, and the charge for depreciationwas adjusted for 1988 by increasingthe depreciationrates by 88%. The revaluationindex representsabout one-thirdof the increase in the Producer Price Index between January 1983, the date of the last revaluation, and December 1988. PKP's overall depreciationrate of about 2.7% is low. This is due in part to the fact that a substantialpart of PKP's traction and rolling stock has been fully depreciatedbut is still in operation. - 39 -

5.11 In addition to meeting debt service obligations,PKP's internalcash generationof ZL 336 billion provided about 72% of its capital investment during the three years 1986-88. The balance of the funds required was obtainedby local borrowing (13%) and Governmentcontributions for passenger equipment (15%). The Governmentcapital contributionof about ZL 70 billion was equivalentto about 80% of the tax on profits from freight servicespaid by PKP during the period. PKP's debt servicecoverage ranged from 4 in 1987 to 9 in 1988. PKP's debt equity ratio of 2:98 as of December 1988 is very low and has resulted from the Government'spolicy on subsidypayments and tariffs and, to a lesser extent, the Governmentcontribution to investmentfor passengerequipment. PKP's major financeproblem during the past decade was a shortage of convertibleforeign exchange. PKP was authorizedto acquire foreign exchange at the officialrate to meet its clearinghouse obligations for transportcosts to other railwaycompanies. The amount of foreign exchange availablefor other purposes,however, was very limited. As a result PKP experiencedconsiderable difficulties in securingappropriate materials, equipmentand spare parts to maintain the system. This almost completelack of foreign exchange,and not a general lack of funds or technicalexpertise, has been the major cause of PKP's maintenanceand operatingproblems and, in addition,has substantiallyincreased maintenance costs.

5.12 The financialstatements for ZWUS for the three years 1986 through 1988 are in Annex 13. About 60% of ZWUS's output during the last three years was sold to PKP, 30% to other Polish organizations,principally local authorities, and about 10% exported. Net profit on sales averagedabout 22%. This resulted in a rate of return on averagenet fixed assets ranging from 40% in 1986 to 61% in 1988. Fixed assets were revaluedin 1988 by 88% in line with the Government'sinstructions but this was substantiallyless than inflation since the last revaluationin 1983 (para 5.10). Therefore,the results,while appearingvery high, are in realityreasonable, allowing for the fact that fixed assets are undervaluedand depreciationunderstated.

5.13 ZWUS's sales increasedby about 100% in current zlotys during the period 1986-1988to ZL 8.2 billion but the increase in real terms was only about 6%. Total working expenses in real terms, however, remained stable which resulted in an increase in profitabilityduring the period. ZWUS's internalcash generationafter debt serviceof ZL 0.377 billion financedabout 90% of its investmentprogram of ZL 0.431 billion during the period. The balance of ZWUS's requirementswas financedby short-termborrowing. It had no long-term debt in its balance as of December 31, 1988. ZWUS paid about ZL 1.7 billion or about 43% of its net profit in taxes to the Government,16% was paid as a bonus to workers and the balance of 41X was retained.

ZNTKS

5.14 ZNTKS's financialstatements for the three years 1986-1988are in Annex 14. About 761 of ZNTKS's sales were purchasedby PKP, 18% sold to other Polish organizationsand 6% exported. ZNTKS's profit on sales was about 17%, v 40 - and its rate of return on averagenet fixed assets was about 40%. However, if the revaluationundertaken in December 1988 had been in line with inflation (para 5.10) the assets value would have doubled,thereby halving the rate of return. The resultingrate of return of over 20X is still satisfactoryeven if depreciationcharges were understatedduring the period.

5.15 ZNTKS's sales doubled in current zlotys terms to about ZL 6.7 billion but increasedby about 10% in real terms during the period 1986-88 to Z1 8.7 billion. Working expenses increasedby about 7% in real terms, thereby increasingZNTKS's level of profitability. ZNTKS's internalcash generation during the three year period of ZL 1.4 billion financedabout 75% of its investmentprogram of ZL 1.9 billion during the period. The balance of 25% of the investmentfunds were borrowed. ZNTKS paid about 45% of its net profit of ZL 2.5 billion during the period in taxes to the Government,13% was paid in staff bonuses, and the balance of 42% was retained. Debt servicecoverage was 5 times in 1988 and the debt equity ratio of 1:99 as of December 31, 1989, giving ZNTKS a strong financialbase.

General Directorateof Public Roads (GDDP)

5.16 The GDDP depends on Governmentbudget allocationsto finance its operations. The General Directo ate's expenditurefor the three years 1986-88 is shown in Table 9. During the period GDDP's budget increasedby about 90% to ZL 189 billion in 1988, howc er, in real terms the budget has remained static at about ZL 245 billioi in December1989 price levels. About 50% of the GDDP's funds were spent on routinemaintenance and about 30% on reconstructionof roads and bridges. The balance of funds of 20% was invested in constructionof new highways and motorways.

E. ForecastFinancial Performance

5.17 With the current high level of inflationand major politicalchanges underway in Poland, it is difficultto predict inflationwithin a reasonable degree of accuracy during the next few years. All the financialforecasts have, therefore,been prepared in constantend December 1988 Zlotys. An exchangerate of ZL 2,000 to the US dollar (the same as for the economic evaluation)was used in the base case forecastsfor conversionof the project'sforeign exchange costs and the Bank's loan to Zlotys. This rate is four times the official exchange rate as of December 1988 of ZL 500 to the US dollar as it was consideredthat the former rate better reflectedeconomic realities. All referencesto Zlotys in the remainderof this chapter are to constantend December 1988 Zlotys unless otherwisestated. A real positive interestrate of 5% p.a. was assumed for Bank funds to PKP and 7.5% p.a. for Bank funds to ZWUS and ZNTKS. The intereston local loans was projectedat 5X p.a. also in real terms. No estimatesof the effects of future major restructuringof the economy on the cost structureof PKP were made but provisionwas made for tariffsto be adjusted four times per year to ensure PKP's financialviability under the presentuncertain economic conditions (para 5.05). - 41 -

5.18 The forecast financialstatements for PKP for the nine years 1989-97 are shown in Annex 12. The projectionsare based on traffic remainingat the 1988 level during the projectedperiod (para 2.08). Expenditureon maintenance, particularlytrack maintenance,is expected to increase during the next five years to bring the level up to requiredstandards. In addition,reductions in operatingexpenses resultingfrom increasedlabor productivity,improved operationsand closure of unecontomiclines are projected,giving an overall modest net annual reductionin working expenses of about 0.5% commencingin 1992. With an increasedlevel of depreciationresulting from a higher rate of 3.31 compared to the historical2.7X and increasedinvestment, overall operatingexpenses are expected to increasemarginally. A substantial increase in real interestpayments has been forecastdue to a projectedhigher level of borrowingand the implementationof positive real interestrates. In 1989, a law2 was enactedwhich provided for the Governmentfrom January 1, 1990 to pay 50X of PKP's investmentin permanentway to assist PKP in providingpassenger service. During negotiationsconfirmation was received that funds provided under this law will be paid in lieu of existing subsidies and will not be additional.

5.19 Under the loan requirements(para. 5.06) PKP is to maintain an operating ratio includingcompensation of 90 from 1990 onwardsand achieve an operating ratio excludingcompensation of 105 in 1990 fallingto 104 in 1991, 102 in 1992 and 100 from 1993 onwards. To meet this reductionin the level of subsidies (para 5.04), subsidypayments are projected to decreaseby 30% from ZL 262 billion in 1990 to ZL 183 billion in 1993. Passengertariffs are assumed to increaseby about 16X in real terms and freight tariffsby 6% as part of a program to reduce the level of subsidiesand maintain the proposed ratios during the project period.

5.20 Based on the above assumptions,PKP's rate of return is projected to fall from about 71 in 1988 to about 51 in 1995 due mainly to a revaluationof assets, an increase in investmentsand the increasedrate of depreciation. The debt service coverage is projectedto range from 9 to 12 during the projectperiod and fall to 3 in 1996 when the repaymentof project loans are scheduledto commence. Debt equity ratio is projectedto change from 2:98 in 1988 to 14:86 in 1996. PKP's overallprojected financial position is satisfactory. To reduce the burden on the Government'sbudget, the projectionswere based on PKP borrowingall its external funds requirements with no equity investmentfrom the Government. As PKP can clearly meet its debt servicerequirements on borrowed funds, during negotiationsagreement was reached that the Governmentwill not contributeequity to PKP unless the debt equity ratio exceeds 20:80. To enable PKP to meet its foreign debt service obligationand secure essentialspare parts and equipment,PKP will be granted full access to the foreignexchange market in line with other commercial

I Act of April 27, 1989: "PKP Polish State Railways". - 42 - firms. This should allow PKP to initiallyinvite bids on selected items of equipmentand to graduallyreduce the present monopoly of its affiliated units. This is an essentialelement in the restructuringof PKP and its affiliatedunits. A debt coverage of not less than 1.3 was agreed (para. 6.01).

5.21 A sensitivityanalysis using the officialexchange rate of US$1.0 - ZL 500 was also undertaken. As the Bank project forms a small percentage (132) of PKP's investmentprogram and as PKP has very limited direct access to foreign exchange income, the effect of the change is marginal except that the debt service coverage in 1996 would improve from 3.3 to 5.0.

5.22 A summaryof PKP's anticipatedsources and applicationof funds for the project implementationperiod 1990-95 is shown below.

Table 5.2: PKP FinancingPlan 1990-95

Sources of Funds ZL Billions USS Million X

(Constantend 1988 prices)

Gross InternalCash Generation 1,536.7 768.4 81 Less Debt Service 158.4 7L. 8 Net Internal Cash Generation 1,378.3 689.2 73 Grants 50.0 25.0 3 Loans: IBRD Loan - PKP Transport 196.6 98.3w 10 - ZWUS 35.0 17.5 2 - ZNTKS 13.4 6.7 1 Other loans 227.8 113.9 11 1901.1 950.6 100 Allocationof Funds

Project Investment 293.5 146.8!/ 15 Other Investment 1,569.3 784.7 83 Increase in Working Capital 38.3 19.2 2 1.901.1 250.6 100

Note: Exchange rate used was US$1.00 - ZL 2,000

A/ The differenceof US$18.95 millionbetween the proposedBank loan of US$117.25million and US$98.3 million representsprice contingencies. bi The differenceof US$28.95 millionbetween the proposedproject investment of US$175.75million and US$146.8million representsprice contingencies.

In keeping with PKP's past finance performance the major part -- 73X -- of its investmentrequirements of ZL 1,901 billion equivalentshould be provided by internalcash generation. Grants paid in 1990 should provide 32. The - 43 - proposed IBRD loan to PKP (Transport)of ZL 196.6 billionwill provide 10 and the IBRD loans for ZWUS and ZNTKS of ZL 48.4 billionwill provide an additional31. The balance of the requirementsof 141 should be providedby local loans.

5.23 The forecast financialstatements for ZUUS for the nine years 1989-97 are shown in Annex 13. The projectionsare based on a gradual increase in output to achieve an overall increaseof about 60X over the nine year period. The proposed investmentduring the project period 1990-95of about ZL 44 billion will replace only part of ZWUS fixed assets in physical terms. Over 851 of this investmentconsists of importedmachinery and this, togetherwith the high exchange rate assumed (para. 5.17) and the undervaluationo' existing assets, resulted in a eightfoldincrease in ZWUS's net fixed assets value during the project period from ZL 4.6 billion to ZL 42.6 billions. This major increase in fixed assets coupledwith an increasein the depreciationrate from about 2.61 in 1988 to 41 used in the projectionswould result in a fall in ZrWUS'srate of return on averagenet fixed from about 611 in 1988 to a projectedrate of about 8X in 1995. In addition,ZWUS debt/equityratio would increase to 72:18 and debt servicecoverage would fall to 0.4 in 1994. Therefore,to ensure a viable financialstructure for ZWUS it was assumed in preparingthe base forecaststhat the price of ZlUS's output would be increasedin real terms by 331 in 1992. This results in a percentagenet profit on sales of about 331, about 401 higher than the level during the three years 1986-89. The rate of return on averagenet fixed assets ranges from 23Z to 841 during the project constructionperiod and averages about 211 after the project is compled. The debt servicecoverage in 1994, the first year for full debt service, is 1.1 and increasesto 1.4 in 1997. The debt/equityratio in 1994 is projectedat 49:51 but to improverapidly to 27:73 by 1997.

5.24 At present ZWUS is the sole supplierof signal equipment to PKP so there would be no problem in increasingprices by 331 in real terms to cover costs. However, to test the assumptionthat ZWUS could secure the necessaryrevenues in a competitiveenvironment, a sensitivityanalysis was undertaken. First ZWUS's export sales revenueswere convertedusing the assumedexchange rate for investmentsof US$1.00 - ZL 2,000. This resulted in increasingZWUS's net profit as a percentageof sales from 331 to about 701. The range of rates of return on averagenet fixed assets would increase to 431-1011. Debt service coverage 1994 would increasefrom 1.1 to 2.2 and the debt/equityby 1996 would fall to 35:65. Secondly,the officialexchange rate as of December 1988 of US$1.00 ZL 500 was used to convert the project cost to Zlotys. This resulted in the projectedpercentage profit on sales for ZWUS ranging from 272 to 441, rates of return on averagenet fixed assets of 651 to 951, a debt service coverage of 4.3 in 1994 and a debt/equityratio of 19:81. The base forecastsare calculatedusing conservativeassumptions to confirm that ZWUS would be financiallyviable in an unstable economicenvironment where major devaluation,inflation and restructuringare foreseenbefore a new economic equilibriumcan be established. ZWUS's actual results should lie somewhere between the projectedbase case and the two other options. The assumptionon price increasesis also justifiedbased on the substantiallyhigher prices charged for the equipmentexported by ZlUS and the prices for equipment - 44 - supplied to PKP. To ensure that ZWUS maintainsa sound financialposition, during negotiationsagreement was reached that ZWUS will maintain a rate of return of not less than 16% on averagenet fixed assets revaluedannually before additionalinvestments in excess of DM 200,000 equivalentcan be undertaken (para. 6.01). A debt servicecoverage of not less than 1.3 was also be agreed (para. 6.01). The financialrate of return (FRR) calculatedon an incrementalcost and reservebasis is 18.9% but as the major part of the investmentis to replaceexisting machinery,the overall FRR is substantially higher than this figure.

5.25 A summary of ZWUS's anticipatedsources and applicationof funds for the project implementationperiod Is shown below.

Table 5.3: ZWUS FinancingPlan 1990-95

Sources of Funds ZL billion US million X (constantend 1988 Prices)

Gross Internal Cash Generation 33.5 16.7 64 Less Debt Service 15.9 i9 30 Net Internal Cash Generation 17.6 8.8 34 IBRD Loan 35.0 1Z.5!1 66

Total Sources 52.6 26.3 100

AnDlicationof Funds

Project Investment 40.0 20.0!/ 76 Other Investment 4.0 2.0 8 Increase/Decreasein Working Capital X. 4.3 16

Total Application 52.6 26.3 100

Note: Exchange rate used was US$1.00 ZL 2,000. a/ The differenceof US$2.5 millionbetween the propcsed Bank loan of US$20.0 million and US$17.5million representsprice contingencies. b/ The differenceof US$2.8 millionbetween the proposedproject investment of US$22.8 million and US$20.0 million representsprice contirgencies.

As the proposed annual investmentduring the project period is many times higher than ZWUS's recent investment,ZWUS's net internal cash generationof ZL 18 billion (US$9 million)will finance34X of its financialrequirement compared to about 90% in recent years (para. 5.13). The Bank loan will provide the balance of funds of 66X. About 76% of ZWUS's funds will be invested in the projectwith an additional8% investedin other works. The increase in working capital, ZL 9.0 billion, represents16% of funds. - 45

ZNTKSi

5.26 The forecast financialstatements for ZNTKS for the nine years 1989-97 are shown in Annex 14. The projectionsare based on a gradual increase in output which results in an overall increasein output of about 35% over the nine year period. To maintain ZNTKS financialviability a real increase in prices of 5% in 1994 was assumed. The real increasein prices is justified, as in the case of ZWUS, based on the differencesin prices paid by PKP and the prices receivedby ZNTKS for equipmentexported (para. 5.24). The project investmentof ZL 15.5 billion will increaseZNTKS's net fixed asset value by about 200%. In making the financialforecasts, depreciation was calculatedat 5.3% comparedwith the 3.01 used in recent years. In spite of the conservativeassumption used in the financialforecasts and the substantial increasein borrowing,ZNTKS should be financiallyviable with a 5% real increase in sale prices.

5.27 ZNTKS's percentageprofit on sales is forecast to average about 141 during the project period, about 31 lower than in recent years. The rate of return on average net fixed assets is projectedto range between 15% and 281 and averagingabout 21% during the period 1990-97. Debt service coveragein 1994, the first year of repayments,is forecastat 1.0 rising to 1.3 in 1997 and the debt equity ratio at 49:51. These results are satisfactoryexcept that the debt service is very low. However, as the projectionsare based on very conservativeassumptions, the actual results are likely to be substantiallybetter. If export sales were calculatedusing US$1.00 - ZL 2,000, the percentageprofit on sales would increase to an average of about 381 and the rate of return on averagenet fixed assets would range from 32% to 651. Debt service coveragewould increaseto 1.5 in 1994 and the debt equity ratio would decrease to 32:68. If the officialexchange rate of US$1.00 - ZL 500 was assumed for conversionof the project's foreignexchange cost to Zlotys, the profit as a percentageof sales would be 191, rates on return on average net fixed assets would average 35%, the debt service coverage in 1994 would be 2.6 and the debt equity ratio would be 36:64. As in the case of ZWUS the actual results should lie somewherebetween the base case projected results and the two other options. To ensure that ZNTKS maintainsa sound financialposition, during negotiationsagreement was reached that ZNTKS will maintain an annual rate of return on averagenet fixed assets revalued annually of not less than 161 before additionalinvestments in excess of DM 200,000equivalent can be undertaken(para. 6.03). A debt service coverageof net less than 1.3 was also agreed (para.6.03). The FRR calculatedon an incrementalcost and revenue bases on the base case is 5.3% but if export sales were calculatedusing US$1.00 - ZL 2,000, the FRR would be 92.41. As the major part of the investmentis to replaceexisting machinery the FRR evaluatedon the above two bases would be considerablyhigher.

5.28 A summarv of ZNTKS'sprojected sources and applicationof funds for the project period is shown below. - 46 -

Table 5.4: ZNTKS FinancingPlan 1990-95

Sources of Funda ZL billign USS million X (constantend 1988 prices)

Gross InternalCash Generation 11.7 5.8 65 Less Debt Service i.s 3.5 39 Net Internal Cash Generation 4.7 2.3 26 IBRD Loan 13. 6 .7 74

Total Sources 18.1 9.0 100

Aoplication of Funds

Project Cost 15.5 7.8!/ 86 Other Investments 1.1 0.6 6 Increase in Net Working Capital 1.5 0.6 8

Total Application 18.1 9.0 100

Note: Exchange rate used was US$1.00 ZL 2,000. a/ The differenceof US$1.05million between the nroposed Bank loan of US$7.75 million and US$6.7 million representsprice contingencies. b/ The differenceof US$1.2 millionbetween the proposed project investment of US$9.0 million and US$7.8 million representsprice contingencies.

As the level of investmentduring the project period will increase substantiallycompared with past investmentlevels, ZNTKs net internalcash generationas a percentageof its investmentrequirements will fall from about 75% prior to 1989 to about 262. The Bank l_an will provide the other 74% of requirements. About 862 of the funds will be requiredfor project financing and 6% for other investments. The balance of 8% will be required for increasingworking capital. - 47 -

VI. AGREEMENTSRECHED AND RECOMMENDATIONS

6.01 During loan negotiationsagreements were reachedwith the Borrowerson the following:

(i) a program of closureof uneconomicrailway lines and stations (para. 3.18 (ii));

(ii) review and discussionof transportsector investmentprograms (para. 3.18 (iii));

(iii) PKP physical and financialperformance, subsidy payment method and tariff adjustments(para. 3.18 (iv));

(iv) carrying out of studies, the findingsof which to be discussed with the Bank (paras.3.12, 3.13 and 3.18 (v));

(v) satisfactoryenvironmental protection measures (para. 3.41);

(vi) ZNKTS' and ZWUS' marketingarrangements (para 5.08);

(vii) PKP financingand debt coverage (para. 5.20);

(viii) ZWUSrate of return and debt service coverage (para. 5.24);

(ix) ZNTKS rate of return and debt service coverage (para. 5.27).

(x) agreementwith the Bank on terms of referencefor the Procurement Unit (para. 3.31).

6.02 The followingwould be conditionsfor loan effectiveness:

(i) establishmentof the Coordinatingand Monitoringorganization and appointmentof its officers (both loans) (para. 3.26);

(ii) effectivenessof the EIB loan (para. 3.23).

6.03 Based on the above agreementsthe project is suitable for two Bank loans totallingUS$153 million for a period of 17 years includingfive years of grace. - 48 -

ANNEX 1 Page 1 of 3

POIAND

STAFF APPRAISALREPORT

FIRST TRANSPORTPROJECT

Managementand Performanceof ZWUS

Statute of the Company

1. ZWUS is a fully-ownedsubsidiary of PKP. For administrativepurposes, it is under the control of the Ministry of Transport,but reports through PKP's GeneralManager. For all technicalpurposes, the GM of ZWUS takes orders from the Director of the Departmentof Automaticsand Telecommunications(DAT) in PKP's generalheadquarters. It has a Board of Directorsappointed by the Minister of Transport. This Board is a part-time board and has the Directorof DAT as an ex-officiomember. ZWUS also has a Workers Council electedby the staff.

2. By decree, the Company is expectedto be run on a "fully self-supporting basis". Its investmentand developmentalactivities are subject to the policies laid down by PKP's generalmanagement. Funding for investmentsand modernizationcomes mostly from internalcash generation. ZWUS is authorized to borrow for its capital investmentand working capitalneeds.

Managementand Staffing Structure

3. ZWUS is managed by a full-timeGeneral Manager, assistedby two deputies,one for technicalmatters and the other for economic and financial management. There is an AccountantGeneral, who is equal in rank to the deputies and is in charge of the accountingand internal audit functions.

4. In addition to full-fledgeddesign and data-processingcenters at its headquartersin Katowice,it has three main productionfacilities: (i) electric and electronicsignalling at Katowice; (ii) electromechanical equipmentat Zory; and (iii) system design,production and testingat Rybnik. Each of these factoriesis technicallyautonomous under its own manager,but the over-all managerialcontrol of finances,staffing and other corporate strategy is provided by the GM of ZWUS. These three factorieshave a total staffing of 2400, of which 100 have engineeringqualifications. This does not include 2500 staff employedby the signallingconstruction companies for field work. - 49 -

Page 2 of 3

CorporateObiectives

5. Nominally,ZWUS has the freedom to design its own corporateplan but its unique position as a feeder industryto PKP to supply equipmentand spare parts for its signallingsystems places it, simultaneously,in a monopsonic and monopolisticposition. This is a single most importantdeterminant which shapes the entire corporatestrategy of ZWUS. In return for this hostage status, ZWUS is able to negotiateits prices on a 'cost plus' basis with PKP.

6. TechnicalManagement of ZWUS and in particularits productionprogram is influencedby PKP's annual forecastof its capital investmentsand maintenance needs. During the last three years, ZWUS's productionwas sold to three principalcustomers: 60% to PKP, 30X to Polish industryother than PKP and about lCZ exported. Export sales relate mainly to ZWUS's productionline for relays which has been installedand operatingunder licenseV from Ericcson'sof Sweden. Because of the price advantage'of productionin Poland, Ericcsonbuys back about 40,000 relays or about 12X of ZWUS's relay productioncapacity. ZWUS is unable to step up its exports,because its present capacity is not sufficientto meet PKP's project needs even at current levels of investment. The present World Bank aided projecthas thereforetwo objectives:

(a) increase the capacity for productionof conventionalsignalling equipment;and

(b) developnew capacity for electronicsignalling equipment like axle counters,computerized CTC and dispatching,automated controls for MYs etc.

7. In FinancialManagement, ZWUS is mandated to provide a positive return on capital from its operations. ZWUS can raise its working capital by borrowing from Banks and other external financialinstitutions. ZWUS is responsibleto cover its depreciationand developmentneeds by incorporating them in the prices charged to PKP for goods and services. ZWUS enjoys autonomy in its export/importfunctions, foreign collaboration etc. Part of the foreignexchange earnings from exportscan be retainedby ZWUS.

8. In PersonnelManagement, ZWUS is expected to conform to nationally legislatedpay scales and regulate the staffing in order to fulfill its financialobligation to earn an agreed return on fixed assets. ZWUS is obliged (i) to give its employeesall the perquisitesand privilegesenjoyed by PKP's mainstream staff and (ii) to provide social benefits like housing, house building advances etc. to its staff in line with PKP's current policies.

JJ Licensingagreement lasted from 1972 to 1982. Now ZWUS i3 free to export its products without an.ylimitation whatsoever.

,V Point machines are sold at $1400 in the internationalmarket while ZWUS's price is $710. - 50 -

ANNEX 1 Page 3 of 3

The level is considerablyabove the level of industryin general.

IndustrialClimate

9. ZWUS operates in an industrialclimate which is governedby Government's labor policies and PKP's practicesin the domain. The workers participatein ZWUS's managementin two ways through the ZWUS delegatesmeeting and the Workers Council. They have the right to express their views on all matters concerningZWUS's activitieswith no exceptionand are authorizedto undertake initiativesand submit proposals.

FinancialPerformance

10. During the last three years, ZWUS's net profit on sales averaged 22%, which yielded a rate of return on net fixed assets ranging from 40% in 1986 to 61% in 1988. Fixed assets were revalued in 1988 by 88% in line with Governmentpolicy.

11. Between 1986 and 1988, ZWUS's sales increasedby about 100% in current terms, and by about 5% in real terms. However, working expenses remained stationaryand resulted in higher profitability. ZWUS's internal cash generationafter debt service,about ZL 377 million (or US$750,000equivalent) financed about 90X of its investmentprogram. However, these investmentswere in the nature of arrears of maintenanceand were far below the level needed to increaseproduction volumes or open up a more modern range of products. In short, ZWUS has not investedin equippingitself to meet the demands of PKP and the market in general, in both these aspects. This conservative investmentpolicy was the result of the lack of foreignexchange needed to modernizeits facilities. While technicallyZWUS's productionlagged behind, the unintendedbenefit was that it had no long term debt as of December 31, 1988. ZWUS paid ZL 1.7 billion or about 43% of its net profit in taxes to the Government,16% as bonus to workers and retained the balance of 41%.

12. The future financialstrategy for ZWUS is linked closely to the proposed World Bank aided project. In return for a projectedinvestment of about ZL 40 billion, output will increaseby 45% in nine years. Coeval with the increase in its net fixed assets from ZL 4.5 billion to 42.6 billion, its depreciation will increase from a presentlyunderstated 2.6% in 1988 to a more reasonable 41 in the future. The projectedannual rate of return on net fixed assets should average at 58% for the next five years but fall to about 20% from 1995 onwards. The debt servicecoverage will be 1.4 in 1997. In addition,the project would help to raise the export percentagefrom the current 10% of productionto 20% of ZWUS's projectedoutput.

ProiectInputs

13. The Bank project is focusedon the improvementof ZWUS's machinery, electronicinstrumentation and the introductionof new technologyneeded for axle counters etc. The inputswould be localizedto two out of the three productionfacilities: Katowice and Zory. ~~~~~~~~~~~~~~~~~~Attachmientto Annex 1 .

. . .

t9rollt U Equipn;en~ *~~~~~eeo A 9 PIonufItLarin9 Works * /{bCp;\ ~~~~~~~~~~~~~/

v -

I' I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~t. .*. - 52 -

ANNEX 2 Page 1 of 2

POLAND

STAFF APPRAISALREPORT

FIRST TRANSPORTPROJECT

Managementand Performanceof ZNTKS

Legal Status and Role of the ComRany

1. As of July 1982, the Polish Governmentpassed a decree consolidating most railway industrialestablishments within "PolishState Railways"or PKP. Till then, most of the workshops, set up to serve the local or regionalneeds, existed as separateunits.

2. ZNTKS or the "Enterprisefor the repair of rolling stock at Stargard" had, in addition to the traditionalrole of maintenanceof rolling stock, a facility for the productionand maintenanceof Track MaintenanceMachines (TMM). The Bank has recommendedthat PKP resort to a higher level of specializationin its workshops. In line with this recommendation,ZNTKS will give up a substantialportion of its rolling stock maintenanceto other workshops (Bydgoszcz)and focus on the manufactureand maintenanceof track maintenancemachines (TMMs).

3. This company is constitutedas an autonomousprofit center under PKP which is the holding company. The managementof ZNTKS reports to the DG of PKP on all technicaland operationalmatters and throughhim to the Ministry of Transporton major administrativematters. The GM of ZNTKS, assistedby one deputy, is in charge of the managementof the facility. They are appointedby the DG of PKP (Organizationin AttachmentII).

Management and ManRower Structure

4. ZNTKS is managed by a GM and a deputy and five heads of departments, engineering,economics includingfinance, production, accounting and administration. The facilityhas five main generalareas of specialization, power hydraulics,electronic systems, structuralwelding and construction, protectivecoatings and regenerationof parts - each of which is managed by a specialistworks manager.

5. It is estimatedthat the demand for ZNTKS'sTMMs products in 1995 will require a labor input of 1.1 million man hours or about 850 workers at current levels of productivity. However, the new high-outputmachines, tighter time- work norms, modern managementtechniques and the automationof the work stations are expected to reduce this labor force to 480 workers. At present, there are 288 workers engaged in wagon repair. However,with the progressive - 53 -

ANEX 2 Page 2 of 2 reductionof the wagon repair and ancillaryactivities, it is anticipatedthat 144 workers will be redeployedin TMMs, leavinga shortfallof some 50 workers.

Market for ZNTKS

6. Currently,ZNTKS is manufacturinglow-productivity track tamping machines which meet part of PKP's requirements. But with increasingaxle loads and speeds carriedby the tracks, the desirabilityof manual maintenance drops sharply and mechanizationbecomes a necessity. With the older type of machines,the track occupationtime per unit of work is significantand needs drastic reductionin order not to consumevaluable line capacity. With these objectives,PKP has been progressivelyincreasing the level of mechanization from a deployed power of 0.24 kW per km per year in 1960 to 4.7 kW/km in 1985. Studieshave shown that even at current levels of mechanisation,the number of speed restrictions,arrears of ballast and sleeper renewalwill continue to increaseunless PKP's machine fleet is increasedto 9kW/km in 1995. Accordingly,the machines needed for adequate track maintenancein 1995 is given in AttachmentI. (This could vary from year to year). The list of investmentsneeded to equip ZNTKS to be able to produce this or an equivalent list of machines with a differentcomposition is given in Annex 4C.

FinancialPerformance

7. About 80X of ZNTKS' sales are to PKP, about 15% to Polish industryand 5% exported. ZNTKS' net profit on sales usually is about 17%. Its rate of return on average net fixed assets is about 40%. ZNTKS' sales doubled in currentZlotis between 1986 and 1988 but increasedby only 10% in real terms. During the same period, working expenses rose by some 7% in real terms, increasingprofitability. ZNTKS' internalcash generation,during this three year period,was ZL 1.4 billion, which financedabout 75% of its investments in this period. The balance of 25% of the investmentfunds were borrowed. ZNTK paid about 45% of its net profit as taxes to the government,13% as staff bonuses and retained the balance of 42%. Debt service coveragewas 5 times in 1988. Debt-equityratio was 1.99. Thus ZNTK's financialbase is sound.

8. During the next nine years, ZNTKS is expectedto raise the value of its annual productionby about 35%. The project investmentof ZL 15.5 billion will increase its net fixed assets by about 200%. In future, depreciation will have to be calculatedat 5.31 insteadof the 3% used in recent years. As a result of the proposed investment,ZNTKS' return on net fixed assets is expected to average about 21% during the ensuingnine years. Debt service coveragewill be 1.3 in 1997 and debt-equityratio 49:51. ZNTKS' net internal cash generationwill cover about 34% of its investmentneeds and the rest will be provided by the Bank loan. The financialfuture of ZNTKS appears to be as sound as it has been in the past. polsaran.2 - 54 -

Annex2 AttachmentI POLAND

Staff AppraisalReport

First TransportProject

StandardProduction and MaintenanceProgram of Star.ardTrack Machine Factory

A. Manufacture Planned 1995 ProductionVolume

1. Track cleaner 7 2. Track screeningtrain 3 3. Snow Plough 4 4. Track weeding machine 1 5. Track formation-benchformer 9 6. Turnoutballast cleaner 10 7. Track tamper 12 8. Turnout tamper 10 9. Drainage excavator 3 10. Draisine 40 11. Universalbreakstone scraper 7 12. Snow-cutting- blowing remover 18 13. Track tamper 13 14. Narrow gauge snow plough 10 15. Engine car trailer 40 16 Track laying set 50

Annual

B. Repair and MaintenanceWorkload No. of Pieces of Eguipment Maintained 1. Track cleaner 24 2. Train for track screening 4+2 3. Snow plough 8 4. Track welding machine 3 5. Subgrade Bench former 10 6. Snow removing combine 6 7. Ballast scraper 15 8. Draisine 50 9. Track laying set 90 10. Universalballast scraper 5 11. Ballast cleaner 3 12. Turnout cleaner 2 13. Ditch Excavator 2 14. Snow-cutting- blowing remover 8 15. Snow-plough-narrow gauge 3

C. AuxiliarvWorkload

1. Repair of tank cars 3,000 2. Productionof spare parts 4% of productioncapacity SCHENATORAN AM PKPZNITK Sltqarqid 2.7i |

H~~~~~~~~~~~~~~~~~~~~~Pp .

/z-m~ G .V. -t .*ow

lo1f SFCd1a ii Nu lIZ eI

1"1F 91>>t' .. lElE.St F Me1t1 W1>+~~~N

I :9~~~~~~~~~~~~~~~~~~~V 9ww i41 , WCzub1stt

ZATWIERDZlk me~q1987-fl WV /~J~ - 56 -

ANEX 3 Page 1 of 4

POLAND

Staff ArnraisalRewort

First TransportProject

Reorganizationof PKP Workshopsfor Increased Sgecializationand Higher Productivity

A. LocomotiveMaintenance

1. Currently,PKP's electric tractionfleet is maintainedin five workshops: GLIWICE,OLESNIGA, MINSK MAZOWIECKI,LUBAN, and GDANSK. These five workshopsdeal with all the aspects of repair and maintenanceof electric locomotives. As a result,there is a substantialduplication of equipment requirementsand spare parts. As all the locomotivesare of east European/Polishorigin, PKP has set up a system of self-manufactureof essentialspare parts. Productionof other spare parts has been farmed out to local industry. The dis.ributionof responsibilityfor the manufactureof spare parts and repair of defectiveunits removed from locomotivesfollows traditionalpatterns.

2. This spread of repair tasks and productionactivity over five workshops leads to severe economic inefficienciesand militatesagainst developmentof specializedskills. Consequentlythe present reorganizationof workshop activitiesin PKP has as one of its objectivesthe introductionof a large measure of specialization.

3. As a first step, the number of tractionmotor repair workshopsdesigned to handle major scheduledrepairs was reduced from five to three: - Gliwice, Olesnicaand Minsk. The other two, Gdansk and Luban would give up traction motor repairs. This has resulted in an optimum scalingof the proposed investments. In short, the three workshopsselected for modernizationwill meet PKP's full requirementsof repairedtraction motors for current maintenanceand buffer stock.

4. Simultaneously,certain repetitiverepair tasks have been allocatedto each of these workshopsas their area of specializedresponsibility, as shown below:

GLIWICE

(i) TractionMotor Gears (ii) Suspensiongears and spring - 57 -

ANNEX 3 Page 2 of 4

MIES

(i) Commutators (ii) General rail car repairs (iii) Scharfenbergcouplers (iv) All rubber components

OLESNIC

(i) Bronze castings

However, as PKP has a very large fleet of elec-locomotivesand over 40X of all failuresare traction-motor-related,it was considerednecessary to strengthen the rewinding, insulation and impregnation of traction motors in all three workshops. Assembly and body work would also be handled by all three workshops.

5. PKP has other smallerworkshops at Radom, Pruszkow,Nowry Sacz, Poznan, Pila, Raciborz,Wroclaw and Lapy. There are severalpurely mechanicaltasks which have been centralizedin these workshops,so that the lines of accountabilityare made clear. A few of the significanttask allocationsare as follows:

WROCLAW

(i) Instrumentationfor casting industry (ii) Hardeningof wheel tires

LAPY

(i) Wheel turningand profiling (ii) Tire changing

PILA

(i) Pneumatictools POZNAN

(i) Piston rings for diesel engines

(i) Oil seals

Ni)luSACZ

(i) Aluminum pistons and castings - 58 - ANNEX 3 Page 3 of 4

PUZKOW

(i) High grade cast iron castings

RADO

(i) Lubricantfittings (ii) Braking system

This degree of functionalspecialization helps the efficientproduction of small spare parts for maintenanceon their respectiveareas of expertise.

Benefits of Sgecializationand Modernization:

6. The cost of certain key repair operationsare expected to drop from present levels by substantialpercentages:

(i) Tractionmotor rotor balancing - 20% (ii) Auxiliarymachines-rotor balancing - 50% (iii) Welding of rotor windings - 66% (iv) Milling of commutatorsegment insulation - 50X (v) Motor rewindingand reinsulation - 30%

7. The modernizationinvolving the use of new materialsand production process is expected to reduce the nunber of locomotivefailures by 602 and increase the availabilityby 3 to 42. The intervalsbetween annual, intermediateand major overhaulsare expected to increaseby 18 to 25%.

B. Rolling Stock Maintenance

8. PKP's freight wagon fleet generatesa repair/overhaulwork load of about 55,000 cars p.a. Most of the repairsrelate to body damage,which is the single most importantreason for the spillage of coal from coal wagons and the resultingcontamination of the ballast bed and the degradationof track geometry. Because it is uneconomicalto handle body repairs on a piece-work basis in 10 workshopsand severalyard repair facilities,PKP decided to set up a large modular repair facilityin BYDGOSZCZto handle all body repair jobs on a productionline basis. The wagon body is segmentedinto standardized modules and the damaged segmentsare replaced. It is proposed to equip this workshop with specializedequipment in order to concentrateall body repairs here.

9. The single most important(in volume terms) spare part needed for rolling stock maintenanceis the brake block. PKP manufactures90% of its brake blocks in various workshopsand the balance is procured from polish industry. Outside purchasehas been consistently10-15% costlier and the supplieshave been delayed and erratic. PKP has thereforedecided to centralize its brake block manufacturingin Bydgoszczworkshop by installing automaticmolding machines. These specializedmachines would raise the annual - 59 - ANNEX 3 Page 4 of 4 output from 34,000 tons to 40,000 tons. With the concentrationof modular repairs and brake block productionin this workshop,nearly 80% of the mean time to repair of a PKP wagon would be spent in this workshop,which shows the degree of specializationof this workshop.

Benefitsof specializationin freightcar maintenance

10. It is estimatedthat the modular repair facilitywould enable PKP to raise the availabilityof freight cars by about 8% and reduce loss of coal spillageby about 90% from present levels.The cost of wagon body repairs is expected to be reducedby about 15%.

11. The centralizationof brake block manufactureis expected to increase wagon availabilityby about 2%.

pob&ran3 * -60-

STAPP WPMS*AL38960

9131 TINAUU PIN=K

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£43003 ini WI 2

I .8~oUtuw.vtfOIEI) 6440 1 4166AN0 6

tu dwts *tWa *-*r-A ------*~ ~ ~ ~ stw~~~~~ WI I aiNS I 9Sm I AMS

aj.m'~~4.,tg USo= I gIO I 6l I U 74.10h~Its 9w iaat. 9010a0Lh*m 6I0 361005cm I a 1a 360

uiolgSow 8 51 2

1o.CawwS em ~~9310 1 9310 1 93W0 9310 3 I IJue. vlw wv1ifw clmw 131005 1 150 1 13on. 1o 106 S 13.8imd mp fr n amawus 3280 a"as i 13.VaiggaweimM. Pla 600 450 1 1450 1 14500 3 14a_elss m ~.ws" a m 2 ° a °613 ° i5peggem,g- t1wviewa 93a 6 t12 18 IV=

t,S |_ | * n *n fl *@1 1 * t 90 3u.wmdUIS ' U9 a 2"0 I o o o 2

as A?5i0 *. -a... *..n *00 .. C.e.o ~~~......

*F.O 0V1A1 # 111010 s

Lam. emitan0 Ce 0 *00

3l .. . . 1...... 000 1 0... . -61-.

ANNEX 4B

POLAND

STAFF APPRAISAL REPORT

FIRST TRANSPORTPROJECT lb

Track MaintenanceMachines to be Financed Under the Prolect

Machine Quantity Esated

(US$ m.)

1. Continuous track tamping machine 8 8.8 (09 CMS or equivalent)

2. Dynamic Stabilizer (DGS-62N or equivalent) 8 7.2

3. Turnout tamping machine (275-35or 4 4.6 equivalent

Total Base Cost 20.60 - 62 - Annex 4C

First Trmanort Project

Staff Annraisal Regort

MachLnes and Eguibment to keProcured for ZNTKS/StarEard

A. Numerical controlcenter-chuck lathes 3

B. Killing machines for spline ways 2

C. Spline grinder 1

D. Lathes and Killing machines

E. Wire Drawing machine for internalsplines 1

F. Gauging stand with universalgauging device 1

G. Hilling machine - numericallycontrolled 1

H. Automatic lathe (NC) 1

I. Deephole drillingearth - auger 2

J. Power hydraulics:compressor and distributionsystem 1

K. Electronicmeasuring instruments 1 lot

L. Welding robot 1

M. Blanking press (NC) 1

N. General tools and instruments 1 lot

wp:d~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - 63 -

STAl APlRaSSALtORT ANNEX 4D fRST ToAmSlOaTPRWJC? List @7 uuuuWbo an. oquaemmnetfo Wus Page 1 of 3 Wykie.mamayn I urzdom

Qty Total

Lo* Wymzoamg6lninUb~Wert di kpld /tyaa/ ... dbm mmmmmmI..a.om

1, InjaeoUft molOng MChist a 3280,0

a. Znjeoti.ES moadi ambos a 340,0 WtiewhMk

3e Thivet LathI 3 9630 Tokarke gausiarmu 4, Avtoseatt turrt lthOs a 6220 Tkokefl r.u laoautomat so Wander 12 324,0 Sauljerk. 6, auiwtift meoUffi a 1,00 Nitomt1ee

7. al"ootto spark uttong ambs 200 Wyoear drutow s. ril inage 20t ao,o 3.dnoetke wierterke

go Autotte asblest for uttnl I 12000 and bending Auomat do myliramamia 019gI4

10o Automati drilUin Nd milling 1 300.0

Automat ul.rtrstk.u.fraaarak

II leotreplatin9 oguipusft Urdu .do obrM*l galwaftlznsj I 1)7,0 S2. Th.r8msreutr for njootl0on 4 6

Uorngdae do trerostotumie fore mtuwkouycb * S Cobs" for dri ad 3 3.0 tranportastin of petios.e. Urqdinmi do acomeule I 'ram- pertomamie tusruyu 14. bums.p trmtmamt dobbs a0o,O U3 aaaia doe ocyeamozn"I ~~~1.ku.~~~~~~

~~~~~~~~ - _ - 64 -3

_2o Reders and point ,ochime . UriAmn hamum .I ne

1. Peieo lathe 4 Tokarke Proc"v3na 2. NClathe i Zio, Tokorko aterwfem nua.ayznio 3. Mahoining contre 770,00 Contrus obrdbaze 4. NCverticl mlUlng mehin a 400.0 frarka pionanlmterow.numer. , Send ow for Mals 2a 1100 Pite tdaim do Matel

.XX. Station Inte rookinge anU2 Uadmgmni setavin. 1. ednoetkeviertarek2 26,0 DrillAng unit 2. Xojeotaonmoulding main.. 2 340*0 Wtryekorka 3. Jring machie for pb I o Wiorterke do pltk drukownah 4, Turrtt lathe 1 26,0 Tokmke rew ens

So Pl1n and treeng machine i 2,0 ftrugork - kopiprka

1. Opticl drilling ahim 9.0 Wiertarke optcne 2. Wearke do plytek drkee. aI 1320 NOdrtSlng Machinefso pob 3. Laomtlng machin 2 La"mintor 12, 4. Odbelpi Machine I 52,0

9. Stripping ahie 1 47,0

6. igulpeent for tinain of pb s is,0 Uzdacaaa do cynomas°Vplytak 7Y Brosg amabhis I , 0 8NEltk*6 l Suoabrk ^ 65- ANNEX4D f 3

so rooo.puter equipment for desegning the pob. ai"s.O MOkrokoawmterae.un:dbonio do pcojekt@aat p&ytOk drukoaanyoh V. IMj= MCL#AdIpwniA la Tool grinder 2 160.0 Slfifwrke nerzgdeiow

. Cylindrical grnder I0,0 8 fllft k do wek4w 3. uaibero tool grlnder £ 40,0 unswara..zlJfsarko..estrxamke 49 Unirersla profle grinder. I i',0 UnisersoexlIfteike do prafli

S. UsIbormol troaing grinder I 113;0 UawreasfSferke kopierk

6G Unibroel tool mlliAng and 2 160.0 borigmcie Uniwro.f rwaorko-ierterks nora.

7* Proliotn jig drilling nachino 1 155sO dnadlouoipre jowiertarka f l vmp6&rxgmt

6. ToolLhorizontel borlng msabin 1 30,0 Wiereateref rwxerke neragdvAoue

VI. Uqiprnm for iron end elA,inie 230,O fowndrf

Y II

Toes& Ouae*olout to00o *f. - 66 -

Annex 4E

POLA FIRST TRANSPORTPROJECT STAFF APPRAISALREOR

Equipmont and Services for G,DP

Unit - USS 000's ------Items Number Costs Local Foreign Total US$ l.Pavmnt= H0ansoen=

1. Falling Weight Deflectometer 6 110,000 660 660 2. Bump Integrator 3 83,300 250 250 3. Weigh in Notion Recorder and classifier 6 50,000 300 300 4. Vehicle Counter/Classifier 26 9,230 240 240 5. ContinuousSkid Resistance Test Vehicle 1 150,000 150 150 6. High speed skidometer 1 100,000 100 100 7. Reflectometers 2' 15,000 30 30 8. Data Storage and Processing 100 100 devices 9. Software 20 20 10. Local Costs for towing vehicles. 220 220 11. Spare Parts & Supplies 130 130 12. TechnicalAssistance and Training 90 90

1. Sub Total: 220 2070 2290

2. Lao tSX J UUtM

13. Electronic Balances 50 3,000 150 150

CompressionTesting Equipment: 14. 0-200KM 17 8,115 138 138 15. 0-2000KM 17 8,115 138 138 16. Nuclear Density N/C 17 1,200 204 204

2. Sub Total: 630 630

Base Cost 220 2700 2920 PhysicalContingencies 20 110 130 Price Contingencies 20 390 410

Grand Total 260 3200 3460

AtW - 67 -

ANNEX%5 Page 1 of 6

POLAND

STAFF APPRAISAL REPORT

FIRST TRANSPORT PROJECT

Study of PKP OperatingManagement InformationSystem (011)

Terms of Reference

A. Introduction

1. Polish Railways (PKP) have designed an Operating Management Information System to be implementedaccording to a phased program. To back up this system, they have designed a cable network, a substantialportion of which has been installedand the rest is under construction. At present, there exists a limited computer network to serve PKP's data collection needs, both at the headquarterslevel and the regional level. This network is designed to gather data with three objectives in view (i) personnel management; (ii) ex gost facto compilation of statistics;and (iii) some financialmonitoring. Though the cable network is well designed to suit the specific needs of PKP as a transport enterprise,neither the computer system nor tha software is adapted to use the computer as a tool disseminationof informationon a real time basis and resulting for management decisions both of which are essential if PKP has to compete aggressivelyin the emerging free market and deliver high quality products to its customers.

B. MIS Needs of PKP

Phase I Reauirements

2. PKP, by virtue of its unique geographicallocation, plays an important role in internationaltransit traffic of both passengers and freight. For the efficient management of this traffic and in order to provide a high quality service to overseas customers PKP has to adapt and hook up its OMIS to the European Railways'operatingdata interchangesystem, HERMES being set up by the InternationalUnion of Railways (UIC). The ticketingand way billing services have to be of the same basic design as the rest of Europe so that a customer from convertible currency areas encounters no impediments in dealing with or transiting through Poland. PKP has a considerable internal traffic of its own. The OMIS should, in addition to interfacingwith HERMES, provide PKP with real-time data processing for efficient management of the whole railway system. Wagon control, wagon location, train ordering and monitoring, locomotivemovement control etc should all be performed by the national segment of the data processing system. - 68-

ANNEX 5 Page 2 of 6

3. In short, PKP's corporate managementneeds informationservices under four main categoriesgiven below:

(i) Ogerating ManagementModule: the operatingmanager's focus on traffic performanceof yesterday and forward planning for today, tomorrow, this week, and the next week etc; wagon and locomotive movements control; monitoring the performanceof all movements at the regional and railway-widelevels.

(ii) General ManagementModule: real time and periodicalreviews of institutionalperformance, primarily in the financial,traffic and commercialareas; "what if" questions by the managers on the most economicalmeans of obtaining the required financial and operating results should be answered;

(iii) CommercialManagement Module: the commercialmanagers's reviews of the guality and profitabilityof each service to enable him to make rational decisions about tariff revisions,marketing strategies,allocation of resources dependingupon the profitabilityof the services concerned,etc;

(iv) Financial Module: the financialmanager's requirementto computerizeaccounting informationin such a way that basic revenue and cost data are gathered and allocated faithfullyto the appropriateheads of account in order to provide informationto the managers to evaluate the profit ability/efficiencyof each cost centre; it should be possible for the managers to have enough data on the financialperformance of each unit so that the new standards of financialaccountability and competitivenessin a free-marketenvironment are rigorouslyapplied to evaluate them and to take appropriatecorrective measures; in this phase, the reorganizationof the existing functionalaccounting system into a management accountingsystem in addition to serving as the basis for tariff structuresis the objective; installationof a full- fledged cost accountingwill follow in the next phase.

4. The operating data and revenue statisticsneeded for these tasks are best obtained from the data recorded and maintainedat the operatingwork centers like the wagon originatingstations, interchangepoints, marshalling yards, etc. These data should, in future, be gathered from an electronicway- billing system (EWB) for freight and an electronicticketing system for passengers to be installed. The study should evaluate the existing way- billing and ticketing system and propose methods to convert them into electronicallygenerated documents to serve as direct-accessdata sources for t'nesystem. From the EWB system, it should be possible to track down the load, destination,name of client, nature of the load of each wagon and through the wagon number, its movement, the delays its suffered on route, the trains by which it was sent, the Marshallingyards (MYs) through which it transitedetc. The software needed for the EWB system and linking it to the OMIS are among the first steps. A similar effort in the electronicgeneration - 69 -

ANNEX 5 Page 3 of 6 of accountingdata at the various expenditurecentres and linking with the computerizedaccounting system should also be undertaken.

5. Individualmanagers should be provided with some analytical tools and management aids. Special purpose softwares,some of which exist in PC versions should be provided. The Train Performance (TP) Model and the Line Capacity (LP) Model are two examples. The T.P. model should be able to construct ideal paths for trains, calculate the effect of speed restrictions, curves, gradients etc. on train performanceand serve as a tool for designing timetables,calculating locomotive horse powers, forming long, heavy trains, etc. The LP model should provide answers to questions like: can I add one more train to this already congested route, if I add a freight train, what will be the impact on the other trains, etc. These packages should be cpaable of handling all common operating questionsbased on "what if I do this or that" type of formulation. The study should propose such management utilities and integrate them into the system.

Phase II Reauirements

6. In Phase I, only the most urgent and essential data processing functions,which would be needed by PKP to compete effectively in a free market environmentand to integrate itself into the unified European rail network of 1992 and beyond, should be undertaken. PKP's other importantdata processingneeds which are to be covered in Phase II are: (i) a full-fledged cost-accountingmodule; (ii) a materialsmanagement and inventory control module; (iii) a track maintenancemodule (iv) a locomotiveand wagon maintenancemodule; (v) a signallingand telecom performancemodule. The cost accounting module should have close linkages with the marketing and commercial module installed in Phase I. This comprehensivecost-accounting system should be capable of determining the cost of operating certain traffic streams or transportinga wagon load between given points on the system. It should be possible to derive long-termand short-termmarginal costs, average costs, fixed costs etc attributableto any particular stream of traffic on any given section of the network. The Financial ManagementModule installed in Phase II should be designed to ensure that it can be integratedinto the Phase I module without any major modification. However, the consultantcould propose other variants for the comDositionof Phases I and II. which would be considered in the meeting under Stage It (para. 8).

C. Obiectivesof the Study

7. The present study has the followingprincipal objectives:

(i) carry out a diagnogticof the present system of data processing in PKP, includingthe coding structure of the data processing methods, way bill and ticketing,financial, cost accounting, general management informationand the reliabilityof the ground level data collectionand recording techniques; make recommendations,if any, for the introductionof the new system; - 70 -

ANNEX S Page 4 of 6

(ii) review the existing telecommunicationnetwork, its capacity and speed, and the protocols adopted;

(iii) prepare a broad master-Rlan for OMIS for PKP, designed in a modular fashion, in which Phase I will be implementedfirst and other modules later, without disturbing the overall design;

(iv) carry out a Rreliminarvengineering for the OMIS system, Phase I of which will be able to meet the operating and management requirementsof PKP described above (paras. 2 to 5), keeping as much as possible of the existing equipment to the extent it is technicallyand economicallyjustified;

(v) prepare bid specificationsfor (a) the railway specific software; (b) the new hardware; (c) the supplementaryadaptive hardware to make the existing environmentcompatible with the new; (d) the networkingequipment necessary for interlinkingthe various terminals to form several local area networks (LANs) based on institutionalneeds and for linking the LANs to the regional centres; linking the regional centres with the headquartersand with the Hermes system; these specificationsshould be (1) broad- based enough to permit competitivebidding and (2) consistentwith COCOM stipulations;

(vi) evaluation of PKP's staff numbers and their skills in the area of informationsystems and the design of a suitable revised staffing and training Rro&rams;

(vii) preparation of TQgs for a follow-up study to cover Phase II.

D. Methodology

8. The Study is to be completed in three stages.

Stage I. The consulting firm selected for the study should visit PKP and study the existing system starting from data collectionand entry to the final stages of processingand reporting; the current tasks which are performed on the system and the efficiencywith which they are performed. This stage is expected to last 3 weeks. The consultant should submit a brief diagnostic report 2 weeks after the field work is completed. The diagnostic report should highlight the deficienciesof the present system and explain how these deficienciesaffect current operationaland financialperformance.

Stag2 II. The consulting firm should depute a senior MIS expert, preferably one who has participatedin Stage I, to organize a study tour for a team of about 5 to 10 of PKP's high-level executives. PKP's team should be drawn from the: (i) operating department; (ii) commercialdepartment; (iii) accounting department; (iv) informationtechnology departmentand (v) telecommunicationsdepartment. This guide consultant (GC) has to put together - 71 -

ANNE S Page 5 of 6 a cost-effectivestudy tour lastingnot more than 6 weeks to cover the informationsystems in the followingrailways: (i) USA (2 railwayseg: SouthernPacific and BurlingtonNorthern); (ii) Canada(both Canadian National and CanadianPacific); (iii) U.K.; (iv)Germany; and (v) France. Understandably,all these railwaysmay not be able to make detailed presentations.The G.C. shouldspend at least30X of the time each week duringthe study tour in the fieldmaking focussed presentations to the PKP team on the functionaland designfeatures of the systemsseen each week and their relativemerits. The G.C. shouldmaintain detailed notes of all his observations,comments and the pointsdiscussed during the presentations.On returnto Warsaw,he shouldspend a week discussingwith the Polishteam the major findingsof the study tour, the relativemerits of the varioussystem and their relevanceto the Polishcontext. He shouldenable the Polishteam to make guidedand enlighteneddecisions on the key -features,the parameters and the shape and configurationof PKP'smaster plan for OMIS. A clear and detaileddefinition of the scope and contentof Phase I shouldemerge out of this master plan. Three weeks after his return to Warsaw, the consultants should submit to PKP management (i) a manual containing all the salient features of the severalsystems with all their key technical data; this manual will serve as trainingmaterial for other PKP officerswho have not gone on the study tour; (ii) a draft decisionpaper settingforth (a) the proposed masterplan, with explanationsof the optionsconsidered and the reasonsfor the choicesmade; the designparameters should be speltout clearly;(b) how the variousrequirements of PKP for a modernOMIS will be fulfilledby the proposedsystem; (c) an explanationof how the systemwill be compatibilewith the Hermessystem; and (d) a clarificatorynote on its conformitywith the COCOM requirements.This draft paperwill be defendedby the consultant's team in a technicalmeeting consisting of PKP management,the World Bank's mission and possibly, an independent consultant. The comments and conclusions emerging from this meeting should be notedby the consultant,based on which, he will carry out Stage III.

State III 9. Eight weeks after this meeting,the consultantshould submit his final draft reportwhich shouldinclude the followingsections.

SectionI. Elaborationof the FinalMaster Plan SectionII. SystemDesign and SystemEngineering with particular referenceto Phase I. SectionIII. TechnicalSpecifications separately for Software, Hardware,Networking equipment and Protocol/interface equipment. This section should confirm the mutual compatibilityof all these groupsof items,the overallfulfillment of COCOM regulationsand the capabilityof the systemto fulfillPKP's objectives and expectations. - 72 -

Page 6 of 6

Section IV. Action Plan with a calendar of actions to be taken by PKP, so that, before the receipt of internationalbids and the choice of the supplier, PKP can complete all preparatorymeasures in terms of coordinationwithin PKP and with the Hermes organizationand other adjacent railways. This action plan should also contain actions to be taken such as constructionof rooms at various sites, arrangementsfor power supply, air conditioning,etc.

Section V. An audit of PKP's staff in the informationservices department,and their current skills based on which, a training program for them should be prepared. This training program should cover the training needed before the new system is installed.

Section IV. A detailed strategy and a step by step implementation plan for Phase I: TORs for the next phase of study. This report will be discussed between PKP management and the World Bank and comments communicatedto the consultantsfor revision and preparationof a final report.

Note: The consultantwould be requested to assist in meeting with COCOM authoritiesand justifying his proposals in order to speed up their approval.

Consultant'sStaff Resources

10. It is estimated that the diagnosticwork (Stage I) would need 10 staff weeks. The study tour and the preparationof the Manual and the Draft Decision Report (Stage II) would require 10 staff weeks. Stage III which consists principallyof report writing should be carried out in the consultant'shome base and should require 20 staff weeks. Thus, the total staff requirementsis estimated to be about 40 staff weeks or 10 staff months. The total duration of the study should be coordinated in such a way that the final draft report is submittednot later than 25 weeks after the beginning of the study.

11. All reports should be in English and should be submitted to PKP in 6 copies. The final report after Stage I'. will have to be corrected on the basis of the comments of PKP and the Bank and final versions submitted 2 weeks after the receipt of comments. polsaran.5 - 73 -

Page 1 of 2

FOU)LND

STAFF APPRAISAL REPORT

ILONG-TERMLOCOMOTV DESIN AMM MAINTENANC PRACTICS TERMS OE REERC

INTRODUM

1. Poland, along with Italy, Spain. and Belgium, is one of the few countries which have not converted their traction systems from DC 3000 V to AC 50 Hz. Polish railways (PKP) have an electrifiednetwork of about 13,000 kms and a fleet of nearly 2,000 locomotives. The large size of the system and the heavy cost of conversion appear to remove the conversion option out of the realms of feasibility, at least in the medium term. Economic pragmatism points to the need of upgrading the efficiency of the existing system by making improvementsin locomotive design and workshop management practices, in line with those developed by railways like Italy, which have demonstratedthe feasibility of this approach. They have achieved significant extensions between successive maintenance operations and have thus reduced locomotive down time. This study aims to help PKP profit from these experiences abroad.

OBJECTIVES OF THE STUDY

2. This study has two major objectives: (A) oper2tional;and (B) institutional.

3. The operationalobjectives consist of:

(i) an examination of the design deficienciesof PKP's locomotives;

(ii) a review of the recent trends of locomotive and traction motor design and an analysis of the possibility of their adoption in PUP;

(iii) a cross-sectionalview of maintenance facilities, equipment and practices in vogue in other railways which have attained higher levels of availability and workshop productivity;

(iv) preparation of a comprehensive locomotive maintenance policy in PIP for the next ten years; this report should cover:

(a) mprovements in locomotive design; - 74 -

Page 2 of 2

(b) improvementsof workshopfacilities and management;and (c) a coherentinvestment program for the next five years which would lead to clearlydefined operating goals.

4. The institutionalobjectives aim to:

(i) providePKP's engineers a hands-on understanding of the recent advancesin locomotivedesign and maintenanceoutside Poland; (ii) lead them througha guidedexercise in the evaluationof the technologies and methods in use in other railways; and (iii) enable them to adapt the lessons learnt from these exogenous sources to their local conditions. With this experiencethey should actively participatein the definitionof the new corporate philosophyof locomotivemanagement.

5. Three railways with advanced locomotive designs and maintenance standards will be chosen. The design and consultancy wings of these railways will be requested to prepare a visit and training program for a hand picked group of PKP engineers. The course would be put together by the "host" railwaywith lectures,demonstrations, and field trips, all of them specifically focussed on specific aspects of design and maintenance which they could identify as their centers of excellence. The proposals of these railways would be evaluated in detail before the agreement to start is declared. These courses would be organized and orchestrated by two groups of expertsdrawn from the 'host'railway, one group from their researchand designorganizations to providethe practicaldimension. The courseswould be followedby an adaptationphase in which the host railway'sand PKP's teams write a report of principal lessons which could be adoptedby PXP. The consulting wing of the 'host" railway will be responsible to prepare the report in its draft final shape.

polsaran.6 - 75

Page 1 of 2

,POIANiID

STAFF APPRAXSALREPORT

FIRST TRANSPORT PROJEGI

Rationalizationof Train Formationand Di a2tLDhing Terms of Reference

Introduction

1. PKP, which currently carries nearly 60X of Poland's total traffic, is being suddenly exposed to a more competitive and open market environmentas a consequenceof the liberalisation of the economy in general. Inevitably, rapid developmentsin other modes are bound to follow, making deep dents into PKP's market share. PKP's short haul traffic will probably be affected most, while even long distance freight and passenger traffics will also be affected, though to a lesser degree. Apart from structural changes, PKP would have to reduce its costs and resort to innovative techniques to raise the quality of its service in order not to suffer heavy shocks from the on-going deregulatary trends. A significant example of an area where improvements are needed is the delay of 2 to 3 weeks suffered by transit traffic flowing across the country. Unless quality indicators like delays, punctuality, custoaer convenience, etc. are upgraded, PKP would find it difficult to meet the new challenge. Other railways have gone through a similar adjustment phase when confronted by de- regulation of the market. PKP should organise itself better to face the deregulatedmarket and maximize its gains.

Objectivesof the Studv

2. The present study will review the current traffic pattern, and the commodity flows by origin and destination and assess the strengths and weaknesses of the linkages between each particular traffic flow and PKP's service quality. Based on this review, the study will aim to:

(i) estimate the volume and type of traffics which will continue with PIP on the strength of the economic advantages which rail has to offer vts-a-vis other competing modes, and also those traffics which will escape to other modes; here, PP's amethod of gathering and distributing '.ow-volume traffic from smell stations based on the German Railways model need closer scrutiny in order to establish its cost-effectiveness and economic desirability in the Polish context;

(ii) establish a revised transport plan to reflect the changing role of PKP, suitably phased to cover the transition period of 3 to 5 - 76 -

AMLZ Page 2 of 2

years, a stabilisationperiod of next 3 to 5 years and a gradual recovery period thereafter;

(iii) evaluate the role of Marshalling Yards (MY) and regional wagon grouping centers in the revised and evolving transport plan, mainly with a view to route wagons from origin to destination in the minimum time at minimum cost;

(iv) make a broad d&cv*r,mination of the capacity needed for each MY and define thereaft;r, its approximate size and its level of development (in terms of facilities) in order to discharge its role effectively;the developmentaldesign should be modular in conception so that progressivebuild-up or scaling down would be possible; the technical solution adopted in the first instance. should be the bare essentials to handle current levels of traffic, in view of the impending decline of PKP's market share.

Ut_hodolMg

3. The study would consist of two phases:

Phase1: A team of PKP operations and commercial managers in collaboration with PKP's Central Economic Institute will undertake a study tour of one of the railways which have faced the challenge of de-regulationsuccessfully, particularly the UK or the USA, and study the following aspects: (i) how low- volume traffic is being handled; (ii) what is the role of MYs in traffic management; (iii) what concrete massures have been taken to enable freight trains to by-pass MYs; (iv) how the transit time of wagons from origin to destinationhas been progressively reduced; (iv) how wagon detentions in MYs are controlled;

Phase Il: The PKP team will return to Poland, review PKP's operations in the light of the experience gathered in the study tour and establish the future role and work load of MYs in PKP fulfilling all the objectives (para. 2) and prepare modular technical plans for their future development.

ReBnrt .-

4. The resulting report will define a nev corporate strategy and a transport plan based on the retention and development certain traffics for which PKP has a comparative advantage and the elilmiation of the rest. The report would also contain a clear section on the future development and investments of MYs In W P.

polsaran.7 - 77

ANNE Page 1 of 4

STAFF APPRAISALREPORT FIRSTTRANSPORT PROJLECT

Know-HowTransfer to ZWUS and ZNTKS

In=rducti1U 1. Duringappraisal, the means for procuringforeign know-how for ZWUS for the manufacture of signalling equipment and for ZNTKSfor trackmaintenance machine manufacture were discussed. It was agreed that in order to enable these companies to compete successfully in the export market, they needed technicalassistance in cost accounting, value engineeringtechniques for cost reduction, and for marketing, in short, a dynamic management style in a free market environment. Tvnes of Technology Transfer 2. There are severalmethods of technologytransfer, ranging from outright purchaseof know-howto a comprehensiveJoint Venture( 1V) schemein which the know-howtransferer installs, operates and managesthe transferee's enterprise.The optionsavailable are based on threedeterminants: (i) the objectives to be achieved,--purely technical or technical and managerial; (ii) the extent to which the transferer should have an impact on the management of the company; and (iii) the modalitiesof paymentfor the know-howand other services rendered.

Obiectives of TechnolouyTransfer in PKP's Case 3. ZWUS, PKP's signallingequipment manufacturing unit is looking for know- how in modernelectronic signalling and computercontrolled techniques. The know-how supplier is expected to provide assistancein areas such as: (i) technical assistance in the particular area of technology; (ii) trainlng of ZWUSs staff; (iii) transfer of detaLled design drawings and specificatiois; (iv) a list of special jigs and tools needed for the manufacture, which ZEUS could procure from the internationalmarket or from recommended sources; and (v) most importantly, management technical assistance combined with joint participatory manageumut in which the foreign firms' managers study, reKCo2end and set up modern managemnt methods in cost accounting, value egineering, mrketing, etc. 4. ZaTnS's ¢case is somewhat different. It needs the know-how to manufacture high efficiency track maintenance machines. It has a large-sized machine shop with several multipurpose machines, saoe of which are being used for rolling stock repairs. These subsidiary activities are to be phased out and specialization introduced. ZNTRShas to mprove the quality of lts hydraulic control equLpment, which holds the key to high-productiLvity in these machins . Unlke ZWUS, ZNTXS needs the help of the forelgn partner to - 78 -

* ~~~~~d * Page 2 of 4 identifymodern machine tools neededfor the upgradedand specialized productionline. Apart from this additionalinput in the technicalfield, its needs for technicalassistance in the other areas of foreigncollaboration are similar to those of ZWUS. However, the significant feature in both cases is that the foreign collaborator is required to identify the equipment, jigs and tools needed and not to supply them. They will be procured largely through ICB using the Bank loan. Available Sources of Technology

5. In the signalling field, the technology which ZWUSis looking for is availablefrom severalsources in a numberof countries.

6. The supplyof Track Maintenancemachines is ratherrestricted as to number of suppliers. This is particularly true in two specialized areas: vibratory consolidation of ballast and tamping of turn outs. But there is a whole range of common-user track machines like ballastcleaners, snow-ploughs, draisinesetc. which are available from reputed manufacturers on a wider basis. One optionin such a case is to obtainthe know-howfor the more complicatedand a comprehensivetechnical assistance package from one foreign partner and enter into pure technical licensing arrangements for the simpler machines from the most advantageous among the other suppliers.

Transferer's Influence on Enternrise Management

7. An noted earlier, both ZUUSand ZNTXS now recognize the need to have foreign assistance in several areas of managemuet. Very often, transferer of high-tech know-how demand more than mere transfer of know-how, they ask for a participation in the company's management, even though limited to certain areas only, as they have concerns about quality, use of brand names, export market share, etc. Whlle both enterprises are fit cases for progressive privatizationthrough an activeJV program,at least in the short term, this choicelies outsidetheir management'scompetence and is for the MTNC to decide. Until the broaderissues of privatization and foreignpartnership are decided, these two companies do need to have, in-house,foreign experts provided by the supplier to advise on and manage cost reduction, quality control, market survey, pricing strategies, coimercialization, sales outside Poland, etc. They wil also train their counterparts on the job. Th1ee experts, one for teehnical trouble-shooting, one for costing and pricing and the third one for commercial and marketing, will be in in-line positions for about two to three yars. 8. The foreign collaborator may seek a higher level of involvement in the manageent of the enterprise through equity participation. While, in principle, there should be no objection to such participation, this question has not been discussed with PKP so far. Rowever, PKP'shesitation, if any, should be alloyed by pointing out that such a partnership would provide a stake in the enterprise for the supplier of know-how and thus make him comitted to success of the project and eventually to buy back some of its products. These enterprises would thus have an assured foreign morket even at the outset. - 79 -

Page 3 of 4

Modalities of Pa'ment

9. It is necessary to make a distinction in the contractual arrangements between renumerationfor the transfer of designs and know-how, and payments for technical assistance and consultancy services. The payments for these services would follow standard practices adopted in consultancy contracts. Payments would be on a man-month rate with agreed overheads for airfares, travel, shipping of personal effects, liability for taxation, etc. Rates for the training of local staff would figure separately. As an incentive to maximize his learning during the understudy phase, the local counterpart should receive a special allowance.

10. For technology transfer, there are a few options: (J) lump sum payment up-front or in pro-identified stages; (ii) royalty payments with the rate of royalty, period during which royalties are levied, taxes on royalties, etc. defined clearly; or (iii) capitalizationof the estimated know-how fees with an annual dividend on capital to be paid; a provision to enable the transferee to buy back the equity after a certain number of years may also be envisaged. Admittedly, this equity would represent a small percentage, less than 0l of the equity of ZWUS and ZNTKS. In the royalty payment system, as the royalty is closely linked to the output and the imported content of the product, the foreign collaboratorwould demand operation of the plant at maximum capacity. This is a powerful influence on management to maximize its production from the outset. On the other hand, the foreign partner is likely to slow down the progressive decrease of the imported content of the product. These aspects require precise formulation at the moment of contracting. In purely lump-sum, once-for-all payments, the foreign partner has no stake in the continued success of the enterprise. It is therefore not an ideal solution except for simple technologies. OrgaMizAtionalOgtions

11. Where a certain measure of joint management control is vested in the foreign partner, the organizational strategies are largely influenced by the following factors: (i) the duration of joint management; (ii) the areas in which the foreign partner has an influence on management policy; (iii) the degree of risk to the respective partners; and (iv) the degree of convergence of the interests of both the partners. In the cases of ZWUSand ZNTKS, as both are interested in quick results and rapid stabilization of the now operations, it would be bkoaficial to accept that some key policy questions be subject to management collaboration. The details could be elaborated in the agreement without prejudLce to the overall influence of the Polish Board of Directors. If the management collaboration ia succssful, a follow-up period of another two years may be euvisaged in which the collaborative process may be transitioned into a consultative phase. By then, the internal management should have grown In strength and independence and be able to relinquish foreign support. It should be noted that the period of interdependence in management need noc be the same as that for royalty payments. - 80 -

Page 4 of 4

12. Management control by the Board of Directors should be implementedonly through standard reports: financial reports, progress reports, financial audits, strategic plans, etc. and not by a set of prohibitions on the foreign collaborator. In any case, the Board is free to call upon the Polish Managing Director for a periodical "State of the Enterprise' evaluation report to assess the efficiency of the collaborationand take broad corrective action, as it becomes necessary.

Solection. Negotiationand Contractint

14. The UNCTADand the International Law Institute, an independent non- profit entity devoted to complex problems of international trade policy have established guidelines, practices and case studies for the benefit of agencies like ZWUSand ZNTKS. Those guidelines include sample bid documents for the invitation of proposals for the transfer of technology. These two enterprises should nominate a panel of two or three of their senior staff to study these documents and prepare themselves to make an evaluation of contending foreign partners and thereafter to negotiate a contract.

polsaran.8 - 81 -

Annex 9

POLAND

STAFFAPPRAISAL REPORT

FIRSTTRANSPORT PROJECT

PKPOperating and Financial Targets ...... _....

Index of Performance 1988 1989 1990 1991 1992 1993 1994 1995 ,,,.,,...... ,,,,...... ,..... -- ,,-- .... ----. ..-- ,-- ___

OPERATIONALTARGETS

Etectric Locomotive Ava 89.6 89.6 90.0 90.5 91.0 91.5 92.0 93.0 ElectricLocomotive km. 387 390 400 410 440 470 500 510 WagonAvailability (a) for the totalwag 83.2 83.5 84.5 86.0 88.0 90.0 92.0 93.0 'b)for coal wagonso 83.7 84.0 85.0 87.0 89.0 92.0 93.0 94.0 Coal wasgonturnround (days) SpeedRestrictions (a) Main Lines 650 650 650 600 550 500 450 400 Cb) Turnouts 310 350 350 350 350 330 300 250 Traffic Units per Eaplo 0.45 0.44 0.43 0.44 0.45 0.46 0.47 0.48

FINANCIALPERFORMANCE

Ope?atfngRatio 105 105 105 104 102 10l t00oo 100io (excluding subsidies)

Operating Ratio 99 90 90 90 90 90 90 90 (including subsidies)

1/ Furtherixprovemmnts will be discussedin the SecondTransport Project.

pol.sr"n9/lotus - 82 -

ANNEX 10 Page 1 of 2

POLAND

STAFF APPRAISAL REPORT

FIRST TRANSPORT PROJECa

Project Coordinationand Monitoring

Introduction

1. The First Transport Project has five main componentswhich are to be implementedby the following executingagencies: (i) the railway component by PKP; (ii) the manufactureof track maintenancemachines by ZNTKS; (iii) the manufacture of 3ignallingequipment by ZWUS; (iv) the highway component by the GDDP; and (v) studies relating to the transport sector by the MTNC. In view of the multiplicityof project components and executing agencies, it is essential to define the responsibilitiesfor project coordinationand monitoring. The methodologydescribed in this note is designed to achieve these functionspromptly and efficiently.

OrganizationalArrangements

2. At the apex level, the implementationof the project will be monitored for the governmentby a unit consistingof a senior representativeof the NTNC, which could be the Director EngineeringPolicies and a representativeof the National Bank of Poland. All the executing agencies will report to this unit through appropriatereports and periodicalmeetings, whose nature and intervalsshall be decided by the unit.

3. In each of the executing agencies, the DG should nominate a working group of technicalmanagers who are directly responsiblefor the implementationof the various project components. This group will be headed by a representativeof the general management,such as the Deputy DC.

Mgnitoring Process

4. The working groups of the executing agencies should submit progress reports to the apex unit at agreed intervals and in the manner mutually agreed upon. Progress reports to the World Bank (WB) should be in the format established during negotiations. These reports should be submitted directly to the WB with a copy to the apex unit.

5. All problems encounteredduring implementation,for which the solution lies within Poland should be reported to the apex unit without delay and a copy sent to the WB. The apex unit is required to take suitable action with due urgency and keep the WB informed. Problems for which the solution rests - 83 -

A A Page 2 of 2 with the WB should be reported to the WB without delay and the apex unit kept informed by appropriatemeans. The WB will take remedial action and inform the Polish authorities.

Flow of Communications

6. PolicX Issues. particularlythose relating to the administrationof the loan will be addressed throughcommunications between the WB and the Polish Government,i.e. the Ministry of Finance and the MTNC

7. Technical Issuues directly related to project implementationwill be addressed through telexes, letter, etc., between the WB and the particular executing agency. A copy will be endorsed to the apex unit.

8. Correspondenceon ProcurementMatters will be exchanged between the general management of the executing agency and the WB. A copy will not be eudorsed to the apex unit, unless there are reasons to keep it informed (e.g. inordinatedelay, differencesof opinion of a fundamentalnature, etc.). Each executing agency should establisha ProcurementUnit which should be directly responsible for handling all procurementactions, such as the preparationof bid documents, the invitationof bids, etc., up to the stage of final signature of the contract. The constitutionof the procurementunit, the names of its members and their functionsand responsibilitiesshould be agreed with WB.

9. DisbursementAnnlications shall be prepared by the executing agency in such forms and with such attachmentsas required by the WB regulations,signed by the person authorized to do so, as agreed during negotiationsbetween the WB and MTNC/PKP. These applications,in the case of the loan to Government, will be sent to the MTNC for countersignatureby the authorizedperson agreed upon earlier. The applicationswill then be forwarded to the WB by MTNC and PKP for making disbursements. - 84 -

Page 1 of 3

STAFF APPRAISAL REPORT

FIRST IRANSPORT PROJECT

St of P1=P Passenger Subsidies

Draft Terms of Reference

1. The standard passenger tariff level for PKP has generally been established at below cost. In addition, there is a whole series of discounts on these standard fares provided to various types of travelers (civil servants, workers, students, etc.). To compensate PKP for the difference between its operating costs of passenger services and the projected revenue based on approved tariffs, an agreed operating subsidy is paid monthly by the Government. The subsidy level for 1988 was ZL 214 for every ZL 100 collected from passengers which was reduced to ZL 189 for every ZL 100 at the beginning for 1989. The operating subsidy for 1988 was ZL 210 billion, ZL 101 billion in 1987 and ZL 103 billion in 1986. These operating subsidies represent about 15% of PKP's total revenue for 1988 and 1986 and 12% for 1987. Operating subsidy as a percentage of passenger revenue was about 200% in 1988, 170X in 1987 and 2402 in 1986. Substantial subsidies are also paid to the municipal and regional road passenger services. To compete in the domestic market, LOT also subsidizes its domestic services for surpluses earned on its foreign services.

2. The Government's economic policy is to establish a market economy in Poland. Across the board subsidies are incompatiblewith this policy. Therefore the objective of the study is to provide the Government with options to reduce or eliminate rail passenger subsidies and restructuring of the method of subsidy payments to ensure that subsidy payments are transparent, equitable and economically sound. The study group should also make recommendations on whether the proposed changes should be implemented in one step or phased in ovar two to three years

3. A study group might be established consisting of about six members: one member from the KinWstry of Transport, one member from the Miniastry of Finance, one member from one of the transport economic institutes and two mebers from PKP -- one from passenger operations, one from the accounting and finace department. The representative of the Ministry of Transport should act as chairman. The representation from the transport economic institute should be secretary and respousible for the detailed work of the study group. Au external consultant to assist the study group if required should be available. The detailed investigation work should be undertaken by the accounting staff of PRP under instructions of the study group. The study group should also have available the services of staff of a transport economic - 85 -

ANNME 11 Page 2 of 3

institute to undertake independent research for the study group and review the data provided by PKP.

4. The study group might work on the assumption that in view of the current economic reform and the limited resources available to the Government, passengers should pay the full cost of the services unless there are compelling social equitable, economic or environmental reasons why the Government should subsidize a service or class of passengers. For the purposes of this study, they might also assume that future Government subsidies for road passenger services, if any, will not discriminate in favor of that mods. Also, that LOT will discontinue subsidizingdomestic services. In calculating the cost of services, the principle of relevant incrementalor long-term marginal cost should be used as a minimum. In the case of services on main lines, an additional congestion charge might also be considered.

S. The followingmethodology might be considered as a modus operandi for the study:

A. Review of present system of subsidies:

Mi) Divide the present passenger system into homogeneous components (e.g., intercity express services, other intercity services, regional services, important conurbation services such as Warsaw, Katowice, other services, etc.);

(Ui) Allocate costs to passenger services for each component based on direct and indirect costs and further analyze these costs between fixed and variable;

(iii) Identify revenue for each component and further analyze the revenue by structure (standard fare, monthly tickets, discount ticket, free tickets, first class and economy, etc.); and

(iv) Allocate the subsiddyto each component and subdivide it between the groups of passengers using the services.

B. Review the level and methods of subsidy paymnts in other countries.

C. Prepare options for reduction of subsidies to PKP:

(i) ScenariosmiSght be prepared for each componskn.ranging from the current subsidy level to a zero subsi4y ivLe4. Different options might be used for each class *f service, or groups of passengers to reflect equitable, :ocia-.and economic conditions. - 86 -

Page 3 of 3

(it) Describe the consequences of the various scenarios on reductionof subsidies,passenger traffic demand distribution,PKP's financialresults, groups of passengers, etc.

D. Recommendations together with a demonstration of the effects of these recommendations as in C(il) above.

6. The study should commence in ______with the appointment of the study group. A draft report should be issued by for review by the Ministryand ths Bank. The final report should be issued by _

polsaran.11 cvn q4 UDPUPA&S J91 PA DA(1 J1) did 04 ahI,NRsFP3 S.I4 UD4 jq /1

- 0-4 O 000OD 001 0ODJ 0oot 03 ZlOt r00 r00 VS91 919 2Wt (1OIlBia) 9NIfM9

co> 0 06 0*0 06 006 l06 0-0 006 006 0-06 ra l 019 (DIV1bSi9iUNavM) 99 Z- VS 51 V69 S-16 0h 9156 V96 616 91 S% (N11!d8 011TG) OlivauuDM O0L M-8106r 9L rW £ ri Ctg r2U 97189 'rOB (NDUW1 UlolwM=) OUWVmom 313 O01 W JD 001 0O- 0`0 001 001 rit V0 8 l 9QSl 6% 611 011 NIDUd v SyAOIU3 11 rg8 '8 T9 61 16 Z6 'f6 T6 96 65 VS11 3IVO INUo! dndTlS i 0Oa 51 Vt5 651 r-an 0w 619 rEt ir2a ris rOS s re ltwm'm me F5 TN reSQ5 rot 9% Cs frli rCL Y% 78 Vf9 SUID maIm rs-I ri. rim W I 8 9 ran 93 191t s-i 98 61S 6WS6 rIom MIM 131 9009 s-ms FW131 !6W19 2191 - 'zsFiW ZFaiL !6L 1195 SUmiG1UNU1 iivIL

_ 90_...... 9£..... _...... ft- ...... _ 6...... £ 8Z£...... 73£...... 0A£...... £13...... o'M...... 7...... 9 ...... LM UV 1 1EEUUi 6ftt £212 a1O St61 BILL CM 011 VNm01 351 mBsUmvI

611 FI 71.C1 . 091'( I'm1 111 V1 0' 09U a11WI O 0 61W S t69 £' F '1 I-0L gs 0l R R s X L9 0 2 | | gi ~~~~~~~m ci uv.

'fIll[ 016 LU Z7s-WI. 8' LZ 691" s-r .. s-lw .. n ~~~~~~~~~~~~~~~~~~~~....10-19 731E D lIIU ......

F6OWl IrM ITIM 286Wt91V916 Y6M 6W1 1195 21a4 96%t 4rWS 'IIOL

_...... _. ... _...... ~~~~~fJ4~~~~~~~~~~...... XII-l 1A61WB fill ~~~~l fil 36190 49 Ft,061m v m i

Isomiskom i~~~~ il ig(UOfl8 ...... i~;iu. mumuz...... i~IIN~mu......

...... ___. ... _. co

x~~~~~~~~~~~~~~~~~~~~A Nc MO*mps ¢~~~~~~~~r " Vt r O T O i Ot 6 'l Y aiw M

6-ZS7 S OL rm fXat roe T9 Z9D 0396 tSt COS O" 3m OmTM

.,.....,,...... -----

IrS O 9-& rM 8 irU Ltt 6116 r t'9 9Wf Or TOt E 033Wu6t£ (v5 Sw 1E1

S6 lt 9 Tt 8~rt Ott 6 Z-#VI 99r tf 6W- WS -Z 6Xrl M SW Na

fit, reSt 9-i K f- 9 f-lSK f fi *$ 6w w ML:=o W .,..rF 8s._. .,.."*w rsa..,_ r0.... rep.... wag.... win..._ rmo.... z£ ..IZ . ... Zwin...... a =mm Wm3a14S lVan

...... , ..- .....,, --......

iiiiiii'iiu...... ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ _......

nn ,,,,,.,,,., Umm...... " .-. ,... x wa _ . ,W _ _ _ _- PRT NKPSAUI 158( T INwIfrWI DeUER 15 PRICES) cZLDIuLLIO

m MS

......

TOTL in ASETS 1S6.4 241:r 3s.s 463.3 5 589 55.9 5Z329.8524.9 S21'.5 5a.3 51B.8

~~~~~~~~~~~~~~...... IEI viiDSEI£6278 ii 14Z2.22491.3 281.5 St5i 3053 3210.23342.0 34s6.7 3617.7 372.4 315.0 Wilt-lil 6D,1 ^,,~~7851243 14,5.0 142. 145.1 14.5, 162. 17.2 1595 14. 147.5Z TOW.fn}E MlETS 14212 15O0. 3817.6 26 5 310D.25Z0.4 3D?9.73SOS 1 3559.8 3777.2 359.9 39Q.5 TOW.M9ETS 1617.6 172.4 3221 349.7 6. 379.3 .7 4.9 41. 42. 4.2 43.

------...... --- ...... a-RifbLIMILITIES . ;

TWALWK--PIVRESllBIT ASMTIES li& 4.12 i47:9?LS 3R62lt.3 475-1.03 U-Vt.1 V1.1M53 4ii14.5 40.216.1 46.713.2 19.192 4.7l.t 420.21.1 lllwm1lWlfUI 46.4 69.0 54.2 50.6 87.8 143.4 214.6 308a5 U12.6 482.8 50.3 55Z.7

i$tt~ ~ ~~141 146Ut 27zt 2I@ £i £^t j fi32 LIABIPL d lgk taf TOIALii~~WWJUY T7.1 14CB3 1404.04. 2401.?. 2939. 3069.4.3 3130.760 315.258 3255.256 ms5. 3306.7.l. 33507.2 6f5.. T1TALLIABILITIES 1617.6 1742.4 3212.1 3459.? 362.5 374. 356 4(5.8 412.8 423.7 4~2 46.3

UT VUTJlITT IUTIO 3.2 3.2 1.9 1.7 2.8 4.4 6.3 8.7 11.1 12.6 13.5 13.9

MIW... o 6 '-a Pa sr t$L wRT

...... (ZL BlllIQ w6 7INI 9IM 9 199 WE WE 1995 199M t AL L ARL rLKIMFOaS= FRCAT FDEDOT FIIE>S FUN= FRE>Sr FWas F

...... Om PIP LN 211W 4.744 "I4 ?AMi2 SM ltAZ8 1l.W 12-fg 12.7t4 U5AW0SAII - OIIE POLIOHDIERV41 LMe13 .7a 2556 LO 2.91D 2.955 4.044 4.W5 4. 4AS1 43St 4.M1 - EtRT SROIE OAI 0.7|4 O.9 1.0 125 13 2.110 29 27.4 3.62 33 3.776 WIaLtlll wm AEi 6.52 S317 & 103i 11'.7CS12.SS 17a B1tl.44 19"31%2,D.15D, 21S1 21.11

...... SILAR AD WM 1.0911 I.al 2373 2Ab L.9 2.961 3.19 3A3f4 3AZ7 US 3.7AI 3I 6 RE Me1ElEMCIRCTY 0.069 Om .llS 0.1550.0.192 OwS 0217 0.ai 25O X7 O.Z5 CJ8 Lu m118 1AX4 2M U31 3A 4.161 4.510 4.746 4.11 4.M 4.W4 $Al L. wImUII 0315 0.4f2 OJR| 0218 k| 0.3t 0311 O= 0A17 0A34 OA52 OAM QTN ; 0 0.02 (o.lto) (OA") 0.55 0.68f o.nl O.h5 O.wS o0e OJ9 0W 0.t aAiL was om ;.;6 3.; 9i35.573RV7' 8JSg L.?'W9 9.. 'O 9"A'92 9.84K, 0 t.q2 10-A-6 10".7-3 cpTnl6 iE _ iATN o .ses i.4S4 2278 2.942 3.S00 3.9 8371 8.962 9.4?4tO.018 IO0s2 1132 DEO ElT 0.063 O.t43 0.150 OJX4 OM 0.374 OM2 09 1299 1.713 1.92 2.111 TOTALPEawTINOES 3;9 4; Z.1C Z; B.S~ Ls.u3 9,.7421034 11.s; 12A1.8s5412 ta4 NETO TNG E; 0.90 1.3 2 D M 2.s5B 3.1?8 3.4ff tABD 8.1as L176 OM 8L 9.t1

UIIEFETCM uSs 0.070 0 0.136 0.000 Q0701 O214 0-M I1Xl 1.776 1.912 1A I-Ml IET CI MIT OA 1217 1.9;12 2.65 3.10B 320 7.;5 6 I!f 6A40 6351 6.SB 7.8tO

MET$LOUI ASIDERCU Of USM 21 25 24 26 as 26 41 37 33 32 33 36 @

9xxse: 3 aerd Om*staff est1m"t. X 23-"V90o , STAFF,SL, ,,tT FNIST1RMMT PUCTI ZWI*CASIULW ,T IN, 0TMIT M M1998 PRIMS) CZL IlllllO)

Ae. AMC, <, MEE R MO,_O ME RM MD MEf, MEN g%, ~~~~~~~~~~~~~......

OTAIIT IDIEN MM DWIATICI 0.9B1 1.440 227 2.942 3.500 3.819 8.31 8.962 9.474 10.018 10.69 11m2 44.V44 LESS:MT TWX 8& 8w OS H 8:3 1:8 &:R2&M J:i Am S:w tJ TOAL K1i.0.698 0.9 i.i48 1.7 1.751 1.8;9 i 2ON.076 2.7 2'.2,71 10O,' IETAJIWIIDE 0.379 0.111 1.130 1.83 2.232 2.111 642 7.06 i.U9 7.992 8.43 8.92 33.457 LMMW 8:B 8:- aWa8:3 8:8 8:i 8.]iI I: M IQU1 ToTALOMB! IW O.M 0.0 0.i68 0E.0 00 0.21 0.5 i:asi 6.771 6W06 6KAO 6.m 1K. I%InM O.nt 0.I 0M 0.7OJ 1.16 0.96 0M 1.743 02 70 0.225603 w 3341 SEl _m as1 WATJW 0.01 0.129 0.200 0.707 146? 1.594 4296 5.553 0.443 0.78 1.481 2.369 14 Hs 8:.Wa8:3 8:3B 3 6:3111IN 'i: 182:911B t.W TONALINURSIf O.tB 0.t11 0.t39 O.UD 122Da 2.740 11CB. 11.9 . 2K2 .200 47.9 snw RM IOS 0.3 (0.018) (

WJUS:W &918:38:B W 8:8 8:8 9l8 in l:.- &m i 8:3 8:1 I:- TOTAL981!o 0.13 0.00 0.000 .a00 .700 2.tO0 8.40 10.i40 9.70 4. 0.0 0.0 34.990 WAns0.000 0.000 0.0 0.000 0.0000.000 0 O.000.00 0.000 O.0U oM 0.000 0.000 lUTALRim MALMIS 0.30 MD 0.00 0Am. 0.700 2.101 BAN 10.10 9.M8 4£.Zm .QM @ 0 34.9 N 2IIEIISJ ItlT (0.05) 0.018 0.061 0.527 1.147 0.94 26 3.93 d.76) (1.71 (0.7 O.W6 53 CN- AT 7IEIM OFVA 0.00 0.001 0.019 0.00 0.607 1.753 2.707 5.53 9.44S 7T9 5.961 S.3 Sl ATSO OF W 0.O0 0.019 O0 o07 1.753 2.707 554 9.445 7.9 5.9S1 5S SAIl 5 il f 5.4 9.5 6.7 0.0 32.1 9.9 11.4 5.7 1.1 1.1 1.3 1. uxzsansId Bff staffw

I:e N

o wI. PMD FISTFSWP 1RfdIwWAMIU *ET85T am *UMMamf T (3 INRI519 3mWltC .. .,CZ...... SILLIOI) ......

a...... ASSEI

~~~~~~~~~~~~~~~~..... _s......

io.onw ASSETS !.9n, ,2,3 4.301 s,,46,9 ?, ,,9 1n,3.30 1,7,537 16!!? 14.n2 14.s 14.853 liP §~~~~~~~~~~~:0Jig J: 1_6 Jfij 'gt§ 1.0 li- 31- IL flR fi- NU FllE AM15 2.4 2.418 4M58 417 .M 61 12. 2 33.4 40. 42.56 ... O.t48 0.090 0.610 1.37 4.750 5.S S.995 3.30 1.tO0 1.100 M.u-umRSS 0.144VA ...... 3 ...... _... T0TALFMl ASSTSE 2.468 2.501 4.131 4.07 5.505 7.81 16.5 27.769 38.460 43.448 43.6 43.754 TOTAL EIS 4. S34 ,91 10. 12.90 16.510 3D018 45.306 54.57 S.jM 57. 5 58.W ,LWLIABTIES OJIIII LBIMIUTIES

TOrAL015ff LIMBLITIES *0. K!t 1KW 1470 1453 1,.150 1.842 1.m 1MB Ka 2.0,2 2.161 LOIS.150 LOWS 0.000 0.000 0.010 o.00o 0.700 2.L00 10.8S0a ).9 23.766 W.91 19.97 14.563

TOrALIniM 3,.4, 4,.18 ,7.0 8.5W 10.437 11.560 17.46 2.42 26.544 31161 35.92 41.4M TOALLIMB!ItTIES 4.439 S.4 9.2 10.077 12.790 16.510 30D168 45.306 S4.5= SBI. 579 58.9W cc=a== == M=== C======C= C= = pm1w1TFS aff 2.0 2. 2.2 3.7 4.4 4.9 7.2 9.2 8.2 7.3 6.9 6.9 L/TOSwTy FATIO 0 0 0 0 6 19 38 48 49 44 36 27 W 1 O MEMEt 40 55 61 58 68 60 84 48 30 23 21 21 Smwr:3156m dIa*staffs.

o0 w SWf US"WL RT1 .. v . .... *o. .... - ..

ams owe =W FOmuD Ns MSTr awlrgIEFE M ce

191E 191 9lm wm 1990 19| "a 9 5 19 199 1911 1 IV:II* AA ACWIALFO=1OM FOiE=S FlE>S S7 WfOMRJE>S FOE FOOI ......

SAlES- RV 2.46t L.1X 4.766 6361 6A0 64s9 7A 7.79 8369 8.5S 9.aB tO.l - OIIE PMOL1|Ell8m15E 0.481 0.540 1644 1S2 1.962 1.996 2.20 2.2ls 2X5 2.419 256 2.n2 -EW SWI 0129 0 22 0590 0.7m o.m ono oA 0.910 o.sO t.W 1.13 I Z 1WALIMTIIIX OM.7 .F . .t 36 96 0i 10*E2 11.3 12.Ct9 12.904t.1

......

SAAIIUISMID WMe 0.7a6 0.93i 1z616 2.025 2.CC6 2.OV 2 .1Vt 2.171 22m0 2.MO 2.2 .0 RR MD El:lTRICM 0.066 O.W1 0.172 OM2 0.22S 0.2 0216 OA36 om oX? O282 0 mvmwu~~~~~~~~~ 1.2 1o-a L5tg 3.97r 40174 40. 4394- 0J 4.469 4JdO 4Ji8 S 0 1111ERmse: 11OA06) MM2) (0;|16 0.ZS2 0.4 O.= 0. 00 0M OM$8 0260 D0A SBIA. 1m eIveWS 2.S70 2.9t4 S;4 .173' 7.452' "A'4S i. 7," 8".1,10, 8SM 8-Aa BM" GOINERIUIllD = EPRKLM 0.709 0.95D 1.54 I.TlO 1.9G6 2.211 2.77 2.91SA 3.2 3A 439 5.119 CEI:LATBI 0 Qe4 0190O 0.1% 0.450 0-SM 0.548 OA61 OJW 1.09S I22 It37 1.42 wR as RHeam 0.625 0.70 139 13D 1A41 1s2 2.111 2.02 2.4ge 23 2.9M 3.M IIIIEB cmLU O.GR5 O.O9S 0.1!B 0.103 0.166 0.27 A04 0.66 0x8 0S9 0.736 0.63 NETSRP114/CIT O.S5B 0sC IMF M? 127S 1.36 1.707 IA42 1^M 1.5% 2Z6 33 NET1X ASA PERIAE OFSkIE 17.0 17.2 IM 13.6 6.6 14.3 16.2 13.2 14.4 12.9 173 21.9

9as aMM ad B8fk Stafff w es. -4. r li Olt 01 1E9 z*t 9rV r19 fle sl Z 63 ()VZ 90(aw N CI4 w~~O IwFo 49o. £E9& seZE £Wrz 109.1 &9wL am0 U 00010 0000 WIAAD (39IV NWJ c ~~~~o~ ~ ~ jw smL0 £wI sg2E £LYz 143& Iwt w WO*0000 00 00D0 W3AdO UKIUNUU IV NWV (E1o) avo (Z0o) (a6FL (two) Lwo WV9 IO~F OWO I6L0 900O OO0D0 0000 IDJ3G/IwUm M

OMOOWEL00 000O 0L' OWE' 0OD8 OME C0OD OLZO W00 0V0 0910 OCO03I'W SOimI olal 000 a*o owl0 ocrot coo-a cowl0 loD co molo oao mto m*lo sNMONIv U0~~E10000 0000 0191 0~~~~UE0OOD MD' L0 00O0OKO 00 VO CIOIN30SWO

SMEI C1aV0) sro WrZ Drg 6901 9WZ OWO (OdO) (%VO) a6t1O 09V0W 0Mun 11 S TOliWU OW91 0001 owo ow 0Wrt oar# OWEt 0911 o%0 oP LwL tiWo gw0 fIMMMI VIO

artE ftl1 9wo (MEIO)(901) tlES. r w Lor &6o MTz swo i4ro MID wIVum HMOAInm 131 arL (OWO) 6WO mO 9WtL OUT) OWO SfO JIWO (WO1 OWO 0r0A') 9W*0 Taw& am N w m% m gTL M7F Wgz WfL 2CM wgP0 IWro irO 9VO 210o 920 arn ICIO 3IAM anGVIOL

4691 91Z' Ift 11362 6WZ US3 fl0I Wn R5_8 5501 ffS0I isro ff4 305 U

6Li. 6w5 an' aWZ ~6176E %Ct a1Z2 gg1 OLWI IL1.050 or UILVI4i`0 306 aum

WR -iw sriiRJ; wm irnwii W ;ai 06l W - .... --- .... 9WI ...... i W (SUWO~m ~ ~ ~ ~ 9 St Ei IS 21 CUGIU41.0 I3O JWJUo NIL3 WIdSVEs;U3 90ML m daa vs6wgi wt tw ut ir *)t ult utooaoULV M= w N - lVIIWIa~ dM3~ ~ ~ ~ ~ ~~~~~~~~~...... FLD STAFFNFIUL MMB

zMMwan gmV CinMi INcwBT fZLa-ul DMVIR la Ih1S) a or OEM 31 C2.3ILLtIS)

_,,,._...... ,...... ,.,,,. ...,, ._ AETS

......

TTL 13 ASfME i972 2.5 4.1A6 4.1 5.746 621 7i2 8.171 6.W7 6.271 60.50 6MG

EM F £1 TS .9U 2.110 .1 5. 5.7 1 . 6ws 15.9 liltv-lll_ 0.m OA30 0.¶ 0M 0.1 OJ2 0.j2 O.AM 0. 0.A66 0.10W OM Tarm FD MSS 12 2.2 40 6.83 5AOD 5.8 6A45 9.4S9 3.W 2 17.401 163 1669 TO.LATS CM J5. 9.7C6 1 1 12_ 112!A756 21!,072'- 2M231 5. LJUBILIIS a.ir LLMIIUTIN 'Ii

TotAL083Sf LUMIITIB 1.14 1K372 2. m3.9 3.47 3.11 5* 31K0 3.19 3,J55 3.A0, 4,3 Win-linEUWS 0.168 0.1OM 0.06? o.0u 0.297 1.077 4.150 80 9.= 9.5n 7t157 5.743

TTALfillY 27ET t51 34 6 3 7.3 7.810 IS337 8 .9 9.53 10.925.LOS 11.7I8 t2.546 TOTALLZLITIES 4.099 5AM 9.116 10.6 1158 12.65 16.731 21.07 25399 2L1 2283 25.072 aAT ATSTOOIr IID tBLtIES 1.7 1.9 1.7 1.5 1.7 1.9 2.0 2.1 2.2 1.9 1.8 1.6 VTMUTItITYMTIO 6 3 1 1 4 11 2 '6 49 47 39 31 32.8 37.8 40A 25.8 25. 27.8 22 19.8 17.9 14.6 17.8 22.8 t

Stavu : MM d wk SW& s 01b 0*0

o - 96 -

ANNEX1 Page 1 of 2

QOLAND

STAFF APPRAISAL REPORT

FIRST TRANSPORTPROJEGCT

DOCUMENTSAVALILABLE TN THE PROJECT FIE

A. Reiorts and Studies on the Trensgort Sector

1. Poland: Reform, Adjustment and Growth. Report No. 6736-POL. August 17, 1987.

2. Poland . Transport Sector MemorandumReport No. 7701-POL. April 4, 1989

3. Policy and Programme of Transport Developmenttill 1990. MTNC. Undated.

4. Services in Polish Economy. DispatchingServices.

5. InternationalMotor-Vehicle Transportation in Poland.

6. Intermodal Transport Corridor Along the *TEM" Route.

B. Renorts and Studies Relating to the Proiect

1. Modernizing of the Rolling Stock Repairs Technology.

2. Developmentof Repair Potentialof Track Structure Including Production of Licera...Track Machines.

3. Railway Signalling.

4. Summary of the Results of the Traffic Census in 1985.

5. The PermanentWay of PLP.

6. Economic Assessment of Planned Investments. -97-

ANNEX 1.5 Page 2 of 2

C. ECONOMIC FINANCIAL AMD ACCOUNTINGDOCUMENTATION

1. PKP - Income Accounts and Balance Sheets (in Polish) 1985-88

2. ZWUS - Income Accounts and Balance Sheets (in Polish) 1985-88

3. ZNTK - Income Accounts and Balance Sheets (in Polish) 1985-88

4. PKP - Law of 2nd December 1960

5. PKP - Announceent of Minister of Communicationsof April 2, 1970

6. PKP - Act of April 27, 1989

7. PKP - Legal Background

8. ZWUS - Principles of functioningfor ZWUS

9. ZMTKS - Decree No. 55 by Ministerof Communications- June 26, 1982

10. PKP - Evaluationof InvestmentPlan to be Financed by World Bank.

11. Economic Evaluationof Project Components.

12. Bank DisbursementSchedule in Zloties.

polsaran.15 - 98 -

Table I

POLAND

STAFFAPPRAISAL REPORT FIRST TRANSPORTPROJECT

Freight Transport According to .Yode of Transport

BrancMS t970 1980 1901 1982 1983 19U4 1985 1956 ...... to in sillt on) ...... Sat1ways 182.3 482.1 401.5 402.1 414.6 425.5 419.4 43g.7 of whtcR staUErWG140 370.7 472.1 394.0 394.9 407.4 414.3 41?.? 423.6 Autametbi 42.6 2167.9 1s17.5 1379.3 1397.2 1420.9 1393.4 1406.5 "ulic ,107.7anbort 231.6 166.1 125.1 125.6 123.9 115.0 112.7 rnmenterarilese1hii 262.0 542.3 $S4.9 4S4.1 416.9 442.9 46.4 st0.a es8wn c trasperte- 492.9 1058.0 344.0 797.1 $12.7 814.1 816.2 771.1 14.9 time Saipng 8.8 .2 16.6 13.7 14.3 11.4 14.5 f 40 AlrtrSflsU - - - -

71A41 1269.1 2712.9 2029.7 1621.8 186.4 1901.6 1846.2 1592.2 Sea sn¶s'n9 J17.6 39.6 32.0 32.9 33.3 3S.4 32.0 25.8 ...... ton.Alouoi r (in *ilioial------)------Qairs 114,79.3 109.5 112.7 115.0 123.5 120.6 121.8

LutomoSlel 15.0 44.5 36.0 34.0 35.4 36.6 36.6 37.0 @i*le trantooet 4.S 11.1 9.5 0.4 *., 9. ,.s 9.6 orancn esterefr1,s 4.2 1I.1 10.5 9.6 10.0 7.9 7.0 11.5 own transvort. 7.1 18.3 16.3 16.0 16.7 16.0 16.7 1S.9 ?nla*Wsnososng 2.3 2.3 1.9 1.6 1.S 1.4 1.4 1.6 Mie tranisert . . . . . p g1 1ne5 ...A ..-.1L .JLZ 1 .. _ 2.. . 1.-.±. . .. 701*L 124.4 19.6 164.8 144.9 172.4 178.8 171.6 178.2

Sea sntooing 106.6 257.4 217.5 191.7 197.1 t93.4 177.8 '72.7

-* nterpris0s serving only rttcumlarbranel s of esonemv * rramsrt tfor O nee" of en-irausort enterrlses': partly estimates . islli*tbl@ Source: Stattsttl Year bb of Floln. 1957 - 99 -

Table 2

POLAND

STAFF APPRAISALREPORT

FIRST TRANSPORTPROJECT

Passenger Traffic bv Public Transoort

Passengers (in millions) ItaMlens 1970 o196 1961 19lt 1963 -984 1965 1964

36t1ws" 1054 1.100 1.114 1.106 1.042 1.035 1.0 990

Read tf6MUoft 1.374 2.379 2.340 2.321 2.424 2.438 2.435 2.458 Air?rert 1 2 2 1 1 2 2 2 tnlaft .1lesios I §t -__ a2

TOtAL 2.439 2.44" 3,44 2.440 * 3.474 3.482 3.448 3.454

,...... ------assenger-mIn (inoli1ins) -......

Rail"wy 34.9 44.3 48.2 49.3 56.1 53.2 52.0 48.5 64 trogeoart 29.1 49.2 4W5 47.3 49.0 52.4 52.1 53.1 Asp ?ttgITr t 0.1 2.8 2.5 1.2 1.8 2.5 2.9 3.2

Znlan SM9931nb 0.4 0.1 0.1 0.1 0.. 0.1 0.1 0.1

TOTAL 4.7 94.4 99.3 97.9 103.0 106.3 t07.1 104.9

Sworn: Statsttscal Tear "a of folaiw 3W4 - 100 -

Tabl 3

POLAND

STAFFAPPRAISAL REPORT ...... FIRST TRANSPORTPROJECT

abwerof fotop Vehicle

VEhICLETYP 1970 1970 1980 lq1 1982 1986 1985

~~~~~~~~...... --*sntlu+-*** ...... *.. in thowausea......

TOTAL 2,847 4,876 5496 5,853 5.996 6850 7.089

of which:

PASSENGERCARS 519 1,916 2,4 2,722 2,972 3.514 3.760

of wich private 43 1,791 2,= 2,587 2,813 3.369 3.611

othwe 40 81 as as 90 8s s9

SUEAND COACS 33 61 66 674 s 83

LOaIES 274 5" 618 641 616 732 780

of which private 27 112 154 180 185 26 297

TACTORS 232 524 621 671 18 860 919

MOTORCYCLESAND SCO0 1,79 1.831 I,M 1,751 1,616 1,' I,s'm

=MUs St1stiat Towr $ook of Pd3r,d, 1987. POLAND

STAFF APPRAISAL REPORT

FIRST TRANSPORTPROJECT FIBfITItU BYT FWslSTATE I AYS (ST"mG ) BYCAIW 1970 978 980no 1983 19211 1982 1S 3986 1970 982 38J6 Carso group thousandtons average trans- part distane p ton Int TOTA...... 370 713 4714 93% 39492 NS4 41274442369 261 269 2 of boitch

Coal ... 2..2ma 162S095 1.....6.21...... 32197S 1548So IS8492 160869 160241 2 62 295 205

Ligtite and coke.1617 169763760417792 IS767 14693 14611 IS773 221 22S 234

Ores ...... 19964 25505 26941 20481 18424 19281 21746 25146 246 342 109 F

Stones.2155...... 3.. 22861 29790 21225 22367 21366 2420S 24688 204 201 2IS

Sand Sod gravel5 ISOS02--.--.- 21112 227n7 16SS2 1577 12447 2I1S9 *47". 208

Crude petroleim and petro- la* products...... 11493 37m91 3662S 139S7 13204 13250 3I2t3 13533 29 237 233

Petal and fetal products . 29264 4530 44457 35684 32686 2437 346844 37687 245 222 a2s

Brick .. I ...... 1912 1200 B 84 664 42S 38S 30S 189 220 24S 255

Ci_ t ...... 13711 10230 7704 . 9222 9761 9712 9080 282 308 314

Fertillfars...... 3.2324 14870 13674 13333 1322 12327 )3060 12403 314 332 U2

Ceeals ...... 9S53 894S 8240 Ss6 4622 4433 2966 337 406 294

Potatoes ...... 2026 1472 3106 926 644 II09 lose 3Ils109 126 78 Sugarbeets ...... 2.003 244S 1938 2847 2495 2629 2soo 24M4 284 272 144 sbo Nd td Products...... 32598 Il596 3374 33126 l3S55 t267 3295 3*26 274

Matca: Statistical Year Book of Poland. 193 7. I - 102 - Table 5

POLAND

STAFF APPRAISAL REPORT

FTRST TRANSPORTPROJECT

Length of Public Roads (excludingurban) (thousandkilometers)

All weatf_er roadsd

Year All Roads Total Asphalt or concrete surfacing

1970 271 130 76 1975 259* 142 99 1980 254 148 118 L981 254 149 120 1962 254 l50 123 1983 254 152 125 1984 254 153 128 L985 254 154 130 1986 2S9* 172 144 1987 293 179 146

source: Statistical Year Book of Poland, 1986 1986: Miseion, November 1987

* due to classificationchanges. - 103 -

STAFFAPPRAIS. REPORT

...... Lwtph ot Puihlc Rloa in Polar in 1917 ...... "TIML ltm$ ~ ~ ISTTRNUR POJC ?ftosma-th ism.+*^- ~INUR URA ROAS ROADS NtATINL R"OAS** ...... tOTAL 2.? of hitch: Pavedro .) x Ynwsvd roads vOVUS ROAOSIP

TotAL 116.3 of whicht: (94.0) ...... pavedroaft -overoads (22.3)

auaA. ao

MOAL. 130.3 of tAiIhl d roas (33.1) a~~~ved toads ~~~~~~~(95.2)

LOCALURIANROAOII

TOTAL *S.8 of whtcf: pavedroads wuwd roadsx

AuL a 23.1 49.3 ...... -.--...... --....- ...... ---...... ----.-...... - of wiblib pavd (171.6 (35.2) U- rd (117.) 11.

TOTALAUL PALIC OS tN POLAN * 3.? ...... In nwtiani thW neswwr twe are:

213 km semWV W Ls _rlasa.offntud.fuw 215bk with dumtca _fegmsW/ S4Qkm ro with du0 eariageusys...... w it tidit see - 104 - Table 7

POLAND STAFF APPRAISALREPORT FIRST TRANSPORTPROJECT Excerpts of Vehicle and Traffic Rezulations RenulaCion317 of 1983 vehicleDimesions: Max. length,single vehicle 12 a , semi-trailer 16 m , truck-onetrailer t8 m , truck-twotrailers 22 m motorcycleand trailer 4 m Max. width 2.5 a Max. height 4 a

ManximumVehicle WeiaIts for:

Vehiclevith 2 axles 16 t 3 axles or more 24 t semi-trailer,3 axles 32 t ft It , 4 axes or more 12 t ArticuW ted bus 28 t

Max Roado nor Axle: Single axle (exceptas listedbelow): 80.0 km 100 kN* Multipleaxles, dependingon spacing: *upto l.l1m 57.5 kM up to 1.2a/t.1 a - 1.2 a 57.5 kN 65.0 kM 1.2m - 1.3 m 65.0 kM 72.5 kN over 1.3 m 72.5 kN 80.0 kN

fax.Noise Level: During driving,at 3 a from vehicle: Vehicleweight i12 eadt nglinepower , 2Q0 HP 94 45(A) to .10 12e I" 00 HP 92 dl(A) Vehicleweight 3.5 - 12 t 89 dW(A) other veblcles,except Motorcycles 8S dB(A) Motorcycles, 125 cc or over 86 W3(A) * under 125 cc 84 43(A)

Remglation33 of 1983 SEMI lwt4t- A. All-purpose,non-urban roads: Passenger cars and motorcylces 90 kmlh Trucks and buses 70 ku/h S. Urban roads: 60 km/h C. Iotorays and exess roads: Cars without trailer 110 km/h Blses' 90 km/h Otherwise as for A. above

* - 1 ka 0.1 metric ton. 105 - Table 8

POLAND

STAFF APPRAISALREPORT

FIRST TRANSPORTPROJECT

Annual AveraRe Dail Traffic on E-Roads in 1985

AAD0T-y VehicleCategory

E Length Light Crwareial Vohielos road of road Motor- Passenger comercial Without With Buses Tractors

number km AAOT cycles cars vehicles trailers trailers

E-30 579 4001 54 1977 638 583 531 159 G0 E-40 573 5391 73 2573 841 852 143 258 5U £-65 513 3853 S6 1900 601 542 464 *234 57

-75 634 6546 6S 3080 1089 1069 91a 266 S8

E-28 356 2891 64 1491 443 428 307 94 63 E-36 82 1789 12 896 188 210 440 40 2 £-67 454 4288 60 2097 69S 626 55S 188 68 E-7Z 740 4703 51 2403 743 687 SSO 217 S5 E-261 3SS 3719 73 1854 627 521 439 126 78 E-462 75 5330 158 2886 744 740 341 373 38

All K- 4472 4546 62 2233 725 684 584 201 S9 roads 49 16 1S 13 S 1

j/ Annual Average Daily Traffic. POLAND

STAFF APPRAISAL REPORT ______FIRST TRANSPORT PROJECT ______GENERAL DIRECTORATE OF PUBLIC ROADS EXPENDITURE 1986-88

1986 1987 1988 ( ------ZL Billion ------)

1. Maintenance of Roads and Bridges 48.600 50 61.735 49 90.397 48 2. Road and Bridge Construction 32.483 33 42.587 34 56.722 30 3. Construction of Motorways and Expressways 7.992 8 10.146 8 22.901 12 4. Investment Expenditure 4.1 Roads 1.083 1 1.713 1 5.993 3 .4.2 Material 1.040 1 0.930 1 1.342 1 4.3 Equipment, etc. 6.204 6 8.571 7 10.441 6 5. Administrative Costs 0.693 1 0.863 1 1.380 1

98.095 100 126.545 100 189.176 100

Source: GDDP. - 107 -

teble 10 pap I R 2

FIRS Thi;;; POW STAFFAPRISL W90 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~...... __._...... xrECsTliESI1 (A;; fiaa- InWSiL t) AS OT PUSCEOITIh PRYSIC.C4WIN0. M TOMA r TAL ...... ;wi...... W. E0WIIT L0AL FREI WN WLEL UtL flIUIGIa LOCL FIS j OOT ,,,,,,,,,,,,...... _._ ...... AUUAUS ldRAO MIMIDWI0E s.4pire trud mKhuu 0.00 21.10 21.10 0.00 4.32 0.00 0.61 0.00 26.04 26.01 ...... _...... w... ; ...... mt 0.o 21.10 21.10 0.00 4.32 0.00 0.61 0.00 26.01 296.0 2.1rII rW. IWIJAP O.Etase f*srop 15.50 7.45 2.95 3S3 1.80 0.47 0.22 19.50 9.47 28.97 bhArete steepms 3.95 7.40 11.35 0.A 1.19 0.20 0.23 5.00 9.42 14.44 c.dpwAwmt oTawwu. 0.82 11.55 12.37 0.27 2.3 0.02 0.44 1.11 14U 15.44 d.Re=%fitifrvaumlts. 0.2 280 3.0B 0.0b 0.57 0.01 0.08 03 3.45 3.80 o.rldl bAt wldd 0. 5.20 5.42 o.as 1.01 0.01 0.16 03 640 64? shotl 20.7 34.40 55.17 /..75 7.54 0.?1 1.13 26.26 43.07 69.3 38LL5 SM MW.(Fi.w by EIB) aAtiid1c 0.11 336 3.47 0.02 0.6 0.00 0.10 0.13 4.12 4.25 b.n* 0.01 2.42 2A3 0.00 0.5 0.00 0.07 0.01 3.01 3.02 C.Oiwls 0.07 320 3.2 0.01 0.69 0.00 0.10 0.08 3.99 4.0? dJLd.m r*uir(*.) 0.0 125 1.1 0.01 0.53 0.00 0.04 0.07 1.81 1.89 sJofaly hr brdm(8t.) 0.43 5.76 6.19 0.00 1.14 0.01 0.17 0.52 7.07 7.59 btal 0.8 15.99 16.6 0.12 3.54 0.02 0.48 0* 20.00 2042 4.SIGtLIS a.hwUuumtsOmiL) 0.10 1.2 1.72 0M 0.47 0.00 0.0o 0.12 2.14 2.26 ------...... _.. shoutat 0.10 162 1.7Z 0.0 0.4J 0.00 .O 0.12 2.4 2.26

a.Sqdp.chta uwbuork 2.60 10.40 13.00 0.0 1.61 0.08 0.36 3.18 12.5 15.53 ...... _ ...... _ ...... btat 20 10.40 13.00 0.50 1.61 0.08 034 3.18 12.35 15.53 6JWI_IN .ntES 6.00 25.00 31.00 1A. 4.32 0.18 1.2 7.2 30.57 37.77 sktotal 6.00 25.00 31.00 1.02 4.32 0.18 1.23 7.20 30.57 37.77

a.perdtirs 8 HYstClo 0.5 0.15 0.20 0.00 0.00 o.0o 0.00 O.CC 0.15 0.21 b* mhw dhsigrlli 0A 0.15 0.2D 0.00 0.0 0 0.00 0.05 0.15 ' 0.21 c.b_J wt i.S.(tna 0.07 0.21 0.31 0.01 0.10 0.00 0.01 0.0 3 0.43 d.0dtw SWISS 0.12 0.77 0.9 O 0.5 OM 0.00 0.17 1.14 1.31 .. ~~~~~~...... ___...... I...... _ stot 0 1.31 1.60 0.06 0.45 0.0C 0.0 0.36 1.80 2.15

aSU* tuis fo am 0.50 0.90 1.40 0.05 030 0.02 0.8 0.5 1.8 1.

RI13.1 (HP) UNTOTAL 30.94 110.72 14146 6.9 23% 1.0 3.97 38.0 137.2 5.15

aibchlm 1.05 5.30 63 0A O.8 0.0 0.16 130 6.30 7.60 *blUrfm fen 0.00 1.20 1.20 00 02 0.00 0.0 0 OM0. 1A5 1.45 . 6...... 7 ...... 0...... _._ . 9.00 *81Slt * ~~~~~~~~1.056.50 7.515 022 US0 0.03 OM2 1,D 7.7S 9.05 - 108 -

TzbA10 fWD2 of 2

FIIST 1URM8W fl .. ,,,,,...... ,,..., STAFFAMA1L WI ,,...,...... P1C ST ESTIMUE(All fig In US mitt.) ...... ,..,...., _ ,...... 8am 0r J S KILL fRlIE a EL Pfl'JC. aITDl. 001 TOrAL ST TOTAL I I I I I ...... I I 1I.. P80J. cmUI L0DL FoalII , ,1;L , ,,, ,,,,,,,, l ...... ' . .,...... OW ;. j! 7W...... OWT R...... T ~ ...... ~~UL ...... fSEiiA~ ....,,, , ,.... tXfEll UX1fIEa II f l IPS c.mm SIIMom±z F.) aEq&gpm 1.13 11.56 12.69 0.18 1.6 0.29 039 1.0 13.58 15.18 b.Xt fast fsady 0.66 2.30 2.94 0.13 0.56 o.o7 0.10 o.a6 2.96 3.80 cJ_a1rg frstruzw 0.06 1.52 1.58 0.01 0.23 0.C5 0.06 0.12 1.81 1.93 d.Trmfnin far NASstaff 0.23 1.50 1.73 0.01 0.10 0.01 0.5 0M 1.65 1.90 sbca 2.06 16.88 18.96 0.3 2.52 0.41 0.60 2.80 30.00 22.80

o.ipat fer fl6 o0.00 1.sB 1.9s 0.00 0.30 0.00 0.09 0.00 2.37 2.37 b.V test &ilttians 0.V 0.00 0.22 0.0 0.00 0.02 0.00 048 O.O0 o.a c.tedLjsst.A Trinfrg 0.00 0.09 0.09 0.00 0.01 0.00 0.00 0.00 0.10 0.10 d.Lx*mdry Gq4 0.00 0.63 0.8 0.00 0.08 0.00 00 0.00 0.73 0.73 ...... j.W - --- W.... --- W.W" -- --- *ss^**Woo*ss*W****--- ;W .. j.7 ai O~~~~~.Z2.70 2.93 0.00 0.3 0.02 0.11 048 3.20 3.46 EJUT4Si OFTLMW & iR.E30W .Studes 0.15 1.53 14 0.6 0.15 O.1 0.12 0.22 1 2.02 b.Trupmcta R.trnwuru 0.37 2.40 2.77 0.03 0.56 0.02 0.06 O.2 3.00 3.42 obtow ~ ~~.,.... , .w ...... ,,, --- Z, htta 0.52 3.93 4.45 0.09 0.7t 0.C3 0.16 0.66. 4.80 5.44

WAD TOAL fre. fl8 c 34.79 140.73 175.52 7.19 27.22 1.52 5.06 43.0 173.00 216.50

OM TOTAL.ml. E3l8 ant 34.11 134.74 158 7.07 253B 1.50 4.56 4246 153.00 19567

M OWST TABlE ...... _

BmW tzz5W'----L--0-----L-ST'''''''---flEIU -- IST+'-AL -'.' - Iasi PH 3l.T. a£8TOAtfL PR.aMT.TOTM. |8YEuliPHrir. 918TOA1L FlRNrn.OTALJ =,,...... _...... A" frt.E1 portian 30.94 1.03 31.97 6.53 3.M0 110.72 3.9? 114.69 22.55 137.25 $.amS 1.0C 0.03 1.08 08 1.30 6.50 0.20 1t 1.03 7.75 Ca"IS 2.06 0.41 2.47 03 2.E 16.88 040 1T.46 2.52 20.00 D.HNWoS 0.22 * ! 0.34 0.00 0.26 2.70 0.11 2.81 0.3 3.20 ElME 0.52 0.03 M 09 064 3.93 0.16 4.09 0.71 4 ...... TrAL 34.79 1.52 3631 7.19 43.50 140.75 5.06 140.12 27.22 !17.00

CUE ca.Et8 pontitn 3048 1.01 31.27 641 3V.8 94.73 3.49 943 19.A0 117.5

N01M I/ All prim wre in Dec. 1958pces. 2, Ew. rmtA1. CO UCZL 3/VFit Pricec etlwies are kasedcn fttdrg inftatit rates. Lacl- , qe; _ in US$Ime been giwn these rates.

1990 7.23 1991 4.4X 1992 4.42 1993 4.42 1994 4.42 1995 4.4X

4/ Cat TAle furtAus 1Ut0 mill.awlent of EIB finrcimg. - 109 -

Table 11

S?AF.FMfAISAL R tI

RARSTTR tI PROJECT lHPHf?AlGsoWIE -IA CHAR?.

aTtVrngS Iw i9f" .990 :99t 1991 j; I4 199 9§ 1994 1994 19q$ tM JU-NECMIAIl4IItLY-iEC IWA-.JIE Jt/W-DEC AMI-FJ W M-CEC:AN-MU%E JULY-IEC 314 I 4W-YC JAN-JAEuLMt-IC

LLOAMDFROCEStINI

I.Neotiatwofte 0 2.boT@Pruontation t :.EftetItgC" s t 4.ClosanqVMS $ S.Project Caaplotion :I

IL.PROCU1IREITILIU

.tech. Stfications mte## 3 Praatiom lid cla. ttt1t50s00st0 $.Aqe sith ha on Itid da - 4.8Id invitatione S.lid oohaatan-t i:iS""""" 6.3id evaluation m etWU# ?.okbds.oiection -- 8.Jmardod contracts

I.orkesopoteomisation A.Suildii erks st"SttJt*$$s b.Delivewyof eachine $44$440$ cdIntall. ttit of mKaconeI d.Ronninginwriod for the foundryfor hrakeh.loch.

.TrackWaint.leprovreut a.Ioldiflq uarkst:ono,S*Io b.1livory of Uchinlt c.Installstionof machines d.Productionof elastc fateonngs. h t u ttt I S / J

3.C&pztysncrease on s4n1111n9f.ctpy A.Dhliveryof mhin L.trndfer of knorhou iUnOsstssOtUnUtflO c.ImstaUttalltof d -acu 4.4laoeqeumtInform."stem 4E:.(oratian of ester polea IWOO$ll b*beioeryof equpmet c.Cassisonia of softwta " - _ dJahoqoswthe S.Studial a.tIII -=/1

?.TrahiAq tttU Uttttttttl00ttitU tgt

lUl: /t.ftnmncedcut of Pepfoss. 12.lVetmutson elastic'ta"tr9s haveto keapgac sith the haaat productionof cancreteslep"rs. - 110 -

Table 12

POLAND-DISBURSEMENT SIHEDULE

140~

°110

uu. ___T - _ - -- _----- C- so _ _I I ___1I I Sn .---___ --- ______-f_

1. 2. 3. 4 .9. ?. U.9. tO.1D.1. 12. 1I.lt.l15.hL7.l?. 1.*9. 20. 2t.2.

O Nli8UNtAHi-UDua

OI_IREET SOEUE.

QUAlRTE M,OUNT CWWLATIVE

1. JUL-S 90. 1.00 1.00-EFEtIVEJESS 2. OCt-DEC90 1 .00 2.00 3.JAN- Y 140 3.500 4. A-Jn 9 2.00 . 540 5. JUSE 91 3.00 3.50 6, OCt-DEC91 4.00 12.50 * . Ja-A 92 5.00 17.50 8. aR-UNln 7.00 24.50 9. JUL-EP92 9.00 33.S0 10. OCT-DEC92 10.50 4.00 11. JAN-NMI93 10.50 54.50 12. APRJUNI93 11.00 b5.50 13. JUI- 9P3*: 11.00 76.50 14. OCT-DEC93 11.50 88.00 15. JAN-HAl94 A1.50 99.50 16. MR-JUNI94 11.00 110.50 17. JUL-SEPt94 10.50 121.00 18.OCT-IEC 94 10.00 131.00 19. JAl-MA13. 95~imw9 1.0"5.50 140.S0 20. AM-JUN95 .00 14.50 . CORPLETIE 21. JUL-W92 3.00 151.50 22. OCT-DEC95 1.50 15.00 LlIIS DTE - 111- Chart 1

POLAND

STAFF APPRAISALREPORT

FIRST TRANSPORTPROJECT

OrpanizationChart of PKP - December 1988

~~~~.1.

OPERATION |INB o En

Plalnnmg Coxmercial Traction rack 8 D ' Traffic Care 1gnal

|AJditing Police Shows Contruction Acquisition Wire dept Investment Personnel

Social

W alth

Intrnational ; L zDistricts , nSR- - - io~~~~~~~~~Districts lOafetY_

* 4 . .~~~~~~~~~~~~~~~~~~~~~~ POLAND STAFF APPRAISAL REPORT FIRST TRANSPORTPROJECT GENERALDIRECTORATE OF PUBLIC ROADS (CDM) ORCANIZATION CHART

GENERALDIRECTOR

bPU DI FINAECIAL iIO N E | QUIPMENT PNNN|NTECHNICAL ANIDCONSTRUCTION A lNDMlATERtIALS....

POLICY LODI ,rOADPMENT PLAING|P

_ACCOUNTING I - I- -I- ECONNICS ROADNLINT.

?RAIISI'IOJBT _AUDITING PERSONNEL TECHNICAL I DEVEOPKENT (Road dslsn) - PERVISION ATEItwLS . ~~~~~~~PRODUCTI4SN .BUWDGET . - | TRAINING am ansacH ioli ~~~~~~~~~~~~~~~~SURVEY

(Research, road. r safety) 1 ADIIINISTIBATION | {URBAN ROADS

HIGIIUUKYI I 17 DISTRICT OFFICES IOTORUAYS COMUTECEMER , _

_ 196 SUB DIVISIONAL __O__ID P___I_ I |INSTITUTE/ OFFICES S /~~~~~~~~~~~~~~~~~~~

_ (~~~~~~~~~~~~~~~~~~~~~~~~~~~~~z

O0 +@ I o 1.; -"-E-,,,,SA !

0 o IL~~0 ~~ ~

z.,i iJ Kz i, ~ ' (I

= 1 4.'_" ~ ~~~~~~~~Ijil1llfAll

Q' 71 ~U 1~. .5i~~~~~~~~~~~~~~~~~~~~~~~~i

H'W a 3,Z)I 'I

X,