ReportNo. 9908-MAI TransportSector Review SelectedIssues (in Two Volumes) Volume Il: Working Papers Public Disclosure Authorized

August10, 1992 InfrastructureOperations Division SouthernAfrica Department

FOR OFFICIAL USE ONLY Public Disclosure Authorized Public Disclosure Authorized r ~~ ~ ~ ~ .ti Public Disclosure Authorized

- Xis-docun*nthias a restricteddistribution and may be wedi by reipi>ents &d. in-theperfomance ~,f their 6fficial duties.-Its contents may not otherwise <~ be e~without Worl Bankauthoizatin. CURRENCYEQUIVALENT (as of November 1. 1991)

Currency Unit - Malavi Kwacha (NK) US$1.00 - MH 2.86 MR 1.00 - US$0.38 MH 1.00 - 100 Tambala

GOVERNMENTOF HALAWIFISCAL YEAR

April 1 to Harch 31

WEIGHTSAND MEASURES

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

GLOSSARYOF ABBREVIATIONS

ABA - African Businessmen's Association ADMARC D Agriculture Development Marketing Board AFRAA - African Airlines Association AfDB - African Development Bank A"RAA - African Airlines Association BA * British Airways CPH-N - Caminho de Ferro-Norte, DCA - Department of Civil Aviation DSS - Decision Support System DEHATT - Development of Halawi Traders Trust !>. - Directed Track Haintenance EPD - Economic Planning and Development Department GOM - Government of Malawi GSA - General Sales Agent IATA - International Air Transport Association INDEBANK - Investment and Development Bank of Malawi INDEFUND - Investment and Development Fund of Malawi RIA - Kamazu International Airport RLM - Royal Dutch Airlines LAM - Mozambique Airlines LFC - Leasing and Finance Company of Malawi LS - Lake Services MHS MMaterial Hanagement Systems MOP - Ministry of Finance MOTC - Ministry of Transport and Communications HOU - Memorandum of Understanding mOW - Ministry of Works MPF - Monthly Payment Factor MR - HTIT - Ministry of Trade, Industry and Tourism NTC a Northern Transport Corridor NRZ - National Railways of Zimbabwe OAS - Operations Audit System OPC - Office of the President and Cabinet PCC - Petroleum Control Commission PR - Passenger Kilometers PRP - Prime Route Policy PVHO - Plant and Vehicle Hire Organization QAS - Quality Assurance System QM AAir Mlalvi RAP * Restructuring Action Plan ROC * Return on Capital Employed RSP - Road Service Permit UTA - Road Traffic Act RTC - Road Traffic Commission RTD - Road Traffic Department RTOA - Road Transport Operators Association SM - South African Airways TEU . Twenty Foot Equivalent Unit (containers) SM - Stagecoach Malawi. Ltd. tR - Railways UNHCR * United Nations High Commissioner for Refugees ZR - Railways FOROmFCIL USE ONLY

MALAWI

TRANSPORT SECTOR REVIEW - SELECTED ISSUES

VOLUME 2

Table of Contents

WORKING PAPER NO. 1

MALAWI RAILWAYS

Page No.

I*INTRODUCTION ...... 1

A. Background ...... 1 B. Past Operating Environment and MR's Response ...... 5 C. Future Prospects and MR's Strategy ...... 8 D. Recommended Strategic Framework for Financial Viability . 9

II. ORGANIZATION AND RESOURCES .R.C.E...... 9

A. The Railway System ...... 9 B. Structure and Regulation ...... 10 C. Organization, Management and Staffing ...... 10 D. Physical Assets and Resources...... 13

III. FINANCIAL AND OPERATIONAL PERFORMANCE ...... 15

A. Financial Performance...... 15 B. Operational Performance ...... 18 C. Operational Efficiency ...... 21

IV. CORPORATE OBJECTIVES AND STRATEGY ...... 21

A. Corporate Objective ...... 21 B. Strategy ...... 22

V. RESTRUCTURING ...... 23

A. Business Portfolio ...... 23 B. Business Potential and Marketing Strategy..... 26 C. Operations Restructuring ...... 27 D. Organization Restructuring ...... 30 E. Staff Reduction ...... 31 F. Assets Restructuring and Investments ...... 32 G. Financial Restructuring...... 33 H. Privatization ...... 34 I. Impact of Restructuring on MR Assets ...... 34

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Page No. VI. MANAGEENCTFECTIVENESS.. 34

A. Systes lmprovement ...... 34 B. Operations Improvementand EfficiencyTargets ...... 35 C. Staff Development and Motivation ...... 36

VII. RAILWAY-GOVERNMNTUNDERSTANDING ...... 36

A. Obligationsof th Railwys ...... 36 B. Obligationsof th Government...... 37 C. Meorandum of Understanding (HOU) ...... 38

VIII. PROJECTIONSAND ACTION PLAN...... 39

A. Financial Proections...... 39 B. RestructuringAction Plan ...... 45 C. ImplementationStratogy ...... 45

ANNEXES

1. Halawi Railways OrganizationStructure (1988189) 2. Basic Data and Key Performance Indicators for the Malawi and Some Neighboring Railways 3. Malawi Railways Staff Levels and Staff Productivity (1975-1990) 4. Malawi Railways Operational Performance and Productivity Indicators (1975-1990) 5. Freight and Passenger Traffic on Malawi Railways (1975-1990) 6. Malawi Railways OrganizationStructure (1990) 7. Malawi Railways Network - Alignment and Gradients 8. Halawi Railways Permanent Way Details 9. Malawi Railways Locomotives - Inventory and Main Specifications 10. Malawi Railways Rolling Stock Inventory 11 Malawi Railways Financial History and Key Financial Indicators 12. Current Estimates of Halawi Railways Assets and Depreciation 13. Malawi Railways Commodity-wiseLocal Freight Traffic for 1989/90 1A, Malawi Railways Sectional Traffic Density Analysis for FY 1989/90 15. Malawi Railways Sectional Traffic Density Analysis for FY 1995 16. Malawi Railways Freight Handled at Different Stations (1989/90) 17. Malawi Railways (includingLake Services) Cost Structure and Trend (1985186-1989/90) 18. Malawi Railways Operational Performance Targets 19. Malawi Railways Operations Analysis and Assessment of Locomotives and Rolling Malawi Railways Stock Requirement 20. Malawi Railways Traffic Forecast - 1995 21. Malawi Railways InternationalTraffic Forecast and Overseas & Nacala Share 22. Malawi Railways Overseas Traffic Forecast by Corridors - 1995 23. Malawi Railways Overseas Traffic Imbalance by Corridors and Wagon Types 24. Malawi Railways Recommended OrganizationStructure 25. Current Estimates of Malawi Railways' Usable Assets and Depreciation 26. Malawi Railways Operations Analysis -1985 High Case WORKINGPAPER NO. 2

AIR MALAWI

Page No.

I. INTRODUCTION ...... 82

II. CURRENT OPERATIONS ...... 83

A. Overview ...... * . * * * . * * 83 B. Air Malavi'sInternational Air Passenger Market . . . . . 85 C. Air Malavi's Domestic Air PassengerMarket ...... 91

III. FINANCIALANALYSIS ...... 92

A. Revenues ...... 93 B. Operating Costs . . . . * * * * . . . . . * . . * . . 96 C. Route Profitability ...... 99

IV. ORGANIZATIONAND STAFFINGD...... 102

A. Staffing and Functions by Department ...... 106 B. Interline Accounting ...... 108

V. CURRENT ISSUES ...... 110

A. Airline Autonomy ...... L1O B. Improved Viability of Existing Operations ...... 111 C. Aircraft Replacement ...... 111

VI. FINANCIAL FORECASTUNDER ALTERNATIVE SCENARIOS . . . . . 112

A. Traffic Forecast ...... 112 B. Aircraft Replacement Scenarios ...... 113 C. Financial Comparison of Alternative Scenarios ...... 116

VII. KAMUZU INTERNATIONALAIRPORT N..A..RPO...... 119

ANNEXES

1. Aircraft Replacement Scenarios - Forecast Assumptions 2. Financial Projections of Jet Aircraft Purchase Scenarios WORKINGPAPER NO. 3

ROADFREIGHT TRANSPORT

Page No.

I. INTRODUCTION ...... 130

II. TRAFFICNETWORK ...... 131

A. International ...... 131 D. Domestic ...... * ...... 132 III. INDUSTRY STRUCTUREI ...... 133

A. InstitutionalFramework. .. . . o ...... 133 B. Regulation ...... 134 C. FreightOperations ...... 137

IV. SUPPLY ...... *. .*...... 139

A. International ...... 142 B. Domestic ...... 145

V. DEMAND ...... lS0

A. International ...... 150 B. Domestic ...... 150

VI. INDUSTRY SUPPORT NETWORK ...... 151

A. Road Transport OperatorsAssociation (RTOA) ...... 151 B. Goods Vehicles ...... 151 C. Vehicle Parts ...... 152 D. Tires ...... 153 E. Vehicle Repairs...... 153 F. PetroleumSupply ...... 154 G. Insurance Companies ...... 154 B. Credit Facilities ...... 155

VII. INDUSTRY PERFORMANCE ...... 156

A. InternationalOperators ...... 156 B. Domestic Operators ...... 166

VIII. ROAD TRANSPORT CONSTRAINTS ...... 170

A. Ministry of Transport and Comomnications ...... 170 B. InternationalTransport...... * . . 171 C. Domestic Transport ...... 172

IX* RECO*OlNDATIONS ...... 173 ANNEXES

1. Guidelines for Granting Exemptions for Foreign Haulage Vehicles to Ply Between Lilcngwe and 2. Informal Own-Account Fleet Inventory 3. Calculationsof Dry Cargo Domestic Road Transport Capacity 4. Malawi Import and Export by Border Post 5. Retail Prices in 1990 Malawi Kwacha for 6X Tractor, Obtained in Malavi, and the United States 6. Leasing Terms and Exchange Rates WORKING PAPER NO. 4

ROAD PASSENGER TRANSPORT

Paae No.

I* INTRODUCTION ...... 187

A. Overview ...... 187 D. The Passenger Transport Sutkector ...... 187

TII STUCTURE . U C S ...... 188

A. Bus Industry Structure ...... 188

III. FINANCIALSASPECTS...... 195

A. Financial Performance (19P5-1989) ...... 195

IV. CONSTRAINTS ...... 197

A. Regulation ...... 197 B. Institutional Constraints ...... 203

V. POSSIBLE SOLUTIONS ...... 205

A. Pollcy Issues ...... 205

VI. SUMARY AND RECO0MENDATIONS ...... 212

A...... 212 B. Recomnended Actions ...... 213 MALAWI

TRANSPORT SECTOR REVIEW - SELECTED ISSUES

VOLUME 2

WORK:NG PAPER NO. 1

MALAWI RAILWAYS

I. INTRODUCTION

A. Background

1.1 The strategic role for Malawi Railways'(MR) lies in its ability to provide the shortest and most economical routes for Malawi's international traffic. While the reopening of the route to Beira is a long way off, the complete reopening of the Nacala line could occur as early as 1994, and the savings to the economy could be considerable. However, MR's current performance is poor and, even with full reopening of Nacala, likely to remain so unless steps are taken to improve MR's productivity and efficiency. MR needs to be radically restructured to make it commercially viable and thereby eliminate the growing drain on government resources.

1.2 From a competitive standpoint, and as far as local traffic is concerned, MR suffers from considerable disadvantages associated with its location and the pattern of traffic within Malawi. Located in the south, MR has access to a limited share of the country's freight traffic, mostly traffic with both origination and destination points along the railway network.l/ Freight traffic originating/terminating away from the railway network necessitates transshipment, which due to the accompanying delay, cost and wastage, makes use of the rail mode generally unattractive to the users. Furthermore, with a route length totalling 797 km, MR is one of the smallest railway systems in Africa and this small network is not evenly utilized.2/ Almost all of the active origin and destination points, such as , Salima, Chipoka, Balaka, Nkaya, Blantyre and Limbe, are located between Limbe and Lilongwe, constituting 60 percent of the total route length- The remaining 40 percent of the network, comprising the southern border (Border)-Limbe and Lilongwe- sections, remains grossly underutilized.

11 The MR network, along with details of distances and altitudes, is given in Annex 1.

2/ Route lengths of some of the neighboring railway systems are: Transport System - 23,244 km, Hozambique Railways - 2988 km, National Railways of Zimbabwe - 2745 km, Kenya Railways - 2650 km, Tanzania Railways-2600 km, Zambia Railways- 1273 km, - 705 km, Swaziland Railways - 457 km. 1.3 As a consequence,the average haul for local freight traffic on MR has been comparativelyshort, fluctuatingbetween 180 and 260 km. The average passenger journey has also been generally less than 70 km. For such short hauls, the cost advantage of rail over road transport is at best marginal and, considering the many other attractJve features of the road mode, road tends to be preferred for the local traffic. This preference is reflected in MR's annual local freight and passenger traffic, which represent about 25-30 percent and 8 percent of the total, respectively.

1.4 The freight traffic and the route traffic density on MR, when compared with some of the neighboring railways, viz., the National Railways of Zimbabwe (NRZ), Zambia Railwayk (ZR) and Tanzania Railways (TR), are also very low. Comparativedata tor MR, NRZ, ZR and TR, on route length, freight and passenger traffic, traffic density and ave-age freight haul, and passenger journey distance, for the years 1975 (referenceyear representingpeak traffic) and 1989/20, is suamarized in Table 1.1 and Figures 1.1 and 1.2.3/ As shown, freight traffic on MR in 1989/90, comprised almost entirely of local traffic, was only 2 percent of that on NRZ and 5-6 percent of that on ZR and TR.

Table 1.1 Malawi Railways' Freight Traffic (ntk) as a Percentaxe of that of Neighboring Railways

Percentage of Percentage of Percentage of (NRZ) (ZR) (TR) (FY 1989/90) (FY 1989/90) (FY 1989/90) MR (FY 1988/89) 2 5 6 MR (FY 1975) 4 22 27

1.5 The disadvantagesof MR's small scale of operations have been exacerbatedby MR's complex organizationstructure and large work force. As a result, MR's staff productivityof 17,000 ntk/staff is very low, e.g., only 10, 22 and 30 percent of the staff productivitylevel achieved by NRZ, ZR and TR, respectively. Even these comparative indicators are overstated,as the referenced railways themselves are operating below the level of performance expected of them, and are in the process of implementingextensive restructuringprograms to improve staff productivity. However, even if productivityon MR were improved, the small scale of domestic freight and passenger traffic would make it difficult for a railway system such as MR to be commerciallyviable. The level and nature of domestic freight and passenger traffic alene do not provide a justification,economic or commercial, for MR to continue.

31 Detailed data are given in Annex 2. lIiiIl ii1 jfJij]II iii

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1.6 As indicated above, the strategic role for MR lies in its ability to provide through its linkage with the Mozambique Railways network, tne shortest and the mout economical routes for Malawi's internationaltraffic.4/ The strategic importance of the routes to the ports of Beira and Nacala became evident after 1985, when, consequent to the closure of the routes due to continuing insurgent activity in Mozambique, all the Malawian internationaltraffic had to be re-routed to the ports in South Africa and Tanxania. According to one estimate, the incrementalcost to the Malawian economy of using the alternative routes amounted to about US$80 million per year. While the route to Beira remains closed, the rail route to Nacala was declared open to traffic in 1989 with resumption of skeleton services. Full potential of the route is expected to be achieved by 1993/94 after the complete rehabilitationof the railway network on the MHzambique side. Although the shift in internationaltraffic to MR, subsequent to the full functioning of the Nacala corridor, is estimated to be only 30-40 percent of the pre-closure level, the savings to the Malawian economy could still be considerableand this remains the most convincing rationale for the continuationof KR.

1.7 In the past 10 years, the internationaltraffic from/to the ports of Beira and Nacala has varied widely. Up to 1981, the level of internationaltraffic remained within 15 percent of the peak level achieved in 1973, i.e., around 0.9 million tonnes. After 1981, with disruption of railway operations on the Mozambican railway network, the internationaltraffic over these routes started declining and finally ceased in 1985. Until 1981, MR's operating ratio was below 100 and, based on this criterion, the financialperformance of MR was considered to be satisfactory. After 1Z 1, the operating ratio gradually deterioratedand, by FY 1989/90, had reached a level of 131. The continuing high operating ratio means that the revenues generated by MR are not sufficient to cover even the operating costs; accordingly,MR does not now have the capacity to service its long and short-term loans, outstandingat MK 65 million, or to finance the replacementof its worn- out assets.5/

1.8 If the deteriorationin financial performancewere attributablesolely to the closure of the Beira/Nacalaroutes, then, with the resumption of traffic to Beira or Nacala, the financial position of MR could be expected to become nearly as sound as it was before the closure. However, this is not the case for two reasons:

4/ The distances to Beira and Nacala are 650 and 815 km., respectively, compared with distances from Blantyre to the ports of Durban by road/rail and Dar-es-Salasmby road/rail of 2,667 and 2,095 kilometers, respectively.

5/ Un -r an informal understanding,GOM, beginning 1985, agreed to waive interest on its loans to MR. Since then, no interest ca.rges on long- term loans have been reflected in the financial statements of MR, and the outstanding loans are exclusive of any accrued interest. (a) even though the operating ratios in the - 708 were below 100, the financial performancewas not eL.lrely satisfactory (para. 1.9); and

(b) all forecasts indicate that even after the reopening of the Nacala corridor, the internationaltraffic level will not reach the pre-closure levels (Section V).

B. Past Ogerating Environment and HR's Response

1.9 1975-1981: As indicated above, MR enjoyed ample traffic during the 19708, with freight traffic reaching its peak of around 1.35 million tonnes (250 million ntk) in 1973 and continuing within 15 percent of this peak up to 1981. This provided MR with an opportunity to achieve and then sustain a financiallysound position, and to some extent MR succeeded. Operating ratios remained between 80 and 90 throughout the period, except 1979 when it was 95. The performancewas better than that of many other railways in the region, which found it difficult to achieve an operating ratio of less than 100. However, MR's acceptable operating ratio diverted attention from the fact that MR was being progressivelydecapitalized. MR was charging only nominal depreciationcalculated on the grossly-undervaluedbook value of assets, an amount which was totally inadequate to finance future replacementof assets. MR also had no debt-serviceobligations, as all past investmentshad been financed through grants or equity from the Government of Halawi (GOM). A correct accounting of the depreciation and the cosL of capital would have revealed the true losses and required MR to take appropriate corrective action.

1.10 The operating performance indicators during this period signalled the underlying deteriorationof MRs (a) declining locomotive utilization,down from 250 locomotive kilometers per locomotive day-in- use in 1975 to 121 by 1981; (b) consistentlypoor wagon utilization, between 30-40 wagon kilometers per wagon day-in-use; (c) average net trailing loads per train continuing at a low level of around 225 tonnes, 50 percent or less of the hauling capacity of the locomotives; (d) average wagon load continuing at a low level of around 25 tonnes or about 60 percent of the wagon payload capacity; and (e) a 20 percent drop in staff productivityassociated with a 16 percent increase in staff during the period 1975-1981 (Annex 3) despite a decline in traffic of about 8 percent (Annex 4). - 6 -

1.11 1981-1985s After 1981, the disruption of operations on the Mozambique Railways caused Malawian internationaland transit freight traffic to be increasinglyre-routed to the ports of Durban and Dar-es- Salaam. Consequently,the traffic carried on MR started declining sharply and by 1985/86, with the complete closure of the routes to Nacala and Beira, had reached a level of around 0.40 million tonnes (96 million ntk), 40 percent of the 1975 level (Figure 1.3 and Annex 5). Until the total discontinuationof traffic to Nacala and Beira, there was considerableuncertainty and MR, expecting a resumption of operations on the Mozambican railways network, continued to retain all physical assets and most of the staff. Against a drop in traffic of 61 percent, staff strength was reduced by only 16 percent. The operating ratio increased to 107 in 1982 and has remained above 100 since then.

1.12 All other performance indicators also showed a sharp decline (Annex 4) during this period (Figure 1.4). In particular, locomotive utilization dropped to 66 locomotive kms per locomotive day-in-use, or 25 percent of the level of utilizationduring 1975. One reason for this sharp drop was the addition of 16 new locomotivesto the fleet in 1980. In hindsight, the decision to invest in 16 new locomotivescommitted the MR to a large operating and maintenance cost for the future that it could ill afford with the declining traffic.

1.13 1985/86-1989/90: Freight traffic on MR. by this time limited to local traffic, dropped further from the level of 406,000 tonnes in FY 1985/86 to 335,000 tonnes in FY 1989/90. Uncertainty, understandableat the time, caused MR's response to this serious setback in the business environment to be inadequate. In particular: (a) MR did not take steps to reduce or redeploy its manpower, and as a result, staff productivityfell to 17,000 ntk/staff during FY 1989/90, or 28 percent of the level in 1975; (b) physical resources, such as surplus locomotives and wagons, were neither offered on hire to the neighboring railways like NRZ and ZR6/, nor mothballed. As a result, the limited cash available for maintenance had to be spent on maintaining an unnecessarily large fleet of locomotivesand wagons and the condition of the entire fleet worsened; (c) despite the reduced utilization levels, the frequency of preventive maintenancewas not altered and, as a result, even variable expenditureslinked to operating performance levels were not reduced in any significantway; and (d) train operating schedules and frequencieswere not modified, which caused the operating performance indicators during this period to be very poor, viz., average net trailing load of 106 tonnes, gross to net ratio of 3.16, average wagon payload of 19.9 tonnes, locomotive utilization of 82 locomotive kilometers per locomotive day-in-use, and wagon utilization of 19.3 wagon kilometers per wagon day-in-use.

6/ These railways were, throughout this period, in need of additional locomotivesand wagons and were hiring them from South Africa. -7-

MAWI RALWAS FIG 1.3 FRE11GITAND PASSENGER TRAFFIC

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MALAWIRAILWAYS FIG 1.4KEY PERFORMANE INDICATORS

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a I, UU C. Future Prospects and MR's Strategy

1.14 In 1990, operations on the railway line from the Malawi border to the were resumed on a skeleton basis under heavy security protection and with considerablespeed restrictions. With a program of limited rehabilitationof the track and easing of some speed restrictions,traffic on the Nacala corridor is expected to pick up. Full resumption of traffic is expected after the complete rehabilitationof the Mozambique Railways network after 1993. MR's expectationsof freight traffic growth and the proposed action plan to achieve that level of traffic and exploit the opportunity to improve its financial performance are indicated in MR's Corporate Plan.7/ The Corporate Plan is based on the assumption that the freight traffic would reach a level of 0.9 million tonnes by 1994/95 and the passenger traffic would grow by 20 percent during the plan period.

1.15 Unfortunately the Corporate Plan appears to presume that railway operations cannot be self-sustainingand commerciallyviable and need to be subsidized. As a result the plan reflects: (a) a continuing lack of focus on the commercial viability of MR; (b) no evidence of an effective turnaround strategy; (c) heavy dependence on government subsidy and free capital grants for replacementof assets; (d) a continuationof the system of computing depreciationbased on the book value of assets and treating the past loans as interest-free;(e) only a small change in the targets of productivityand efficiency proposed to be achieved, e.g., locomotiveutilization 41 percent,8/wagon utilization 45 wagon kms per wagon day and an average net train load of 209 tonnes; and (f) an intention to increase the staff, locomotive, wagons and other resources in preparation for handling the expected increase in traffic. Not surprisingly,despite the assumptions of the availabilityof free capital and earnings based on an unrealistically high traffic forecast, the operationsat the end of the five-year plan period are shown to result in a net deficit of about MK one million. The real loss would be about MK 14 million if earnings were adjusted for a realistic freight traffic and depreciationbased on replacementcosts, and MK 34 million if the proposed investmentswere financed by coumercial loans instead of grants.

7/ MR's "CorporateFive Year Development Program" for the period 1990/91 to 1994/95 issued in May 1990.

8/ MR's definition of 'locomotiveutilization' is based on the percentage of hours the locomotives,after becoming available to traffic, are utilized for the operation of trains. Even though this statistic is important, the more commonly used definition of locomotive utilization, i.e., locomotive kms per locomotive day-in-use, is a better indicator of overall locomotive productivity. While the data on locomotivekilometers per locomotiveday-in-use is being maintained by MR, targets have not been indicated in the Corporate Plan. - 9 -

D. Recommended Strategic Framework for Financial Viabilitr

1.16 The traffic forecasts (SectionV) indicate that with the changed trading pattern, the internationaltraffic on MR is unlikely to reach the 1975 level and would most optimisticallybe around 250,000 tonnes/yearby 1995 and 400,000 tonnes/yearby 2010 in the high growth scenario. Despite the prospects of such a modest increase in traffic and the continuing small scale of local freight operations and short freight haul, MR can still become an efficient and financiallyviable railway if it implementsan appropriateturnaround strategy. Such a turnaround strategy would require:

(a) committingMR to the objective of achieving comercial viability with "commercialviability being clearly defined (Section IV);

(b) formulating and implementinga strategic plan involving appropriate restructuringof products and operations, organizationand staff, physical resources, tariffs, and capital in line with realistic traffic forecasts and organizationalgoals (SectionV);

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

(d) developing a clear understandingof the respective obligations and authority of .nd between MR and GOM (Section VII).

II. ORGANIZATIONAND RESOURCES

A. The Railway System

2.1 MR is a 1067 mm gauge single line system with a route length of 797 km. The outline of the network comprising the main line of 696 km from Mchinji (Zambia-Malawioorder) to Nsanje (Mozambique-Halawi border) and the branch line of 101 km from Nakaya to Nayuci (Mozambique- Malawi border on the eastern side) with details of stations en-route, distances from one another and terminal points, the altitude with a visual view of the nature of the gradients between various sections is given in Annex 1.

2.2 The maximum gradient, 2.27 percent uncompensated,exists on the southern border-Limbesection. The maximum on the Salima-Mchinji section is 1.9 percent compensated and on the Nakaya-Nayucisection is -one percent. The border-Salimasection, apart from steep gradients, has sharp radii, the minimum being 111 m.

2.3 Important users of the railway services, accounting for about 80 percent of the total local freight traffic, are connected through dedicated private sidings to the major yards on the railway -10 -

network at Limbo, Blantyre, and Lilongwe. The rest of the users need to bring the goods to common railway sidings through trucks.

2.4 The network has a total of about 90 stations, although only 13 of these handled more than 10,000 tonnos of freight traffic/yearand only 25 handled more than 1000 tonnes of freight traffic/yearor about two wagon loads/month.

B. Structure and Regulation

2.5 Malawi Railways Limited, incorporatedin the United Kingdom, is a wholly-owned subsidiary of the Malavi Railway Holdings Company, which is a statutory body incorporatedin Malawi under the Malawi Railway Holdings Company Act. The responsibilities,authorities and operating constraintsof the Malawi Railways Limited are generally prescribed in the Railways Act (cap 69.03). This Act regulates the construction,control, management and operation of the railways in Malawi.

2.6 Under the section on management, rules have been prescribed for ensuring safety of passengers;prohibiting smoking, drinking and other such practices causing public nuisance; carriage of dangerous and offensive goods and of passengers suffering from infectious diseases on trains; prevention of accidents; and penalties and liabilities of the railways and users under various situations. There are no specific restrictionsin the Act pertaining to the setting of tariff rates, staff employment, organization or other matters of commercial interest.

2.7 Normally iM, as all limited companies, should be free to formulate policies in pursuance of its objectives, subject to its own articles of association and memorandum of understanding. However, being a parastatal,MR is subject to the control of the Ministry of Transport and Communication (MOTC), and the written or unwritten rules and procedures have been restrictiveof the railway's authority and ability to respond quickly to the changing business and operating environment. Particularlyrestrictive are the powers of the railways to make changes in tariffs, goods classifications,rules for warehousing or retention of goods at stations/warehouses,staff complements,organization structure, and many other aspects of railway management. Cumbersome rules pertaining to imports and sanction of foreign exchange and of local loans have also tended to curtail the autonomy of the railways.

C. Organization,Management and Staffing organizationand Management

2.8 HR's current organizationalstructure is illustratedin Annez 6. The key features of the organizationalstructure and the management style are:

(a) a functional departmentalizationat the headquarterslevel, with all field staff reporting through defined channels to the functional heads at the headquartersand then to one controllingdeputy general manager; - 11 -

(b) functioningof two assistant general managers as advisors to the deputy general manager, for administration and technical services;

(c) existence of many specialized independentdepartments on an advisory level dealing with collection and analysis of data, including Cost and Management Accounting, Statistics, Data Processing and Computerization,and Market Research;

(d) a "tall" structurewith 6 to 8 reporting and decision-making levels at the headquarters;

(e) emphasis on formal channels of communicationand formal ways of dealing with most issues; and

(f) sharing of responsibilityfor operations for the rail and lake services divisions by a number of managerial staff.

2.9 A few changes in the organizationalstructure have been recommended in the Corporate Plan (Annex 3). One major change would entail creating four divisions at the top level - Lake Services, Rail Services, Finance and Administration,and Engineeringand Supplies. However, not only would all the existing functional departments be retained, but also some new ones created by splitting the existing ones. All departments,existing or new, would be placed in the four divisions, except for the personnel and training departments and four small departments to be called branches - internal audit, medical, security, and planning - which would be placed directly under a deputy general manager. Under the proposal, the staff positions of the assistant general managers would also be abolished. Though the "organigram"shows the divisional managers to be reporting directly to the general manager and hence acting autonomously,the deputy general manager, by virtue of being placed in a level higher than the divisional managers, is in practice likely to act as an additional layer of authority.

2.10 The recommendedchange in the organizationstructure amounts to a regrouping of the existing departmentsand is far removed from the concept of divisionalization. Likely consequencesof a departmentalized organizationinclude: (a) an increase in the cost of staffing and administrationin direct proportion to the number of departments; (b) departmentalconflicts leading to delayed decisions, compromises or wasteful strategies;and (c) inversion of corporate objectives arising from undue emphasis on departmentalobjectives, and with demand for resources and budget allocationsunrelated to the level of business and the earning potential of MR even on a long-term basis. The departments, by emphasizing their departmentalobjectives, have been able to justify and retain the staff and resources and the expenditurebudgets almost at the same level as in 1975 despite a 60 percent decline in freight traffic. The departmentshave also succeeded in creating and sustaining specific dedicated facilities for maintaining their equipment. One central maintenance/manufacturingfacility could provide all these services more economicallyin place of 7-8 such facilities being currently operated. - 12 -

2.11 A tall structurewith too many organizationallevels, while facilitatingthe upward mobility of the managerial staff, has few other merits to reconmmendit. Expensive staffing, long communication channels, excessive supervision,reduced delegation of authority tad resulting deteriorationof morale, inaccessibilityof top management to staff, greater reliance by the management on data and statistics than on observationexemplify the negative impact of a tall structure. The change recommended in the Corporate Plan would result in adding one more layer, that of the divisional manager, to the existing 6-8 levels.

2.12 The Larrent formal management style is the combined result of excessive functional departmentation,a tall structure with too many managerial staff, and excessive dependence on job analysis and detailed procedures. The resulting lack of motivation and tendency to adopt work-to-rule strategies as opposed to problem-solvinghave affected operational performance. Thus, poor performance on MR is not only attributableto financial and structuralconstraints, but also to an organization structure that results in inefficientand slow responses to problems arising during operations.

2.13 The Lake Services Division derives little benefit from reporting to and seeking decisions from the assistant general manager (projects)and other department heads at the headquarters. This is because the headquarters staff's main focus is on railway problems rather than the problems and the objectives of the lake services, and delays in decision-makingare common. If at all, the managers are detracted from concentratingon railway operations.

2.14 The staff holding middle and top management positions are qualified and experienced, but are hampered in turning MR around for many reasons. First, the management lacks commitment to running MR as a commercial enterprise, and as reflected in the Corporate Plan, continues to operate under the assumption that railways can, at best, balance revenues with operating expenditure,with most of the capital inputs for replacementof assets and the resultingdebt service obligationsmet by the Government. As a result, the majority of the investment decisions and many operating decisions are technically-drivenrather than based on economic or financial justifications. Second, the management is frustrated by the lack of adequate capital and foreign exchange for spare parts, which is partly responsible for the railway's poor performance. This, however, has drawn attention away from what could be achieved with existing resources. Third, there is a feeling that the situation will correct itself after full rehabilitationof the Nacala corridor.

Staffing and Staff Productivity

2.15 Staff productivity on MR is low compared with staff productivityon the neighboring railway systems. Even in 1975, the year of near-peak performance for MR, the staff productivitywas only 20 percent of that currently achieved on NRZ and 45 percent of that on ZR. Annex 7 indicates overall and departmental staff strengths and staff productivity levels achieved by MR for the period 1975 to 1990. The inadequate response to the declining traffic is evident from the data - is - su=marized at Table 2.1. While trafficbetween 1975 and 1989/90 declinedby 73 percent,total staff strengthdropped by only 1 percent and the administrativestaff increasedby 57 percentduring this period. As a consequence,staff productivity dropped by 72 percent (ntk/staff) and by 45 percent(ntk + passengerkm)/staff).

Table 2.1 HalawiRailways - TrafficLevels and Staff Productivity

_Y 1975 FY 1982 YY 1989/90 FreightTraffic 252 181 69 (millionntk) Z changefrom 1975 -28 -73 Total Staff 4,054 4,995 3,998 Z changefrom 1975 23 -1 Admin Staff 567 1,050 890 Z changefrom 1975 85 57 Staff Productivity 62,161 36,236 17,259 (ntk/staff) Z changefrom 1975 -42 -72 Staff Productivity 84,000 56,000 46,000 ((ntk+pk)/staff) Z change from 1975 1 -33_ -45

2.16 Threemajor actionsthat need to be taken as far as staff is concernedare: (a) staff reduction,and redistributionof job responsibilitiesand redefinitionof job contentamong the remaining jobs/positions;(b) staffmotivation, to ensureimproved productivity and coammitmentto reducingcosts and recapturingexport/import traffic; and (c) staffdevelopment, in areas of MR operationssuch as material management,maintenance management, cost analysis,and operations plannirgand control. D. PhysicalAssets and Resources

Permanent Way 2.17 The stretchof 340 km (46 percentof the total)between the Borderand Penga-Penga,a stationon the Limbe-Salimasection, is fitted with 30 kg/m rails and steel sleepers(except for 55 km of scattered length,which is fittedwith wooden sleepers). The remainingsections, Nayuci-Nakayaand Penga-Penga-Mchinji,are fittedwith 40/37 kglm rails and concretesleepers. Exceptfor the stretchfitted with 30 kg/m rails,the permissibleaxle load on the entireroute is 18 tonnesand permissiblespeed 50 kmlh. For the sectionfitted with 30 kg/m rails, the permissibleaxle load is only 15 tonnes. Annex 8 presentsdetails of rail weights,sleeper and ballasttype, curvatures,gradients and permissibleaxle loads for differentsections. - 14 -

2.18 The track is generally in good condition with very few speed restrictionsand the few that exist are mostly on 55 km of the track fitted with wooden sleepers. The use of 40 kg/m rails on the Lilongve- Mchinji section of 104 km length with a very low traffic density, in preference to the busy sections between Limbe and Salima, appears to represent incorrect priorities. Interchangingthe sections could prove to be of great advantage.

2.19 However, the track from the border to NampAtlaon the way to Nacala is in bad condition, and though the traffic on the section has been resumed, average speeds are low due to speed restrictionsthat have been imposed. The few trains that are being run on the section have to be escorted by the security personnel from Malawi and Mozambique. In the mean time, minimal action towards repair of the track and removal of speed restrictions,comprising replacementof one out of every 4 sleepers and track fastenings,is in progress simultaneouslyfrom both the Nampula and Malawi ends by Mozambique and Malawi railways, respectively. When completed towards the end of 1991, trains will be permitted to run at moderate speeds. The systematic rehabilitationof the track with complete replacementof all damaged and rotten sleepers, worn-out rails, and missing and damaged fastenings has also commenced and is planned for completion by the end of 1993.

Signalling

2.20 The rail network is fitted with a simple signalling system, and the train control is accomplishedby the electro-mechanicalkey token block system. Once the key is given to the driver of a train and the section is blocked for the train, another key cannot be issued unless the original key is returned to the instrument on stations at either end of the section. Not many failures of the system have been reported. Given the current low traffic density and the expected traffic after resumption of normal operations, there is no need to replace the system with a more technologicallyadvanced one.

Motive Power

2.21 The motive power types and characteristicsfor both the main line and shunting operations are given in Annex 9. The permissible trailing loads for different types of locomotiveson different sections of the system are also given in the Annex. MR has a total of 37 main line locomotiveswith an average age of 14 years, 16 locomotiveshaving been introduced on MR only in 1980. Most of the main line locomotives are diesel-electric. Eight shunting locomotives in service are all diesel-hydraulic. The locomotiveshave been maintained according to the manufacturers'recommendations and the overall availabilitylevel has been kept high.

Rolling Stock

2.22 The current holding of general-purposeand tank wagons is 875, and the types and the numbers are given in Annex 10. Of these, 623 are operational,25 are trapped on the Mozambique railways network, and the rest are either under repair or awaiting repairs. According to MR - 15 - about178 wagonswill reachthe end of theirstipulated life In the next five years,i.e., by 1995. MR has 30 thirdclass coaches, 26 of which would remainin servicethrough 1995. MaintenanceInfrastructure

2.23 MR possessesextensive facilities for the maitenance of locomotives,wagons, coaches, road motorvehicles, railway motor trolleys,locomotive and rollingstock wheels and electricalequipment. The railwayalso has facilitiesfor the manufactureof spareparts, iron brakeblocks, brass bearings,forged components, and machineparts. In addition,the railwayhas facilitiesfor providingrunning repairs to coaches,wagons and locomotives.About 600 staffare employedin the manufacturingand maintenancefacilities.

2.24 The maintenancefacilities are generallyin good condition, thoughthere are demandsfrom the functionalmanagers for replacementof eristingequipment, procurement of new machines,cranes and equipment, and for creatingfacilities for new processesand extensionof buaildings and sheds. The genesisof thesedemands lies in the many and varied perceptionsof the managersand the superviborsregarding the departmentalobjectives and theirown responsibilities,which may at timesbe at variancewith the objectivesof the enterpriseas a whole. The technicaland economicjustifications for replacement/new procurementproposals, if they exist,are not alwaysdetailed or comprehensive.There is a basicneed to curtailthe size of the maintenanceinfrastructure and bring the same in accordancewith the scaleof activityon the railways. Effectiveand efficientutilization of the maintenanceinfrastructure and enhancingits productivityare as importantas that for the operatingassets.

III. FINANCIALAND OPERATIONALPERFORMANCE

A. FinancialPerformance FinancialRatios and PerformanceIndicators

3.1 All indicators(Table 3.1) point to a progressive deteriorationin the financialperformance of MR since1982. The operatingratio increasedby 40X betweenFY 1981 and FY 1985/86,and by another8 percentup to FY 1989/90. The net deficitalso increased duringthe last five yearsby about 65Z, and the profitmarRin was less by 20 percent. Comparativedata on financialperformance for the five years startingFY 1985/86is given in Annex 11. - 16 -

Table 3.1 Malawi Railways - Actual and Adlusted Indicators of Finavcial Performance (MK million unless stated)

Financial Performance FY 1985/86 FY 1989/90 I FY 1989/90 Indicator Actual Actual Adjusted Operating Ratio (Z) 125 131 242 Net Surplus/Deficit -4.6 -7.4 -28.3 OutputsCapitalEmployed (2) 16 18 4 Accumulated Loss -23 -44 -140 Fixed Assets 101 103 550 Current Assets 14 20 20 Capital Employed 115 123 570 Surplus required for 62 ROC 6.9 7.4 34.1 Depreciation 2.6 2.8 24.8 Net Profit Margin (X) -25 -30 -130 Note is Output is representedby revenues Note 2s ROC means return on capital employed Note 3: Depreciationis as accounted, except for FY 1989/90 adjusted where it is imputed

3.2 As discussed gbove, the financial statements of MR understate its poor performance because depreciationwas computed on the basis of the book rather than replacementvalue, and the statements ignore the importance of earning a fair return on the capital employed (ROC). A broad assessment of the replacementof value of the fixed assets at the end of FY 1989/90 in 1990 prices (Annex 12) indicates the replacementvalue to be US$200 or MK 575 million, nearly six times the book value, and the correspondingdepreciation to be MK 25 million, eight times that actually provided for. The financial performance indicators, adjusted for the replacementvalue of the assets and the correspondingdepreciation for FY 1989/90 are also given in Table 3.1. These reveal an extremely poor financial performances operating ratio of 242 percent, net deficit for 1989/90 of MK 29 million, and a profit margin of -130 percent. The past depreciationpolicy therefore has left MR with no internal capacity to finance the replacement/rehabilitation of its assets.

3.3 Unlike a normal commercial enterprize,MR has not employed ROC as a measure of its financial and commercial performance,nor has it been required to be accountableon that basis. MR has been conscious of its obligation to service its debts, but not to generate a fair ROC. Even at a modest rate of return of 6 percent, MR could not be considered commerciallyviable, if the net surplus, after accounting for the operating expenses and replacement-value-baseddepreciation, were less than MR 34 million. Against this requirement,the adjusted net surplus for FY 1989/90 was MK -29 million. The net gap between the performance of MR and a commerciallyviable entity thus was as much as MK 63 million. With its actual net deficit, MR could not even service the outstanding loans, which at the end of FY 1989/90 amounted to MK 65 million. - 17 - 3.4 The output (revenues)to capitalratio, when computedusing the replacementvalue of assets,becomes 4 percentin place of 22 percentbased on the book value of assets. The under-utilizationof fixed assets,as apparentfrom the poor outputto capitalratio, is one of the main reasonsfor the adversefinancial performance of MR. Althoughpart of the reasonfor the ratio being low is the steady declineof sales (output)during the last 5 years,another is the excessiveholding of assetsby MR in relationto its businesspotential, and in particularthe use of about 40 percentof the its assetsfor low revenue-yieldingpassenger and freightservices (paras 3.10 and 3.11 and Annexes13 to 16).

3.5 The accumulationof significant losses and inadequate depreciationnecessitated: (a) frequentresort to long-termloans, currentlyoutstanding at MR 65 million;(b) defaultin the paymentof interestdue on the outstandingloans; and (c) a cut-backon the procurementof locomotivespares, which in turn could affectthe long- term reliabilityof locomotives.Moreover, MR currentlyhas no capacity to rehabilitate/replaceits assetsand, accordingto the CorporatePlan, would need loans and grantsto the extentof MK 200 millionin the next five years. 3.6 Short-termLiquidity: The poor financialperformance has severelycurtailed the short-termliquidity of MR. As indicatedin Annex lls (a) the currentratio dropped from 2.9 for FY 1985/86to 1.41 for FY 1989/90;and (b) the acid test ratio droppedfrom 1.25 to 0.41. The positionwas made worse by: (a) the very high level of outstanding accountsreceivables, equivalent to 91 days of sales;and (b) deteriorationin the inventory:turnoverratio, which appearsto have tied up cash in comparativelyhigher level of stocksthan requiredfor the level of operationsand probablyin low priorityitems, as according to MR, the more urgentlyrequired spares for locomotivescontinued to be in short supply.

3.7 Long-termsolvency: With negativecash surplus,MR is in no positionto serviceits debts. Even in 1994/95,the CorporatePlan projectsa cash surplusthat would be inadequatefor debt servicingof the existingloans of MK 65 millionand the futureloans of MR 200 million. Subsidization 3.8 The poor financialperformance of MR is resultingin its subsidizationon a graduallyincreasing scale. Varioussubsidies to MR for the differentyears are indicatedin Table 3.2. Without restructuring,the net gap in FY 1994/95,including the provisionfor a ROC of 6 percent,could be MK 67 millionand probablymore if traffic fails to materializeas expectedor if the productivitytargets are not achieved. With restructuring,the gap is expectedto be restrictedto MK 10 million,and althoughthe resultswould not be fully satisfactory, HR would be on the path to commercialviability. - 18 -

Table 3.2 Malawi Railways - Extent of Subsidization (MK 000)

1989/90 1989/90 1994/95 1994/95 Actual Adjusted Without With Restruc- Restruc- turing turing Operating Cash Surplus -3,416 -3,416 11,128 32,871 Depreciation 2,828 24,870 24,870 16,030 Net Operating Surplus -6,244 -28,286 -13,742 16,841 Fixed Assets 102,221 548,730 548,730 333,697 Current Assets 19,188 19,188 19,188 19,188 Capital Employed 121,409 567,918 567,918 352,885 Return on Capital 7,285 34,075 34,075 21,173 Future Loans 200,000 50,000 Interest on Loans e 1OX 20,000 5,000 Net Gap -13,529 -62,361 -67,817 -9,332

B. Operational Performance Freightand PassengerTraffic

3.9 Freight Traffic: Annex 5 indicates the freight and passenger traffic levels on MR for the years 1975 to 1990, in terms of tonnes and net tonne kilometers for the freight traffic and number of passengers and passenger kilometers for passenger traffic. The data in Annex 5 excludes departmentalfreight traffic. Commodity-wisetraffic details for the year 1989/90 are given in Annex 13. It is clear thatt (a) the freight traffic, both in tonnes and ntk, has steadily declined since 1975, and in 1989/90 was only around 30 percent of the level in 1975; (b) even by 1981, before the routes to Nacala and Beira started showing signs of deterioratingreliability and security, the freight traffic had dropped by 20 percent to about 1 million tonnes presumably as a result of reducing share of overseas and a corresponding increase in the share of regional traffic in the imports/exportsof Malawis (c) local traffic has been fluctuating,and after reaching a peak level of 482,000 tonnes during FY 1986/87, declined again to 335,000 tonnes during FY 1989/90, mainly due to the deterioratingquality of rail service. Declining quality of performancewas evident in a sharp increase in the wagon turnaround. The decline in ntk was even more severe as the average haul declined from 215 to 200 km during this period.

3.10 Passenger Traffic: Since 1975, the passenger traffic has shown an overall increase of 41 percent in terms of the number of passengers, increasing from 1.2 million in 1975 to 1.7 million in 1990; and by 30 percent in terms of passenger kilometers, increasing from 88 million in 1975 to 115 million in 1990. The comparatively slow growth in passenger kilometers has been due to the average passenger journey reducing from 73 to 67 kilometers (Annex 5). - 19 -

3.11 Local Traffic Structures Data from 1989/90(Annex 13) show that only 13 commodities (52 percent of all commoditiescarried by MR) accounted for 82 percent of the total freight traffic. For each of these commodities,the annual quantity offered exceeded 1.0,000tonnes. These commoditieswere fertilizer,petrol, maize, beer, cement, diesel, clinker, empty bottles, tobacco and cotton seed, coal, cotton lint and ethanol. The remaining 10 items and other small miscellaneous items accounted for only 18 percent of the freight traffic. Most of the latter were offered in very small quantities, less than 5,000 tonnes per year and sometimes as low as 200 tonnes. Many of the same items also have a short average haul, ranging from 70 to 170 km. Such traffic, neither bulk nor long-distance,is responsiblefor the low average net train load of 106 tonnes and the average haul of around 200 km.

Sectional Traffic Density

3.12 1989/90 Freight Traffic: The section density analysis (Annex 14) indicates that: (a) 48 percent of the route length on MR, between Limbe and Lilongwe, accounted for 88 percent of the freight traffic in ntk, the traffic density on this busy portion being 150,000 ntk/km; (b) the average traffic density on the remaining 52 percent of the route length was only 20,000 ntk/km; (c) the traffic density on the Border-Sankhulanisection was only 4,000 ntk/km; and (d) the average traffic density for the whole network was only 87,000 ntk/km, which is low for a railway system.9/

3.13 1995 Freight Traffic: Traffic density on the Nkaya-Nayuci section is currently low, but would probably be the highest when the route to Nacala becomes fully operational. The estimated ntk and traffic densities for various sections of MR for FY 1994/95, based on the traffic forecast (SectionV), are given in Annex 15. The conclusionsare the same: (a) 60 percent of the network, including the Nkaya-Nayuci section, would account for 95 percent of the freight traffic; and (b) the two main sections, viz., Lilongwe-Mchinjiand Border-Limbe,with a total route length of 313 km (40 percent of the total route length), would carry only 5 percent of the total freight traffic. The traffic density on the two sections would be around 30,000 ntk/km.

3.14 With current traffic density of only 34,000 ntk/km, the relaying of the Lilongwe-Mchinjisection with 40 kg rails and concrete sleepers with a speed potential of 80 km/hour, in preference to some of the high traffic-densitysections between Limbe and Salima, shows the need for adequate economic analysis of investments.

3.15 Passenger Traffic: Annexes 14 and 15 also give details of passenger traffic in terms of passenger kilometers (PK) and the passenger traffic density on the different sections of MR. respectively,

9/ The average traffic densities on some of the neighboring railway systems are: 2.4 million for the National Railways of Zimbabwe, 1.05 million-for the Zambia Railways and 418,000 for the Tanzania Railways (Annex 2). - 20 -

for the years 1989/90 and 1994/95. The passenger traffic density is the lowest on the Border-Sankhulaniand Salima-Hchinjisections, which account for only 20 percent of the passenger traffic for both the years. Comparing with the freight traffic densities,passenger traffic density on the Sankhulani-Limbesection is comparativelyhigh, while freight traffic density is one of the lowest. This indicates that the operating expenditure on this section is primarily incurred to maintain the passenger services.

3.16 Sectional Operating Ratios Givin the current decision- making process, only diesel fuel and part of the maintenance costs could be consideredas variable, being proportionalto the train kilometers. The remaining costs, about 70 percent of the total (Annex 17), are fixed in nature and have been consideredas proportionalto the route length. The train kilometers logged in different sections, the length of the different sections, the fixed and the variable costs, the ntk and the passenger kilometers and the correspondingfreight and passenger revenues for FY 1989/90 are indicated in Table 3.3. The data have been taken from HR's records, but the costs have been adjusted for replacement-value-baseddepreciation. Based on this, the operating ratios for the different sections have been computed in the same table. As expected, the operating ratio for the Border-Limbe,Lilongwe-Mchinji and Nakaya-Nayucisections is the worst at more than 500. The operating ratio on the Nakaya-Nayucisection would improve with the resumptionof internationaltraffic, but no change is expected in the traffic density on the other sections (Annex 15). The analysis confirms that operating these sections makes little commercial sense.

Table 3.3 Malawi Railways - Sectional Operating Ratio (MK '000)

LENGTH TKMS VAR. FIXED TOTAL NTK PK REV. OPTG. SECTION (km) (000) COST COST COST (mill.) (mill.) RATIO Border-Blantyre 209 101 1,932 8,986 10,928 3 20 1,455 751 Bantyre-Nkaya 79 190 3,635 3,400 7,035 19 32 4,955 142 Nkaya-Salima 181 224 4,285 7,791 12,076 24 31 5,835 207 Salima-Lilongwe 111 97 1,856 4,778 6,633 14 10 3,040 218 Llongw.-Mchinji 104 73 1,396 4,477 5,873 4 10 1,190 494 Nkaya-Nayuci 101 72 1,377 4,347 5,725 2 13 955 509 total 785 757 14,481 33,789 48,270 66 116 20,430 236 Totl Cost 48,270 FibedCost - 70% 33,789 Variae Cost 14,481 TariWf/NTK(MKI 0.19 Taff/PK(MIQ 0.05 _ _ _ _

Freight Traffic Handling at Stations

3.17 The network has a total of about 90 stations, of which 77 stations were commerciallyoperative in 1989/90 with respect to freight traffic. Only 13 of these stations handled more than 10,000 tonnes of traffic, forwarded or received, during FY 1989/90, or equivalent to - 21 -

about 20 wagon loads/month. Of these stations, 12 handled between 1.000 and 10,000 tonnes during the year, and the remaining 65 stations handled less than 1,000 tonnes or less than 2 wagon loads/month (Annex 16).

This level of traffic is too i - for a station to operate on a commercial basis. Since passenger service is recommended to be phased out (paras 5.3 and 5.4), the stations with low commercial transactions need to be closed unless necessary for operationalrequirements. Once the freight service and operations are restructured,the requirementof commerciallyactive stations would drop further.

C. Operational Efficiency

Asset Utilization

3.18 Locomotive utilization,measured as locomotive kilometers per locomotive day-in-use, has gradually dropped from around 250 in 1975 to 82 in 1989/90. Declining freight traffic, without correspondingdrop in the number of locomotiveson-line, is primarily responsible for this steep drop in the level of motive power utilization. There also is a strong correlationbetween the level of freight traffic in terms of ntk and the locomotive utilization,as the ntk dropped from 252 in 1975 to 69 in 1989/90. Similarly,wagon utilization,wagon km per wagon day-in- use, dropped from 30 in 1975 to 19 in 1989/90. The level of wagon utilizationwas low even in 1975, presumably because of the operation of a large number of mixed trains. With the operation being restricted to local traffic and the number of wagons being retained beyond the normal requirement,the utilizationhas dropped further. As mentioned earlier (para 3.2), the excess of assets has led to the poor financial performance of MR.

Other Indicators

3.19 Average gross trailing load per train has dropped from 554 tonnes in 1975 to 335 tonnes in 1989/90. Even the trailing load of 554 tonnes is, for most of the sections on MR, much lower than the locomotive capacity of 1,200 tonnes. The gross:net ratio also increased by 30 percent during the 1975-1990 period from 2.43 to 3.16. As a consequence,the net trailing load per train has also dropped from an average of 228 tonnes to 106 tonnes. The main reasons for the increase in the grosssnet ratio have been: (a) decrease in the net payload per wagon from 24 to 20 tonnes; and (b) use of inappropriatewagons for different traffic streams.

IV. CORPORATE OBJECTIVES AND STRATEGY

*A. Corporate Objective

4.1 MR's corporate objectives and strategy, as outlined in its Corporate Plan, reflect a deep-rootedperception about the operation of railways in Africa, viz., win the prevailing industrial and commercial circumstances,the cost of meeting the country's rail transport requirements,quantitatively and qualitatively,cannot be fully met from - 22 -

the railways' revenues at rates which would not have a major adverse impact on the country's economy'. Emanating out of this perception are the principles to guide MR's workings (a) MR would achieve predeterminedperformance indicators; (b) MR would meet all operating expenses out of its revenues and would make whatever contributionit can towards the cost of replacementof assets; and (c) GOM would finance MR's capital asset replacementprojects through free grants, as well as eliminate the outstanding loans and bank overdrafts. Given this understanding,MR's corporate objectives have been defined as: (a) assessment and meeting of rail borne demand to the maximum extent permitted by the use of all available human and material resources; (b) developmentof these services in line with the country's developing transport needs; and (c) development of systems such as Responsibility Budgeting, ComputerizedStores Recoupment,and ComputerizedPlanning and Control.

4.2 The process of Malawian development cannot be served by subsidies that divert scarce resources away from their best productive use. MR, as any other commercial organization,needs to be and can be commerciallyviable, and many railways, including a number within Africa and the SADCC region such as Zimbabwe and Tanzania, have initiated the difficult but feasible process of restructuringthemselves. However, for these railways and MR to turn around, all objectives pertaining to business development,productivity and efficiency improvement, reliabilityand staff and resource developmentmust support the central objective. The linkage between these individual objectives and the commercial viability goal can then be used as a basis to appraise sub- objectives and individual strategies. Both the main and the sub- objectives also need to be stated in quantitativeterms so as to make them effective as a means to direct or control departmentaleffort within the organization. The operationaltargets that could be instrumentalin achieving the main objective, defined as a ROC of 6 percent within a reasonable time frame, are indicated in Annex 18.

B. Strategy

4.3 The proposed turnaround strategy would have three distinct components: (i) restructuringof the railways; (ii) improving management effectiveness;and (iii) improvingGOM-MR understanding. As a basic step, a thorough restructuringis essential, as improvementsin operational efficiency and productivitywould be overshadowedby current complex organizationof MR, its over-staffing,the excess of physical assets, and the high-resource-consumingand low-revenue-generating services. The restructuringneeds to cover MR's business portfolio and potential, operations, organization,human and physical resources, tariffs and all other pertinent aspects (Section V). Improving management effectivenesswould involve revamping the important systems, improving staff motivation and morale, close monitoring of the achievement of operational targets, and staff training and development (Section VI). A strong GOM-MR focus on MR's commercial viability objectives and a clear understandingof each others' obligations and authoritywould also be important for the success of the turnaround strategy (Section VII). 23 -

4.4 Broad financialprojections for the period up to PY 1994/95, given in Table 8.1 (see Section VII), indicate that without restructuring,the net gap (includinga 6 percent ROC) during FY 1994/95 would be of the order of MK 67 million, while with restructuringand assuming that the operating targets are also achieved, the gap could be reduced to about MK 10 million. A proposed Action Plan for implementing the strategy is given in Table 8.2 (see Section VIII).

V. RESTRUCTURING

A. Business Portfolio

5.1 The services currently offered by MR include; (a) freight service for small, wagon or block loads between any station/railway sidings; (b) freight service for wagon and block loads from/to all private sidings; (c) all internationaltraffic; (d) passenger service between all stations in first, second and third classes; and (e) departmentalservices for transportationof its own construction materials, fuel and spare parts. To facilitate provision of these services: (a) all the stations are kept operative, even though more than 70 percent of these stations handle less than two wagon loads/month (para 3.17); (b) the entire track length is maintained to specified standards, even though traffic density on more than 40 percent of the track is very low (paras 3.12 and 3.13); (c) locomotivesare allowed to wait at outstations for long periods, mainly in accordancewith mixed train schedules, leading to poor utilizationof locomotives; (d) a large number of shunting locomotivesare pressed into service at a number of locations to provide service to private sidings on a wagon by wagon basis; (e) a large number of mixed trains (currentlyabout 90 percent) are operated to serve small stations and users offering small loads; and (f) a large number of maintenanceworkshops with extensivemaintenance facilities are kept operative and functional. All these requirements add up to a large amount of capital in physical resources and staff.

5.2 A full cost-benefitanalysis of these services has not been made by MR. It is, however, possible to assess the resources and operating and maintenance costs that could be avoided if a particular service were discontinuedand the remaining services restructured. Based on this analysis (Annex 19), the main candidates for eventual discontinuationcan be identifiedast

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

Passenger Services

5.3 All passenger traffic on MR is carried in mixed trains (carrynig both passengers and freight traffic), as the level of traffic does not justify operation of exclusive passenger trains. Mixed trains - 24 -

are generally very slow, because of the need to pick up small freight loads from almost every station en-route. The train timings are also generally inconvenientfor most of the passengers who have no alternative to chose from, there being only one train per day per section. As a result, the journey times are long.10/ Not surprisingly,surveys report that the passenger services are preferred only by a small percentage of passengers, only 8 percent of the total, and only for short journeys, the distance of an average journey being 65 km in 1989190. Passengers who choose to ride on MR do so either because of lack of capacity of the bus passenger service in Malawi or because it is often possible to carry heavy parcels free of charge on the trains. Once the bus industry is able to resolve its problems and the rail passengers are required to pay for their parcels, it is likely that much of the passenger traffic would shift to road.

5.4 The share of revenue from passenger services currently comprises 25 percent of total MR revenue, but is projected to drop to about 15 percent after the resumption of internationaltraffic. Against this, a very high percentage of resources, such as coaches, locomotives, stations, track and staff, are required to operate these services. As a result, the average cost of operating the passenger service currently amounts to MK 0.29/pk against an average passenger tariff of MK 0.04/pk (Table 5.1). Passenger service thus contributes heavily to MR's losses. Even after restructuringand operational improvement,the incremental cost of passenger service would not be less than MK 0.10/pk against the current cost by road (on paved surfaces) of MK 0.03-0.04/pk (Table 5.2). If passenger services were discontinued,the freight services could be structured differently and much more efficiently.

Table 5.1 Malawi Railways - Sectional Operating Ratio (MK '000)

FREIGHT PASSENGER TOTAL TRAFFIC TRAFFIC Operating Cost 65,855 32,928 32,928 Traffic Units 169,664 115,394 ('000) Cost/TrafficUnit (MK) 0.19 0.29 Tariff/TrafficUnit (MK) Io_ 0.21 0.04

4

10/ For example, the journey time between Blantyre and Lilongwe is about 16 hours, whereas the journey by road would be about 4 hours. - 25 -

Table 5.2 Malawi Railways -IncrementalCost of Passenger Traffic

Units Yearly Cost/Amount IncrementalCapital MR million 165 Depreciation MR million 7.4

Incremental Staff Numbers 300 Staff Cost MR million 1.456 Incremental TKMs '000 524 IncrementalFuel Cost MK million 2.385 IncrementalMain. Cost MK million .88 Total Cost MK million 12.12

Totalpks million 116

S ~~~~~~MK .104 Cost/pk _

Small Loads

5.5 An analysis of freight handled by different stations on MR (Annex 16) shows that only 17 stations out of the total of 77 (22 percent) handled 94 percent of the total traffic handled by the railways. As discussed,MR has to commit a disproportionatelyhigh percentage of resources to handle 6 percent of the freight traffic from the remaining 60 stations. The traffic, generally in smalls (less than wagon load), is in need of being discontinued.

Services from/to Border-Limbeand Lilongwe-MchinjiSections

5.6 The traffic density on these two sections is currently very low (Annex 14) and, according to the traffic forecasts (Annex 15), likely to remain so. In fact, the traffic density on the Lilongwe- Mchinji section is likely to become lower after the resumption of traffic on the Nacala line and import of POL from overseas. The cost of maintaining the track in the two sections is very high in relation to the income generated from these sections, as indicated by the operating ratio which is currently estimated to be 751 for the Border-Limbe section, and 494 for the Lilongwe-Mchinjisection (Table 3.3). These sections need eventually to be abandoned and the assets disposed off. However, until a more definitive trend of traffic is available, operations on these sections could be continued but with a considerable reduction in the input of physical resources,manpower and materials. This reductionwould be possible if these sections were operated as - 26 -

sidings, which would implys (a) suspensionof all scheduled freight and passenger services in these sections; (b) despatch of empty rakes only on demand from the users; (c) formation of train lengths strictly in accordancewith the users' requirementand selection of locomotives of matching capacity; (d) operation of trains only as block trains; (e) insistenceon prompt loading of wagons to enable the locomotivesto return with the same full/empty load; (f) managing the sidings with the mzinimum level of operating and maintenance staff, maintenance expenditure, operating stations and other facilities; and (g) refusal of all traffic in small loads or occasionalwagon loads.

Wagon Loads from/to Private Sidings

5.7 The rail users should be encouraged to shift gradually from single wagon loads to full/partial block loads to reduce the heavy cost of shunting and wagon marshalling. This could require users to invest in additional facilities for warehousing, placement of block trains, and simultaneous loading of many wagons at a time, but in return should be offered reduced shunting and siding charges by MR.

B. Business Potential and Marketing Strategy

Domestic traffic

5.8 The local traffic on MR has remained below 400,000 tonnes, except for the year 1986/87. An unusually high volume of maize traffic in 1986/87 (140,000 tonnes) caused the traffic volume to be 480,000 tonnes. The domestic traffic is forecast to remain within the range of 300,000 and 350,000 tonnes due to: (a) a slight drop, on average, in domestic production, particularly maize (Annex 20); (b) road transport maintaining its major share of the domestic market of between 70-75 percent; (c) the origin/destination points for a large percentage of the small loads and short-haul traffic not being on the rail network, favoring road traffic; and (d) MR's strategy requiring it to concentrate on bulk traffic like, fertilizer,beer and minerals, clinker, coal, cotton lint and seed, maize, and tobacco, all above 10,000 tonnes/year in 1989/90. A traffic level of 350,000 tonnes for PY 1994/95 has been assumed for this analysis.

InternationalTraffic 11/

5.9 Malawi's total exports and imports have steadily decreased in recent years, and the base year forecasts for 1990 indicate a total of 641,000 tonnes of imports and 193,000 tonnes of exports (Annex 21). The level of exports has dropped mainly due to a significant decrease in the surplus of maize, sugar and groundnuts. The level of imports is constrained by the availabilityof foreign exchange. In the high growth scenario,with an assumption of an average economic growth of 4 percent per annum and with maize and groundnuts returning to the export circuit,

111 Most of the information and conclusionspertaining to the internationaltraffic are based on the working paper on traffic forecastingof the Transport Sector Review. - 27 - exportsore estimatedto reach a level of 323,000tonnes by 2010 and importsa level of 937,000tonnes. The commoditydetails are given in Annexes21 and 22. 5.10 The overseasshare of exports/importsin the base year is estimatedto be 44 percentfor importsand 79 percentfor exports. Of the overseasshare, MR's share is estimatedto be 60 percentfor both importsand exports,or 26 percentof total importsand 46 percentof total exports(Annex 22). MR's share of the overseastraffic will be restrictedto 250,000tonnes in 1995, as Nacalacorridor is programmed to be completedonly by 1993 and some time will be requiredto resolve the teethingproblems. Even after the corridorbegins to function normally,the level of trafficwould be much lower than 900,000tonnes actuallyachieved in 1975 due to: (a) the overalllevel of exports/importshaving declined as mentionedabove; (b) the share of regionaltraffic having increasedin the recentpast; (c) a numberof alternativecompeting routes, such as Durban,Dar-Es-Salaam, and the NorthernTransport Corridor (NTC), having been establishedsince 1975 and currentlyhaving surplus capacity; and (d) the GOM's policyof keepingall the routesactive at least for vital commoditiessuch as fertilizer,diesel and petrol. Even in the high growthscenario, the share of internationaltraffic on MR by 2010 would be less than 400,000 tonnes. An internationaltraffic level of 334,000for FY 1994/95has been assumedfor the financialand capacityanalysis of MR. This estimateis 30 percenthigher than the forecastindicated in Annex 22 and is consideredfeasible after the qualityof freightservice improves as a resultof restructuringand operationsimprovement. 5.11 There is also a major imbalanceof overseastraffic on all routes,imports exceeding exports (Annex 23). A similarimbalance existsfor the regionalexport/import traffic as well. Since a major share of the regionaltraffic would move by road from/toMalawi, the combinedimbalance would leave considerabletruck capacityfaced with empty backhaulstowards South Africa. It is likelythat substantial tariffconcessions would be offeredby the truck operatorsto attract some of the exporttraffic, and for MR to retainthe trafficallocated abovewould requiredevelopment of an activemarketing strategy and a pragmatictariff policy. C. OperationsRestructuring 5.12 Currently,MR is operatingmostly mixed trains,and occasionallyblock or through freighttrains. During1989190, out of the total of 749,949locomotive kilometers for commercialtraffic, 695,408(94 percent)were loggedagainst mixed trains. The mixed trains,having to meet the requirementsof both the passengerand freighttraffic, end up: (a) followingthe timetablessuited to passengertraffic, with unavoidablylong idle periodsfor locomotivesat the terminalsand with stopsat almostevery stationto pick up passengers;and (b) takinga long time at some of the stationsfor droppingand attachingwagons. The resultingoperating statistics are extremelypoor -- averagenet train load of 105 tonnes (equivalentto two large-sizedor threemedium-sized trucks), gross train load of 334 tonnes,and utilizationof locomotivehours of only 33 percent. The - 28 -

normal advantages that favor trains over trucks for high volume and heavy traffic are completely lost.

Block Trains

5.13 All internationaltraffic should be moved using block trains. Most of MR's traffic originates/tenminatesat Lilongwe, Blantyre, Salima, and Bangula for sugar. A train hauled by one of MR's high-capacity locomotivescan normally have a gross load of 1270 tonnes,12/and if the wagons are fully loaded to their designed payload capacity of 40 tonnes, each train should have a net payload of 800 tonnes. Also assuming a turnaroundperiod of 10 days and a working period of 360 days/year, 36 round trip journeys are possible with one block rake, and one train of 20 wagons can carry 28,800 tonnes of traffic per year or, say, 25,000 tonnes. Out of the total estimated internationaltraffic of 334,000 tonnes/year,the imports would account for 230,000 tonnes requiring 9-10 block rakes in service with not more than one loaded train leaving Malawi/Nacalaper day. The exports, being less than the imports, would be carried on the return trip with about 50 percent of the trains running empty, providing built-in extra capacity for additionalexport traffic to the extent of 100,000 tonnes/year. Tank, covered, high-sided, low-sided,and containerwagons could be formed into fixed block rakes for the transportationof POL, sugar, wheat, maize, tobacco, fertilizer, salt, tea and general goods.

5.14 Similarly, all bulk goods within Halawi could be transported in block trains if the rail users were connected to the rail network through private sidings. The traffic most amenable to block rake operation would be fertilizer,coal, tobacco, clinker, maize, beer and minerals, cement, cotton lint and seed. The quantities to be moved are generally more than 10,000 tonnes per year and would require about 12-15 trains/year at a full train-load of 800 tonnes net or one train per month or in three weeks. Analysis shows (Annex 13) that 12 commodities, all with a traffic level of more than 10,000 tonnes/year,account for 80 percent of the total local traffic, and this 80 percent of the traffic is amenable to block-train operation. However, the planned block train operation would require the users to create additional capacity for storage and material handling. In the intermediatestage, part blocks could be offered. Some of the small load traffic would need to be abandoned by the railways, the balance requiring pick-up type of service.

Yard Operations

5.15 With a majority of freight trains planned to be operated as block trains, the yard operationswould also need to be restructured. The trains, instead of terminating in the yards, could be taken straight to the unloading/loadinglocations within the rail users' premises. Much of the work currently being done in the yards would become

12/ In some sections, such as Nakaya-Blantyre,a consist of two locomotivesmay be required for trains moving to Blantyre because of stiff gradients. - 29 - redundant,as would the shunting locomotives. The staff and the facilities in the yards would also need to be appropriatelycurtailed. Some yards would need to be closed and a few, such as Nakaya, may need to be expanded.

Track Maintenance

5.16 Currently, track maintenance is carried out by gangs of 10- 12 staff, each gang being responsible for about 10 km of track length. the total number of gangs being 78 with a total staff strength for track maintenance of 800. Given MR's low traffic density, the most appropriate form of track maintenancewould be the Directed Track Maintenance (DTM), whereby the track is maintained as required by its condition rather on a pre-planned basis. Each gang, with the help of a diesel engine operated gang-trolley,can inspect a track length of 100 km by inspecting and repairing, if necessary, 10-20 kms of track everyday and the rest on an urgent basis, if required. The entire track maintenance program (excludingthe Lilongwe-Mchinjiand Blantyre-Border sections)would require a provision of four to five trolleys and a staff of about 50. Two additional gangs could be nominated to maintain the track on the sections relegated to siding status.

Locomotive and Rolling Stock Maintenance

5.17 Different locomotivemaintenance schedules, including major overhauls, are currently based on hours between successivemaintenance schedules rather than the kilometers earned. With the low locomotive utilization levels on MR, sometimeswith only 30 percent of available locomotivehours being used for train operations, this maintenance policy invariably results in excessive maintenance;hence the maintenance schedules linked to kilometers earned. Similarly, the wagon utilization level is low and the current maintenance policy leads to over maintenance. However, since it is impossible to log individual wago,nkilometers, the periodicityof maintenance schedules for different types of wagons would need to be modified depending upon the wagon design, the average utilization level for the wagon type, type of commodities loaded and wagon age. Train examination rules would also need to be changed in accordance with the changed operations. Block rake consists could be examined less frequently without any loss of reliability,but with considerablereduction in wagon delays. This in turn would increase the rate of wagon utilization.

Rationalizationof Maintenance Facilities

5.18 Separate workshops and maintenance facilitieshave been established in MR for undertaking the maintenance of various assets, including locomotives,rolling stock, track equipment and trolleys, bridges, and for the manufacture of brake blocks, forgings,machined components and other spare parts. The workload of these workshops is comparatively small and with restructuringcould be further reduced. All of these workshops possess a number of common manufacturing, testing, and material handling equipment, as well as departments/groups for production planning, scheduling and control; inspection and testing; material management, financial and cost accounting. Consolidationof - 30 - these facilities,at least of the overlappingfacilities, would lead to increasedutilization of the equipmentand personneland reducedcosts. D. OrganizationRestructuring 5.19 Organizationrestructuring, aimed at improvingdecision- makingprocesses and organizationalbehavior, and reducingthe overall cost of staffing, is an importantelement of the turnaroundstrategy. This would comprisethree main actions: (a) effectivedivisionalization at headquarters;(b) functionalregrouping at the operatinglevel; and (c) introductionof appropriatesystems and procedures.The recommended organizationstructure is indicatedin Annex 24. 5.20 Effectivedivisionalizations In order to derivethe intended benefits from the creation of five main divisions -- lake services,rail services,engineering and supplies,personnel and support functions,and financeand administration-- it would be necessaryto link the operationaland financialperformance objectives of each divisionto the overallcompany objectives and goals. Within the broad frameworkof agreeddivisional objectives, the divisionswould have to be given adequatefreedom to take their own operationaldecisions. By focusingon organizationalrather than departmentalgoals, the divisions in turn would be expectedto the stepsnecessary to improveproductivity and reducecosts. 5.21 To enablethese expectationsto be achieved: (i) the departmentsand branchesat the headquarterslevel shouldbe abolished, and the divisionsallocated appropriate managerial, technical and supportstaff for planningand monitoringthe operationspertaining to their division;(ii) the internaldivisional organization should avoid a hierarchicalstructure, but insteadprovide for close supervisionand everymember of the divisionhaving a well definedrole with specific responsibilityand authority;(iii) the numberof total staff in every divisionshould be kept small in line with the small scale of the restructuredoperations, perhaps not more than 20 in each divisionand not more than a total of 80-100at the headquarterslevel including supportstaff; (iv) clear performanceobjectives should be identified for every divisionto facilitatedivisional planning and performance review;and (v) the MR railwayssystem being small,geographical divisionalizationat the operatinglevel shouldbe avoided.

5.22 Functionalregrouping at the operatinglevel: Groupingof staff on rigid departmentallines is, for a small railwayslike MR, neithernecessary nor cost-effective.The abolitionof the departments at the headquarterslevel could facilitatethe regroupingof staff on a rationalrather than strictlydepartmental basis. In particular:(i) all maintenanceactivities, currently organized under 6-8 separate groupsunder differentdepartments and sub-departments,are particularly amenableto being organizedas one group under the engineeringand suppliesdivision. Througnsharing of specializedskills, machines, plant,tools, space, and managementand supervisorystaff, considerable economiesof scale can be achieved;and (ii) for very smallwork- stations,the staff shouldbe trainedto dischargemore than one function. - 31 -

5.23 Systems and procedures: Systems and procedures need to be redefined in accordancewith and supportive of the restructured organization. The system design should also enable more programmed decision-makingwith respect to operations.

E. Staff Reduction

5.24 The commercial viability of MR depends on a substantial increase in staff productivity,and this increase would be impossible without a large reduction in the staff levels to about 1000. Staff reductionwould be possible across the entire railway system after restructuringas a result of: (a) intensive training of staff, resulting in improved efficiency and capability; (b) introductionof motivationalpackages in most of the departments;and (c) the availabilityof improved office equipment, such as computers, communicationsand goods tracking systems. Apart from the above, specific possibilitiesfor reducing staff in every departmentinclude:

(a) Headauartersand Administrativestaff: from about 890 to 230, mainly by adopting a simpler divisional type of organization structure; removing overlap of responsibilitiesand excessive supervision;reducing accounting, finance, personnel, computer, supplies staff as a direct consequence of the reduction in the overall staff and fixed assets; making effective use of comput6rs for office work; rationalizingand simplifyingprocedures and office systems; and reducing staff involved in tasks connected with passenger service operations;

(b) Civil Engineering staff: from 1510 to 250, as a result of the introductionof directed track maintenance (para 5.16); relegation of the Lilongwe-Mchinjiand Border-Limbesections to the status of sidings (para 5.5); reduction of staff and of offices and residentialhouses, and in turn, maintenance staff; and rationalizationof maintenance facilities through creation of one maintenance center (para 5.18);

(c) Transportationstaff: from 861 to 215, as a result of the discontinuationof passenger services (para 5.3); discontinuation of the freight traffic in small loads (para 5.5); relegation of the Lilongwe-Mchinjiand Border-Limbesections to siding status (para 5.6); operation of block and through trains, with three times the current freight being handled by 20 percent fewer trains (see Table 8.1 in Section VIII); closure of commerciallynon- viable stations; and improved locomotive and wagon utilization (Annex 18):

(d) Mechanical Engineering staff: from 646 to 220 as a result of reduction in the total holding of locomotivesand wagons (Annex 25); discontinuationof the passenger services; operation of less trains; reduction and rationalizationof locomotive and freight stock variety; revised maintenance policy (para 5.17), and rationalizationof maintenance facilities (para 5.18). - 32 -

F. AssetsRestructuring and Investments 5.25 Once the businessportfolio is identifiedand operationsare restructured,the utilizationof locomotivesand wagonswould increase considerably.Improved management (Section VI) shouldlead to further enhancementof locomotiveand wagon utilizationlevels, as well as higher verage wagon payloadsand locomotivetrailing loads, and more reliableoperations. The requirementof locomotivesand wagons for trafficuse, based on the enhancednorms of efficiencyand productivity, and for the estimatedforecasts is estimatedto be:

(a) locomotives (Hain Line) - 8 (b) Locomotives (Shuntlng) - 8 (b) Tank wagons - 117 (c) Covered wagons - 225 (d) Open wagons - 145 (e) Containerwagons - 80 The detailedworksheet is given in Annex 19. The underlying assumptionsof wagon payloads,train loads,gross to net ratio, locomotiveand wagon availabilityand utilization,seasonality, operatingefficiency and local and internationalforecast factors are given in Annex 26. The assessmentof the wagon requirementis also based on the assumptionthat all wagonsfor Malawiantraffic, even while in Mozambique,would be made availableby MR. 5.26 MR's holdingof locomotivesand wagons is much higherthan required. As a result,MR does not need to investin any new locomotivesand wagons,and the existingfleet and use of locomotives and wagonsneeds to be rationalizedthrough: (a) prematureretiring of all old, inefficientand obsoletewagons, particularly the short and plain-bearingwagons; (b) designationof wagonsaccording to their capacitiesand designfor specificstreams of traffic;(c) hiringout of wagons and locomotivesto other railwaysystems if possible;(d) holding of surpluswagons and locomotivesin good order by rotationuntil the surplushas replacedretired assets or is requiredfor additional traffic. 5.27 New Investment:However, new investmentswould be required for: (a) rehabilitationand upgradingof some of the locomotivesand wagons; (b) rehabilitationand upgradingof a part of the track between Lilongweand Blantyre;(c) procurementof gang trolleysand related equipmentto facilitateintroduction of DTM; (d) rehabilitation/replacementof machinery and plant in maintenance workshops;(e) procurementof qualityassurance equipment; and (f) strengtheningcommunication and computersystems. Given the already large asset base, all investmentproposals would need to be evaluatedin terms of their contributionto the main corporateobjective of commercialviability. The estimatedlevel of investmentshould not exceedMK 50 million,including the cost of restructuringand paymentof severancepay to the redundantstaff. - 33 -

G. FinancialRestructuring TariffRestructurinR

5.28 Local trafficis highlycompetitive and the tariffpolicy must take into accountthe capabilityand willingnessof rail users to pay. Thus the possibilityof completecost recoverywould increasewith the restructuringof railwaysand consequentimprovement in the quality of service. Determinationof the full cost-recoverytariff for differentcomponents of the serviceportfolio offered by MR -- wagon loads,block trainloads, small loads, dedicated train operation, serviceto the users'premises etc. -- requiresa correctassessment of costs incurredfor theseservices. For internationaltraffic, a user's selectionof routeand mode would be influencedby the actualcosts of loading/unloading, rail/road transportation, port handling,storage and shipping,tne perceivedcosts of delayduring transit and risk of damage. Even thoughthe Nacalacorridor offers a shorterdistance, the perceivedcosts of delay duringtransit and at the port of Nacalamay continueto be high. Until full efficiencycan be achieved,tariff increaseswill have to be limited. This analysisassumes an upper limit of 80 percentof the long-distancetransport cost by road/railand a tariffof MR 0.3/ntk. Revaluationof Assets

5.29 Assetsmust be frequentlyrevalued for MR to accurately computedepreciation and the replacementvalue of the capitalemployed. As indicted,the book value is only about20-25 percent of the current replacementvalue of the assetsand the depreciationcharge is also correspondingly low.

Capitalization

5.30 MR's proposalsfor increasingthe sharecapital appears logicalwhen viewedin the lightof acceptabledebtsequity ratios for commercialenterprises. However, the assumptionthat the conversionof loansto equitywould enableMR to avoiddebt serviceobligations, makes the proposalquestionable. If the main objectiveof earningan acceptablereturn on capitalemployed is maintained,the debtsequity ratiocan be determinedmore rationally. Financialand Cost Accounting

5.31 A raw financialand cost accountingsystem needs to be in place to enableaccurate determination of the cost of all activitiesand services,and of the importantratios and indicesthat couldbe used by managementto arriveat optimaldecisions. The systemwould also help in identifyingthe variablecosts and their relationshipto the units of performanceor other influencingvariables. - 34 -

H. Privatization

5.32 A number of activities,because of their small scale of operation on MR, can be off-loaded to other enterprises in an open market. Some activities that could be considered for privatizationand subsequentcost reductionwithout adversely affectingMR's performance, safety or reliabilitywould be: (a) manufacture of castings, forgings, and machined parts, etc.; (b) maintenance of road vehicles, cranes, compressorsand other items of machinery and plant; (c) computer services; (d) weed removal on track; and (e) maintenance of office and residentialbuildings.

I. Impact of Restructuringon MR Assets

5.33 As a result of the different restructuringstrategies, the replacementvalue of the usable assets on MR would drop from the current level of US$200 million or MK 575 million (Annex 12) to US$122 million or MK 350 million (Annex 25). While disposal of the redundant assets would be a formidable problem and a considerableamount might finally have to be written off, the retention of only usable assets by MR would provide MR an opportunityto reduce its maintenance and depreciationcosts and enhance its capacity to earn the expected ROC.

VI. MANAGEMENT EFFECTIVENESS

A. Systems Improvement

6.1 Systems for direction and control would have to be redesignedand significantlyimproved for the benefits of restructuring to be achieved. High priority for redesignwould be given to the following: (a) Decision Support System; (b) Material Management System; (c) Operations Audit System; and (d) Quality Assurance System.

Decision Suppo-t System (DSS)

6.2 MR has been regularly issuing a compendium of statistics for the last 20 years or more, and these statisticshave served a useful purpose in facilitatinganalysis of trends of operationalperformance. The compendium is based on data that are collected regularly and in some detail, i.e., separately for each locomotive and wagon type, sections, stations and commodities. However, the informationis not being used to facilitate optimal decision-making,direction or control.

6.3 An appropriateDSS design must recognize that: (a) almost the same informationwould be used for decision-makingon a daily/weekly/monthlyand longer-termbasis; (b) the requirementof information,e.g., speed, accuracy, comprehensiveness,and detail, would be different for different levels of management; (c) daily decisions, generally taken by lower-levelstaff, need to be programmed,while longer-termdecisions need a more analytical and innovative approach. - 35 -

An appropriateDSS needs to be in place to facilitate evaluation of the impact of restructuringand other strategies on performance and enable timely course correction.

Material Management System (MKS)

6.4 An inadequate supply of spares, a direct result of inadequate availabilityof funds, appears to have been the main cause of delayed, infrequent and unsatisfactorymaintenance of locomotives,and consequently for almost all the problems of the railways. on the one hand, the locomotive reliabilityhas been below expectations,and on the other hand, the locomotivesare being over maintained (para 5.17) leading to consumption of more spares than usually recommendedby the manufacturers,though no detailed analysis has ever been made. The problem of spare parts supply may, in fact, be the lack of ar efficient MMS. Accurate assessment of the spare parts requirements,timely procurement,controlled use, frequent material variance analysis, particularlyof the more expensive items, are among the aspects of the MKS that need to be developed to ensure that the maintenance of locomotivesremains cost-effective.

Operations Audit System (OAS)

6.5 Because of the small scale of operations,the break-even traffic level is high, and any slippage in the level of operating efficiency would adversely affect performance. A regular system of auditing operations is necessary for analyzing costs, asset utilization, and effectivenessof maintenance. The audits would also be aimed at identifying the causes of variance.

Quality Assurance System (QAS)

6.6 Poor reliabilityof locomotivesand rolling stock is a main cause of their low utilization,in turn leading to a large increase in the requirementof these assets for the current operations. Continued poor reliability and low utilizationof locomotivesand wagons would lead to an excessivelyhigh investment in locomotivesand wagons for the estimated traffic in the coming years. Frequent failures of the locomotivesand the rolling stock also result in high maintenance costs and commitment of maintenance facilities and staff. Installing and implementingan appropriate QAS on MR should be accorded high priority.

B. Operations Improvement and Efficiency Targets

6.7 Improved targets of operationalperformance, resulting from restructuringand redesign of systems, need to be established to enable monitoring by management as well as facilitatingregular operational audits. The areas of performance for which targets need to be set, along with recommendedtargets are given in Annex 18. These targets pertain to locomotive and rolling stock availability,reliability and utilization,wagon payloads, locomotive trailing loads, yard detention, percentage empty running, gross:net ratio, and percentage of block train operation. - 36 -

C. Staff Development and Motivation

6.8 Staff motivation, commitmentand involvementalso are essential for the turnaround of MR. After the rationalizationof staff strength, intensive and effective programs aimed at staff development and motivation need to be implemented. This would include: (a) staff training in all disciplines;(b) implementationof appropriate incentive schemes; (c) delegationof decision-makingauthority; (d) setting up of challenging targets and correspondingrewards; (e) making the remunerationpackages more attractive;and (f) converting the present predominantlybureaucratic organization to a more informal group-based one as recommended in Annex 24.

VII RAILWAY-GOVERNMENTUNDERSTANDING

A. Obligations of the Railways

7.1 The obligationsof MR. both as a commercial entity and as a parastatal responsible for its performance to the government, need to be clearly defined. The broad framework for the key result areas would be:

(i) Profitability: MR would generate income from its operations adequate to: (a) meet all its operational expenses; (b) finance all replacement,rehabilitation and upgrading of its assets; and (c) have a balance which represents an acceptable return on the capital employed in MR, considered as 6 percent for the restructuringperiod, to be used for servicing debt, payment of dividends on equity capital, while keeping adequate reserves for tiding over fluctuations in operations;

(ii) Productivity: Profitabilitywould be ensured not by exploiting the monopoly position of MR on the Nacala route but by ensuring the most productive use of all the physical and human resources employed by MR and achieving the operationalperformance and productivitytargets given in Annex 18;

(iii) Market Share: Through a combination of lower and special tariffs, quality of service and market research, MR would increase its market share for the freight traffic that offers a distinct commercialand economic advantage over the other modes of transport;the special tariffs and arrangementswould be aimed at increased utilization,at only a small incrementalcost, of empty-returntrains and containers, fixed assets and resources;

(iv) Customer Satisfaction: MR would maximize customer satisfactionmainly through: (a) improved punctuality of passenger trains as long as these are operated; (b) minimizing transit time for freight traffic; (c) minimizing loss, damage, pilferage and wastage of goods while under - 37 -

storage, transit or transhipmentwith MR; (d) prompt settling of genuine users' claims; (e) reduction of the waiting period for appropriatetypes of wagons/block rakes on demand; and (f) providing prompt information on the status of the users' goods, wagons or containers;

(v) Staff Motivation and Morale: The staff morale and commitment to MR would be improved through a variety of policies and management actions includingt (a) implementationof intensive staff training and development programs; (b) improving the payment scales of the staff; (c) rewarding hard-working,innovative and efficient staff through appropriatelydesigned incentive schemes; (d) organizationalredecign aimed at enhanced participationof the staff in the decision-making process within MR; and (e) improved retirementpackage aimed at staff retention and avoiding staff turnover;

(vi) Upgrading Technology: Subject to financial and economic feasibility, all investment decisions would be aimed at modernization and upgrading technology. In particular: (a) future wagon designs would aim at a gross load of 72 tonnes or a net payload of 54 tonnes to fully exploit the permissible axle load of 18 tonnes; (b) the locomotives would have the capacity of hauling longer trains of 1200 tonnes even on sections with steep gradients; and (c) information and decision support systems would be progressively computerized;

(vii) Concern for Environment: MR would actively participate in meeting the important societal objectives, particularly those pertaining to the improvement of the environment through weed control on the track and railway property; appropriate disposal of lubricants, greases, chemical residues; discontinuation of environmentally degrading and otherwise harmful chemicals and products and implementing other items on the agenda.

(viii) Malawi-Mozambique Coordination: Growth in international traffic via Nacala would depend on the total quality of service to the user. Since 70 percent of the route to Nacala lies within the control of Mozambique Railways, it must operate at an equally high level of efficiency and reliability. MR would maintain a close coordination with Mozambique Railways at the operating as well as the top management level, and resolve all problems expeditiously.

B. Obligations of the Government

7.2 GOM, both in its capacity as the government and as the sole shareholder of MR, would meet its obligations to provide a healthy competitive environment for the transport sector aimed at improving the overall efficiency and productivity of the sector. In particular GOM woulds - 38 -

(i) make it possible for the differentmodes of transport to compete on equitable ground, and to that end, implement adequate cost-recoverymeasures for road use and discontinue subsidizingthe railways;

(ii) make foreign exchange accessible to all modes on the basis of agreed and uniform rules;

(iii) once the MR board has been constituted,leave the board free to make all important decisions regarding investments, pricing, business and operationalactivities, staff regulation,and other matters aimed at achieving MR's objectives in all key result areas, at least after a general agreement on these objectives has been arrived at;

(iv) permit MR to select its business portfolio and not require the undertaking of financiallynon-viable operations, including continuationof passenger services or transportationof food grains and fertilizer at reduced rates; if such operations are required,make explicit arrangementsfor pricing and appropriate levels of cost recovery;

(v) leave MR free, subject to reasonable regulations,to dispose of its uneconomic assets, privatize part of its operations and activities on the basis of acceptable criteria of economic/financialfeasibility;

(vi) resolve all problems with the Government of Mozambique, if required, to ensure that the internationaltraffic is not adversely affected by political issues; and

(vii) assist MR through short-term loans for meeting its cash requirementsduring the period of restructuring.

C. Memorandum of Understanding (MOU)

7.3 An MOU signed between MR and GOM, including all obligations and the rights of both MR and GOM, would facilitate: (a) a clear understandingof the expectations-andproblems on both sides; (b) formalizationof the roles, objectives, targets, and action plans; (c) reconciling any differencesin perceptions,modality or details regarding the objectives, obligations,powers and procedures;and (d) monitoring of the performanceof MR and causes of shortfalls, particularly if due to GOM. To enable the MOU to be signed, MR would prepare, at the earliest, a revised Restructuringand Corporate Plan. - 39 -

VIII. PROJECTIONSAND ACTION PLAN

A. Financial Projections

8.1 The financial projections indicated at Table 8.1 are indicative of only broad orders of magnitude and are not meant to serve as reference data for the purpose of control, monitoring or decision- making. The main purpose is to focus on the impact of the restructuring plan on the financial performance of MR and the adverse implicationsof continuingwithout restructuring.

8.2 Assumptionss Financial projectionshave buen made under two scenarios, one without restructuring (WR) and the other with restructuring (R). In both scenarios it is assumed that: (a) the freight traffic would be restricted as forecast (paras 5.8 and 5.9); and (b) depreciationwould be based on the replacementrather than book value of the assets. However, the assumptions regarding the level of resources to be deployed and fresh investmentsto be made differ in the two scenarios. The WR scenario assumes that in accordancewith MR's Corporate Plan: (a) the currently held physical and human resources would be continued to be utilized more or less in full, and accordingly the depreciationas well as the ROC would be based on the replacement value of the total assets (Annex 12); (b) fresh investmentsof about MK 200 million would be made during the 1990/91-1994/95period for the rehabilitationof existing and procurement of new assets; (c) the passenger traffic and the tariff would be maintained at the current level. For the R scenario, it is assumed that: (a) the usable assets would be curtailed (Annex 25) and depreciationand ROC would be based on the replacementvalue of the remaining assets; and (b) investment in the rehabilitationof assets would be restricted to funds available within MR, and fresh investmentswould be restricted to MK 50 million inclusive of the requirementsfor meeting the cost of restructuring.

8.3 The specific assumptionsmade with regard to the different financial years in both the scenarios are as follows: (a) FY 1990/91 is already over and since no specific action was taken by the management towards staff reductionor any other change, the financial results for this year have been assumed to be similar to FY 1989/90 except for the depreciationhaving been charged on the basis of the replacementvalue of the fixed assets (Annex 12); (b) during FY 1991/92, minor operational improvementswould be made and staff would be reduced to some extent through attrition; (c) the restructuringplan would be implemented in three years starting FY 1992/93. Based on these assumptions,the financial projections for all the years after FY 1992/93 reflect the impact of restructuring. To facilitate comparativeevaluation, the financial projections for FY 1994/95 have also been made for the WR scenario. MAnAWI RAILWAYS INCOMEAND EXPENDITUREPROJECTIONS AunU(ooo) unless stated) - | EActualAdjusted MR Corporate Plan" With Restructurhng Reference/ Units Share 1989190 1989190 1990/91 1991192 1994195 1990293 1993/94 1994/95 Remaks 1 1 2 3 4 5 6 A. INCOME

Fright Trafic

Frlght Trall (Loca-Tones 321 321 321 321 334 325.3333 329.6666 334 Freght Traf (Inter)Tonnes 14 14 14 14 351 215 283 351 FreightTrafflic (otal-Tonn.s 335 335 335 335 685 540 612 685 NTI (Local 62219 62219 63575 64931 69000 66288 67644 69000 Annex5 & 19 NTKOntomallonal 2829 2829 2829 2829 100000 61132 80566 100000 Annex5 & 19 NTIC(rota 65048 65048 66404 67760 169000 127419 148210 169000 RateNT( (L) MK 0.18 0.18 0.21 0.21 0.21 0.21 0.21 0.21 RateNTK () MK 0.11 0.11 0.25 0.3 0.3 0.3 0.3 0.3 kIcom Freight(L) 11316 11316 13174 13455 14299 13736 14017 14299 Income FreightI 307 307 707 849 30000 18339 24170 30000 IncomeFreight (1) 11623 11623 13882 14304 44299 32076 38187 44299 a- Passenger Traffic

PassKM 115469 115469 115469 115469 115469 46188 23094 0 Annex5 RatelPK MK 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 hcom Pass. 4470 4470 4470 4470 4470 1788 894 0

Other Income 3891 3891 3000 3000 3000 3000 3000 3000

TotadIncome 19984 19984 21352 21774 51769 36864 42081 47299 Annex11

IgrE 0b l. S. EXPENDITURE(X

-Transportation No. aat 861 861 774 861 541 378 2tS Anx 6fr xtSE Chl Enghnet No. 1510 1510 1 1359 tS10 951 665 250 AnnexQTex1 SE -Mch. En _wd No. 646 648 646 Sal 646 408 2B4 220 Anex6,frxt SE *T_1.cmmnlaln No. 91 91 91 ai 91 56 39 45 Annex6SText SE *Admliiontaon No. 890 890 890 801 890 560 392 230 Arnex 6)TextSE Told stad No. 3998 3998 3998 3596 3998 2514 1758 960 6/Text5E Std''elahod Exp 12942 12942 112942 17461 19413 12207 853 4661 Aiix 17 Thi Lkm Fuel ConsumpUon Shar 8shw

TOld Loco kinn 1.00 998 998 1006 1013 1573 707 582 457 Olw Loco knn 0.14 144 144 145 146 227 102 84 66 Told TrainLkms 0.86 84 854 860 867 1346 605 498 391 Freilt Train Lkns 0.51 0.44 439 439 443 446 692 417 389 360 Annex19 Pass.Train Lkms 0.43 0.37 372 372 375 378 587 149 74 0 Depat. Tran Lkms 0.04 0.04 42 42 42 43 66 38 35 31 FuelcostJLoco kcm MK 5.20 5.20 5.20 5.20 5.20 8.34 8.75 9.38 FuelCost 5193 5193 5232 5271 8184 5893 s509 4289 Annex17 Malntenunce

Losnodvs HoUdWO No. 45 45 40 35 45 30 25 20 Annex9 and 19 WagonHoklin No. 875 875 814 757 875 704 655 624 Annex 10and 19 CoachHoling No. 30 30 30 30 30 12 6 0 EqFhn'dutFkSHold No. 1925 1925 1764 1607 1925 1364 1185 1024 Maintnance Exp. 2551 2551 3038 4258 5102 2349 2041 1765 Ovarboada

Adinirtrauon 865 865 1001 1001 2214 1001 1001 1001 nn" 17 wagonlnteclwge 0 0 0 0 0 0 0 0 Ann" 17 FrcYy WVhkices 591 591 684 684 1963 684 684 684 Annex17 Told 1456 1456 1685 1685 4177 1685 1685 1685 Annax17

Other Expemditure 1259 1259 1384 1523 3765 1675 1843 2027 Annex17

Told OjeraUinp ExPendbture I I_ 23400 23400 24282 30198 40640 23809 19194 14427 I r_

P. Operalku Surplu -3416 -3416 -20 8424 11128 13055 22887 32871

Us"bl Ase Va" 102221 548730 548730 548730 548730 333697 333697 333697 Anex 12end 19 DeprekAt 2828 24870 24870 24870 24870 16030 16030 16030 Annex 12end 19

C. NET SURPLUSIDEFICIT 46244 -282 -2780o 33284 -13742 -2875 6857 16841 D. RETURNON CAPITAL

FbiodAsets 102221 548730 548730 548730 5487 333697 333697 333697 x 12 nd 19 Curnl Assets 19188 19188 19188 I8188 19188 19188 19188 19188 Annex11 4. To Assets 121409 567918 567918 567918 567918 352885 352885 352885 Raoeof Rebm #600 6.00 6.00 6.00 8.00 6.00 6.00 8.00 Assumed Surpl Reqrd 7285 34075 34075 34075 34075 21173 21173 21173

E. ADDMONAL FUNDS REQC

CLur.Funds Reqd -carp plan 0 500 200000 20 3X00 50000 hlerm4 an Adi. La 0 5000 20000 2000 3000 5000

F. NET GAP .13529 42381 61875 -72369 467817 -28148 -17318 -9332

G. OPERATING RATIO 131 242 114 139 127 108 84 64 * A4usted far replacenientvalue of assts and correspondngdeprelaiown ^' Ad)nW for replkmatt valu of assetsnd correspondngdepecIaion. restic trafficforecast nd kwreasedtaiff

80rIt"

t'2 CD - 43 -

8.4 All costs and income projectionsare at FY 1989/90 prices. Assumptions and adjustmentsmade for different elements of income and expenditure are as follows:

(a) Freight Traffic: Freight traffic levels are based on the traffic forecast indicated in Annexes 20 to 23, adjusted as indicated in para 5.10, with the ntk calculatedon the basis of origin-destinationinformation for each commodity; the forecasts are considerabl lower than the Corporate Plan forecasts.

(b) Passenger Traffic: Even in the WR scenario,no passenger traffic growth has been assumed; for the R scenario, the passenger traffic has been assumed to be brought to zero by FY 1994195 by discontinuationof the trains on different routes in two stages: ti) where parallel bus routes are available; and (ii) for other routes.

(c) Freight Tariff: A marginal (16 percent) increase in the local freight tariffs has been assumed to be effected gradually over the restructuringperiod; the current average freight rates for the internationaltraffic are not clearly established and have been derived based on the willingness of the users to pay for the Nacala route in comparison to the alternativeof using the longer routes. The selected tariffs would result in the overall cost of transport by rail to Nacala to be not more than 80 percent of the cost by other routes to reflect the foregone benefit of convenience in using the road transport and the more reliable service expected on the establishedroutes. However, the tariffs need to be more accurately determined.

(d) Passenger Tariff: Passenger tariffs have been kept constant.

(e) Staff Costs: Staff levels for the WR option have been kept the same, but have been reduced gradually for the R option to about 25 percent of the current level, as discussed in Section V-E. Starting with FY 1991/92, the average staff emolumentshave been assumed at 150 percent of the current rates in real terms to account for increase in wages and incentive allowances aimed at motivating the staff.

(f) Fuel Costs: Even though the ntk are projected to increase gradually, the train kms would, in the R option, show a sharp reduction on account of the plan to run fully loaded block trains with a gross load of 1200 tonnes in place of the current average of 335 tonnes. However, the fuel consumptionhas been consideredas proportionalto gross tonne kilometers,but adjustmentshave been made for a sharp drop in the gross to net ratio as a result of the expected increase in the average payload of the wagons from the current level of 19 to 38 tonnes. -44 -

(C) Maintenance Costs Three adjustments/assumptionshave been made towards assessingmaintenance costs (i) maintenance cost has been consideredas proportionalto the holding of the locomotivesand the rolling stock; (ii) the unit cost of maintenance has been increased to 130 percent of the current level to compensate for the possible deferment of maintenance due to the shortage of cash resulting in an apparent reduced cost of miintenance;and (iii) since disaggregateddata on maintenance cost is not available, the equivalentunits have been used with one locomotivebeing consideredequal to 20 units, one coach to 5 units, and one wagon to 1 unit.

(h) Depreciation: Starting in FY 1990/91, the replacementvalue of usable assets has been used for calculatingdepreciation; the calculationsfor the replacementvalue of the current assets and the level of depreciationare given at Annex 12, and for the year 1992/93 for the R option at Annex 25.

(i) Other Costs and Overheads: These costs for the R option have been retained at the current level, as any increase because of volume of business would be compensated by the steep reduction in the level of manpower; for the WR option, the values indicated in the Corporate Plan have been used.

(j) Provision for Return on Capital: The return has been calculated at a rate of 6 percent on total capital, i.e., fixed as per Annexes 12 and 25, and current assets as at Annex 11.

(k) Interest on loans for fresh investment: It is assumed that the funds for fresh investmentswould be raised through loans with an interest rate of 10 percent (commercialrates in Malawi are actually higher) and thereforeuntil 1995, addit-onal interest has been assumed for both the scenarios.

8.5 The projectionspresented in Table 8.1 would need to be refined on the basis of more detailed data and may, as a result, undergo some change. However. the basic conclusionswould remain valid, viz., a severe restructuringis essential to put MR on the path to becoming financiallyviable, even though the operations on MR will probably not yield a 6 percent ROC by 1994/95. Without the proposed restructuring, an annual subsidy of MK 60 to 70 million inclusive of the foregone ROC, equivalent to almost 120 percent of the total revenues of MR and about 30 percent of the overall deficit in the GOM budget, would be unavoidable. In fact, with a view to achieving the expected ROC, the restructuringstrategy would need to be deepened and intensifiedafter 1994/95, particularlyin the areas of business development and increasingMR's share of the freight market and of the utilization of major assets. - 45 -

B. RestructuringAction Plan

8.6 A RestructuringAction Plan (RAP),in broad terms,is indicatedin Table8.2. A more detailedRAP would need to be establishedby MR on the basisof detailedwork to be undertakenby the MR divisionsand by outsideconsultants, if necessary. The detailedRAP shouldpreferably be readyby the end of 1991/92so that its implementationcould commenceby the beginningof 1992/93,with full implementationby 1994/95. Even while the detailedRAP is under preparation,implementation of a numberof actionsrecommended in Table 8.2, particularlyconcerning operations improvement, organization restructuringand staffreduction, could be initiatedduring the current financialyear. C. ImplementationStrategy

8.7 Full realizationof the anticipatedbenefits would require sustainedeffort on two frontss (a) effectiveimplementation of RAP; and (b) effectivemanagement of redundantassets and surplusstaff. It would be preferablefor the managementof redundantresources to be undertakenby an independentcell, specificallycreated for this purpose to avoid loss of focuson the restructuringeffort. The appropriate actionin the case of physicalassets could comprise their sale,hiring out, moth-ballingor scrappln.g,and in the case of surplusstaff their early retirementor resettlementin alternativeemployment, including self-employmentafter retrainingwith assistancefrom MR. - 46 -

TABLE 8.2

RESTRUCTUlUNGACTION PLAN

Ar d Worm ReckmnnRdedAh on com p C_omJed

_usins _. Olecontinuepassenger To avoid lossesas average FY 1902193 R.sucturng svies fromroute where pasengr journeyis ort paralleibus srvices are and ooe/pkis muchhigher avaiableIn PhaseI. thanof the roadmode. II. Discontinuepasnger FY 1903/94 servicesfrom remainingroutes In PhaseII. il. Stopaccepting small loads To avoidloss from the FY 1901/92 from otherthan main uneconomicoperations - originatingand destination smallloads. stationm. IV. Discontinueall normalsarvices To eliminatesectons with FY 1992/9 on Sorder-Umbesecion. very poortraffic density. v. Discontinueall service on . To eliminatesections wih FY 1W2/99 Ulongwe-Mchinjisection. very poortraffic deity. vI. Discontinuewagon-load . To avoid high costof FY 1991/92 servicefom/to privatesidings. servicingprivate sidings on a single wagon basis.

2. Buskes 1. Concentrateon bulktraffic; . To improveaverage freight FY 1991/92 Developmentand uLershaving private sidings haul and obtainmore NTKs MarketngStrategy and blocktrain operations. with less/sametonnage. iI. Offerincentives for faster . To improvewagon FY 1991/92 loadinglunloadingof trainsand turnaround. loadingof wagonsto theirfull capacity.

3. O __ipatios I. Graduallyinrease the shareof . To increaseproductivity of FY 1993194 Resruchuing block,through and dedicated locomotivesand all other trains. assat. iH. Terminatetrains in the uers . To avoidfreight train delays. FY 1tO1/92 premse insteadof railway yardsas far as possble. Oi. Switchover to DirectedTrack . To enablestaff reducton and FY 1192l93 Maintenance. Improvetrck quality. IV. Maintenanceof locomotivesto . To reducemaintenance cost FY 1991/92 be basedon kmsand riot and improvelocomotive hours. relabiHty. - 47 -

TABLE 8.2 (Cont 'd.)

Ana d R nrm Ro mnded Acto Ca*e*PURpM Compltbn

4. Resource i Resaritth usableasm on To reducemaintenance and FY 1902/93 Rational MRto tho in Annx 25. opeatingct and impre Il Oprte te flet of assets,utiization locomotivesand wagons requiredand seIl/hire ouVmothball. iL Reeict invetmen to the To reducedepreciation FY 1994/96 minimum, chargesand improvertun on captl employed. Iv. Closecommremlaly inviable To reduceoperatig cos. fY 1994/9 stations v. Consolidt mantenane To attin advantagesof FY 1904/9 worshop and faciliti. increasedscal of opeati and reducecosts.

5. Organization I Conducta detaied To definethe positkin to be FY 1991/92 R ucuing reorganizationand redgn abcoiished/mrged. study. iL Implemnt recommended To reducecosts and Improve FY 1992/93 OrganizationDesign. managementffectivenes. S. StaffReducton L Graduallyreduce stff as per Costreduction and FY 1994/ Annex18 finally to 100. productivityimprovemen 7. Fknnca L Tarff resuurig afterinterl To improverevenues FY 199IS Resrctrig study. iL Rluation of asss To ensureadequacy of FY 1991/92 employedon MR. depreciatonfor replacment of asset. iiL Improvedcostng systemto To Improveprofitiity and FY 1991/92 enabl beter controld asst operstingratio. utilizationand otherimpoa ratiosas perArnne 18. 8. Sysem I Desgn and implementthe To improvemanagement FY Ig=3 Imp rvem fobowing: and effectivenessin aW - DecisAinSupport System aspoesof management. - MaterialMaagemet System - OpeaingAudit, - QualikyAssuance System. . Op ions L Achiev Opains To bcrese _me and man. FY 15;I ImprovemenTargets as per powerproductivity. Anex 1a. 10. Staf Develpmet i Organizea ManpowerStudy. To improvestff productiyt FY 1992190 a MotMatin iL Implementan appropriteHRO package. IL Implementan appmpriate incww scheme. 1t. Railay- i MRand GOM to signa To impov undestning d FY 1991/92 Govenmnt Memorandumd the long-termobjectives d Underntanding Undeatanding MRand faciitateth* achievement - 48 -

TABLE 8.2 CContd.)

Am d PAt.faidi clanepCm oda

12. ImIwnw_tion L Caindue a hti4evl. To avoIdsippge hi Fie FY l991/92 satelgy committeefor coo,ddhintingth Impmntation oIdu hIip.m.Wtton of Va Remuctrhi ActionPlan. RamutA AWon Plm. i. ConstUg a cal fr wuglng . To enbh reductonof staff Y 9so4/9 staff ud asset reducton and asse i an effucnt Pmgmm.______. MALi RAILWAS ORGAUATION STRMTWIE (U8WS)

r~~~~~~~~~- -- n

aarl I HaI I ¢I I I 0ozI nmr uamnwm nnr OECL"MSTAFFAM09MMMMMAOFFEREIST~~~~OEPAR"Efl -' -'I'----

. I I POSIT"-Wm WW PERMOM CLWL TRA~~~~~~FFIC IICNAI ICAL FftICla LAKEEUMM lEtÂŁC:0YSUlCATIW TOTAU EM. S 0 II52 S41

TUCTC"E 0 1 2t 2 1 *ot Z 1 2 2 42 s 2 1

E N t U O I * 4 10a~~~~~~ a 242 MALAWIRAILWAYS BASICDATA AND KEYPERFORMUANCE INDICATORS FOR TE MALAWIAND SOMENEKIGHORNG RAILWAYS

_ALAWI ZWIMABWE TANZANA ZAMBIA MR (1019) UR (1975) MR(1919) MR (1975) MR (I10) MR (1975) S BASICDATAI UR MR NAZ AS% AS% TR AS% AS% ZR AS% AS% NO. NCENDICATORIfOM NOTATN WUTS ÂŁ191l1 -107519M(IN OF NRZ OF NRZ (09) OFTR OFTR .L9S OF ZR OFZR A. SASICDATA

1. R 0UTLENGTh IL KM 7B9 789 2760 29 29 2584 31 31 1278 62 62 HFREIGTTRFFIC 1ONNES T MILION 0.35 1.318 15 2 9 1.2 29 110 4.65 8 28 NET-TONNEKM NuI MILLION 68 20D 6750 1 4 1080 6 27 1342 5 22 a SNETRAFFIC PK 1MLLION 115 88 710 16 12 1200 10 7 422 27 21 4. STffRENTH 8 NUMER 39 454 1600 25 26 1500 27 27 8489 47 48

5.MNC INOITOR USMORS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~La 5. STAfF PRODUICTMITY NTIqS (000) 17 71 421 4 17 72 24 99 158 11 45 NTKP (0 45 93 468 10 20 152 30 61 207 22 45 6RAFFIC DENSITY NTKIRL (000) 0w087 .368 2.446 4 15 0.418 21 a8 1.050 8 35 7. V. FREIGHTHAUL AFH KILOMETERS 195 220 450 43 49 900 22 24 289 68 76 _ Y.-PASSENGERJOURNEY APJ KLOMETERS 67 72 228 29 32 392 17 18 224 30D_ 32 NOTATION: NRZ- NATIONALRAILWAYS OF ZIMSASNE NTK - NET-TONNEJKILOMETERS ZR - ZAMUARAILWAYS PK - PASSENGER-KILOMETERS TR- TANZANIARAILWAYS RL -RoUTE LENaTH MR - AUWI RIULWAYS MALAWIRAILWAYS STAFFLEVELS AND STAFF PRODUCTIVITY (1975-1990)

DESCRPTIN 1976 1976 1977 1978 179 198 1961 12 103 1984 1966 16 1917 18 1069 9940 A. STAFFSTREN7TH

L TRANSPORTATION 1222 1071 1102 1124 1181 1166 1166 1297 1287 1049 966 936 889 074 892 861 CIVILENOINEERING 1418 1385 1494 1545 1576 1668 1645 1680 1667 1447 1367 1354 1387 1515 1510 1510 IL MECHANICALENGINEEFUNG 742 738 709 745 796 837 815 863 864 747 729 682 691 648 669 646 b. TELECOMMUNICATION 106 105 102 98 107 103 104 105 105 97 91 89 87 85 87 91 v. AU}iNMSTRATION 567 830 789 836 876 929 958 1050 1055 974 978 929 928 943 934 800 wL TOTAL 4064 4127 4198 4348 4536 4703 4688 4995 4978 4314 4161 3990 3982 4065 4101 3998 %OF PREVIKJSYEAR 102 102 104 104 104 100 107 100 87 96 96 100 102 101 97 C)F1976 100 102 104 107 112 116 116 123 123 106 103 98 98 100 101 99 %OF THEMAXIU MIN 1962 el 83 84 87 91 94 94 100 100 86 83 80 8o S1 82 80 9. STAFFPROCUClt

NET-TONNE-KM (MILLKO 252 221 208 2D4 224 247 233 181 177 12D 109 99 132 93 71 6C L PASSENGERIKMJ MILUON) a8 62 59 68 79 80 78 97 102 103 113 121 108 114 112 115 NTIQSTAFF- NAIA (00) 62 64 49 47 49 53 50 36 36 28 26 25 33 23 17 17 % OF 1976 100 86 79 75 79 84 0 568 57 45 42 40 53 37 29 28 b (NTK.PIQS7AFF-(91JIA( tOOC 84 69 63 83 87 70 6S 56 56 52 53 55 60 51 45 46 %OF 1976 100 62 7s 75 8o 83 79 66 67 .62 64 66 72 61 53 55 Swo4s. MR CorxpunPimn nd |Bz~~~~~~~~~~~~~ MALAWI RAILWAV OPERATIONALPERFORMANCE AND PROOUCTMffY IICA1ORS (197s-1990) FORMCAACE I6V UV CMATOr LT -112s1051 - 19W t9167-- I8-j 1075 son0 1077 1073 1079 136 loaf 1u92 *1913 Is"4 16s load 11w1it" to .two 1 oppemd"rPI *II 77 75 67 96 79 87 L rft. Tulle to? 101 IOS t06 127 109 120 124 132 *Tam lb 1336 1236 1195 1144 II" 1303 110s 663 "1 Oil 643 461 666 *N*Tom-. iO 416 347 420 262 221 206 204 224 247 233 1IS 177 120 10o 99 132 U3 71 .Awmp Had 161 179 I72 1t 104 Ito IN 205 PowwowuTrafi 206 190 201 215 246 224 206 164 *Peee_l.l 963 904 1003 1136 1207 1207 1631 rPamrgovKM. 1596 1606 1720 1614 16s m0 Is" 1713 so 62 69 6 l9 60 76 97 102 103 113 121 1n Amfp J.mm5y 73 014 112 11I a6 of 63 70 63 61 63 64 do 66 61 So 61 97 61 -SIAlShqS N. 4054 4127 419 4348 4536 4704 4688 4995 4678 4314 4161 399 392 4065 4101 39 *mTis( Us 0.062 0.064 0.040 0.047 0.049 0.063 00os 0.036 0038 0.02a PiTK#PlOSIi 0026 o026 0033 0023 0.017 0017 0.054 o0.0 0.003 0.403 0.007 0.070 0.0o0 0o050 0.0os 0.052 0.053 0oss 0060 0.051 0045 006 *04TK*26PK%SaS* 0.6ou 0.057 0.063 0.061 0.064 0.067 0.064 0.041 L UMIv Pws PrdudMl 0.4i 0.034 0.033 0.032 0.40 0.030 0.024 0.024 AWAMbIt # 2 67 62 a 74 78 74 77 77 *WbaOho 63 79 U 79 7B 78 77 kutI.oodmy 260 243 196 163 Ito10S 121 106 908 9 e 68 L RMIWASkck PiedesUfI 67 02 82 62 *vUgonAva nbIV 96 96 95 97 88 97 96 90 95 93 V.MaoUaI."o 96 96 95 95 ff 96 d_v 30.2 38.0 30.6 26.1 20.0 42.2 37.3 24.6 24.1 21.3 330 30.4 330 Track Ulilsle 25.7 21.2 193 LA PAhubLn a 70 76 7To 769 769 769 70 789 7 Trac0k_hlIp 7 7 m 769 76 79 709 NTIirN(Mon) 0.32 0.26 0.26 0.26 0.20 0.31 0.30 0.23 0.22 0.16 0.14 013 L Opumng EUlecy ot7 0.12 0.09 0.09 Av.1eUTaIb LoWa Taw" 228 207 223 232 226 221 226 199 200 150 147 133 *Av.O" Tialk Load Tuvi Ise 129 102 too 664 614 643 as 626 612 654 493 606 422 440 400 424 371 319 *OaoaToNURiaUo NM" 243 335 2.46 2.43 2A1 2.34 2.32 243 2.48 243 281 2.00 301 268 20a 313 310 *VaN 01uTold D 19712 17163 15365 14160 15937 17020 15673 12448 11772 1038 .Vs" kmoEmpt 10001 10144 11570 9424 N970 79MI 650 5019 4140 3821 4062 4426 3526 2670 2273 2244 2115 2477 2935 %dlliSmplylToIrl 2241 1614 1655 t o 33 27 26 26 28 23 21 19 22 25 24 25 24 23 *Awag OLOaW T 218 23 24.7 25.7 26.0 26.4 24.9 241 24.6 266 226 21.0 206 234 21.4 20.2 169 *0oa8ma __6_ O Ila 120 122 129 117 9t so 89 69 75 99 _ 1 i5 112 SUwc: MRC4_pema ndC_Pn 63_ * PYdwpdk lthJwIl4d I lildvh4 @0 PlCa4ase &uebiaw~hl4 o.218belq I tobmi of w*f pu PKCan NTIC MALAWI RAILWAYS FREIGT AND PASSENGER AFIC ON MR (19756130 Freit _._ Pas_g_e Tonw (000 Told as % NTK 1TKas % Av.Haa Numbers No.as % PK PKas % A_ Jour__ Yew lImped Expoi Tanst La Totad of 1975 Pm f 1975(o dkm o 1975 km

1975 492 198 25 338 12 10 247 100 196 1211 100 88 100 73 1978 457 105 11 345 1110 88 210 as 108 954 79 62 70. 65 1077 418 240 00 370 ills Be 201 81 180 964 8 59 87 61 1978 440 216 70 370 1102 87 201 81 182 1084 90 68 77 63 1979 473 231 4* 3B2 1115 a8 221 89 19s 1138 94 79 90 70 19o8 457 285 28 320 1090 8a 234 95 215 1287 105 80 91 63 1981 384 go9 30 309 902 79 225 91 227 1287 106 78 89 61 1982 302 170 22 292 778 61 176 71 227 1531 126 97 110 63 1982J83 R29 170 20 285 750 59 172 70 229 1596 132 102 16 64 106m84 148 106 7 279 540 43 117 47 217 1508 125 102 116 68 1908448 46 45 2 357 450 36 106 43 233 1720 142 113 128 65 1ies 5 10 0 391 408 32 96 39 236 1814 150 121 13B 67 19W87 2 10 0 482 494 39 128 52 259 1639 135 108 123 66 1987188 8 6 0 369 381 30 93 39 244 1710 141 114 13D 67 198989 4 8 0 307 317 25 68 28 2151 1664 137 . . 127 67 198qNK 10 4 0 321 335 27 67 27 200 1713 141 116 132 68 Saws: MRowaeniums Nolte: FreighVff edudts dqaimmtIfib tUVAL RUALWAVI ORGOANZANOSTRUCTURE (1tu)

LEVELCOTOLRLKEVCE

CjGEN E LT CHE 9IRA;FIC T { n I~~~~~~~~~~~~~~~~~~~~~~~~~I

DEPASTUENXTAL C LEVEL ' Z r. - r-. '-~~~~~~~~OFIER 4 !Y

BRANCH. LEVEL L[E~RTL EA

IDIVIS| ATPRIOSUNCHIEEFEH I I 0RN _II I E 3

IT 0~~~~~~~~~~~~~~~~~~~~~~EtRT CHEF~~ I ~ ~~~~~~~~~~~~~~~~~I CER3

LEVEL. 4 SENIOR 3f 3A2E

TiTHEJIDNEA S 3 2 2 3 113 bRNHHEAD 0 1 4 °

TOTAL ~ ~ ~~~~~45 3 3 2 I0 - 55 -

ANNEX 7 Page 1 of 2

MR NETWORK- BORDERTO SALIMA ALIGNMENTAND GRADIENTS

...... Blantyre ......

...... I......

Luchn Chlpoka

...... '.1...... ---

Bordi Smnkhu

Sod SS i- | ; t 11 46 6WSS z~~~~OM DwsB,InKi Km fte BWdm as No - 56 -

ANNEX 7 Page 2 of 2

MR NETWORK- NAYUCI TO NAKAYA ALIGNMENTAND GRADIENTS

Alllude In mwrs

go...... I...... I......

Soo ...... I......

4fl ......

300 ......

200 _1......

190 ...... I......

O00 40 * so tO0 120 iutanceIn Km ftom MRACFM(N)border

- 81 + SHg2 MALAWI RAILWAYS PERMANENTWAY DETAILS

RAIL SLEEPER BALLAST MINIMUM MAXIMUM M iMUM DESKiN PERMIllED STATION ILOMUElERAGE LENGTH WEIGHTTYPE TYPE CURVATUREGRADIENTAXLELOAD SPEED SPEED FROM TO FROM TO EKM) EKGIM) _ c- RADIUS) (%) (iJ (UMtD (KMI)

Bowr Lmb. 0 201 201 30 Sleal@@ Stone" Limb. Naeaya 201 268 87 30 SoeW@ Slone" Nakay. Sam 288 348 60 30 Steel@0 Slone 348 378 30 40 Stee Slone 11t 2.27 (U) 15 25N 378 433 55 37 See Stone 433 482 29 40 Ste Slone 462 469 7 40 Concrete Store Salkna Logwe 469 5Q0 t11 40 Concrete Stone 175 1.9(C) 18 65 $0 ULlao" Mchbh 580 898 116 40 Concrete Slone Nmwc Nakyva 0 101 101 40 Cncrete Slone 244 1.00 18 80 501 Soruu: The Mlawi Rabays 65Km be*wwmnBodor and NakHyagrWl bdad 0 0 59 kselonb d wmodonw soepem U Speed Lin* in SloopGradbe and Shop SedbonCurves U - U_oonaled C Compeatod

I1 MALAWIRAILWAYS LOCOMOTIVES- INVENTORY AND MAIN SPECIFICATIONS

COUNTRY LOCO AXLE PERIMSSIBLE CLASSOF NO.OF OF MADE YEARS HORSE MAX. TRANS. WEIGHT LOAD LOCO TRALING UNITS ORIGIN BY OLD POWER RPM MISSION _LOAD r) A. MAIN LINE

1. NIPPONSHARYO 2 JAPAN NIPPON 23 492 1800 HYDRAUUC 38.0 9.5 545 2 18 524 2000 HYDRAUUC 38.0 9.5 545 2.AEI SULZER 4 UK AEISULZE 25 1400 800 ELECTRIC 81.0 13.5 995 5 22 1200 750 ELECTRIC 81.0 13.5 995 3. BOMBARDIER 4 CANADA MLW 17 1500 1100 ELECTRIC 86.0 14.3 1270 16 10 1500 1100 ELECTRIC 86.0 14.3 1270 4. HUNSLETTAYLOR 4 UK H TAYLOR 22 525 2100 HYDRAUUC 38.0 17 545 a TOTAL 37 VAGE 14 B. SHUNTING

1.BAGNALL 2 UK BAGNALL 28 340 2100 HYDRAUUC 40.5 13.5 2. BARCLAY 2 UK BARrJAY 23 355 2200 HYDRAUUC 43.0 14.3 3 HUNSLET 4 Uk HUNSLET 14 386 2200 HYORAUUC 40.0 13.3

TOTAL 6 _____ AVAGE 20 1! MALAWIRAILWAYS ROLUNGSTOCK INVENTORY

Currently Reaching Estimated Type of Curren On Under Awaiting In Full age Holding Stock Hol.f CFM(N) Overhaul Rehab Operation By 1995* By 1995 a.Wagons Covered 287 55 232 HighSided 134 0 134 LowSlded 213 43 170 RailBearer 22 0 22 FuelTank 80 16 64 Container 139 64 75 Total 875 25 50 34 766 178 697

b. Coaches 30 4 26 6 __ 24

Basedon a life of: 60 yearsfor Covered,High and Low Sidedwagons 55 yearsfor Co itainerwagons 50 years for Tank wagons

I.. o - 60 -

ANNEX 11

MALAWIRAILWAYS FiNANCIALHISTORY AND KEY FiNANCIAL INDICATORS

Itom Unit 19865/8ti 196/879 1987/68 1988/i89 1989/90 11989190, A. iPref it/La & OpendIngRatio (MR*xoL Lake Semi_e) 1. ;Totalincomo nc.Lako Swvoi) MK000 166i8 22850 21611 21192 224441 iI. !IncomofromLakeswvices MK OO 3261 3401 3197 3020 24601 ili. !IncomefromRailways MK000 15325 19449 18414 18172 199841 19984 iv. :Optding Exponditure MK 000 16487 17989 20418 19330 23400 23400 V. IOperatingSurpkis (Ail-Aiv) .1162 1460 -2004 .1158 -3416 .3416; VI. Oepreion MiK000 2651 2790 2773 2872 2828 248701 vii. ProMbefore Inteest (Av-Avi) .3813 .1339 -4777 .4030 .6244 -282861 Vili. Totl ixpendtur (Aiv+Avi) 19138 20788 23191 22202 26228 48270! ix. Opating Ratio (AviWAiAi) 125 107 126 122 131 2421 B. Key FinancialOda iC Ratios (MRinc. LakeServiwes) 81. FinancialDat (MU000) i. FixedAsset 101907 101614 99193 100483 103490 549767' ii. CurrentAsset 14536 14398 13380 22330 19188 191881 ii. -Stock 8263 8215 7902 16183 13544 135441 IV. - Debtors 5162 5420 4873 5503 5569 5569. v. -Cash 11t1 763 605 644 75 75 vi. CurrentUablt 5015 3513 6914 9443 13603 136031 vii. Longtenm Loans 51679 53219 52091 64299 65737 657371 viii. ShareCapnia and Resetves 59740 59280 5358 49081 43338 433381 ix. *Share Capi . 94 945 945 946 945 9451 x. - Reserves 82158i 84529 84565 84J43 86543 532820 xi. - AccumulatedProfit .23406 .26230 -31942 -36707 -44150 *85839' xii. Salesfor the Year 18586 22850 21611 21192 22444 224441 xii. Prolt/LOSfor the year 4613 -2825 .5712 -4765 -7443 .29132i xiv InterestDue 179 256 248 534 823 823! 82. Key Fnncina Ratio

ShorttermLiquidity Rati I I. CurrentRatio 2.90 4.10 1.94 2.36 1.41 1.41 II. AdcidTes Ratio 1.25 1.76 0.79 0.65 0.41 0.41 ili. InventoryTunover wiio 2.25 2.78 2.73 1.31 1.66 1.66 iiv. Day#swes in Reodvableshhixw3 101 87 82 96 91 91 Asset-utillation Rato

v. Sles to FixedAss I 0.18 0.22 0.22 0.21 0.22 0.04 vI. sale toTord asaf_ ON") 0.16 G.20 0.19 0.17 0.18 0.04, vil. Proftmargnmoron(%Oi O) -25 -12 -26 -22 .33 -130! capita sucturRu"e

viia. FbiodAsaflequfty 1.71 1.71 1.85 2.05 2.39 1269 ix. TotalDOMtlototwCapi 40 40 52 60 65 14 x. Timesitrst eKeid 6xIly) -26 -11 -23 .9 .9 -35I Source: Mawi Riways Cooate Pln Annu,Repot a Acounts andaN Conpetndums I:89O9Data en Indiorsbased on Revalud Ase andcoresponding 'epvcatltk Malawi Railways Current Estimates of MR Assets wd Depreciation

Expected Residual Current Current YearlyDep. Asset Age of Lift of Life of Value/Unit Valueof at Current Type Unit Quantty Asot NewAsst Asset NewAsset MR Assets Prices (YVoS) (YeVOsW) ( s$ Mill.) (U$slMill.) (US$ Mill.) Track Km 797 20 60 40 0.20 106.27 2.66 Locomotives -Mai Line No. 37 14 30 16 2.00 39.47 2.47 Shuning No. 8 20 30 10 1.50 4.00 0.40 Rolling Stock - Wagons No. 875 20 40 20 0.06 26.25 1.31 ° Coades No. 30 20 40 20 0.30 4.50 0.23 - Mlsc. No. 30 20 40 20 0.06 0.90 0.05 Mairt. Equip. Lumpsum 5 15 10 20.00 2.00 Total 201.381 9.11 Notes: 1. Brakevans, Akldnt Reliefvans, Catile Wagons etc D. Reskul le estimatesare very broad and not computedfrom asset inventories IN. Estimatesof newunit asset values are general estimates and not specificto MR MALAWI RAILWAYS COMMODITY-WISELOCAL FREIGHT TRAFFIC FOR 1908900 -_Trda_cIn Tonrus Tahic iNTK % 'at il*U Averagc Cumwnada cd Cwn Curns"tve % of CumnK4mjLn Haw Conunodllv Conalner Other Total Total Totd Container Other TO TotI Tousi I gem. km A Commerdial

1 F4trw 280 352R2 35652 355B2 11 108 9723 929 90829 16 4 276 2 PuId 13576 13576 49138 15 6133 6133 15962 26 a 452 3 Malzs 3737 33737 82875 26 5994 5994 21958 35 13 178 4 Ofm id lhwfas 79 21180 21258 104133 32 17 5537 5554 27510 44 17 261 5 Cwnnt 14831 14831 118964 37 4932 4I32 32442 52 22 333 t O0asals 10032 10032 128998 40 3508 3508 35950 58 2B 350 7 Clker 63018 63078 19274 s0 3408 3408 39356 63 30 54 6 EnipIe Rboanad 79 10507 10586 282660 63 28 2716 2742 42098 68 35 259 9 ToTbh 146 14432 14578 217238 68 54 2602 265b 44754 72 39 102 10 Ctan Sad 11533 11533 228771 71 2312 2312 4706B 76 43 2D0 11 Coa 18443 16443 247214 17 2026 2026 4902 79 48 110 12 Co'onLkt 10478 10478 257692 80 1649 1649 50741 82 52 157 13 Ethano 59B2 562 263654 82 1352 1352 52093 84 57 227 14 Eapty Conars 2422 0 2422 266076 83 900 0 900 52993 85 61 372 Is 13 nmdm Pe" 51 3352 3403 2098479 84 20 858 878 53871 87 65 258 18 Rim 5705 50 275184 86 738 738 54607 a8 70 129 17 Ta 16 1664 1700 2784 86 3 638 641 55248 89 74 377 isCcoonnUnglmad 3871 3871 280755 87 263 263 55511 89 78 68 19 Gbowndm 4 720 724 281470 86 2 180 182 55693 90 83 251 20 Saft 400 304 704 282183 86 3 67 70 55763 90 87 99 21 Pwarn 180 188 282371 88 67 67 55830 90 91 356 22 1tolok 247 247 2868I 88 32 32 55862 90 96 130 23 0lUw 4096 34231 38327 320945 100 1547 4810 6357 62219 100 t00 166 Total 7572 313373 322094 2675 59541 62219 194 % d Tobl 2 9 160 4 96 100 8 Depwrlmnta

1 Mlsodanami 4 20088 20093 2 2709 2711 135 2 BalPa 63744 83744 1820 1820 29 Totdal 4 83833 687 2 4529 4531 54 Ovwal Toal 7576 397205 40m2 2680 64070 16750 UALAWIRAILWAYS SECTIONALTRAFFIC DENSAfY ANALYSIS FOR FY 19190 A. FREGHTTRAFFIC

LENGTH SECTIONALCUMUULATE CWUULATIVE NTKAS% LENGTHAS % SECTIONAL CUUTO SECTION (KM NX (000) NTK PM00) LENGTH OFTOTAL OFTOTAL TD (000) (00) 1 2 3 4 6 5 7 _ 9-j Naksya-SuIma 11 23768 23768 181 37 23 131 131 LUbnwNakaya a7 19255 43C23 268 66 34 221 161 SaII.a-UIngwe- 111 14149 57172 379 as 48 127 151 LUongwMchijMl 104 3534 60706 483 93 62 34 126 SatkhuliUnie 107 2186 62892 590 97 75 20 107 NkayaNayucb 101 1757 64649 691 99 58 17 94 BwdM.SwIdIdu 94 398 65047 785 100 100 4 83 e. PASSENGERTRAFFIC

LENGTH SECTIONALCUMULATIVE CUMULATIVE PKIAS% LENGTHAS % SECTIONAL CUM1PD SECTION (KCM) PK (000) PK (000) LENGTH OFTOTAL OFTOTAL PD(000) (000) _ _ _. ... ___. _ 4

Lkmbe-Nkaya 87 31975 31975 87 28 11 368 368 Nkay-Suia 181 30782 62757 268 54 34 170 234 Sankhulan-Umbe 107 18059 78816 375 68 47 150 210 Nayuci.Nkca 101 13207 92023 476 80 60 131 193 Ulngwe-Mdinl 116 10038 102059 592 88 74 87 172 Saina-ulofgw 111 9484 111543 703 97 88 85 159 Owder*Suhulanr 94 3851 115394 797 100 100 41 145 ToIt 797 115394 115394 797 103 100 145 145 Noaa NTM Net-TownnKIoetws PM:Passer Klbmets TO:Frdgt TraftI Oensdy-NTKJRouI Length P1:Passng TraWicDonsly-PKjRcue Length No paralebis roue avaib MALAWI RAILWAYS SECTIONAL TRAFFIC DENSITY ANALYSIS FOR FY 1995

A. FREIGHT TRAFFIC

LENGTH SECTIONAL CUMULATIVE CUMULATIVE NTK AS % LENGTH AS % SECTIONAL CUM TD SECTION (KU) NTK (000) NTK (000) LENGTH OF TOTAL OF TOTAL TD (000) (000) 1 2 S 4 6 5 7 *=312 9-4I6

Nkaya-Sallma 1a1 67082 67882 181 40 23 375 375 Nkayc Nayuchl 101 36863 104745 282 82 3e 365 371 Sailma-Llongwo 111 29025 133770 393 79 50 261 340 Blantyre-Nkays 70 19192 152961 472 90 60 243 324 Lliongwe-Mchinjl 104 14096 167057 576 98 73 136 290 iangula-Luchenza 65 1391 168448 661 99 84 16 255 Luch.nza-Blantyre 52 1216 169664 713 100 91 23 238 Border-Bangula 72 0 169664 785 100 100 0 216

B. PASSENGER TRAFFIC

LENGTH SECTIONAL CUMULATIVE CUMULATIVE PK AS % LENGTH AS % SECTIONAL CUM PD SECTION (KL) PK (000) PK (000) LENGTH OF TOTAL OF TOTAL PD (000) (000) 1 2 3 4 6 5 7 8=312 9=416

Limbe-Nkaya 87 31975 31975 87 28 11 368 368 Nkaya-Salima l18 30782 62757 268 54 34 170 234 Sankhulanl-Umbel 107 16059 78816 .375 68 47 150 210 Nayucl-Nkeya* 101 13207 92023 476 80 60 131 193 Lilongwe-Mchinil 116 10030 102059 592 88 74 87 172 Sallms-1.1ongwe 111 9404 111543 703 97 88 a5 159 BDoder-Sankhulanl* 94 3851 115394 797 100 100 41 145 Total 797 115394 115394 797 100 100 145 145

Notations NTK: NeltTonne Kilomeltes PM: Passenger KIometers TD: FreIght Traffic Density- NTKlRoule Length PD: Passenger Traffic Densiy = PK/Route Length No parallel bus route available - 65 - ANNEX16

Malawirailway Freight Handledat Different Stations (1989/90)

Total CumulativeY % of Total! Serblii Freight Freight Freight Freight Freight I % No. otf No.,S1an Forwarded Received Handled Handled Handledl Stations. 1 Mudl 50999 103229 154228 154228 22 1.30: 2 'LUlongwe 37831 60011 97842 252070 36 2.601 3 ' Namatunu 63501 30169 93670 345740 50 3.90' 4 imbe 19357 33501 52858 398598 57 5.19 5 Blantyre 31944 15521 47465 446063 64 6.49 6 iSalima 21885 23590 45475 491538 71 7.79 7 Mchinji 28450 1590 30040 521578 75 9.09! 8 Chipoka 9117 17013 26130 547708 79 10.39' 9 balaka 15084 5737 20821 568529 82 11 S99 10 Luchenza 7744 7596 15340 583869 84 12.991 11Mtaktaka 870 13482 14352 598221 86 14.291 12 Sharp.vals 13900 372 14272 612493 88 15.58j 13 Bangula 4891 6451 11342 623835 90 16.88| 14 Nansadi 7189 296 7485 631320 91 18.18 15 Ndirande 1935 5166 7101 638421 92 19.48 16 Kanengo 6414 6414 644835 93 20.78 17 Chichirl 4187 1339 5526 650361 94 22.08 18 Lambulila 3028 1944 4972 655333 94 23.38 19 Llwonde 3842 951 4793 660126 95 24.68 20 South Lunz i 4254 4254 664380 96 25.97 21 Makhanga 1477 2040 3517 667897 96 27.27 22 Kamwendo 2249 915 3164 671061 97 28.57 23 Vubwe 2730 85 2815 673876 97 29.87 24 Maleule 1429 983 2412 676288 97 31.17 25 Namanja 488 1688 2176 678464 98 32.47 26 Urangwe 1186 864 2050 680514 98 33.77 27 Thekeni 1399 144 1543 682057 98 35.06 28 Nyanja 628 858 1486 683543 98 36.36 29 Golomot 670 590 1260 684803 99 37.66 30-77 6410 4800 11010 694553 100 0.00 77 694553 _ 1 1

Source: MR Compendiums MALAWIRAILWAYS (NCLUDING LAKE SERVICES) COSTSTRUCTURE AND TREND (19851861989190)

Cost AmountsIn MK000 I ElementCost as % of Total Cost Element 19151861986/87 1987/88 108889 1980/90 19858 1986/87 19871881988189 198Cl00 A. Staff-Related 1. Salaries,Wages andAlowances 6640 7623 8745 8733 11068 29 31 32 33 35 U. Personnel-Social 8W2 839 983 910 1162 4 3 4 3 4 II. Personnel-lndired 331 386 539 530 629 1 2 2 2 2 iv. Accomodalon 1287 1602 1638 1825 2123 6 6 6 7 7 Total 9129 10350 11805 11998 14982 40 42 43 45 48 B. DieselFuel 5183 5727 5721 5275 6012 22 23 21 20 19 C. Repairsand Maintenance 2270 2452 3352 2637 2953 10 10 12 10 9 D. OtherExpenditue 1200 1216 1740 1484 2602 5 5 6 6 8 E Overheada

1. Admindistraion 683 678 1080 1070 1001 3 3 4 4 3 I. WagonInterchange 1002 669 0 0 0 4 3 0 0 0 iI. AncNlagyVehicle 602 522 757 909 684 3 2 3 3 2 Total 2287 1869 1837 1979 1685 10 8 7 7 5 F. TotalOperating Cost 20069 21614 24481 23373 28234 G. Depreciation 2982 3148 3119 3231 3181 13 13 11 12 10

H. TotalCost 23051 24762 27580 26604 31415 100 100 100 100 100 I Source:MR Corporate Plan and Annual Report and Accounts MALAWI RAILWAY OPERATIONAL PERFORMANCETARGETS

PERFORMANCE Actual Targets INDICATOR UNIT 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95

1. Operating Ratio % 242* 230* 226 108 84 64 2. Staff Productivity NTK/Staff - Staff Strengt No. 3998 3998 3596 2514 1758 960 - NTK 000 65048 66404 67760 127419 148000 169000 - NTK/Staff 000 16 17 19 51 84 176 3. Motive Power Productivi - Availability % 77 77 77 78 79 80 - Ulizatlon loco kn/Loco day 82 100 150 200 250 300 4. Wagon Productivity -Wagon Availability % 96 92 92 92 92 921 - Wagon Utilization Wkn/Wagon day 19 25 40 60 70 75 5. Track Utilization - RouteLength Kn 789 789 789 477 477 477 - Track Density NTKIan (Million) 0.08 0.08 0.09 0.27 0.31 0.35 6. Operating Effbiency - Av.NetTrailing Load Tonnes 106 112 200 400 600 800 - Av.GrossTrailing Load Tonnes 335 335 500 600 900 1200 - Gross To Net Ratio Number 3.16 3.00 2.50 1.50 1.50 1.50 - AverageWagon Load Tonnes 20 25 26 30 35 38 - Derailmrents Number 83 60 40 20 10 0

* Adjustedfor replacementvalue based depreciatfon

' 1a,~~~~~~~c - 68- ANNEX19 SA-tu TAAwAYS Page 1 of 7 SscTK)QN-t TRAIC OCN IPORT/EXPORT.NON CONTAMAfIn

tTO L LKA NKA4AL ML.oi CH.A SAL.L ULL4CH NKIAV4Y Xy7 2 as5 52 7S 25 123 27 Itl 104 0t1 100

UEERVMINERALS 0 0 0 0 0 0 0 0 0 0 0 GEN.CAROO4 0 0 0 4110 1534 1634 1066 1065 0 .734 0 TEA 0 0 0 3874 0 0 0 0 0 3B74 0 GEN.CARGO4 0 0 0 0 .1170 .1170 .I" .1170 0 1170 10290 WHEAT/FLOUR 0 0 0 .2652 1274 1274 1274 1274 0 0=26 0 EMPToY6OrrLES 0 0 0 0 0 0 0 0 0 0 a GROUNOtUTS 0 0 0 0 4520 .50 *S3 .X0 0 520 0 MAIZE 0 0 0 49000 0 0 0 0 0 .3WO 0 SALT 0 0 0 .1320 60 60 8W. m0 0 .22100 0 SUGAR 0 11822 11622 11622 .10296 .10296 .102 0 0 2l9¶6 0 CEMENT 0 0 0 0 0 0 0 0 0 0 0 COTTON 0 0 0 117 0 0 0 0 0 117 0 CUNKER 0 0 0 0 0 0 0 0 0 0 0 COAL 0 0 0 0 0 0 0 0 0 0 o FERTIUZER 0 0 0 0 32760 32760 32730 327M3 0 3270 0 PETROLIPARAFFIN 0 0 0 4t16 9191 9191 1046 104" 0 .17927 0! OIESEL 0 0 0 .1460 11060 11060 14660 14A0 0 44670 0 TOBACCO 0 0 0 0 !3s$"5 3so se 6 .345 0 3s6se 0

2. NET TOM4E-K SEEEMINERALS 0 0 0 0 0 0 0 0 0 GE.CARG04 0 0 0 .463 I1 29 116 0 .772 0 TEA 0 0 0 308 0 0 0 0 0 301 0 GEN.CARGOE 0 0 0 0 .29 151 32 .13J 0 116 10296i WHEATIFLOUR 0 0 0 .210 32 1t4 34 141 0 5097 0 -EMPTYBOTTLES 0 0 0 0 0 0 0 0 0 0 01 GROUNO#UTS 0 0 0 0 .13 467 -14 .59 0 63 0o MAiZE 0 0 0 .006 0 0 0 0 0 -3mu 0' SALT 0 0 0 .1046 221 1140 233 96 0 23 01 SLXGAR 0 6 60 916 .57 .432 .278 0 0 2214 01 CEMENT 0 0 0 0 0 0 0 0 0 0 o COTTON 0 0 0 .0 0 0 0 0 0 12 01 icUNKER 0 0 0 0 0 0 0 0 0 0 01 !COAL 0 0 0 0 0 0 0 0 0 O O !:

2A. WAO 32 OUECT1ONAUOO i8gErOMINERALS 0 0 0 0 0 0 0 0o 0 0 01 NGEKCAAO4 0 0 0 -12 1 5 1 3 0 .19 01 ITEA 0 0 0 IS 0 0 0 0 0 20 0' GEH.CAR0O.E 0 0 0 0 -1 4 .1 3 0 3 2s71 !WHEAT/FLOUR 0 0 0 .5 1 4 1 4 0 .0 °l EMPTVY OTTfLES 0 0 0 0 0 0 0 0 0 0 01 IGROUN0NUTS 0 0 0 0 4 *2 .0 .2 0 2 0 :MAIZE 0 0 0 .77 0 0 a 0 0 4.0 0 ;SALT 0 0 0 -a 6 29 6 25 0 6 0 ;SUGAR 0 2S 15 23 4 4S3 .7 0 0 58 0 CEMENT 0 0 0 0 0 0 0 0 0 0 ICOTTON o 0 0 .0 0 0 0 0 0 0 0 CLJ(ER O o00 0 0 0 0 0 0 0 0

:FEPMTo0 R 0 0 0 27 141 29 12t 0 .110 0 ;PE17ROLPARAFF1 0 0 0 12 6. 30 7 29 0 48 0 :iESEL 0 0 0 .42 I 41 tt 47 0 .106 0 'T OS^a 0 0 .37 .02 Am a 5 0 0t

.UiEENiMudsEM.S 0 0 0 0 0 0 a 0 0 0 !GEILCARGO4 0 0 0 12 1 6 1 3 0 19 0 ITEA 0 0 0 15 0 0 0 0 0 20 0 jGEN.CAROO.4 0 0 0 0 1 4 1 3 0 3 257 IWHEAT/fLUR 0 0 0 5 1 4 1 4 0 10 0 IEMr OTarrLE 0 0 0 0 0 0 0 0 0 0 0 IROUNoNUTS 0 0 0 0 0 2 0 2 0 2 0 MAIZE 0 0 0 77 0 0 0 0 0 96 SALT 0 0 0 25 6 20 a 25 0 56 0 ISUoAR 0 25 15 23 a 3: 7 0 0 SI 0 ICEMENT 0 0 0 0 0 0 0 a 0 0 oi :OOTTON 0 0 0 0 0 0 0 0 0 CLNIIR 0 0 0 0 0 00 0 0 O 000 0 0 0 0 0 0 COAL O 0 0 0 0 0 0 0 0 0 0 FERTUJZER 0 0 0 0 27 141 20 121 0 110 01 iPETROLPARAffN 0 0 0 12 a 30 7 20 0 4S 01 ,DIESEL 0 0 0 42 6 41 11 47 0 10 0 fr o 0° 0 06° 0t° 37 1SO 40 16 0 750 27 iTOTAL 1oi 30 0 104 657 _ 69 - ANNEX19

mcnOr4w*'g TR c N,Pa2e 2 of 7 1. TONN0S LOCAL TONNSU 0L 4A0 ASW4JLCLSNK GL ULJL.MNi. V X.Y' n 52 76 5 12S 27 1i1i 101 t00 BEER& MINERAIJ 0 0 0 10t20 10920 10920 10920 10920 0 0 0 GEN CANO 0 0 a 0 0 0 0 0 0 0 0 TEA 0 0 0 0 0 0 0 0 0 0 0 GEN.CARGO 0 0 0 26440 29640 296M0 2u06 20640 0 0 102900 MISC 0 0 0 0 0 0 0 0 0 0 0 EMP?YaOrrLES 0 0 0 400 400 4005 JON 480 0 0 a *GoUNONUTS O O 0 0 0 0 0 0 0 0 MtAIZE 0 0 0 *210t50 210"0 2 210S *2100 0 0 0 SALT 0 0 0 0 0 0 0 0 0 0 0 SUGAR a 0 0 0 0 0 0 0 0 0 O CEMENT 0 0 0 2306 2301 2306 220" 238 0 0 0 COTTON 0 0 0 0 0 0 0 0 0 0 0 CuNK(ER 0 a a .436 0 0 0 0 0 O44o 0 COAL 0 0 0 287M 0 0 0 0 0 26704 0 FERTIUZER 0 0 0 0 0 0 0 0 0 0 0 PErROL& PARAFF 0 0 a 0 0 .2121t .21216 .21216 .21216 0 0 OiESEL 0 0 0 0 0 Is0n .15600 -I N .lsS0 0a TOBACCO 0 _ 0 ,22776 .22775 *2277 .22T7B .22776 0 Oa

2. NET7CtN046.1 SEER& NERI 0 0 0 "a 273 140 296 1212 0 0 j .GEN.CARGO 0 0 0 0 0 0 0 0 0 0 oi 'TEA 0 0 0 0 0 0 0 0 a O o i GEN.CARGO 0 0 0 2342 741 3824 SaO 32e0 0 0 10296S MwsC 0 0 0 O 0 0 0 O0 Oa EMPTYsOrrLES 0 0 0 439 .202 .1044 .219 .80 0 0 ol GROUNONUTS 0 0 0 0 0 0 0 0 0 0 ol MAIZE 0 0 0 .14 .53 *27t7 *5 .23W 0 0 ol SALT 0 0 0 a 0 0 0 0 0 0 SULtAR a 0 0 0 0 0 0 0 0 0 0 CEMENT 0 0 0 1624 577 2978 62 2563 0 0 0 -COTTON 0 0 0 0 0 0 0 a 0 0 0 CUNKER 0 0 0 .7773 0 0 0 0 0 4"2 0 COAL 0 0 0 3231 0 0 0 0 0 20° 01 :FERMUZER 0 0 0 0 0 0 0 0 0 0 0 PETROL& PAAFF 0 0 0 0 0 .2737 473 *23585 .0 0 0 0DIESEL 0 0 0 0 0 -20M2 *2t .17:2 I1620 0 0 TOSACCO _0 0 0 .1790 -5S0 .*0 J15 .252_ 0 0 0

MfR* MEaL" 0 0 0 22 7 35 7 30 0 0 0 'GIEN.CARGO 0 0 0 0 0 0 0 0 0 0 0 :TEA 0 0 0 0 0 0 0 0 0 0 0 GEN.CAO 0a 0 a so I9 So 20 62 0 0 257 MISC ~~ ~~~00 0 0 0 0 0 0 0 0 0 EMP1YTSEoST5 0 0 0 40 *13 46 .14 Z1 0 0 0 'GROUNONU13 0 0 0 0 0 0 0 a 0 0 a -MAIZE 0 0 0 .42 .13 45 *14 4. 0 0 0 'SALT 0 0 0 0 0 0 0 0 0 0 0 SUAR 0 a 0 0 0 0 0 0 0 0 0 ICEMENT 0 0 0 40 14 74 16 64 0 0 0 ICOTON 0 0 0 0 .a 0 0 0 0 0 0 :CUNKER 0 0 0 4194 0 0 0 0 0 .240 0 COAL. 0 O 0 57 0 0 0 0 0 72 0 .FERTlZIER 0 0 0 0 0 0 0 0 0 0 o .PETROLAPAPRAFF 0 0 0 0 0 45 .14 49 4S 0 O ;DIESEL 0 0 0 0 0 .87 .12 As 46 0 T04OS 0 0 0 .73 .24 .122 .08 .10 0 0 C -T0BA0CO 0 a .70 0 0 0 0 3 6. W AGONlOB ______IN & M t" O 0 22 - 7 38 7 30 0 -0 0 GEN.CARO O O o o a o o o o a o TEA 0 0 0 0 0 0 0 0 0 0 0 *GEIICARO 0 0 0 Ss it f 20 82 0 0 257 'MlSC 0 0 0 0 0 0 0 0 0 0 0 EMPTYUOTTLAS 0 0 0 40 13 66 14 so 0 0 0 OROUNONUTS 0 0 0 0 0 0 0 0 0 0 0 ;MIAE 0 0 0 42 13 a 14 1 0 0 a .SALT 0 0 0 0 0 0 0 0 0 0 0 ;SUaR 0 0 0 0 0 0 0 0 0 0 0 !CEMENT 0 0 0 46 14 74 t6 0 0 0 COTTON 0 0 0 0 0 0 a 0 ICUNlmR 0 0 0 104 0 0 0 0 0 240 0 :COAL 0 0 0 57 0 0 0 0 0 72 0 jFERTIuZU 0 0 0 0 0 0 0 0 0 0 0 PETROLIPAPA4F 0 0 0 0 0 a 14 so aS 0 0 loissa 0 0 0 0 0 57 1Y An 40 0 0 rOTAALg0 IT 06 0 0 o * 5871 1~~~~~~~~~~nleN 8061° 102070 0 70 - ANNEX 19 Page 3 of 7

I. TONNES LJ SAL4-LL UL AYN! 04 N A*LLW 14LUC .41=0M"U NKAAAI AL-CM @41-SAL 5A.J L4 x.V! n2 6. 52 7_ 23 125 27 III 104 101 1001 SEERJUINERALS 0 0 0 0 0 0 0 0 0 0- GEN.CARGOOI 0 0 0 .24d0 6136 6136 4264 4264 0 .30578! TEA 0 0 0 15496 0 0 0 0 a Is S4 GEN.CARGOOE 0 0 0 0 460 0 A6M 410 0 4a 0 WwEATIFLOUR 0 0 0 160 0S6 5096 soe 509tl 0 .1S704' EMPry OrrLES 0 0 0 0 0 0 0 0 0 0 GAOUNONUrS 0 0 0 0 .2080 .2 -200 *2060 0 2080' MAIZE 0 0 0 0 0 0 0 0 0 01 SALT 0 0 0 0 0 0 0 0 0 0 SUGAR 0 774J r74J 774J 464 411S4 a"4 0 0 14612' CEMENT 0 0 0 0 0 0 0 0 0 01 COtTON 0 0 0 .1063 0 0 0 0 0 1053t CuNKER 0 0 0 0 0 0 a 0 0 COAL 0 0 0 0 0 0 0 0 0 0' FERTIUZER 0 0 0 0 0 0 0 0 0 01 PETROUPARAFFIN 0 0 0 .2612 m 360 44"5 4411 0 .76601 OIESEL 0 0 0 0 0 0 0 0 TOSACCO 0 0 0 0 .192Dt .1020t .19201 .19201 0 19201,

2. NETTONNE4 B8ERJMINERAIJ 0 0 0 0 ~ ~0 0 0 0 0~ GEN.CARGO4 0 0 0 611 792 016 473 443 0 -M011 .TEA 0 0 0 367 0 0 0 0 0 15501 'GEN.CARGO4d 0 0 0 0 4604 .128 .10 467 0 46 .WNEAT/FLOtR 0 0 0 .265 667 136 Su 530 0 .S170 EMPTY OTTLES 0 0 0 0 0 0 0 0 0 0 GROUNONUTS 0 0 0 0 .266 41 .231 .216 0 206 'MAIZE 0 0 0 0 0 0 0 0 SALT 0 0 0 0 0 0 0 0 0 0 iSUGAR 0 403 612 104 466 .16a .-72 0 0 14s1 CEMENT 0 0 0 0 0 0 o 0 0 0 ;COTTON 0 0 0 .20 0 0 0 0 0 t05 :CUNI¢R 0 0 0 0 0 0 0 0 0 0 iCOAL 0 0 0 0 0 0 0 0 0 0 .FERTIUZER 0 0 0 0 0 0 0 0 0 0 ;PETrROI.JPARAPP1 0 0 0 .46 Sol 106 4dO 4" 0 .765 IOIESEL 0 0 0 0 0 0 0 0 0 0 'TOBACCO 0 0 0 0 .2477 416 2131 .19W7 0 1920

3A. wAaoN Km oIRLmNAUM0007 BE---DMINUA 0 0a 0 0 0 0EKCARGO4 0 0 0 .15 an 4 12 1t 0 .75 IEA 0 0 0 19 0 0 0 0 0 77 IGENCARQO 0 0 0 0 .15 .3 .13 12 0 12 'WI4EAT/FLaUR 0 0 0 .7 16 3 14 13 0 -a ?EUPTYBOTTLES 0 0 0 0 0 0 0 0 0 0 :GROUNOMJ7S 0 0 0 0 4 42 7 J 0 6 MAIE . 0 0 0 0 0 0 0 0 0 0 ,SALT 0 0 0 0 0 0 0 0 0 0 ;SUGAR 0 10 15 5 -2 46 .19 0 0 37 iCEUENT 0 0 0 0 0 0 0 0 0 0 CoTrrON 0 0 0 .4 0 0 0 0 0 3 :CUNbMR 0 0 0 0 0 0 0 0 0 0 COAL 0 0 0 0 0 0 0 0 0 0 .FERTILIZER 0 0 0 0 0 0 0 0 0 0 .PETROUPARAFIN 0 a O0 2 13 3 12 12 0 10 -OIESEL 0 0 0 0 0 0 0 0 0 .TOBACCO 0 0 0 0 .10o .22 41 0 so

38. WAGONA ISOLUTI 6EERIMINERALS; 0 0 0 0 0 = OEN.CARGO.I 0 0 15 36 4 12 tt 0 75 TEA 0 0 0 10 0 0 0 0 0 77 GEN.CAROO.E 0 0 0 0 I5 3 13 12 0 12 WHEATIFUR 0 0 0 7 Is 3 14 13 0 30 .EMPTYUOTrL5 0 0 0 0 0 0 0 0 0 0 GROUNONUTS 0 0 0 0 a 2 7 6 0 O ;MAIZE 0 0 0 0 0 0 0 0 0 0 'SALT 0 0 0 0 0 0 0 0 0 0 SUGAR 0 10 15 5 22 s 16 0 0 37 ICEMENT 0 0 0 0 0 0 0 0 0 0 ;COTTON 0 0 0 1 0 0 0 0 0 3 !CUNKER 0 0 0 0 0 a 0 0 0 0 jCOAL 0 0 0 0 0 0 0 0 0 0 1FERTILER 0 0 0 0 0 0 0 0 0 0 PETROtPARAFFI 0 0 0 2 13 3 12 12 0 10 0 0 0 0 0 0 0 0 0 T9%D.CCO 0 0o1 22 0 VTA~L 0 1 11 4 17 41 166 1311 0 WAGONREQUIREMENT IMPORTIEXPORT 0OR-EAN*AN UC LUC-SLANMLAN-NKA NKA-3AL SAL-Cit CHI-SAL SAL-UL UL-UCH NKA-AY XY TOTAL 72 a5 62 79 25 129 27 III 104 101 100

UPWKM(O) o 25 Is 3s 7 38 a 31 0 so 257 499 DNWKM (p) 0 0 0 121 a 3a 8 5 0 163 0 364 NIGHERWKM 0 15 121 8 as 8 31 0 183 257 687 WAONSRED. 0 1 8 0 2 1 2 0 12 16 44 NO.OF AKES 6.00 0.A 0.06 07 0.02 0.12 0.02 0.09 0.00 0.56 0.79 2.10 FMRAKES 3 WAGONREaD. 63

WKMP 0 0 a 0 27 141 29 121 0 0 0 313 W M0lt 0 0 0 a 0 0 0 110 0 tlO WKM 0 0 0 27 141 29 121 0 110 0 429 ANZOSREQAD. 0 0 0 0 2 9 2 a 0 7 0 26 .OFRAES 0.00 0.00 0.00 00 O8 0.43 0.09 0.37 0.00 0.34 0.00 1.31 FUI RAKES 2 HMOtlSIREOD. 4 POL WKM(000) 0 0 0 0 14 70 16 76 0 0 0 178 DNWKM(O0) 0 0 0 54 0 0 0 0 0 151 0 205 HIOHERWKJII0 0 0 54 14 70 1S 76 0 151 0 383 AOONSREOD. 0 0 0 3 1 5 1 5 0 10 0 25 NO.OFfRAKES 0.00 0.00 0.00 0.20 0.0 0.27 0.97 029 0.00 0.57 0.00 1.45 RAK1ilES 2 MOWSOREOD ' t34

W PM000) 0 10 15 24 48 10 38 36 0 214 0 0 WKMlt00) 0 0 0 24 148 31 127 102 0 135 0 0 OQ WKM 0 10 15 24 148 31 127 102 0 214 0 672 a WJUlONSREQD. 0 1 1 2 9 2 8 7 0 14 0 41 oS OF RAKES 0.00 0.03 0.04 0.06 040 0.06 0.34 0.27 0.00 0.57 0.00 1.70 oI UU.RAKES 2 "'1 AGOWSREOD. 46 %o WAON REQNREMENT LOCAL DON-BANBAN-LUC LUG-BLAUNLAN-NKA NKA-OAL BAL-Cu CHI-SAL SAL-JL UL-MCH A- V v-y TOTAL 72 U 2 73 25 129 27 11t 104 101 100

WKMPO0M) 0 0 0 126 40 205 43 177 0 WKUJ00) 0 257 0 648 0 0 0 -62 -26 -133 -28 -115 0 0 0 0 -383 H1EAWK 0 0 0 126 40 205 43 177 WINSARECD. 0 0 257 0 048 0 0 0 13 4 22 5 19 0 0 27 0 09 NO.Of RAIKES 0.00 0QO A00 003 020 1.03 0.21 0.86 0.00 ULRAKES 0.00 1.29 .O0 4.23 GONJSREQD. 11t

PWKM(0PM) 0 0 57 0 0 0 0 0 DNWKM000) 72 0 0 0 0 194 0 0 0 0 0 249 0 a RWKU 0 0 104 0 0 0 0 0 AGÂŁ;ONSlEQD. 249 0 0 443 0 0 19 0 0 0 0 0 24 0 0 43 OFRAKES 0.00 0.00 oAs 0.00 0.oo 0.00 0.00 0.00 1.14 RAKES 0.00 0.00 ABONSRED. 53

PWM .NO 0 0 0 0 0 0 a 0 WKMtl 0 0 0 0 0 0 0 128 26 lUB 102 0 0 0 HIGHERWKM 0 0 0 0 126 26 108 102 0 AhOSHSREOD. 0 0 362 0 0 0 0 12 3 10 10 0 0 0 35 .OF RAKES 0.00 0.00 0.00 0.00 0.71 0.15 0.81 0.57 0.00 0.00 0.00 p WAllOISREOD. 43 - 73 -

ANNEX 19 Page 6 of 7

All WagonRequirement

Covered Open POL Container Total mulawi P 63 42 34 48 187 ._IT 0 0 0 0 0 Al 111 53 43 0 207 _-AL 174 95 77 48 394 fOutaIdcIlawi No. of trains/day 1.39 RakeSIze 20 TumaroundTine (Days) 6 WagonsRequired 167 lictal 562 LOCOMOTIVERECAUREMENT

BOA-BAN BAN-LUCLUC-ULANBLAWN-4KA NKA43AL BAL-Ctl CHI-SAL SAL-LIL LIL-MCH NKA-YV ---_-_ X-V TOTAL 72 85 52 79 25 129 27 III 104 101 1-0 TKII4JP 0.00 1.74 1.52 12M2 6.86 23.27 6.88 22.08 0n00 18.37 2580 11879 1KM-DOWN 0.00 0.00 0.00 15.82 51 314 6.72 5.02 5.09 41.54 0.00 8364 nKKM7 0.00 1.74 1.52 15.62 6.6 2127 Ob.i 22.08 5.00 41.54 2580 150.40 0MNl9EO 0.00 1.74 1.52 -135 0.38 2013 0.14 17.06 -5.09 -23.17 25.80 TKM-EMEqYI}D 0.00 o0D0 O.00 -1.8 OM.0 0.00 0.00 0.00 -2.54 -11.59 .00 44.33 TOTAL lCUMtD 0.00 1.74 1.52 17.30 6.88 2127 6.80 22.08 7.63 53.12 25.80 LKII 0.00 12 1.86 19.03 7.55 2560 7.54 24.29 0.40 58.43 2838 182.82 OCOCONSIST 20 2.0 2z00 200 2.0D 1.00 .0 1.00 1.00 1.OD 2.00 V. LICKSDY 234

OELIREMENTOF INJUSE o.00 0.09 0.08 0.94 0.37 0.63 0.19 0.60 0.21 1.44 1.40 5.94 LC>DCNISN 7.93

TD. TRAFFICDIRECTION ECkEMPrY DIRECTION

SENSITVIY ANALYSIS

T__FFIC | LOCO LC UlLIATl WAGCNONUTlUZAlON BLObCK OPTO LOCOS WAONS SCENARIO EXPPM LOCAL TOTALI AVAIL BLOCK OTHERS BLOCKTHROUGH LOCAL TRAIN EFF.REQUIRE REQ1MRE( ______TONNES TONNES TONNES % LKU4#"D LKWILJD WICM1WO% _ __ NO. NO. 1. LOW TRAFFIC LOWEFFICIENCY 257300 2700M9 527389 as 200 100 70 60 50 60 70 15 551

VS.EFFICIENSCY 257300 270089 527309 70 250 125 60 70 00 6o so 9 475 a USETAFUFFIC. EFCU4FlICIlENCY257300 270089 527309 80 300 150 t0o 75 0D 60 95 5 429 4; TRAFFIC OW EFFICWEN,C 334490 421339 755829 S 20D 100 70 60 50 60 70 22 775 L TRAFFIC V. EFFICIENCY 334490 421339 755829 70 250 125 6o 70 60 60 60 13 641 z HTRAUFFIC , R _=EFFICINC 334490 421339 75529 60 300 150 100 75 60 ___ 60 95 8 _ 562

-JIto MAIAUARAILWAYS TRAFIC FCAECAST lass

-b 00144AL NKA41AU UKO4iL HKA4IAINKAOAL NKA- NPKA4*ICKA4SAIOtA4WFVUMWS.U UL144ANDLA4AL SLA-8.ua LALAW UI4. V241ALUAQ"440 NANM 2-V hAOOLUtE TOTALS le 010 54 $ I* ga OtPp'P CA~L IAIMemAIS a ll ~I" 64 ass2 Us IOTA st aii i 0n_ __ __I"__ N.CMFAO5 4860 ~~~~~~~~~~~~~~~~~~~7600 .23800 is" 40400 0 130 aits" Oh 8~~~~~~~~~~~~~48W ~~~~~~~14300 N.CARGO45 .40W 14000 a66 554W 4500 1600 8406 S la"W limews soW446w 56W .~~~~~~~4000 600 300 0 M .30000000 1 -1380 00W~~~~~~~~~G.14500 -67000 8000" 130W .1380 14000 438W 86100 8700" 5 use NT set" TWos ~~~~~~~~~~~~~~~1,40W, 0 00800 ~~~~~~~~~~~~4W0 4W55 S 400 ~~~~~~~~~~~0t4600 * ~~~~~~43800 0 500 * ~~~~~~15400 "I"38 "38" 010400 &FAR~M 054W I1600 .460 .1400 .10100 11360 .14300 460 -28610 -13000 .NO5 1360 080 422160 -lo0w 43200, .4000 afW so0w 860 42360 540W 00

M-oNA41AL"Imam NXA4* UKALMONIMK41AI NKA.CHIWEA4AUCNKA4SAYO8A.QHIPNWI4U MUtaB41"*A4AL SLA-8A1 L8L4V UL-JM N5A48.UA04A UOM* 8-V 560-5 *065U70 TOTALAI 56~la 636 us6 Vs as 104 VW lot IIS S"3 311 100 l04 66 CONTAW &ACAL va01 "a6 70 III 6371 Its 16S"______N~~ft0O4 00 8064 4110 0 466 0 .1644 0 0 0 0 0 0 0 0 0 0 0 764 0 0 021 864 0 5 0 18007 0 60 045004 0 374 0 S 0 0 0 ~~ ~~~0.10 0 0 5 0 1870 0 674 540 0 647400 0 00 0 Isel1, 040644, 00 ÂŁ100 1036 8eTV0OTI3SS6 0 0 0 0 0 40.8370 TO 0 0~~~~ ~~ ~~~~~~~~~~~~0470 00 0 420 0 0 0 a 536o SSW 0 0 0 5 8060 308 54~~~000 400 5860 0 0 0 20 3W0 1 0 0 6640.13380 5 0 00 00 36100 0 0 0-3316~~0 0 1 000 3620W 144660 040 0 0 "60 0 5 0 10630050 260*0 .102566 18066 0 0 0 0 61610 0 0 0 0 0 0 0 5 NEWT 6 0 0 0 5. 0 30U son6 1060 ~ ~~ ~~ ~ . 0 0 130 I ITON 0 0 0 0 0 ~~ ~~~~~0-I, 0 0 1778" 0 0 5 0. 1454 88660 0 0 54 0 0 0 0 00 0 344 0 670 0 0*3 0 It ÂŁ1O7 108 r8700 04S 0 0 6 00 0 0 0 0 0 0 3 0 0a0a 6 608 608 0 0" 0 0 5o 0 3630" 332

5 0 a86 0 0 0 04370 * a 0 a 0 0 0 0 0 0 5 3W 0 2W OIL ~~ ~~~04 84600 . a40 0 .65 S 475 0 ' 0 GOACCO 0~~a G4M0 0 00 00 .10 0-0a0 0 30060 .05 80 10 00 00 0 0 0 800 800 55 1

EWN6IEIIAL6 0 0 0 ~ 0 0 0 0 0 0 N.CA18004 0 0 0 0 0 00 0 4204~~~~ 24440 0 57 0 -74300 0 0 0 CA 0 0 0 0 0 0 0 ~ ~~~~~~~0" 66"0 0 0 00 0 0 0 160 0 0 00 00 0 0 0

a 040 0 0 0 0 0 0 0 00 00 0 0 0 4064 77416 -307 0 032 a 30 a41 0 0 0a0 00 a - 76 -

ANNEX 21

Malawi Railways Intemational Traffic Forecast and Overseas & Nacala Share InternationalTraffic InternationalTraffic Toal j1995 2010- High Growth ,Totl Overseas Nacala Importa/ Total Overseas tacala Imports Imports/ as % as % of Exports Importa/ as % as % of Exports Exports of Total Overeas Via Mcala Exports of Total OverseasVia N Commodltf (0C t) (000t) l000 t) (000tfl A.Imports POL 120 100 40 48 225 100 40 90 Fertilizer 135 31 60 25 235 31 60 44 'Wheat/Flour 22 77 89 15 33 77 89 23 .Maize 150 20 100 30 0 0 0 0 ,Salt 17 100 100 17 25 100 100 25 Iron/Stool 22 9 60 1 48 10 63 3 !Pulp/Paper 8 38 63 2 20 40 62 5 MIs. 167 32 50 26 350 33 48 56 :TotalImports 641 44 59 165 937 50 52 246 B. Exports

Sugar 50 90 61 28 43 100 61 26 Tobscc 60 98 72 42 108 99 72 76 ITea 40 85 36 12 53 86 36 17 iColtes 4 100 35 1 9 100 0 0 ,Goundnuts 2 100 100 2 18 90 100 16 iCottonLnt 2 105 43 1 2 100 43 1 MIsc. 35 17 35 2 90 17 48 7 ITotalExPorts 193 79 58 89 323 74 61 143 Total Expo Plus ImPort 334 253 1260 389 - 77 -

ANNEX 22 MALAWIRAILWAYS OVERSEASTRAFFIC FORECAST BY CORRIDORS- 1995 ALLCORRIDORS OPTIMAL ,OstJ Wagon Over4ss by Corrdor I TotaI_Oversas Nacala Commodity jOrigin TyPe N#ab. Durban Or NTC TotII Overseas as % oft as % of A. Import_ #R62lnall Total Overseas A. Imports I I Oiesel IBlantyre Tar* 14.20 14.20 0.00 7.00 35.401 40 julongwe 11.30 11.40 0.00 5.60 28.30 1 40 !Mzuzu 2.80 2.80 0.00 1.40 7.00 40 :Total 28.30 28.40 0.00 14.00 70.70 40 ~Ptrol 81antyro Tank 6.80 7.70 0.00 2.60 17.10 40 IUlongwe 5.50 6.20 0.00 2.10 13.80 I 40 Mzuzu 1.40 1.50 0.00 0.50 3.40 41 Total 13.70 15.40 0.00 5.20 34.30 40 Jet Al LUongwo Container 6.00 4.50 4.50 0.00 1S.00 40 Tota 6.00 4.50 4.50 0.00 15.00 40 TotalPOL 48.00 48.30 4.50 19.20 120.00 120 100 40 iFertlizr Llongwe HighSkded 25.20 0.00 0.00 0.00 25.20 100 Mzuzu 0.00 0.00 0.00 16.80 16.80 0 Tota 25.20 0.00 0.00 16.80 42.00 135 31 60 WhoesF4ourLilongwe Container 4.90 0.00 0.90 1.00 6.80 72 Sntyre 10.20 0.00 0.00 0.00 10.20 j 100: Total 15.10 0.00 0.90 1.00 17.00 22 771 89 Maize Slant Covered 30.00 0.00 0.00 0.00 30.00 100! Total 30.00 0.00 0.00 0.00 30.00 150 20 100 ISalt Liongwe LowSided 6.80 0.00 0.00 0.00 6.80 100l Siant 10.20 0.00 0.00 0.00 10.20 100i Total 17.00 0.00 0.00 0.00 17.00 17 100 100! Iron/Steel ,3antyre LowSded 1.20 0.00 0.80 0.00 2.00 60' Total 1.20 0.00 0.80 0.00 2.00 22 9 60; PulpPap BWanare ContaIner 1.90 0.00 1.10 0.00 3.00 63' Total 1.90 0.00 1.10 0.00 3.00 8 38 631 M LO.C.aT.w7 ContaIne 20.40 0.00 16.70 0.00 37.10 Ss! ULongw. 4.1 0.00 4.10 2.50 10.70 38. Mzuzu 1.80 0.00 2.10 1.40 5.30 34. Total 26.30 0.00 22.90 3.90 53.10 167 32 50! TotalImp. . 16470 4.230 30.20 40.90 284.10 641 44 58; Totalas % 53 17 11 14 100 B. Exports

Sugar Salma Covered &60 1.40 0.00 0.00 10.00 861 C4rftir 4.00 0.00 2.90 1.10 8.00 so5 Bangia Covered 7.50 7.50 0.00 0.00 15.00 soj CoTADier 7.40 2.90 1.70 0.00 12.00 62 Totld 27.50 11.80 4.60 1.10 45.00 50 90 61 TObCo Lilongwe Contaner 12.70 7.40 9.30 0.00 29.40 431 Covered 29.50 0.00 0.00 0.Oa 29.50 100 Tota 42.20 7.40 9.30 0.00 58.00 60 98 721 Tea shunt" coeub,e 12.40 6.90 6.90 5.80 34.00 40 85 361 'Coffee hanTyr Cmi 1.40 1.30 1.30 0.00 4.00 4 100 :51 Groundnuts LIwOnd CKahwr 2.00 0.00 0.00 0.00 2.00 2 100 1001 CotconUnt banr4T. CAM"n 0.9 0.4 0.5 0.3 2.10 2 105 43 MIsc Conlr 2.10 1.90 2.00 0.00 6.00 3s 17 3s tal Expa 83.50 29.70 2360 7.20 1SL00 193 79 S8 ToWas % _I_ S8 20 18 6 100 - 78 -

ANNEX 23

Malawi Railways Overseas Traft Imbalance by Corridors and Wagon Types

_ Overseas by Corridor Nacala as Nacals Durban Dar NTC Total, % of Total

A. Imports

'Tank 42 43.8 0 19.2 105.001 40 ,Covered 30 0 0 0 30.00j 100 High Sided 5.2 0 0 16.8 42.001 60 iLow sided 18.2 0 0.8 0 i9.00i 96 IContainer 49.3 4.5 29.4 4.9 88.10i 56 Total 164.7 48.3 30.2 40.9 284.10! 58

9. Exports

Tank 0 0 0 0 0.00 0 Covered 45.6 8.9 0 0 54.50 84 HighSided 0 0 0 0 0.00 0. Low sided 0 0 0 0 0.00 Container 42.9 20.8 26.6 7.2 97.50 441 Total 88.5 29.7 26.6 7.2 152.00 581

Import/Export Imbalance

Tank 42 43.8 0 19.2 105.00 Covered -15.6 -8.9 0 0 -24.50 High Sided 25.2 0 0 16.8 42.00 Low sided 18.2 0 0.8 0 19.00 Container 6.4 -16.3 2.8 -2.3 -9.40 Total 76.2 18.6 3.6 33.7 132.10 _ MALAVIRAILWAYS RECOIWENO_ORGANIZATSO STWCTURE

_ LMIONAL FR |m | NV. NV. M RMANER DI CWI1PCBLRA LA_lKl E URVICES

110DEPARTMENES NO0DEPARTMEN1S NODEPTMENTS . DARTMENTS UINIMAlASTAFFSINI 3NSWM SNtt FMlMM STAFF MNMUMSTAFF STAFFAT ALL S STAFFAT F LL S LEU I ORARAES LEWIS A GRADES LEVELS& GRADES LEWELS& ORADES LEVLS&GRADES NODUPLCATION Of NO ULPICATIONOf NO DWICATIONOf NOOULICATION aND DUPLICATION0o OUTES OUTIES OUTES OUTES aurotwisi_ ONLV V N OKS RN ONLYNRSSION SUV ONLY Sl3PERVSION ONLY BYOIV. CHIEF BY ONl.CHIEF BYOIV. CIUEF BYON. CHEF BYON. CIZEF MAXU USEOF M.A. USE OF USEOF OF * RATIONALIZAT10 * tUXTlO@ILE^TID'RATIONAOAZZTIONTC1Al'N *RATIONALIZATION COM *OPUTEfIZATIOOPUTERIAT * COMPUTEAIZATIC MALAWIRAILWAYS CURRENTESTIMATES OF MR'S USABLEASSETS AND DEPRECIATION

Expocted Residual Current Current Yearly Dep. Asot Age of LIfe of Life of Value/Unit Valueof at Current Type Unit Quantity Asset NewAsset Asset NewAsset MR Assets Prices ______(Years) ______(j erS yfe) (US$MiII.) (US$ Mill.) (USSMill.)

Track Km 477 20 60 40 0.20 63.60 1.59 Locomotives - MainLne No. 15 14 30 16 2.00 16.00 1.00 -Shunting No. 6 20 30 10 1.50 3.00 0.30 Rolling Stock - Wrnons No. 624 20 40 20 0.06 18.73 0.94 - Coaches No. 0 20 40 20 0.30 0.00 0.00 c - Misc.* No. 30 20 40 20 0.06 0.90 0.05 MairnLEquip. Lumpsum 5 15 10 20.0C 2.00 Total I_ I _ 122.23 5.87 Notes: I J. *' Brakevans, Accident Reliel vans, Cattle Wagons etc. II. Residuallife estimatesare very broadand not computedfrom asset Inventories Di. Estimatesof new unit assetvalues are generalestimates and not spedficto MR AALwTh BASSVARLDBLES [OIibWMNi TA tW PAMOIWMU# tRFI IY I f LOOD MA 11PM S tW sum DAVMIR _m.o hso- CI#WIA SoA POtWK1t % K AVBACK 01 BLOCK EOM LO AIN KM AVAIL FM IBMP*tAMR"3I? 40 SI 0.4 100 is U 00 a0 300 1I0 0.A0 .3 2 GO4 G Il0 40 21 0.n 1OO 75 0 s0 0so 30 1 0AS 1.30 1.3 1.10 U0 11 31EA l G? 20t 21 O4D a 0 75 60 30 1@0 01D 130 1.30 4 N.CA0E 33OWV t 7 40 21 0GAD 1m 5 9 0D s 31 1no 015 t 30 1 WEAT MIM 3UDoW t 7 40 2) 0#0 1 25 so so0 OD60 10 0315 10t 130 V s ElYWOTiRm 3300Ov7 t a om tNo is so so :o300 015 1.30 1.30 7iSSOWOBU 3M0Do t 7 as 21 0a1 1 15 s so 00 300 10 OAS 1.30 *WIIm 3OCGO t7 40 21 om 100 705 0 so 0 300 180 O@l5 O3 1.1 * $&T J30 CW 17 35 21 00m 100 75 so OD U 30 1 0A 130 13 t0O R 330COl 17 40 2t 040 1OD 75 U 9 U 300 160 0C15 t. 130 tI CKIEW 3 0CM 7 40 2t 0.l 1 is U OD O 30 160 015 1.30 1. I2 OTnON I 300C 1 7 40 21 OD we 15 s s0 O 300 SWO 0m 130 1 13 *UNK I 17 40 21 o000 m 75 a0 so OD 0D S1 tSU 10 130 14UAL 330HU 17 40 2 0.00 10 75 o so O 300 160 015 S0 13D t5 fERIUEPme 1UD 1 40 29 015M No 7s5 0 SO 300 t6SO 01 130 130 fU EWPOLIAWF31 300TAW is 20) 24 030 10 15 OD OD U 0 160 015 1.30 I30 17 ESC U0 TN as 40 t 7 0O. nOD 7S5 00 o 300 10 0M t30 130 co U T 100OmNT tS 30 2 03S t O so so *,e 1J01 0.00 130tW3D ...

I" - 82 -

MALAWI

TRANSPORT SECTOR REVIEW - SELECTED ISSUES

VOLUME 2

WORKING PAPER NO. 2

AIR MALAWI

I. INTRODUCTION

1.1 Air Malawi (QM) is one of the smaller airlines and one of the few not showing heavy losses in the region. At the time of the review, QM was operating a regional and domestic route network with two BAC-l1l jet aircraft and one British Aerospace 748 turboprop aircraft. Subsequent to this analysis, in May 1991, the Government of Malawi (GOM) took delivery of a Boeing 737-300. This was anticipated,and thus one of the financial scenarios evaluated includes purchase of a Boeing 737- 300. QM also acts as a general sales agent (GSA) for foreign airlines that serve Malawi, does all airport handling for other airlines and, through a wholly-owned subsidiary,conducts cargo business by chartering space on other airlines.

1.2 In recent years the airline has operated approximately on a break-even basis, and in the 15 months ending March 31, 1990, QM made a net profit of MK 1.1 million. However, further analysis reveals a number of matters that give rise to considerableconcern. First, the profitabilityof the airline has been made possible through its earnings from sources other than its own air services,namely its earnings as GSA, royalties collected from other airlines as payment for the exercise of traffic rights, and ground handling of foreign airlines at Kamuzu InternationalAirport (KIA) in Lilongwe. Second, QM's existing fleet was almost fully depreciated,so that costs of ownership were minimal, resulting in an inadequate provision for capital replacement and an effective overstatementof profitability. Other concerns are that QM is accumulatingdebts which result from its failure to pay the Kamuzu InternationalAirport Authority for various airport services and facilities,and that QM is financing some of its activities through a long-term government loan. In effect, QM's financial situation is precarious, and QM is dependent for its financialviability on non- aircraft operations.

1.3 The efficiency of QM's aircraft operationshas been in serious jeopardy due to the considerableage, unreliability and high maintenance costs of its BAC jet fleet. A decision to replace the aircraft was made by GOM, which placed an order for two 115-seat Boeing 737-500 aircraft in June 1989. GOM subsequentlyaccepted an option to upgrade the order to two 135-seat Boeing 737-300 aircraft, the first of which was delivered in May 1991. The cost of the two aircraft is around US$72 million. Malawi reportedly secured favorable financing terms for one aircraft, receiving a loan for US$27 million at 5 percent for 15 - 83 -

years, including four years' grace. Financing for the second aircraft is still being sought, but the aircraft is scheduled for delivery in December of 1991.

1.4 Such an investment needs careful review since improvements in operating costs alone may not be sufficient to offset the higher capital costs of the replacementaircraft. In view of the magnitude and potential repercussionsof the QM investment program, this working paper analyzes the potential impact on Malawi's resources of the proposed purchase and considers whether alternativesolutions could lead to a more effective use of funds available for investment. QM's current situation and problems are assessed first, followed by an evaluation of the alternativesopen to QM for aircraft replacement.

II. CURRENT OPERATIONS

A. Overview

Fleet

2.1 QM's operating fleet consists of the following aircraft:

Market Value Aircraft Type Year of (1990/1991) Manufacture Seats (USS millions) Jet BAC-111-475 1972 74 2.1 BAC-111-500 1971 94 2.3 Turbo ro BAe 748 1969 44 0.8 Jet Boeing 737-300 1991 129 35.0

In 1989, the average utilizationof the QM fleet over its existing routes was 4.3 hours daily for the BAC fleet, and 3.7 hours daily for the BAe 748. The comparable utilization in internationalservice is 6.8 hours for the BAC-ill and 4.8 hours for turboprop aircraft.

2.2 These aircraft are being used to operate regional and domestic service. The regional routes consist of service from Lilongwe to Johannesburg,Harare, , Nairobi and Gaborone (Figure 2.1). Domestic cities served out of Lilongwe are Blantyre,Mzuzu, Karonga, and starting recently, . QM offers no intercontinentalservice. - 84 - Figure 2.1

MALAWI TransportSector Review October 1990 AIR MALAWI INTERNATIONAL ROUTE STRUCTURE ExistingRoutes

I ff f - _~~~~~~~~I - 85 - RecentHistory 2.3 QM was first registeredas a separatecompany in 1964, the year of Malawi'sindependence. In the late 1970s and early 19809, Malawiwas a key hub in the intra-Africanmovement of passengersand cargo,when directservice could not be offeredbetween Harare and the rest of Africa. The airlinewas then expandingrapidly, with traffic volumewell in excessof that attributableto the demandof the local economy. Duringthis periodQM purchaseda VC-10 four-enginelong-haul jet to operateservice to Londonand Amsterdam. High fuel pricesand heavy maintenancecosts made the operationuneconomic, and it was suspended. The aircraftremains the propertyof Malawi,but effortsto sell it at a price satisfactoryto QM's Board have been unsuccessful. 2.4 In the early 1980s,when directflights from Harare to other destinationswere reintroduced,Malawi declined in importanceas a regionalhub and trafficdeclined as well. QM's route networkhas been essentiallyunchanged since 1985,except for the discontinuationof its weeklyservice to Mauritiusearly in 1986 and the additionof serviceto Gaboronein 1988. Initiallyall internationalservice was operatedfrom Blantyre. By 1984 all internationalpassenger service had been shifted from Blantyreto Lilongwewhich, except for occasionalcharters and cargo flights,is now the only internationalairport in Malawi. B. Air Malawi'sInternational Air PassengerMarket 2.5 Since 1985 internationaltraffic in and out of Malawihas been growingslowly. Regionaltraffic increased at an averagegrowth rate of 6 percentfrom 92,000passengers in 1985 to an estimated123,000 passengersin 1990 (Table2.1). The growthhas not been uniformfor all destinationssince trafficvolume has been influencedby the flight frequenciesoffered.. The two largestmarkets are Johannesburgand Hararewith about 43,000passengers each in 1990; the next largest, Nairobiwith 16,000passengers annually, is less than 40 percentof each of the two largestmarkets. - 86 -

TABLE 2.1

Malawi International Air Passenger Traffic - Both Directions

1985 1986 197 1988 1989 1980 AverageAnnual Growth Ulongwe- Harare 40,956 40,208 41,661 43,955 46,273 43,101 1.03% Ulongwe- Johannesburg 31,896 36,647 33,S68 37,079 43,091 43,797 6.55% Ulongwe- Nairobi 10,834 12,413 14,103 14,325 16,078 15,577 7.53v. Ulongwe- Lusaka 6,513 5,926 7,793 6,853 9,686 10,643 14.06% Ulongwe-Gaborone 0 0 0 1,774 1,490 1,286 -14.86% Ulongwe- 2,488 2,474 2,445 2,292 2,410 3,115 4.60Yo Ulongwe- AddisAbaba 0 0 0 1,879 3,814 4,830 60.33% Uiongwe-Entebbe 0 0 0 407 380 265 -19.31% Ulbngwe- Ubreville 0 0 0 232 322 383 28.49Y Ulongwe- Sfea 0 0 0 344 392 0 *100.00%

TotWRegional 91,687 97,568 99,570 109,144 123,936 122,997 6.05%

Ulong-; - London 9,201 9,799 9,943 11,689 10,225 12,588 6.47Yo Ulongwe- Paris 2,781 2,625 1,986 2,871 2,592 2,800 0.14% Ulongwe-Annsterdam 4,111 5,994 8,515 12,087 14,403 13,168 26.22Yo

TotalInecontlnentai 16,093 18,418 20,444 26,647 27,220 28,55S 12.15%

TotalInternationa Traffic 107,780 115,986 120,014 135,791 151,156 151,583 7.05%

Non- revenuepassengers excluded Based on FirstNine Months

Source:Air Malawi

2.6 Intercontinental traffic increased at an annual growth rate of 12 percent from 16,000 passengers in 1985 to an estimated 29,000 in 1990. This growth rate, however, is not indicative of a long term trend since it has been heavily influenced by the addition of intercontinental service by Royal Dutch Airlines (KMLt). A significant proportion of KLM traffic consists of passengers between Harare and Europe who arrive at Lilongwe from Harare on QM and connect to KlM's European service. In 1990, one such QM connecting flight was eliminated, contributing to a decline in QN's Harare traffic and KLM's Amsterdam traffic. In the future, should KLM receive authority to serve Harare, its frequency and traffic at Lilongwe would be significantly reduced. - 87 -

Connecting passengers from regional flights to intercontinentalflights accounted for about 20,000 passegers of that total; the balance represents passengers with Malawi as their trip origin or destination.11

2.8 Future prospects for traffic growth in internationalmarkets are for the continuationof historical growth trends in regional markets, with perhaps a slight slowdown reflecting recent increases in fuel prices and unstable world economic and political situations. An annual 5 percent growth rate as an average for both regional and intercontinentalmarkets appears reasonable and has been used in forecasts presented here.

Air Malawi's Competitive Position

2.9 QM faces competition from national carriers on all the routes it operates except for Gaborone where it is currently the only airline. The number of flights currently being offered in each market both by QM and the competition is shown in Table 2.2.

1/ This informationwas developed from a comparison of Lilongwe air traffic statisticswith Department of Civil Aviation (DCA) records of airport departure fees collected from Malawi and foreign nationals. - 88 -

TABLE 2.2

Week"yMulawi Air ServiceFrequency FromUlongwo

Air Malawi ForeignFlags Nonstop Onestop Nonstop One Stop TwoStop

Domestic Blantyre 19 1 Karonga 2 MonkeyBay 1 Mzuzu 3

Total 23 3 0 0 0

Regional AddisAjaba 2 DarleqiSalaam 1 Gaborone I Harare 4 3 Johannesburg 4 3 Lusaka 2 2 Nairobi 2 1 1

TotalRegional 12 1 12 1 0

Intercontinental Amsterdam 1 1 Pans 1 London 2

Total Intercontinental 0 0 0 4 1

Total 35 4 12 5 1

Source:Official Airline Guide January 1, 1991 - 89 - 2.10 In the aggregate,QM carrieshalf the t:ifficover the routesthat it serves(Table 2.3). In the Johannesburgmarket, QH carries just over half the traffic and offers four weekly flights to South AfricanAirways' three. In the Hararemarket, QH has a share advantage,but derivesit from offeringfour flightsweekly to Air Zimbabwe'sthree. Towardsthe end of 1990, Air Zimbabweadded another flight,to equalizefrequencies. In the Nairobimarket, QH appearsto be losingshare to Kenya Airways. In the expandingLusaka market, QH has been offeringone flightto ZambiaAirways' two, but has not been able to captureone-third of the traffic. A possiblereason for Zambia Airways'traffic advantage is that it markets its servicebeyond Lusaka to London (and New York in the past) intensivelyin Halawi. In November 1990, QH added a secondflight to improveits market share. TABLE 2.3

MalawiRegional and tntrconUnmntl Air Paenger Ttr.do BothDireOtlona Average 198S 1986 1987 1988 1989 1990 Annual Air MalawiRoutes. UlongwoTo: Growh

Harare Air MalawI 26,948 23,429 21,939 23,842 25,761 24,137 -2.18% Air Zmbabwe 14,010 16,779 19,722 20,117 20,512 18,964 6.24% Total 40,956 40,208 41,661 43,959 46,273 43.101 1.03Y.

Air MalawlShare 66. U8% 53% 54% 56% 56%

Johannesburg Air Malawi 15,950 20,067 15.152 18,595 21,518 22,336 6.97% SouthAfrican 15,946 18,480 18,416 18,484 21,573 21,461 6.12% Total 31,896 36,547 33,566 37,079 43,0P1 43,797 6.55%

Air MulawiShare 50% 55% 48% 50%Y 50%Y 51%

Nairobl Air Malawi 6,380 5,940 6,569 7,332 8,321 7,769 4.17% KenyaAirways 4,484 6,473 7,534 6.993 7,757 7,788 11.67Y Tot 10,834 12,413 14,103 14,325 16,078 15,577 7.53%

Air MalawiShare S9% 48Y. 47Y. Sit. 82% 50%

Lusaka Air Malawi 2,946 2,967 3,294 3,304 2,S33 3,551 3.81% ZambiaAirways 2,567 2,959 4.499 3,549 7,153 7,092 22.54% Total 5,513 5,92S 7.793 6,S63 9,686 10,643 14.06%.

Air MalawiShare 53Y 50% 42Y. 48% 26%Y 33%

Gaborone Air Malawi 0 0 0 1.774 1.490 1,288 -14.86Y. Air Botwana 0 0 0 0 0 0 0.00% Total 0 0 0 1,774 1,490 1,286 -14.86%

Air MalawiShare 0Y. 0 0Ye 100% 100%. 100%

Air MalawiTotal 52,192 52,403 46,954 54,847 59,623 89,099 2.52Y% OtherCarriers 37,007 42,691 50,171 49.143 56,99 58,305 8.37% Toow 89,199 95.094 97.125 103,990 116,618 114,404 5.10%

Air MulawShare 59% 5S% 48% 53% 51% 52%

ExdudesNon Revenue Passengers 'Esoksh d frorn9 monts of data

Source:Air Malawi - 90 -

The InternationalCompetitive Environment

2.11 The internationalcompetitive environment is set within the framework of bilateral agreements between individual countries and, in some cases, subsequent agreements between individual airlines. In regional markets, the general principle is to maintain government control of the number of flights on the basis of parity between the two countries,with provision for exceptions if mutually agreeable. For example, the agreement with Zimbabwe provides for service between Harare and Lilongwe, with up to four flights weekly for each airline, and with seating capacity to be divided equally. In addition, the Zimbabwe government permits QM to fly beyond Harare to Gaborone, but without traffic rights. The agreementwith Zambia is slightly different; capacity is to be adjusted to respond to market demand, but is at present set to equalize approximatelythe number of seats offered. QM thus is permitted four flights, two with its BAC and two with its turboprop; Zambia Airways is allowed three flights, two with a Boeing 737, and one with its ATR-42 turboprop. The agreement with South Africa confines air service to Johannesburg-Lilongwe(despite the indication of market potential at Durban), includes a provision for approximate parity of service, and provides for a pool agreement between the two airlines. Currently QM receives a net payment from South Africa since the agreement provides for the division of revenue in proportion to seating capacity and QM offers more capacity.

2.12 Within this regulatory framework, there is little room for inter-airlinecompetition, and airlines, in fact, do not compete intensely for regional traffic. A major reason is that frequencies by both airlines combined in individualmarkets are, at most, daily. A passenger desiring to leave on a specific day has no choice of airline. The one exception, effective only since November 1990, is the Lilongwe- Harare route, where, on one day of the week, both QM and Air Zimbabwe have scheduled a flight.

2.13 The airlines have considerableflexibility in cooperating with each other. QM shows the flights of its regional competitors in its own timetable, and the airlines readily transfer passengers to each other in the event of flight cancellation. For example, QM has placed its Harare passengers on British Air (BA) flights when its own flight was canceled, even though BA has no traffic rights over the route. Airline cooperationwithin the region also includes cross-charteringof aircraft when an airline is temporarilyshort of eouipment. Such arrangementshave been made between QM and both Air Botswana and Air Zimbabwe on a wet lease basis.

2.14 In the intercontinentalmarkets, GOM is dealing with nations and airlines that can exert strong competitivepressure. Agreements provide generally for parity of traffic rights between QM and the European airlines,with some provision for fifth freedom rights at intermediatepoints. Once GOM decided not to exercise its traffic rights to Europe, it made arrangementsthrough QM to receive payments from European airlines. This arrangementhas been advantageousboth to Malawi and to the airlines. QM is assured of additional revenue, while the European airlines are assured of a traffic stop in Africa which - 91 -

renders their intercontinentalservice profitable. For example. KLM could not support its Tanzania service without the extension to Malawi. Malavi therefore is attractive since it is not large enough to support an intercontinentalflight on its own, but can make a valuable incremental revenue contribution to such a service. Thus both KlM and UTA pay royalties to QM for the traffic they carry in and out of Malavi. BA refuses to pay royalties o4 principle, but pays instead an additional 5 percent commission an all sales in Malawi. In total the three airlines paid MK 2.3 million to QM in the 15 months ending March 31, 1990. A breakdown by airline is not available.

2.15 Competition for intercontinental traffic is not confined to the khree European carriers with direct service to Malawi. The limited scope of the direct flights encourages the movement of intercontinental traffic via other African gateways. Three African carriers are particularly active in this market: Kenya Airways, Ethiopian Airlines, and Zambia Airways. The traffic they route to intercontinental destinations through their national hubs is of great value to them, and they are understood to be discounting significantly to obtain this traffic. The three sirlines have their own ticket offices in Malawi where such discounts can be arranged. All other airlines ticket only through QM. For example, the BA office includes its own management and marketing personnel, but reservations and ticketing are done in that office by QH agents.

2.16 QM acts as GSA for all airlines serving Malawi. In its GSA capacity QM collects a three percent commission on all sales in Malawi, plus the normal nine percent commission for sales made through its own ticket offices. It also sells tickets on the three airlines that have their own ticketing offices, but does not offer discounts.

C. Air Malawi's Domestic Air Passenger Market

2.17 Over 90 percent of the domestic traffic is accounted for by the Blantyre-Lilongwe route, where QM currently offers 20 round trips weekly with a mix of BAC-lll and BAe 748 flights. Traiffic volume in the market has been declining, but the decline has been arrested in the last two years (Table 2.4).

TABLE 2.4

Air Malawi Domestic Air Passenger Traffic Both Directions Average AnnualGrowth CityPaw 1985 1986 1987 1988 1989 1990

Ullongw- Blantyre 57,490 60.594 45,491 S5,845 58,342 56,487 -0.35% Liongwe- Mzuzu 7,111 7.484 8,543 4,766 4,540 4,328 -9.45% iong"e - Karanga 491 304 291 383 542 603 4.20Y. Mzuzu- Karonga 501 208 196 63 55 66 .33.33% Othe 193 0 265 14.95%

65,593 68,680 54.523 61,250 61,479 61,739 -1.20%

Souroe:Air MaaiM - 92 -

2.18 About 70 percent of Blantyre-Lilongwe passengers continue on to international destinations on QN or other airlines.2/ Consequently, of the 1989 total of 61,500 one-way passenger trips, 43,000 trips were made as part of international Journeys, while only about 18,500 consisted of air journeys wLth final origin and destination in Malawi. This is equivalent to 25 passengers daily each way. The low volume is not surprising considering the substantially lower cost of prebookable nonstop bus transportation. The elapsed door- to-door travel time is approximately the same considering the distance between each airport and its city and the required check in time. These factors alone would tend to put air transport at a disadvantage even at a high level of regularity and punctuality.

2.19 The 43,000 trips between Blantyre and Lilongwe that are part of international Journeys mount to about one-third of the 130,000 total international arrivals and departures at KIA (excluding connecting passengers). It is likely that some additional international Blantyre traffic reaches Lilongwe by surface; nevertheless, it appears that for international visitors on business and pleasure, Lilongwe is a more important destination than Blantyre. The other domestic markets served are of negligible importance in traffic volume and service can be justified only on social grounds.

III. FINANCIAL ANALYSIS

3.1 The Air Halavi Corporation consists of the airline and its wholly-owned subsidiary, Air Cargo Limited. The latter is responsible for the charter of cargo space on other airlines, primarily National Air Charter of Zambia, and for cargo handling in Malawi. The subsidiary breaks even after the payment of a management fee to QM.

3.2 The consolidated accounts are prepared in detail in accordance with standard airline accounting procedures. The latest accounts available are for the 15-month period ending March 31, 1990,31 and care must be taken in comparing the current 15-month period with calendar year 1988. The consolidated group accounts show a net profit of MK 1,333,000 for the 15 months ending March 31, 1990, compared with MK 1,603,000 for 1988. The comparative airline results are as follows:

2/ This percentage was validated through a sampling of tickets undertaken specially for this study.

3/ QM converted its accounts from a calendar year ba.iis to a fiscal year ending March 31. To bridge the transition, a 15-month financial period was established. No audited financial data is therefore available for a calendar year. - 93 -

15 mos. ending 1988 3131/90 MK '000 MK '000 Revenue 59,762 48,591 Expenses 58,662 46,572 Profit 1,100 2,019 As percent of revenue 1.84 4.16

A. Revenues

3.3 QM's revenues are summarized in Table 3.1. The various categories of revenue employed by QM have been rearranged and highlighted to concentrate on items of special interest. QM's gross revenue breaks down approximatelyas follows:

Percent

Passenger revenues 61 Cargo and mail 4 Leases and charters 8 Services to other airlines 23 Other revenues 4 - 94 -

TABLE 3..1

Air Malawrs Revenue (1SMonths Ended March 31, 1990)

MK 000's TransportRevenue PassengerRevenue 36,086 OM SalesOffices 8,012 TravelAgents 11.008 OtherAirlines Sales Offices 3,974 TravelAgents 9,304 Unusedrickets' 3,788 ExcessBaggage 597 Cargo 1,632 Mail 293 Chartersand Lease of A/C 5,024

TotalTransport Revenue 43,632

TransportRelated Revenues CommissionsReceived 7,499 Royalties 2,330 SAAPool 125 GroundHandling Services 2,913 CargoHandling Charges 657 Other 294

TotalTransported Related Revenues 13,818

Non- OperatingRevenue Admin.Fees Air Cargo 567 RentsReceivable 194 Other 1,551

TotalNon - OperatingRevenue 2,312

Total Revenue 59,762

rickets over 12 monthsold

Source:OM accountsadjusted - 95 -

3.4 The passenger revenue data has been adjusted.fromQM's own report to include the revenue from ticke.s whose validity has expired. This is not a one-time adjustment,but occurs regularly in QM accounts. Most of the revenue in this category includes the value of the unused return portions of excursion tickets, where the passenger had no intention of using the return, but bought a round trip excursion ticket because it vas less expensive than a one-way full fare ticket. This amount cannot be related to specific routes, or even a specific time period, but since it is a regular occurrence it is more logical to include it as passenger revenue than simply an adjustment. If it zere properly allocated to routes, it could raise route revenue by over 10 percent.

3.5 QM provides a breakdown of passenger revenue by ticket stock used and type of outlet. Thus, of the current passenger revenue on QM (excludingthe special unused ticket item), nearly 60 percent is on QM ticket stock and 40 percent is on other airlines' ticket stock. (This does not reflect the geographic distributionof sales since QM ticket stock is used outside the country as well.) QM handles 42 percent of sales on its own ticket stock through its own offices rather than through travel agents to reduce commission expenses.

3.6 Cargo and mail revenue derived from traffic carried on QM's flights is very small, amounting to just over five percent of passenger revenue, well below the proportion experiencedby other airlines. However, most of QM's cargo traffic is handled through Air Cargo Limited and carried in chartered space on other airlines between Lilongwe and Europe. These revenues appear in group rather than airline accounts. Charter and lease revenue consists primarily of short term wet-leases to other airlines in the region while those airlines' own equipment i. unserviceable.

Commissions and Royalties

3.7 QM acts as GSA for foreign airlines serving Malawi. Travel agents in Malawi issue tickets on QM ticket stock and remit the receipts to QM; these, in turn, are passed on to the airlines that perform the carriage. Travel agents collect a nine percent commission,while qM collects an override commission of three percent. In addition,whenever QM issues tickets through its own offices, it is entitled to a nine percent commission, the same as a travel agent. In addition to its override commissions,QM strives to increase its commission revenue by offering more sales outlets to the public.

3.8 QM collects substantialcommission revenues from other airlines, but has to pass their share on to the travel agents. QM's financial statementsdo not net commission payments. For the 15 months ending March 31, 1990, commission receiptswere MK 7.5 million and commission payments MK 8.3 million. The payments exceeded receipts by MK 0.8 million because, in addition to remit*- to travel agents their portion of commissions for sales on other fir s, QM has to pay commissions to travel agents for the ticke e - sell over QM's own route network. QM's accounting policies ren..c it difficult to determine the revenues (net of commissions to travel agents) it derives - 96 - from its GSA activity,and thus its relativeprofitability given the avoidablecosts of such activity.

3.9 In additionto cowmissionrevenues, QH receivedroyalty paymentsof MR 2.3 millionfrom UTA and KLM and a supplementaryfive percentcommission from BA. The royaltypayments are based on traffic carriedIn both directions;BA's additionalcommission relates only to sales in Malawi. QH also obtainsa small revenuegain from its pool agreementwith SAM, since it providesa proportionatelyhigher share of seats than of passengers. Other Revenues

3.10 QM derivesnearly MK 3 millionfrom providingground handlingservices to foreignairlines at KIA in Lilongwe. QM supplies the labor and uses equipmentsupplied by the airport. QM does not pay the airportfor the use of that equipment,or bear any of ground handlingequipment maintenance - depreciationcharges. 3.11 Also includedin non-operatingrevenue category are the administrativefees billedto Air Cargo Limited,its wholly-owned subsidiary.Rents also are separatelyidentified, amounting to MK 0.2 million. These are revenuesderived from company-ownedhousing, whereby the comparyprovides housing for its employeesand chargesthem rent. At the same time,QM pays out MK 3.5 millionin rentals,of which 0.9 millionis for rentalof staff houses. Staffhousing rents, therefore, yield a net expenseof MK 0.7 million. B. OperatingCosts 3.12 DetailedQM accountsfor the 15 months endingMarch 31, 1990, have been analyzedand reclassifiedin order to providea breakdowninto two cost categories,direct operating costs and other costs. Directoperating costs refer to the physicaloperation of the aircraft;other costs includeindirect costs and overheadas well as costs incurredin the performanceof the GSA function. Table 3.2 presentsthis reclassification. - 97 -

TABLE3.2

Air Malawi'sOperating Costs (15 MonthsEnded March31, 1990)

MK000's DirectOperating Costs FlightCrew Salaries and cxpenses 1,459 Fueland Oil 12,669 Maintenance 11,658 HullInsurance 949 Leases of Aircraft 905 Depreciationof FlightEquipment 450 Landingand En Route Charges 1,416 GroundHandling 891 TotalDirect Operating Costs 30,397

OtherCosts Salariesand Benefits 6,953 CommissionsPaid 8,313 OtherMarketing Expenses 2,452 Communications 2,292 Rentals 3,463 Other 4,792 TotalOther Costs 28,265

TotalCosts 58,662

Source: OMAccounts

3.13 Qt's direct operating costs reflect the operation of a fleet of old aircraft with high maintenance costs and low depreciation charges. Maintenance costs are high because the aircraft are old and require intensive routine maintenance and a periodic major overhaul. one of the two aircraft has undergone such an overhaul; the second would be due for one in 1991. As for many African airlines, it is uneconomic for QMto maintain the facilities and labor to perfom major overhauls. QMhas to send its equipment out of the country for engine and component overhaul. Among other direct operating expenses, depreciation, though nominal, is still in evidence despite the age of the aircraft, since major overhaul expenditures are capitalized. Flight crew expenses are at average levels for the continent. 3.14 Fuel costs are high since Malawi has one of the highest costs per liter in Africa and the BAC fleet is not fuel efficient. Fuel costs throughout the region have escalated sharply since August 1990, especially in Johannesburg, where the price differential with Lilongwe - 98- has narrowed significantlyand eliminatesany advantage that at one time may have been derived from tankering'fuel. Table 3.3 shows recent fuel price changes by airport and indicates theix overall impact on QM fuel costs over a recent three-month period. The incremental expense of MK 821,000 over three months represents an increase of 39 percent over the average expenditure of MK 2.1 million in the correspondingmonths of 1989.

TABLE 3.3

1990 Fuel Price - MK/UTRE % Increase AUG SEP OCT NOV NOV / AUG

Blantyre 1.13 1.38 1.38 1.51 34% Lilongwe 1.13 1.38 1.38 1.51 34% Johannesburg 0.60 0.80 0.95 1.39 132% Harare 0.89 1.38 1.36 1.36 53% Nairobi 0.89 1.01 1.26 1.26 42% Gaborone 0.60 0.80 0.95 1.39 132% Lusaka 1.54 1.54 1.60 1.60 4% Mzuzu 1.31 1.53 1.53 1.54 18% Karonga 1.31 1.53 1.53 1.54 18% MonkeyBay 1.31 1.53 1.53 1.54 18%

Incremental Fuel Cost- MK

SEP OCT NOV 3 MonthTotal

Blantyre 23,968 23.968 24,946 72,882 Lilongwe 105,018 105,018 109,304 319,340 Johannesburg k8,912 47,097 106,304 180,313 Harare 39,713 38,092 38,092 115,897 Nairobi 8,482 26,154 26,154 60,790 Gaborone 6,305 11,034 24,905 42,244 Lusaka 2,117 2,117 4,234 Mzuzu 5,759 5,795 6,026 17,580 Karonga 689 689 721 2,099 MonkeyBay 1,748 1,748 1,829 5,325

Total - MK 218,594 261.712 340,398 820,704 Total- U.S.Dollars ($1 . MK 2.65) 82,488 98,759 128,452 309,700

Source: Air Malawi - 99 -

3.15 These fuel cost increaseswere not fully offsetby fare increases. InternationalAir TransportAssociation (IATA) fare increaseswere agreedshortly after fuel pricesbegan to escalate,but these could be appliedonly for travelto Malawi;for outboundtravel no fare increases,domestic or international,were authorizedby the Malawi DCA duringthe entirethree-month period. The additionalfuel costs incurredcould well eliminateQM's slenderoperating profit. This kind of lag jeopardizes QM's abilityto functionas a commercialentity and illustratesthe need to clarifyobjectives, define the respectiveroles of governmentand airlinemanagement, and streamlineprocedures and processes. C. Route Profitability

3.16 QM maintainsa routeprofitability analysis, which reviews the contributionof each routeto total companyoverhead costs. This contributionis a functionof yield,load factorand frequency.41The data for three of the quartersin 1989 for which reportswere available indicatethat nearly60 percentof the contributioncame from the Johannesburgroute, 20 percentfrom Blantyre-Lilongwe,and most of the rest from Harareand Nairobi. The Gaboroneextension did not cover its out-of-pocketoperating cost (Table3.4).

4/ Thus a routewith many flightsbut low yield could contributemore than one with few flightsbut high yield. _ 100 -

TABLE 3.4

Mr MalaWi'sRevenue (15Months Ended March 31.1990)

MK 00s TransportRevenue

OM SalesOffices 8,012 OM Travel Agents 11,008 OtherAirlines Sales Ofices 3.974 OtherAirlines Travel Agent 9,304 UnusedTickets 3.788 PassengerRevenue 36,086 Excess Baggage 597 Cargo 1,632 Mail 293 Chartersand Lease of Aircraft 5.024

TotalTransport Revenue 43,632

TransportRelated Reveruaes CommissonsReceived 7.499 Royakis 2,330 SM Pool 125 GroundHandling Servit.i 2,913 CargoHandin Chare 657 Other 294

TotalTransported Roeted Revnus 13,818

Non- OperatingRevenue Admin.Fees Air CargoLmited 567 RentsReceivable 194 Other 1,551

Total Non- OperatingRevenue 2,312

TotalRevnue 59.762 qlcket over 12 monfs old

Source:OM accounts - 101 - 3.17 The above relativeprofitability findings are supportedby an analysisof load factors(Table 3.5). The relativeprofitability in the Harare and Johannesburgmarkets is the resultof high 'oad factors, while the Lusakamarket suffers from low load factors,and a relatively high yield (revenueper passenger-k.)on this route is insufficientto offsetthe low trafficvolume. In 1989 the Lusakaflight was supported by its extensionto Gaborone,which increasedload factorsover the Lilongpe-Lusakasegment. However,in 1990, the Gaboroneextension was moved to a Virare flight,providing additional traffic to an already well patrouizedservice. TABLE 3.5

Air MalawiLod Factors - 1989

International Passengers Seats LoadFactor

Lilongwe Johannesburg 21,518 30,316 71% Lilongwe- Harare 25,761 36,492 71% Lilongwe- Nairbi 8,321 16,820 49% Lilongwe-Lusaka 2,533 7,062 36% Lilongwe- Gaborne 1,490 7,227 21% Intemational 59,623 97,917 61%

Domestic

Lilongwe- Blantyre 61,513 106,256 58% Lilongwe- Mzuzu 4,540 10,095 45% Lilongwe- Karonga 380 6,402 6% Mzuzu - Karonga 56 6,337 1% Domestic 68,488 129,090 52%h

AirsineTotal 126,111 227,007 56%

* IN 1989the passengerswere routed over Lusaka. Therefore on-board load factor of LLW- LUNflights was 36% + 21%- 57%

Source:Air Malawi - 102 - 3.18 In the domesticmarkets, the Blantyre-Lilongweflights operateat an average58 percentload factor,after netting out non- revenuepassengers. The Blantyre-Lilongwemarket's contribution to overheadis in part the resultof relativelyhigh frequencieson this route. The remainingdomestic segments do not carry enoughtraffic to make any contribution.

IV. ORGANIZATIONAND STAFFING

4.1 QM's organizationfollows standard airline practice (Figure 4.1). The positionof CommercialManager has not been filled,so that the Planning,Marketing and ReservationsManagers report directly to the GeneralManager. Both the DeputyGeneral Manager and the Operations Managerare also pilots,and participatein airlineflying as necessary.

4.2 With 830 employees,QM appearsto be overstaffedcompared with other Africanairlines. Figure4.2 comparesQM's labor productivity,defined as revenuepassenger-km per employee,with that of other airlinesin Africaand elsewhere. Two factorshelp to explainthe low laborproductivity of QM when relatedto the volumeof trafficit carries. First,QM has the disadvantagesof small-scaleoperations and the absenceof economiesof scale. However,even when an adjustmentis made for airlinesize, QM shows up badly againstLesotho and Royal Swazi airlines.

4.3 the secondreaeon for QM's high staff levelsare the functionsit performsas GS..or as an operatorof airportservices, functionswhich are normallyoutside the organizationalstructure of an airline. These functionsgenerate additional revenue not relatedto the trafficcarried by the airline. To take into accountthis factor,a secondcomparative analysis was compiledwhich relatesthe numberof employeesto total revenue(Figure 4.3). This comparisonshows QM in a betterposition relative to otherAfrican airlines, and slightlymore efficientthan Air Tanzania. However,compared to the airlinesof Lesotho,Botswana, and Swaziland,QM would appearto be less efficient. At the time of this analysis,QM was aware of the need to reducestaff and was developingplans to do so. AIR MALAWI COMPANYORGANIZATION CHART

General Manager

Deputy. General Manager I~~~~~~~~~~~~~~~~~~~~~~~~~I

Company Fmandml Engineering Operations Commnerdal Secreary Controller | | Manager MMnager

PersonnePurchasing Finance Ground Servi nn Mang ResevMations | C Manager Maager Manager Managr Maae - 104 - Figure 4. 2

|[ 0 ~~~~~~~~~~~~~~~~~~~~~.!

l ll l lU .p.~~~ I l 1}|} . ~~~~~~~~I ReventuPer Emipy. 1989- (UISOOS)I

$60.00

$50.00

$40.00

$30.00 I

$20.00

$10.00

$0 .0 0 SI______SQ.OO- I 1 EUab ou Zawia lhenyks Lmogio TAG Angaa ZbaknsM RoyalSa Air Mw I AkTauu

MW~~~~~~~~~~~~~~ - 106 - A. Staffingand Functionsby Department 4.4 The distributionof QH staff by departmentis shown in Table 4.1. Commentson staffingand functionsof selecteddepartments follow. TABLE 4.1

GM STAFF - 1990

Division Blantyre Ulongwe Mzuzu Karonga Total

Management 7 7 CargoServices 20 53 2 75 Commercial 64 30 5 99 Engineering 146 58 204 Finance 124 5 129 3roundSerices 31 87 6 3 127 Operations 52 29 81 Personnel& Training 42 21 1 64 TechnicalMaterials 20 5 25 OutstationOftices* 19

Total 506 288 14 3 830

*Johannesburg - 5, Harare=6, Nairobi- 6, London- 2

Source:Air Malawi

4.5 Operations. The operationsstaff of 81, includes15 cockpit crew membersand 21 flightattendants. The efficiencyof crew utilizationis reducedby the need to startnearly all international departuresfrom the operationsbase in Blantyre.5I 4.6 Maintenanceand Enaineering.QM's engineeringdepartment has a staff of 204 employees. This figureincludes 70 groundtransport driversat Lilongweand Blantyrewho drive betweenthe citiesand their respectiveairports. Engineeringstaff proper is 134, of whom 26 are based at Lilongweand 106 in Blantyre. Only 30 of the engineeringstaff are qualified aircraft maintenance technicians.

4.7 QH undertakes nearly all the maintenance on the airframes of its BACaircraft in its own hangar. Engines, major components such as landing gear, radio and navigation equipment are sent out of the

5/ This, however, may be cost-effectivegiven the high cost of moving maintenance facilities, staff housing, and the like to Lilongwe. - 107 -

country, mainly to the United Kingdom and South Africa. Major overhauls can be scheduled ahead of time, and flight schedules adjusted accordingly. The BAC aircraft frequentlybecome unserviceabledue to unforeseen mechanical problems, putting considerable pressure on the QM maintenance organization. Although maintained in serviceablecondition, the BAC aircraft have been subject to frequent maintenance delays and some cancellations.

4.8 QM keeps track of delays by computing a regularityratio (Table 4.2), which for the first seven months of 1990 stood at 76 percent for domestic flights, and 66 percent for regional flights. The average delay time was 45 minutes on domestic routes and 55 minutes on regional routes. The delays and cancellations experiencedhave given the airline a reputationfor poor reliability. Consequently,while the BAC aircraft appear to be maintained at an acceptable operational level, there has been some reluctance among the traveling public to fly on these aircraft. However, the net impact on QM's market share most likely has been negligible since on any given day there is no air alternative to flying QM.

TABLE 4.2

Flight Regularity and Punctuality- 1990

JAN FEB MAR APR MAY JUN JUL Total

Scheduled Regional

TotalMovements 106 91 94 100 101 106 106 704 Numberof Delays 36 19 49 39 24 28 46 241 AverageDelay Time (Min) 53 28 54 70 45 87 47 55 Regularity 66% 79% 48% 61% 76%h 74% 57% 66%

Scheduled Domestic

TotalMovements 212 182 184 244 218 225 226 1491 Numberof Delays 44 28 67 49 59 55 54 356 AverageDelay Time (Min) 50 41 45 46 49 33 52 45 Regularty 79%/o85% 64% 80% 73% 76% 76% 76P/o

Total Airline - Scheduled

Total Movements 318 273 278 344 319 331 332 2195 NumberofDelays 80 47 116 88 83 83 100 597 AverageDelay Time (Min) 52 35 50 58 47 60 50 50 Regularity 75% 83% 58% 74% 74% 75% 70% 73%

Source: Air Malawi - 108 - 4.9 CommercialDepartment. The commercialcategory comprises 34 communicationsstaff, 25 reservationsstaff, 23 sales staff,9 employees in the marketingdepartment, and 6 in the plannLngdepartment. Sales officesoutside the countryaccount for a further19. Much of the commercialstaffing is requiredfor QM's functionas GSA; the existence of many ticketoffices is also designedto limit recourseto travel agents. However,the financialviability of theseactivities has not been determined,and currentaccounting practices do not enableQM to controlor determinetheir cost-effectiveness and profitability.

4.10 Despiteheavy staffing,the marketingfunction as such is underdeveloped.The departmentconcentrates on salesrather than marketing. There is no marketingplan, but only a successionof negotiationswith individualairlines and travelagents. QM similarly has no specificpricing policy. Internationalfares are set by IATA. 4.11 QM does not participatein the fare conferenceto avoid the expenseof the additionaldues involved. However,there is no evidence of any adverseeffect due to this lack of partiLipation,and in any case, all IATA faresare subjectto the approvalof GOM. Domesticfares are also subjectto governmentcontrol, and here the proposalsof the airlineare usuallyacted on, but with some delaywhere fare increases are concerned. QM has not made significantefforts to promotetraffic on weakly patronizedflights or to manageyields, i.e., to control capacityfor sale in such a way as to generatemaximum revenue from the scheduleflown. Possiblysome of thesetasks should fall within the scopeof dutiesof the PlanningManager, but his functionat present primarilyappears Io be to providemanagement with informationand to undertakespecial projects as required.

4.12 FinanceDepartment. The financedepartment produces large amountsof financialand trafficdata. The professionalstandards are relativelyhigh and the data are maintainedin great detail. However, the accountsshow certaininconsistencies among different sources, usuallythe resultof differentgroupings of highlyspecific cost and revenueitems into broaderbut less clearlydefined categories. The amountof detailcompiled is probablyin excessof QM's needs,and the data are not presentedin a form readilycomprehensible to management. QM lacksconcise management information reports that dispensewith detailand focuson essentials.

4.13 The financedepartment maintains both an objectiveand a functionalclassification of accounts,allocating to each departmentthe costsfor which they are responsible.Despite some computerization, much of the accountingis stillconducted manually. This partly accountsfor the high stafflevel of 129 employees. B. InterlineAccounting

4.14 The otherkey factorin staffingis the largevolume of activityrelated to QM's GSA functionand the complexaccounting proceduresrelated to it. QM has to processa high volumeof sales reportsfrom travelagents and its own ticketoffices to accountfor all receipts. The fundsQM collectsfor travelon otherairlines - 109 _ substantiallyexceed the revenuesof its own operation. In 1989 for example,QM was debitedby other airlineswith over US$20million of passengerand cargo revenue(Table 4.3). Similarrevenue over its own routesamounted to an estimatedUS$ll million. TABLE 4.3

Intemational Air Transport Association Clearing House Summary - 1989 Debit Debits Credits Balance Pasengers Cargo MNo. ToWa

Jn-6-9 $1,701,143 $97,274 $107,993$1,906,410 $1,219,574 $686,8 Feb.89 1,130,513 150,142 123,190 1,403,845 733,080 670,765 Mar,89 1,285.781 151,127 457,076 1,893,984 777,952 1,116,032 Apr-89 1,887,484 183,349 268,535 2,139,338 941,907 1,197,431 May-69 1,252,497 144,796 112,386 1,509,679 1,300,084 209,595 Jun-89 1,443,137 173,438 -7,490 1,609,085 997,730 611,355 Jul-89 1,928,648 147,528 43,444 2,119,620 1,073,441 1,046,179 Aug-89 1,976,704 144,189 462,947 2,583,840 933,309 1,660,531 Sep89 1,970,856 88,868 -88,225 1,971,499 1,153,847 817,652 Oct-89 1,762,125 90,938 150,432 2,003,495 793,727 1,209,768 Nov-89 1,440,837 80,939 60,157 1,581,933 903,576 678,357 DeoW9 1,537.846 125,643 147,264 1,810,773 880,187 930,586

Tola $19,117,541$1,578,231 $1,837,729 $22,533,501 $11,708,414 $10,825,087

4.15 The debited amounts consist almost entirely of prorated interline revenue. QM also has to calculate prorates on its own revenue so that its own billings can be made promptly. In calendar year 1989, QH billedother airlinesfor nearlyUS$12 millionfor variousservices rendered,including tickets issued for travelover QM routes. All the interlinecalculations have to be done on a ticket-by-ticketbasis. QM does so for all the interlineclaims against other airlines, but is not sufficientlystaffed or knowledgeableto disputebillings of other airlines. 4.16 QM has made an effortto check on the accuracyof the interlineclaims made againstit by other airlinesand has employedan Aer Lingusexpert to sampleits records. The samplingindicated that some airlineswere systematicallyoverbilling QM. Followingthe discovery,QM's contentionthat it was being overbilledwas not challengedby its interlinecreditors, but recoveryof overbillingshas been negligibledue to the age of the transactionschallenged. One airlinehas offeredto supplyQM with the programdesigned to compute proratesbased on IATA rulesand to check the proratebillings received. The potentialimpact of incorrectinterline billings is substantial, given the two-to-oneratio betweeninterline debits and QM's traffic revenues. - 110 -

V. CURRENT ISSUES

5.1 The previous discussion,which has indicated QM's tenuous financial position and hidden subsidies, points to a number of issues that need to be addressed. The umbrella issue is whether or not the airline can be fully viable without supporting government funds. Given the objective of commercial viability, the most immediate concern is an appropriate investment strategy for replacing the BAC fleet. However, there also are a number of fundamentalissues that must be resolved to establish a sound basis for operation into the future. These include regulation and oversight, operational and financial objectives, and operationalautonomy. Clarificationof the respective roles of the government and airline management in decision-makingwill be necessary for the objective of commercial viability to be met.

A. Airline Autonomy

5.2 QM is heavily regulated. As is true of most airlines in the region, the airline is directed to operate on commercial principles, but the authority of management to make major decisions is limited. With respect to markets served, the internationalcompetitive environment is set within the framework of bilateral agreements that are negotiated largely by the governments involved (para. 2.11). Government policy dictates both internationaland domestic markets to be served, and such determinationsmay reflect political or service coverage objectives to the detriment of commercial ones. This is also true of tariffs, which are tightly controlled in the domestic market. Fare approval lags and constraints have caused losses for QM, particularlyin times of high inflation (paras. 3.15, 4.11). Regional and internationaltariffs are less of a problem than domestic tariffs, as they are structured on a more economic basis under the auspices of IATA and the African Airlines Association (AFRAA), both of which provide a forum for airline tariff negotiations.

5.3 The selection of replacementaircraft has also been made at the government level, with the financingnegotiations conducted primarily by GOM (para. 1.3). Thus, in most key respects pertaining to QM's strategy, service coverage, tariffs and investments,GOM not only sets the overall frameworkwithin which the airline must operate, but also gets involved in the specifics of airline management. This effectively relieves the airline of the obligation to be profitable, since it can point to government directives that make profitability impossible. The airline similarlyhas little incentive to take steps, e.g., in marketing or scheduling,that may be profitable, but involve some risk.

5.4 For the airline to operate according to commercial principles,management requires the freedom to determine fares, routes and schedules, as well as to follow strict business practices with respect to investments,loans, staffing and salary levels. If the government requires the airline to provide certain services under - 111 -

conditionsthat are documented to be loss-making,predetermined subsidies should be contractuallyprovided.

B. Improved Viability of Existing Operations

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

5.6 Neither the Seychellesnor Bombay is included in the category of potential new markets. Both destinationshave been considered by QM for service as part of their re-equipmentplan and have figured prominently in QM's draft schedule to be implementedafter new aircraft delivery. The Bombay market was deemed to be an excellent sixth freedom market for QM, with the major source of traffic being the one million-strongIndian community of South Africa. Currently there is no direct air service between South Africa and India, but connecting service is available over Nairobi, Addis Ababa and Lusaka. A routing over Lilongwe would be slightly shorter, but it is likely that by 1994 there will be nonstop widebody air service between South Africa and Bombay, since such service is being held back by political factors rather than lack of market potential.

5.7 Furthermore,the Indian community is concentratedin Natal province; yet South Africa is unwilling to give QM rights to Durban. QM also would be competingwith a narrowbody aircraft, against partial widebody service over other routings. The high gross weight version of the Boeing 737 that QH is acquiring can fly the Seychelles-Bombay segmer.teffectively (as can a comparableused 737-200 aircraft),but the long flight over water in a small twin-engineaircraft could deter some passengers. It is unlikely, therefore, that traffic to Bombay will attain the forecast levels, while the Seychellesalone provide little potential on an African routing. The islands are purely a tourist destination,and as such would find few clients in Malawi. The proposed service is a very high risk operation,regardless of the aircraft type employed.

C. Aircraft Replacement

5.8 GOM has opted for new rather than used aircraft to replace QM's fully depreciated but unreliableand costly to maintain BAC fleet (para. 1.3). The justificationfor the purchase of two aircraft has been given as follows: (i) the new aircraft are cheaper to operate; (ii) the existing aircraft need to be replaced to avoid maintenance problems and increase the passenger appeal of QM's fleet; (iii) larger aircraft are needed to accommodate traffic growth; and (iv) the new - 112 - fleetwill permitthe routenetwork to expand,e.g., to extendthe Nairobiservice to Addis Ababa and begin new servicesto the Seychelles and Bombay. The governmentordered two aircraftrather than one to ensurethat there would be no seriicesuspension for scheduledperiodic maintenance. No considerationappears to have been given to the purchaseof used aircraftsuch as the Boeing737-200. The purchaseof the 737-200would not have precludedmodernization of the fleet in 10 years'time, when a used 737-300could be acquiredat prices,in constantdollars, well below currentlevels. 5.9 The decisionto purchasethe new 737 aircraftwas supported by a study that includedan optimistictraffic forecast for existing routesand a significantexpansion of the route networkto increase utilizationof the two-aircraftfleet close to the eight-hourdaily level achievedby large airlines. To reach this level,the study presumedthat existingflights would be extendedto Windhoekand Addis Ababa and that a twiceweekly Lilongwe-Seychelles-Bombay service would be in place by 1994. 5.10 The importanceof high utilizationis a functionof the pricingof new aircraft,which withincertain limits depends more on what airlinesare willingto pay for the aircraftthan cost of production.A fuel-efficientaircraft obviously will commanda higher price than one that is less fuel-efficient.Since most aircraftare sold to airlinesin Europe,the UnitedStates, and nationalcarriers of Asia, the new aircraftare pricedto allow these high utilization carriersto reap the benefitsof the newer technology.Conversely, given this pricingstructure, a low utilizationcarrier will have difficultlyrealizing sufficient benefits to offsetthe high capital cost of the new aircraft. Further,new aircraftsuch as the Boeing737- 300 complywith Europeannoise restrictionseffective in 1992. Users that do not need to meet such noise restrictionsthus pay a price premiumover older generationaircraft with littledirect benefit for the highercost. 5.11 In order to explorethe trade-offsinvolved, an assessment was made of the relativeprofitability of aircraftwith different capitaland operatingcosts. In the followingsection, the impacton QM's financialposition of six differentaircraft replacement scenarios is evaluated.

VI. FINANCIALFORECAST UNDER ALTERNATIVE SCENARIOS

A. Traffic Forecast 6.1 The first step in developing an evaluation of the relative profitability of different aircraft was to develop a traffic forecast for QM's existing routes. The forecast was based on totalmarket trends rather than just QH's experience. Accordingly, the total market for QH's existing city pairs was projected through the year 2000 (Table 6.1). The average growtn rate for the 1990-2000 period was forecast at 5.7 percent for regional routes and 3.0 percentfor domesticroutes. - 113 -

The forecast is optimistic in that the growth rates assumed are somewhat higher than past experience, as recorded in Table 2.3 for regional routes and Table 2.4 for domestic routes. The growth rates selected consider the tapering off in traffic growth in selected markets, which occurred in 1990. to be a temporary phenomenon with no effect on long- term trends. The growth rates are also generally in line with those used in the SADCC Regional Airline Study to project traffic of airlines in the region.

TABLE 6.1

Rovsed Forecast of Total Malawi PassengerTraffic (Both Directions) Aveae 1990 1991 1992 1993 1994 1995 1998 1997 1998 100 2000 Atnud

Lpongw.-Hamr 43,101 48,256 47,519 4a,895 5Z390 5S,009 57,209 59,498 61,878 64,383 68,927 4.50% Loangw.-Johannesburg 43,797 46,644 49,676 52,905 56,343 60,006 63,306 8,788 70,461 74,337 78,425 6.00% Likgwe - Najrc 15.577 16.748 18.001 19,351 20,803 22,363 23,816 25.364 27.013 28,769 30.39 7.00% Ljongwe.- Lusa 10,643 11,601 1264S 13,657 14.613 15,t82 16,574 17,58 18,622 19,740 20,924 099% Ulongwe -Gaboron 1.286 1,350 1.418 1,489 1.563 1,641 1,707 1,775 1.846 1,920 1,997 4.50%

ToW nmrniganal 114,404 121,506 129,28 137,26 145.711 154,581 162,613 170,994 179,821 189,118190,912 5.60%

LUkgs- intyre 61,513 63,358 65,29 67.217 69,233 71,310 73,460 75,653 77,923 80,261 82668 3.00% Liongwe- Wu=u/ Kamngp 5,138 6,292 5,451 5.614 5,783 5,956 6,135 6,319 6,509 6,704 6,905 300%

Toti Domesic 66,661 68,651 70,710 72631 75,016 77.267 79,585 81,972 84,431 86,964 89,573 3.00%

TOW 181,055 190.247 199,96 210,127 220,727 231,848 242,197 252,66 264,252 276,083 288,485 4.77%

6.2 QH's traffic was derived from the market forecast by assuming a 50 percent market share in all its existing regional markets, exceptGaborone, where the low trafficvolume precludes competition. QM would,of course,retain 100 percentof the domesticmarkets. New routesare assumedto experiencegrowth of 20.5 percentthrough the year 2000. B. AircraftReplacement Scenarios 6.3 The totalmarket trafficforecast was used as a point of departurefor an analysisof alternativescenarios for the years 1992- 2000,with each scenarioreflecting a differentaircraft replacement plan. The alternativescenarios were designedto presentthe incrementalimpact of alternativeaircraft purchases on the airline's financialperformance to the year 2000. The scenariosare as follows. - 114 -

Type of Aircraft Number of Cost of Aircraft Condition Aircraft _Capital (X) Scenario1 B-737-300 New 2 12,5* Scenario2 B-737-200 Used 2 12 Scenario 3 B-737-300 New 1 12 Scenario4 B-737-300 New 1 5* Scenario5 B-737-200 Used 1 12

* 5S cost of capitalincludes four years of grace on repaymentof principal.

6.4 Althoughonly the aircraftare varied,the resultsof each scenarioreflect both aircraftoperations and other economicactivity of QM, includingthe substantialrevenue derived from its servicesas GSA for foreignairlines and the incomeit derivesfrom groundhandling services.6/All scenariosassume that QM will continueto receive servicesand facilitiesat KIA at nominalcost; that replacementjet aircraftenter serviceat the beginningof 1992,with flightsin 1991 being operatedby the existing(BAC) fleet; and that a replacement turbopropaircraft enters service in 1995. For this latteraircraft, an ATR-42was selectedbecause it is alreadybeing flown in the regionand has provedboth reliableand economical.The underlyingassumptions are documentedin Annex 1. 6.5 The jet replacementscenarios consider the possibilityof operatingQM's systemwith eitherone or two jet aircraft. Existing frequenciescan be successfullyoperated with one jet aircraft,provided that the turbopropperforms all Blantyre-Lilongweservice. (Figure6.1 presentsa specimenschedule.) The relativeannual utilization of aircraftunder the two- vs one-jetaircraft use would be as follows:

Two-Jet One-Jet ______Fleet Fleet Jet 2,555 hours 2,300 hours Turboprop 1,351hours 2,373 hours

6/ The scenariosdo not fully reflectthe financialsituation of the airline,given, for example,currently unpaid debts of MK 17,784,000 owed to variousgovernment and privateparties, and a long-term governmentloan which stood at MK 4.1 millionat the end of the financialperiod (March31, 1990),payable in 15 equal installments between1992 and 2006 at a fixed interestrate of 14 percentper annum. - 115 - Figure 6.1 Air Malawi B-737-300Air Schedule- CityTim3emble

LIV - LILNOKE. MALAWI / K s T0: BLZ - 51A1TY2m, MALAWI/ C 3-.... itROl: 312 - BLANTYRE, IIALAWI /C- --.. CLAP 3 CA ÂŁ2? 2DC EFFCT 01800363 SIP TIME1 EFFECT 0ISCON6 3 -zi-545- am 7 1030 LIV OLZ 1130 ATR 100 3 - 7 GM 21 0805 812 LLK 0845 733 40 3 -7OM4 25 1100 ILK 312 1200 "AT 100 3 123456- OM I 0810 312 LLK 0810 AIR 100 3 -5-- ON 28 1440 ILK 812 1540 ATht 100 3 - 7 04 31 0930 8L2 11w 1030 ATh 100 3 -23-- OM 23 1500 ILK 312 1600 ATO 100 3 -23-56- ON 8 1300 DL: 11W 1400 Anh 100 3 - 7 O4 27 1500 LKU 312 1600 ATIt 100 3 - 7 01 26 1300 ILL L1W 1400 ATR 100 3 1-4-- OM 15 1710 LLK 812 1810 ATA 100 3 -- 5-- OM 29 1620 31Z LKW 1720 ATR 100 3 -5.- 04 30 1800 1114BLI 1300 ATR 100 3 -23- ON 24 1635 812 ILK 1735 ATR t00 3 -5-- ON 20 2030 LLK 312 2110 733 40 3 1-4-- 04 16 1850 312 LLW 1950 ATR 100 3 1234-6- (IN 2 2045 LLK 312 2145 ATIt 100 3 3

ILK - LILONGWE, IIALAWr / K 3 T0: 65E - GA8CRONC- 3 - FROM' 68E - AECRO3E4----- CLALP 3 ELAP 5TP TM34 EFFECT PISCON3 STP TIME IFFICT 12I8CON 3 -2- OM 9 1530 ILK G8E 1915 733 1 345 3 -2- ow 10 2000 COE LLK 2335 733 1 335 3

IlK1 - 1ILONGCKC I4ALAI / K 3 TO: HIRE - HAR6ARE,ZINAVEW / C - 3- ~ FROM: HR34 - HARARE, ZIMBABWE/ C CLA 3 CLA CT? TIME EFFCT 01800363 STP TIM4 IFFCT DISCON 3 1-3-5-7 OM 5 1640 ILK HIRE 1745 733 105 3 1-3-5-7 ON4 6 1845 lIRE ILK 1950 733 105 3

ILK - LILONGWKE.M4ALAWI / K 3 TO: 3348- JOHANN2SBIRO. G.ArR%I 3 FOMr 3t113 - JOHAHNCSBORO, S.AFRI CLAP 3 Cam STP TIME EFFECT 01860343 8TP T24 EffECT OISCON4 3 1-3-5-7 034 3 1030 ILK 3118 1255 733 225 3 1-3-5-7 oM 4 1345 3NB ILK 1610 733 225 3

IVA - LZIONGKC, MALAWI / K 3 TO: K(0S- KARONCA, MIALAWI 3- ~FROM: 3(0S- KARONCA. MIALAKI- CLAP 3 CLA 5T? TINE EFFECT 01Sc363 STP TIE EFFECT OISCON 3 1-4-- OM 13 1030 IK KOS 1245 ATR 1 215 3 1-4- oM 14 1330 KOS5ILK 1540 ATR 1 210 3 …n.....s..... … ...... LIW - LILlONOK, HALAKI / K 3 T0t LULN- 1USAM. Z838AMBIA 42 FROM: lUNl - LUSAJC, IMBIA / I N T mmA 3 CLA 82? TIME EFrECT 02800363 STP TUC4 EllIOT DI50C1N 3 -6- ON 17 1500 LKW 13UN1630 ATR 130 3 - 6- ON 18 1730 LUllILK 1900 ATR 130 3 -2- am 9 1530 ILK 1U14 1635 733 105 3 -2--- OM 10 2230 LUll ILK 2335 733 10 3

LINI - LILONOKE. MAL,AWI/ K 3 T0s MZZ - MZ2U2U,MALAWI 3------MROMS3422 - MZU2u, IIAAWI - ELAP 3 ELAP S2P T134 EFFECT 02800363 8T? TIME EFFECT 025S0ON 3 1-4- Of 13 1030 LIW 3422 1130 ATR 100 3 1-4-- OM 14 1435 MZ22LLN 1540 ATR 105 3

12K - LZIMII0, NUALAI / K 3 Tot 368 - NAIROBI, KEnYA / JO h-3 3064- r 3480ND- NAIROBI- MYVTA/ .iON- CLAP 3 CLA 82? T2342 EECT 0280363 8TP TIME 9FFECT 028S036 3 -2-4- an 12 0935 LIV 3620 1250 733 215 3 -2-4-- ON 12 1340 3N30 LWN 1455 733 215 3 - 116 - 6.6 Even under the one-aircraftscenario, the *verage utilizationrate is very modestby internationalaviation standards. If only one jet aircraftwere purchased,a replacementaircraft would be requiredfor a few weeks each year at the time the singlejet undergoes its scheduledmaintenance check. The cost of such a short-termlease is includedin the one-aircraftscenarios. Also, in the base case one-jet scenario,traffic is assumedto be 10 percentbelow that of the two-jet scenarioto accountfor trip cancellationsor delays. The one-jet aircraftoperation provides no capacityfor possibleschedule expansion; however,within the forecastperiod, existing cepacity is adequateto serviceexisting routes, while the marketpotential of new routesis highlyspeculative. C. FinancialComparison of AlternativeScenarios 6.7 The financialcomparison is presentedin Table 6.2, which shows,for each scenarioand one year, the estimatedprofit/loss, cash flow and returnon capitalemployed (ROC) in transportoperations. The year 2000 was selectedfor this comparisonunder the assumptionthat trafficlevels and operationswould have stabilizedby then. However, given the sensitivityof the resultsto trafficlevels and hence revenues,and the optimisticnature of the forecast,calculations are includedto reflecta 25 percentreduction in trafficlevel. This reductionwould correspondto the trafficleveling off at about the 1994/95level. The more detailedfinancial forecasts for each scenario for the 1990-2000 periodare includedin Annex 2. - 117 -

Table 6. FPiaiali Forecast f Alteraetiwe Je Aircraft Porchase Seoarlo. ,Year 300 flS600M 1. Ceepa1leonfoe YVer I000

I TWO-lot Scenarie- rb__ rlo_

7I 7400 7W7 787841100 mn7-0 o M-200 Searmo Scenate,f 2 Sc.enrl-a SC N.ie 4 ] Scenario S OperatingRevenue 19,870 19,670 16,67? 16,677 18,677 OperatingCoot 8,089 6,290 7,976 7,976 6,258 Dopreciation 4,869 2,828 2,484 2,4S4 1,410 Overhoad 6,806 6,806 6,283 6,28S 6,28B TransportProfit 1,104 2,949 2,162 2,182 2,931 Non-transportRev 5,860 5,850 5,850 5,8S0 5,860 Net AirlineProfit 6.464 *.299 7.582 7.632 8.281 CashFlow 10,628 10,622 9,906 9,966 9,691 Principal 9,765 8,075 4,697 5,688 1,787 Interest 1,955 1,086 1,428 918 709 Not Cash Flow (917) 6,611 3,944 8,865 7,196 Cost of Capital 76,000 28,000 41,000 41,000 17,000 ROC (Transport) 1.6X 10.6X 5.8X 6.8X 17.2X

1I. SensitivityAalysis - One-fourth Lees TrafficIn thb Yer 3000

TM_-jo__ narlos_b ___-ot sceneries 787-40 787-200 787-80 787-800 787-200 I______SoenarioIe* Scenorio 2 Scenatro 8 Scenario 4m Sc nrto C OperatingRevenue 15,606 16,896 16,101 16,101 15,101 OperatingCost 6,089 8,290 7,976 7,976 8,268 Depreciation 4,369 2,828 2,484 2,484 1,410 Overhead 6,806 6,808 6,288 6,268 6,268 TransportProfit (2,670) (1,025) (1,594) (1,694) (645) Non-transportRev 5,850 6,850 6,850 6,5,0 6,850 Net AirlineProfit 2,480 4,326 8,768 8,760 4,605 Cash Flow 6,849 6,648 6,190 6,190 5,91F Principal 9,785 8,075 4,597 5,608 1,786 Interest 1,955 1,086 1,428 918 709 Net Cash Flow (4,691) 2,537 170 (411) 8,419 Cost of Capital 76,000 28,000 41,000 41,000 17,000 ROC(Traneport)"* -8.6x -8.7X -8.01 -8.9X -6.0X o All scenarlos assume12X cost of capitalunless noted otherwis; all scenarios Include purchase of a turboprop aircraft to replace the NS 746. *o 5X cost of capital for the firstBoeing 787-800and 12X for tho second. coo 5X cost of capital for the Boeing787-300. *so. Return on capital employed; (for the purposes of this coeparison capital Includes aircraft only).

Source: Annex 2 - 118 -

6.8 The first set of scenarios involves purchase of two jet aircraft, of which Scenario 1, purchase of two new 737-300s, is the least viable, despite the concessionalinterest rate for one aircraft. In the year 2000, this scenario is estimated to yield a transport- related profit of about US$l million and a return on capital employed of less than 2 percent. As this return is based on aircraft only, the total capital employed is much larger, especially considering QM's significantaccumulated losses and loans. Thus the ROC for the airline would be much lower than indicated. This also is the only scenario that even in the optimistic traffic scenario continues to show a negative cash flow after nine years of operation and even after non-transport revenue is included. Cumulative losses are projected to total US$19 million over nine years after taking into account non-transport revenue of US$45 million (Annex 3).

6.9 Scenario 2, purchase of two used Boeing 737-200's,yields more favorable results. In this scenario, operating revenues remain the same as in Scenario 1, operating costs are slightly higher, but ownership costs are much less. As a consequence the cash flow is positive, after taking non-transportrevenue into account, after the first year of operation. However, as shown in Table 6.2 for the year 2000, the return on capital employed is only 10 percent in the high traffic case, compared with interest payments of 12 percent. Thus, ever& in this lower cost scenario, there would be no effective return on the governmentis investment.

6.10 The second set of scenarios,involving the purchase of a single new or used jet aircraft yields more favorable financial results than the purchase of two comparableaircraft. This is because the existing volume of traffic and required flight schedules can be accommodatedwith one jet aircraft plus somewhat more intensive use of a turboprop for domestic services. The annual utilization of aircraft under the one-jet scenario is estimated to be 2,300 hours for the jet aircraft and 2,350 hours for a supplementaryturboprop aircraft; this can be compared with a two-jet scenario with 1,250 hours for each of two jets and 1,350 hours for a supplementaryturboprop aircraft. Even under the one-aircraftscenario, the average utilization rate is very modest by internationalaviation standards. If only one jet aircraft were purchased, a replacement aircraft would be required for a few weeks each year at the time the single jet undergoes its scheduledmaintenance check. The cost of such a short-termlease is included in the one- aircraft scenarios. In addition, the one-jet aircraft operation provides no capacity for possible schedule expansion;however, within the forecast period, existing capacity is adequate to service existing routes,while the market potential of new routes is highly speculative.

6.11 Scenario 3, purchase of one Boeing 737-300, is less desirable than Scenario 2, as the cost of the one new aircraft exceeds that of two used Boeing 737-200's. Purchase of one new Boeing 737-300 at a commercial interest rate of 12 percent, is projected to yield transport profits of US$2 million and a transport-relatedROC of only 5 percent. This return would be negative if traffic growth were to stagnate at the 1994/95 level. While passing on the concessional interest rate of 5 percent to Q1M (a subsidy) does not affect the ROC, it - 119 -

improves the cash flow, which even excludingnon-transport revenue, would become positive in year 1994 as opposed to remaining negative through year 1999 (Annex 3).

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

6.13 It is probable that the preferred aircraft purchase plan would have been two used 737-200s, based on the projected ROC, combined with the greater flexibilityand ease of operation of a two jet aircraft fleet. However, given that delivery has already been taken of one Boeing 737-300, the best fall back position would be to maintain the jet fleet on a one-aircraftbasis. Consideringthe severe financial penalty attached to the purchase of a second new jet aircraft, it would be more advantageousto begin planning for a replacementof the BAe 748 with another turboprop aircraft. In this way QM would possess a modern though small fleet that would permit it to derive maximum profitability from existing routes. The purchase of the second jet aircraft should not be implementeduntil it can be establishedthat a sufficient volume of additional traffic can be assured on existing or new routes to support an economicallyviable operation. This phased approach would provide an important hedge against the risk of unfavorable economic trends and the resultant absence of traffic growth or even docline.

VII. KAMUZU INTERNATIONALAIRPORT

7.1 As the designated internationalairport, KIA at Lilongwe is subject to a special regulatory regime. It was constructed at the cost of MK 100 million with the assistance of the African Development Bank (AfDB). A requirementof the loan was that KIA be incorporatedinto a separate parastatal entity, with the objective of ultimately being self- supporting. In re2lity, GOM is paying off the loan out of general revenue. Meanwhile, DCA receives all the income from landing fees and air navigation charges, as well as revenue from passenger departure taxes. The receipts are incorporatedinto the government budget, out of which funds are made available for the technical operation of the airport and for routine runway maintenance. The KIA Authority "owns" the terminal and all the housing on airport property which is rented to airport employees. The Authority is responsible for maintenance of the housing, the airport terminal building, and other service buildings at the airport. It also maintains all the capital equipment used by QM for its ground handling services and the fleet of buses for transportation to and from the airport. - 120 - 7.2 The Authority'sincome consists of housingrentals and rental of space at the airportterminal (including space rentedto DCA). It bills QM for the rentalof the groundequipment and for the office space and facilitiesused by QM at the airport. QM, at present,does not pay thesebills, but retainsall revenuederived from ground handlingand airporttransportation. So far the KIA Authorityhas been breakingeven and has been able to supportthe modest staff requiredto cover the areas of its jurisdiction.It has not been enterprisingin its effortsto improvethe terminalor to developadditional concessions.This is partlydue to the lack of cleardefinition of its authorityand jurisdiction. 7.3 The financialviability of KIA cannotbe properlyassessed, given the way both the expensesand revenuesare distributedamong differentauthorities. Presently, DCA is not requiredto relateits airportincome to loan repayments. Landingand parkingfees have been unchangedin kwachasince October1987 and are substantiallylower than at other airports. SAM's 737-200pays under US$100,while the same aircraftpays US$564in Johannesburg.A DC-10-30of UTA pays under US$500;the same aircraftin Parispays US$3,700. 7.4 A reexaminationof the financialstructure of KIA is recommendedin order to facilitatethe properpricing of servicesand the sound financialmanagement of the airport. This is importantfor two additionalreasons: (i) the proposedtransfer of QM facilitiesto Lilongwowould have a major impacton the operationand financesof the airport:and (ii)GOM has proposedimprovements in the facilities availableat KIA, the advisabilityof which can only be judgedwithin an overallfinancial and operationalanalysis of the airport. - 121 -

Annex 1 Page 1 of 4

Scenario Assumptions

(a) General

*all financial data are in constant 1991 dollars;

* replacementjet aircraft will enter service at the beginning of 1992, with flights in 1991 being operated by the existing fleet, and replacement turbopropwill enter service in 1995; the turboprop proposed is the ATR-42, becauee it is already being flown in the region, and has proved both reliable and economical;

*the number of weekly flights and their routings will remain at current levels;

*QH will continue to receive certain facilities and services at Lilongwe airport at a nominal cost; and

* QH will continue to derive income from its ground handling services and from its GSA function (net revenues, i.e. commissions received less commissionspaid out, derived from the GSA function are included in the other revenue category).

(b) Traffic and Revenue

* traffic growth will continue at the rates forecast for each market (Table 6.1); consequentlyload factors will increase slowly; forecast passenger traffic by route and forecast load factors under each of the scenarios are shown in this annex;

*1992 fares will be about 20 percent above their 1989 levels, incorporatingboth long-term trends and the fuel-specific adjustments authorized at the end of 1990;

*cargo revenue is forecast at 5.5 percent of passenger revenue;

*other revenue includes net commissions,ground handling revenue and other miscellaneousincome (its volume-relatedincrease is forecast at 2 percent annually);

*commissions are forecast at 8 percent of passenger revenue.

(c) Operating Costs

*fuel prices are estimated at US$2.00 per gallon, and forecast to stay unchanged in constant dollars;

•maintenance costs are based on U.S. levels for the appropriate aircraft type, then approximatelydoubled to reflect the high cost - 122 -

Annex 1 Page 2 of 4 of spareparts in Africa, expense of contractingout maintenance,and diseconomiesof scale associatedwith a small fleet;

* ownership costs were based on the following aircraft prices:

Aircraft Aircraft Type Condition Cost 737-300 New US$35,000,000 737-200 Used 11,000,000 ATR-42 Used 6,000,000

* hull insurancewas calculated at 2 percent of the current fair market value of the aircraft.

(d) Definitions

* Contributionbefore Overhead = (Net Transport Revenue) - (Total Expenses (Jet+Turboprop))+ (Total Ownership (excl. Depreciation))

* Airline Result - (Net Transport Revenue) - (Total Expenses (Jet+Turboprop))- (Jet Depreciation)- (TurbopropDepreciation) - (Total Ownership (excl. Depreciation))- (Total Overhead)

• Net Profit/Loss - (Airline Result) + (Non-transportRevenue) + (Total Ownership (excl. Depreciation))

* Cash Flow - (Net Profit/Loss)- (Total Ownership (excl. Depreciation))+ (Jet Depreciation)+ (TurbopropDepreciation) - 123 -

Annex I Page 3 of 4

a Ai 3

1 l-RU| -I! aI a

2 2

i' - ZZ| mf msE

g ^|8.g- 5 $ t !

}}}}I i I}X Air Malw Passenger LoadFactors 1992 - 2000

Scamb 1 &2 1992 1993 1994 1995 1996 197 199 1999 200

Ulonge Hame 44.7% 45.1% 47.3% 49.7% 51.7% 538% 55.9% 582% 60.5% Lllogwe Joaeb 44.9% 47.8% 5099% 542% 572% 60.4% 63.7% 67.2% 70.9% Ulon Narobi 32.5% 35.0% 37.6% 40.4% 43.0% 458% 48.8% 520% 55.4% Ulngwi Lusaka 26.4% 28.5% 30s% 32.5% 34.6% 36.7% 389% 41.3% 43.7% Ukongw Gaomron 10.3% 10.8% 11.3% 11.9% 12.3% 12.8% 13.3% 13.9% 14.4% lOWe amte 54.8% 56.4% 58.1% 59.9% 61.7% 635% 65.4% 67.4% 69.4% Ulogwe MzuzI/Kaonga 57.0% 58.7% 60.4% 62.3% 64.1% 66.0% 69.0% 70.1% 72.2% Scmnalo3

Llongsw Hame 51.7% 52.1% 54.8% 57.5% 59.8% 62.2% 64.7% 67.3% 69.9% lionwe J_a qbur 51.9% 55.3% 58.9% 62.7% 66.2% 69.8% 73.6% 77.7% 82.0% IJnw Nairobi 37.8% 40.4% 4335% 46.7% 49.e% 53.0% 565% 60.1% 64.0% UIbow Lusaka 37.8% 40.8% 43.6% 46.5% 49.5% 523% 55.6% 58.9% 62.5% IUnge Gabrone 11.9% 124% 13.1% 13.7% 14.3% 14.% 15.4% 16.1% 16.7% tInwe Blate 55.7% 57.3% 59.1% 606% 62.7% 64.3% 66.5% 68.5% 70.5% ibosgw MzuzIKaronga 57.0% 58.7% 60.4% 62.3% 64.1% 66.0% 68.0% 70.1% 72.2% So&naas 4 & 5

Ulongw Hamnu 44.7% 45.1% 47.3% 49.7% 51.7% 53.8% 55.9% 582% 60.5% Llongw J _hnnsb 44.9% 47.8% 50.9% 542% 572% 60.4% 63.7% 672% 70.9% L1ngws NaiobI 32.5% 35.0% 37.6% 40.4% 43.0% 45.8% 48.8% 52.0% 55.4% lwS Lusaka 26.4% 28.5% 30.5% 32.5% 34.6% 36.7% 38.9% 41.3% 43.7% ngwe Gaboone 10.3% 10.8% 113% 119% 12.3% 12.8% 13.3% 13.9% 14.4% liongwe l"e 65.3% 67.3% 69.3% 71.4% 73.5% 75.7% 78.0% 80.3% 82.7% UJong M z/ Karonga 57.0% 58.7% 60.4% 62.3% 64.1% 66.0% 68.0% 70.1% 72.2% Scnib 6

UIongw Htame 51.7% 52.1% 54.8% 57.5% 59.8% 62.2% 64.7% 67.3% 69.9% longwe Johnnsbur 51.9% 55.3% 58.9% 62.7% 662% 69.8% 73.6% 77.7% 82.0% UJongw Nairobi 37.6% 40.4% 435% 46.7% 49.8% 53.0% 56.5% 60.1% 64.0% Lbongw Lusaka 37.8% 40.8% 43.6% 46.5% 49.5% 52.5% 55.6% 58.9% 62.5% f IJongw Gabor 11.9% 12.4% 13.1% 13.7% 14.3% 148% 15.4% 18.1% 16.7% 4 Ulonw hbmre 66.5% 68.5% 70.6% 72.7% 74.9% 77.1% 79.5% 81.8% 84.3% 0a Longwe MztzuI Kaonga 57.0% 58.7% 60.4% 62.3% 64.1% 66.0% 6s.0% 70.1% 722% "f " a_l7S _lO-

NokHua Fmm IASI 1.351 1.351 3l#51,351 1,351 1,35I * p CamPo dah* 06l 901 01e 713 713 713 713 713 713 s a 6 t,p006PaOnum 16,tlOD 120.000 116.00 112.00 lo06o0 106,000 104.000 O CA cou R1.256.216 1.256M.21 1.256.218 1.063.263 1.07M.263 1.075.263 1071.263 1.071.263 1.06726n

TQaEq5(JsVFwboplp) 46SMASS OA61S W526 sAndw 6241Mg 47MN 8,15,463 6.121M O.M.403 t 0 =eiubmuts. 4.725.764 ,6466 4 936 731,1M 4.11.415 616,161 6,632,2 110. 2 11.71076 9 Onu*JpCmh Jd ii- Dqxpblla I.35.709 3.036.706 1.935.709 1.935.709 1.016709 1,935,701 1.935.700 1.626,700 1.635.701 Jd 01. Rucpd 1.654.572 1.153.120 2,075.404 t324,554 6.03W.5 2.915.90 3.265831 3.657.73D 4.00.658 O A Jd 841-_Wa 3.4t4.276 3,A2S,726 3.063.33 kO14.204 2.535.34 2.222026 1.873.017 1.4I1.117 1,042t190 Jet 63.-To_d1w C- (E.,6336 553365648 5134 55.134 5.1336 6.134646 6.136B4 5.136.611 5.136g 4 Jo 82- (oa 1.935,709 3,3670 1,1635.701 1,935,70 1.36.700 1,935.706 1.35.706 1.35.700 1.935.700 t us J 82. 1l6' 0 0 0 0 4.2668746 4.462.S3 4.706.292 4.941.f07 1.13,f67 : Jai Alwsl 0 0 0 0 1.451.782 1.23.345 1.014,235 7716921 531,60 I N Ja 82-r OW lAp (ExmDs) 0BO 0 0 5 N,720,6 72 5.720529 s ,72s0.529 5,720.52a n TP *OWpdu ° 0 0 497.754 497.764 497.764 497.754 47,754 497.74 TP- Pb0 , °°° 263.641 317.678 35.790 390.495 546.314 400.672 * TP* _Iw o o o 697,324 S63.267 625.146 402.450 434.631 381,072 n H TPo-TWOuO t4 (Ent Dep.) 0 0 0 66*4M5 S60.9o" no" 80945 660.045 60.045 "* co TululOmweslalp(Eao.Dspj 5,138646 k364 5,136*6 ,01979 11.740,321 10,74321 311740,321 11,740,21 31,74063*t1: 2 Coabbalsabebbi OvuhsIi 413.064 322249 1,16l3 1,341,964 4.3,564 2.272114 -1.637,3 4215.7 40.462 a 66 o _,WUsI 6.022.75d 6.022.756 6,022.758 6,022.768 6.022,758 6,022,756 6,022,7ss 6,022,759 6,022.750 " hbSUIU(outnd 2650o 215,00 265.50 2a5.5c 2a.0 25s0 256 265.500 205.500 Teol usu G.306.266 6,306.256 6,306.25s 6.306,259 6.6.266 *.306.26 6306,258 6,306,266 6.306.256

I_ _a -16,2,761 ,427 4k61t,365 4325446 -14241.276 13,36,3 -12,514,466 -11.566,7126 -1*,9 7 06

NsTF_imuPlO fts 4,34,6 4,35767 4.5,6*2 4,6 464M2,753 5.041 5,142441 5,45M 5,50,195 n a-'

1 MIbtm Ex _be .467,3 46136 676,163 1t530,194 2,441,6 *,362 4 9,22 5,3,364 6.453AN O0

Cas Rw ,155 , 4 43,327 .020,437 -4,62351 W.6,16 4,6,U$", -. 476 _ 126 -

Annex 2 Page 2 of 5

TRANSPORT SECTOR REVIEW - SELECTED ISSUES Air Halavi: Financial ProiectLons of Jet Aircraft Purchase Scenarios

d.-~~~~~~~~~~~~~~~~~~~~~.-rnp.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~%aI I ;8.4

s~. ~~~~P5E. fiI*N_g1 qP( 40 4

w35R '1 t;~3 2S|trf 5 R-@l$2fi a2 5§

3 @ v 8 cl S "' V. N* S :wfiN8i2}_||§ - q 0~~~~~~~~~~~~~~I~4 n4

5} 3 ~2g § 8 to8r § g g DRI§ §50 g g 2

S il li l § 0 I ,,It- xs2 I I X a Mel3T460Scemds 1992 1993 1994 1996 1996 1997 19Q8 19S9 2000

Puuge Rennue . 13.719.099 14.407.646 15.209.556 16,056li95 16,838,849 17,658.035 18,519.677 19.426,079 20,379,678 0. CawoR.venuae .1 754.550 79EL421 836.526 83.113 926.137 971.192 1,018.582 1,068,434 1,120,882 I' TouaTranspod Revnu 14,47364n9 IS.00,067 16,046,082 16,939,708 17,764,9B6 18,629,227 19,s38.259 20,494,513 21,500,560 CWnvISalonExpense *1.097,528 -1,152.612 -1,216.764 -1;.24.528 *1,347,108 -1.412,643 -1.481.574 -1.554,066 -1.630.374 NolTrTnmal Revenue 13.376.22 14U047.45514,829;317 15,655,180 16,417.878 17,216,584 186056,685 18,940.427 19.870.186

ULtzaPoneParDay 6m30 6.30 6.30 6.30 6.30 6.30 6.30 630 6.30 t bockHun loRwn 2300 2,300 2300 200 2.300 230 2300 2,300 2.300 M peralwaCos PerMock How 2,577 25707 2,57. 2,577 2,577 2757O 2577 2.577 2,577 "1

HulInsrance 442,000 408.000 378.000 350.000 326,000 306.000 286.00 270.000 256.000

ToldOrect Jet 6,367.812 8,3333812 6,303,812 6,275,812 6,251,812 6,231,812 6,211,812 6,195,812 6,181,812 Pt 0 Expua. Turboprop 3 BlockHow8 Flown 2,373 2.373 2.373 2,373 2,373 2,373 2,373 2.373 2.373 rt CostPer Block Hour 918 918 918 713 713 713 713 713 713 O tn HuElnsurance 16.000 16,000 16.000 120.000 116.000 112.000 108,000 108.000 104.000 a l.3 Tot DrectTurboprop 2,194,414 2,194,414 2,194,414 1.911,949 1,807,949 1,803,949 1,799,949 1,799,949 1,795,949 n 0 et so Tot. Expenses(JeVrurboprop) 8.562,22i 8,528,26 8,498226 8,087,761 8,059,761 8,035,761 8,011,761 7.995,761 7,977,761 P|

ContibuSon 4,813,896 5,519,229 6133,092 7,567.420 8.358.117 9,180,824 10,044,925 10,944,667 11,892,426 0 OwnerhIp Cost Jet- DoiptwClauo 1,935,709 1.935.709 1,935.709 1,935.709 1,935,709 1,935,709 1.935.709 1.935.709 1.935.709 4 Jet - Ptdipal 1,654,572 1.853,120 2,075,494 2,324.554 2.603,500 2,915,920 3.265.831 3.657.730 4,096,658 Ca Jet - Intwres 3.484,276 3,285.728 3.063,353 2,814,94 2.535,348 2,222.928 1,873,017 1,481,117 1,042,190 P Jet-Tota Owneiship (Exc5 D8p.) 5,138,848 5,138.848 5.138,848 5,138,848 5,138,848 5,138.848 5,138,848 5,138,848 5,138,848 , TP - DeprecIaton 0 0 0 497,754 497.754 497,754 497.754 497.754 497.754 n te TP -PlCnPal 0 0 0 283,641 317,678 355.799 398,495 446,314 499,872 P t TP - terost 0 0 0 597.304 563.267 525.146 482,450 434,631 381,073 N1 TP- TotaOwnertp (Exc Dsp.) 0 0 0 880,945 880,945 880.945 880,945 880.945 880,945 CA Tol OwnershIp(Exe. DOp.) 5.138.48 5,138,648 51138. _ 6,019,793 6,019,793 6,019,793 6,019,793 6,019,793 6,019,793 Cenirlbulonbletr. Oerhead -324,952 380,381 1,192,244 1,547,626 2,338,324 3,161,030 4,025,131 4,924,673 5,672,632 CA Overhlad 6,022.758 6,022,758 6,022.758 6,022,758 6,022,758 6,022,758 6.022.758 6,022,758 6,02Z758 - khilanmOverhead 259.90 259950 259,950 259.90 259.950 259,950 259,90 2590 259.950 ToalOhead 6,282,706 6,282.708 6,282,708 6,282,708 6,282.708 6,282.708 6,82,706 6,282708 6,282.7086o Abbe Result 4.5M0366 -7,U8,36 -7,06173 -7,166,544 ,377,847 4,555,140 .4,661.039 43.M,?297 -2843,538 SQ N-Tru et Revnue 4.56,40 4,8576657 4,750,820 4,845,37 4.942753 5,041,606 6,142,441 5,245,289 S;150,19 o°| 0

,Not PrtlHt lLdssEbudlsgt Cplul 1,t61Jlt9 1jMRi9 %035oNs 3~Wji 4,594,700 5J 211 6.471,194 7,473,755 IjS

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Air Malawi: Financial Proiections of Jet Aircraft Purchase Sc:enarios

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MALAWI

TRANSPORT SECTOR REVIEW - SELECTED ISSUES

VOLUME 2

WORKING PAPER NO. 3

ROAD FREIGHT TRANSPORT

I. INTRODUCTION

1.1 Road freight accotnts for 95 percent of Malawi's import and export traffic and an estimated 70 percent of domestic traffic. The private sector industry that provides these services is made up of Malawi and foreign transport operators. The Malawi portion of the industry consists of three operating segments,domestic own-account, domestic for-hire and internationalfor-hire and as the descriptions imply carries both domestic and internationalcargo. The foreign operators are permitted to carry only internationalcargo.

1.2 For the first time since it began serious operation, the Halawi internationalfor-hire fleet has experienceda decrease in relative operating costs due to recent Government of Malawi (GOM) actions. Malawi internationaloperators still face stiff competition from foreign transporters,many of whom hava business advantages of various kinds, including lower operating costs and access to high revenue import cargo. In spite of this, the share of Malawi traffic carried by Malawi registered vehicles has increased in the last 12 months. This is due mainly to the increased participationof indigenous Malawi transportersin the movement of petroleumr.products, and the fleet expansion of foreign investor-ownedMalawi transport companies that work only internationally. However the total number of vehicles used internationallyis decreasing, because trucks operated by Malawi dual transporters,who engage in both domestic and internationaltransport, are increasinglybeing used in domestic operations. This decline in vehicles operating internationallyis responsible for the improvement in domestic supply that has occurred since late 1989.

1.3 In late 1987, the aging and unreliable domestic fleet was unable to satisfy the increased demand resulting from an additional 100,000 tons of refugee food aid and still supply service to the traditionalmajor customer, the Agricultural Developmentand Marketing Corporation (ADMARC). There is evidence to suggest that factors such as professional ability, transport rates and the shipper/transporter relationshipalso played an important role in what appeared on the surface to be a clear case of under-capacity. This situation continued in the 1988/89 season but appears to have eased this season for several reasons. ADMARC has recently implementednew contracting procedures that guarantee the transporter a fixed tonnage amount for specified routes, increased its storage capacity, and improved its logistics management to maximize wherever possible a return load. The increase of - 131 - dual operator participationin domestic transport,coinciding with a boost in the maximum transport rate to MK 0.4/ton-kmalso has helped ADMARC to secure adequate levels of transport in most cases.

II. TRAFFIC NETWORK

A. International

2.1 The road route network that supports internationaltruck transporthas four major origin/destinationpairos

(a) Blantyre/Hararevia the Tete Province of Mozambique; (b) Lilongwe/Lusaka; (c) Blantyre or Lilongwe/DarEs Salaam via the northern corridor; and (d) Blantyre or Lilongwe/Johannesburgor Durban via Harare.

In general these routes provide an all weather surface but the quality varies considerablyamong routes and on the same route.

2.2 Currently over 95 percent of Halawi's overseas imports and exports pass through the ports of Durban or Dar Es Salaam. The road distance to these ports and the other main origins and destinationsare presented in Table 2.1. The route to Durban normally encompasses the use of a rail link between South Africa and Harare coupled with the road link between Malawi and Harare. On rare occasions special cargo (tallow, oversized machinery and road vehicles) is transported directly from Durban to Malawi entirely by road. Access to the port of Dar Es Salaam usually entails an all-road journey from Blantyre or Lilongwe. This situationwill change to a muilti-modalone once the Malawi cargo centers are in use on the Northern Transport Corridor (NTC) route.

Table 2.1 Road Distance Between Points in Kilometers

Dar Durban Harare Johannesburg Lusaka

Blantyre 2,140 2,350(2) 600 1,750(2) 1,100(2) 3,350(4) 1,100(3)

Lilongwe 1,800 2,700(1) 950(1) 2,100(2) 750 3,000(4) 1,250(4) 2,400(4)

Note:(l) Via Blantyre (2) Via Harare (3) Via Lilongwe (4) Via Lusaka - 132 -

2.3 These routes handled 890,000 tons of traffic in 1989. Traffic levels per route are indicated in Table 2.2. During this period, the majority of tonnage, over 66 percent, entered and exited Halawi via Harare.l/ Cargo entering via Lusaka accounted for 23 percent of total tonnage, while Dar Es Salaam, via the northern corridor, accounted for 11 percent.

Table 2.2 Tcns (000) and Z Total Traffic by Border Post 1985-89

1985 1986 1987 1988 1989

Post Tons X Tons X Tons X Tons X Tons Z

Mwanza(l) 413 49 359 55 406 60 633 66 584 66

Mchinji(2) 405 48 276 42 230 34 247 26 207 23

Kaporo(3) 26 3 23 3 40 6 80 8 99 11

Total 844 100 658 100 676 100 960 100 890 100

2.4 The utilization of the route via Mwanza/Hararehas consistentlyincreased, as evidenced by the route tonnage between 1985 and 1989. During this period, traffic via Harare increased steadily from 49 percent to 66 percent, with the share since 1987 above 60 percent. Operations on the corridor through Mozambique were carried out under the protection of Zimbabwe Army convoys, but these forces were withdrawn in December 1990. Since then, virtually all road traffic from the south has been coming in via Lusaka and Lilongwe, including refugee supplies. The cost of transporthas once again increased substantially, the route via Lusaka being much longer.

B. Domestic

2.5 The road network in Malawi is well documented through an inventorydone by the Ministry of Works (MOW). Characteristicsof the present network are shown in Table 2.3. Earth, gravel and bitumen roads represent 73, 8 and 19 percent of the total network, respectively. Bitumen roads c3nnect the main origin and destination points served by long haul domestic truckers. The larger domestic operators maximize the use of vehicles with a carrying capacity of 30 tons or above on long hauls, i.e., over 200 km, and operate on the paved portion of the network whenever possible. For short hauls that include rural distributionof consumer goods (includingbuilding materials, manufactured items, processed food and beverages), crop evacuation and

1/ Cargo via Harare has various origins and destinations,including South Africa, overseas points and Zimbabwe itself. - 133 -

agriculturalinputs, most of the trips are made on earth (secondary and district roads) which form the backbone of the rural transportation network. The nature of this rural transport results in higher cotuodity costs due to increased delivery time and higher transporters'operating costs.

Table 2.3 Malawi Road Network, 1989 (Km)

Road Classification Main Secondary District Other Total

Bitumen 1,868 245 24 81 2,218

Gravel 113 703 16 0 832

Earth 703 1,793 5,316 579 8,391

Total 2,584 2,741 5,356 660 11,441

Source: Ministry of Works

2.6 Use of the domestic road network is not as clearly defined as in the case of internationaltraffic. The main long haul origins and destinationsare Blantyre, Lilongwe and Mzuzu. These cities in turn act as hubs for local distributionwith trips up to a maximum of 150-200 km. With the notable exceptions of ADMARC, donor food aid, and tobacco transportation,little is known about what actually moves on the network or where it goes. This situation is discussed in more detail in the section on transport demand.

III. INDUSTRY STRUCTURE

A. InstitutionalFramework

3.1 During the last 10 years, Malawi has been confronted by a series of transport interruptionsthat required emergency action by a strong central force outside of MOTC.2/ Over time, this has led to the erosion of support within GOM for MOTC and its pivotal role in the administrationand planning of domestic and internationaltransport. The weak position of MOTC results in an institutionalframework that is fragmented and uncoordinated,to the detriment of overall policy planning and implementation. Several major participants in this

2/ This historicallyhas been the Office of the President and Cabinet (ContingencyPlanning Unit). - 134 - framework, such as MOTC, Ministry of Trade, Industry and Tourism (HTIT), MOW, Office of the President and Cabinet (OPC) and Ministry of Finance (MOF), are involved with policy initiatives,planning and regulation that either directly or indirectly influence road transport. Others, includingADMARC and the Petroleum Control Commission (PCC) for example, have a particular interest in certain segments of the road transport market. This frameworkmust first be simplified and then used to define more clearly and strengthen the institutionalstructures responsiblefor the planning and support of road transport.

B. ReLulation

3.2 GOM has avoided creating an onerous process that could restrict entry and thus hamper road transport development. GOM clearly supports the view that road transport is best provided in an environment where private enterprise and competitionare encouraged if at all possible, and has shown no interest in initiating or supporting a parastatal road transport industry. However, many aspects of road transport are regulated by the GOM, both directly and indirectly,and some regulatory actions do representconstraints to road transport. The agencies responsiblefor direct regulation include MTIT and MOTC. Indirect regulation in the past has been mainly a function of foreign exchange control and customs duties, both oi which are under the control of MOF.

Ministry of Finance

3.3 The road transport operating environmenthas improved in the last few years due to actions taken by MOF to support the industry as a whole. These actions are greatly appreciatedby transporters,and include the followings

(a) removal of duty and surtax levied on the importation of vehicles with a gross vehicle weight exceeding 10 tons; (b) rebate of 80 percent of the duty and surtax paid by internationaloperators for the purchase of parts and tires; (c) liberalizationof foreign exchange, which has improved the availabilityof parts, tires, and new vehicles; and (d) foreign exchange allocations for direct importationof vehicles, parts, and tires by Malawi transporters.

These government actions have begun to reduce and stabilize operating costs for both domestic and internationaltransporters. However, they have not and will not on their own mitigate the effects that many years of tight foreign exchange control and poor economic performance have had on industry-widefleet size and reliabilityand, in particular, on the domestic for-hire segment. - 135 -

Ministry of Trade Industry and Tourism

3.4 MTIT is responsiblefor issuing the license necessary to register a company, regardless of its specific activity. This license permits the holder to engage in trade as a Halawi company and is granted only after an investigationby the Malawi police to determine the background and character of the applicant.3I Informed transport industry personnel indicate that many small operators, e.g., operators with a single truck of less than 10 tons, do not apply for a business license or permit of any kind.

Ministry of Transport and Communications

3.5 MOTC is the major regulatorof the road transport industry through enforcement and administrationof the Road Traffic Act (RTA) by the Road Traffic Department (RTD) headed by the Road Traffic Commissioner (RTC). The RTD is responsible for overall regulation in four distinct areas includingvehicle registrationand licensing, vehicle safety, operators' licenses and Road Service Permits (RSP). The first three areas apply to all road transport and the general driving public while the last area, RSP, is the mechanism used to regulate for- hire road transport operators. In addition, MOTC sets a maximum road freight transport rate that is currentlyMK 0.4/ton-km.

Road Service Pemits

3.6 RSP can be issued in two types, temporary for three months or permanent for a period of one to three years. Both variations are availableto Malawi individualsor registered companies. Foreign operators wishing to enter Malawi for the purpose of discharging and picking up internationalcargo are issued temporary permits only.

3.7 The application process to obtain permanent RSP is set out in the RTA and consists of three steps:

(a) an application form is completed and submitted to the RTD; (b) the application is gazetted and presented at a public hearing, objectors may present evidence before or during the hearing; and (c) the application is accepted and a permit is issued by the RTC or application is denied and the applicant may appeal to MOTC for a final ruling.

In practice, the procedure is handled somewhat differently. Usually, upon receiving an application,RTD issues a temporarypermit and continues to issue such a permit until the next public hearing is held. Once the public hearing has been held RTD makes recommendationsto the HOTC concerning the applications. MOTC approves or rejects the

3/ This investigationalso serves to restrict certain groups, i.e., Asians, from participating in domestic transport. - 136 - application and informs RTD to act accordingly. There is no requirement under RTA to gazette or hold a public hearing for a temporary RSP. Three-month permits usually are granted upon request to both domestic and foreign operators after receipt of the application and payment of the prevailing fees.

3.8 Though RSP can specify commodity and route, these restrictionsare not currently applied when issuing a RSP to Malawi- registered transporters. Route restrictionis currently applied to RSP granted to foreign transporters. Such restrictionson permanent RSP granted to foreign investor-ownedMalawi-registered companies were standa-dizedin October, 1990. In effect these restrictionshad kept these Malawi operators from providing internal collection or distributionof internationalcargo. MOTC policy changes now permit any Malawi-registeredtransporter to engage in domestic transport activities vith no restrictions.

3.9 Foreign companies are those operating vehicles registered in and controlled by a country other than Malawi. The major foreign operators are registered in Botswana, Zimbabwe, Tanzania, South Africa and Zambia. At times vehicles registered in Mozambique, Kenya, and Zaire also have been granted RSP. Under present regulations,all RSP issued to foreign operators, except Zambians,41 specify the geographic area of Lilongwe or Blantyre where operators can discharge or pick up cargo. If the operator wishes to move legally with the vehicle loaded within Malawi, say from Blantyre to Lilongwe, he must be granted an exemption by RTD to do so. Automatic exemptions are granted by RTD for certain commoditiesas indicated in Annex 1. All other exemptions are subject to concurrenceby MOTC, RTD and Malawi Railways (MR) that local rail or road capacity is not available. The RTD has neither the institutionalnor manpower resources to enforce the current regulations, and as a result it is common practice for foreign operators to move illegallywithin Malawi.

3.10 The existing organizational,regulatory and operational framework of RTD is restricting its ability to monitor and support the road transport sector. Specific deficiencies,such as insufficient planning, lack of professionalability, minimum manpower and equipment resources, lack of sufficient data collection and analysis, and outdated transport legislation,all contribute to the situation. This prevents the effective administrationof registration,licensing, road service permits, vehicle inspectionsand axle load enforcement. These RTD functions are vital to ensure the provision of safe, dependable and efficient road transport service. The confusion, indecisiveness,slow response time, and lack of direction on the part of RTD were mentioned repeatedly in discussionswith both users and suppliers of road transport. The need to strengthen the planning and monitoring ability of MOTC exists and any support to MOTC should also contain provisions for strengtheningRTD and streamliningthe RTA.

41 A bilateral transport treaty with Zambia prohibits restrictionson operating area. - 137 - TransportRate Regulation 3.11 HistoricallyMOTC has set minimum,differential and max'mum transportrates that appliedexclusively to ADMARCdomestic cargo. In 1987, as a resultof premiumtransport rates paid by refugeefood aid relieforganizations and privatetraders, ADMARC could not secureenough transportcapacity from the privatesector to move its cargo. ADMURC asked GOM to provideemergency transport in the short term and take whateveractions were necessaryto preventthe distributionneeds of refugeefood aid from disruptingthe collectionof crops and distributionof agriculturalinputs. In responseto this emergency, MOTC abandonedthe familiarADMARC transport rate structureand replaced it with a singlemaximum rate for all domesticroad transport. The singlerate approachseems to be caueingconfusion aeong small transport operators,who preferthe old rate systemand indicatethat supply problemswere due only in part to the rate offered. 3.12 The initialsingle maximum rate was set at MK 0.3/ton-km. As a resultof the limitedavailability of accuratecost data, the rate had to be determinedarbitrarily and, in retrospect,did not :eflectthe actualcosts incurredby transporters.It was set below the maximum allowedunder the old systemand failedto improvethe supplyof vehiclesoffered. In 1988 ADMARCagain was forcedto rely on GOM vehicles. It was not until 1989, when Malawidual operatorsincreased their share of domesticwork, that ADMARCwas able to secureadequate capacityfor all but the most remotelogistic efforts. The current maxinumrate of MK 0.4/ton-kmis appliedacross the board regardlessof vehiclecapacity or trip distance. The resultof this single-rate applicationcontinues to be the inefficientprocurement of transport servicesand the ongoinginability to attractprivate sector operators for remotesmall tonnageshipments. C. FreightOperations

Own-account 3.13 Data classifying the vehicle makeup and operating characteristics of this industry segment are not available. No public or privateorganization collects or analyzesdata of this type and no collectionefforts are anticipated.Information provided by RTD suggeststhat this segmentaccounts for over 90 percentof goods vehicleslicensed in Malawi. This is arrivedat by factoringout the numberof vehicleswith RSP from the totalnumber of goods vehicles licensed. Own-account operators are not requiredto have a RSP in order to transporttheir own cargo (althoughit appearsthat some have applied for RSP) but are subjectto the same safetyand registrationregulations as for-hireoperators. The largestown-account fleets are operatedby the beverageindustry and petroleumproduct distributors. An informal inventoryof these two fleetsis containedin Annex 2. 3.14 A more accuratepicture of this marketsegment would require interviews with hundreds of owm-account operators which is outside the scope of this review. However, this group of vehicles is probably greatly under-utilized. Manufacturers, traders and other entrepreneurs - 138 - who operateroad transportequipment in their businesshave indicated that they do so becausethe smalldomestic transporter has proven to be eztremelyunreliable. A studyof own-accountoperators could provide usefuldata and quantifythe actuallevel of operators,vehicle utilizationand operatingcharacteristics. The remainderof this report will deal only vith the for-hiresegment of the road transportindustry.

For-hire

3.15 A reviewof figurescomplled by the RTD in 1988 and more recent information collected during this study indicate there are approximately 382 Malavi companies or individuals in possession of RSP for a total of 850 power units and 569 trailers. The distribution of operators by fleet size is shown in Table 3.1. As indicated, the road transport industry is very fragmented, as 69 percent of the transporters are operating only one vehicle and 85 percent of all operators have a fleet size of five vehicles or less.

Table 3.1 Distribution of Fleet by Operators and Units

382 Operators

300 Capacity Units 261 0-2 Tons 155 O 3-6 Tons 56 p 7-20 Tons 440 e 100 > 20 Tons 768 r a 67 Total 1,419 t

r 50 30

14 5 4

0 1 2-5 6-10 11-20 21-30 31-40 41-50 51-70 Number of Units - 139 -

3.16 Malawi for-hire operators fall into three categories according to operating area including internationalonly, domestic only and dual operators who engage in both domestic and internationalwork. Operators that move internationallytend to have larger fleets and use higher capacity vehicles than those working domestically. In addition internationaloperators tend to be more professionallymanaged and better financed, and usually are members of the Road Transport Operators Association (RTOA). Some internationaloperators also have the personnel and financial resources to allow direct importation of vehicles, tires and parts, which makes both their fixed and variable costs lower than other Malawi transporters.

3.17 In addition to internationalor domestic, Malawi for-hire operators can also be classified into three groups according to management and technical skills. A small group of transport companies has highly skilled expatriate management and technical personnel and in most cases are owned by foreign investors. These firms appear to be operating quite successfully. A somewhat larger group of operators exists that has indigenous Malawi ownership, management and technical personnel. These operators have a basic understandingof road transport operations and although successfulenough to remain in business, are constantly plagued by financial and operating problems. The largest group consists of indigenous Halawi owner operators who often have only rudimentarybusiness and technical skills, and in some cases operate without proper permits and licenses.

IV. SUPPLY

4.1 The available data concerning vehicle supply, such as registration,licensing and RSP needed to quantify and classify Halawi's transport fleet are at best ambiguous. The registrationof vehicles is currently the responsibilityof RTD, while the sale of annual licenses is controlled by the Treasury Cashier branch of the Accountant General. These activities should be combined under RTD in a computerized system that could facilitate classificationof all registered vehicles in terms of annual license, owner of record, operator, make, model, age, certificateof fitness, capacity and RSP. This would ensure that all aspects of vehicle data would be available to MOTC in its effort to support and monitor Halawi's road transport activities.

4.2 Goods vehicle registrationsfrom 1972 through 1989 are presented in Table 4.1. A truck over 10 years of age operating under the physical conditions found in Malawi and surroundingcountries is approaching,if it has not already reached, the end of its life in terms of reliable revenue service. Using 10 years as the replacement criterion and starting with 1972 registrations,it is possible to estimate the shortfall in the number of vehicles registered from 1982 through 1989 that would have been required to replace vehicles imported during the previous 10 years. As indicated in Table 4.2, this exercise yields a shortfall of 1,958 trucks since 1982. These calculationsdo not take into account any increase in demand over the 10-year period, - 140 - that normally would have resulted in a larger number of vehicle registrationshad import restrictionsnot been in effect. The available records further indicate that over 50 percent of the goods vehicles imported during many of the years 1982 through 1989 were already used and therefore will require replacementbefore they have achieved 10 years of service in Malawi. There also is a high probability that many of the used vehicles imported were pickup type vehicles with very low capacity and are used as family transportation.

Table 4.1 Annual Registrationsof Total Vehicles and Goods Vehicles 1972 - 1989

Year Total Vehicles Goods Vehicles 1 Total

1972 3,569 1,135 32 1973 3,896 1,158 30 1974 3,292 975 30 1975 3,640 1,324 36 1976 3,703 1,170 32 1977 3,373 1,269 38 1978 3,849 1,199 31 1979 4,233 1,339 32 1980 4,291 1,257 29 1981 3,240 912 28 1982 2,960 748 25 1983 3,065 706 23 1984 3,253 965 30 1985 4,235 1,019 24 1986 3,854 1,055 27 1987 3!396 1,088 32 1988 3,058 1,028 34 1989 3,380 1,002 30 Source: Road TrafficDepartment - 141 -

Table 4.2 Shortfall of Replacement Goods Vehicles

Goods VehLcles Goods Vehicles Registered 10 Goods Vehicles Registered Years Later Replacement 1972 - 1979 1982 - 1989 Shortfall

1972 1,135 1982 748 1982 387 1973 1,158 1983 706 1983 452 1974 975 1984 965 1984 10 1975 1,324 1985 1,019 1985 305 1976 1,170 1986 1,055 1986 115 1977 1,269 1987 1,088 1987 181 1978 1,199 1988 1,028 1988 171 1979 1,339 1989 1,002 1989 337

Total 9,569 7,611 1,958

4.3 MOTC statistics presented in Table 4.3 indicate that 8,142 privately owned goods vehicles were issued an annual license in 1988.51 Using the MOTC figures makes the shortfall at least 24 percent of the running fleet.6/ The shortfall has had a pronounced effect on domestic transporters. Many smaller transportersoperate 7 to 15 ton trucks and purchase only used vehicles. However, with the import quantities reduced, the number of secondhandunits offered for sale is small. This, in effect, postpones replacementand further decreases the fleet reliability of this group of operators. A random survey of 774 goods vehicles done by MOTC in 1989 indicates that 32 percent of the vehicles included were in the possession of their owner for more than 10 years. but not necessarilypurchased new by the owner. Although the supply of new vehicles in the lower tonnage ranges being offered for sale by motor dealers is now much improved, high cost coupled with practically non-existentaccess to credit puts these vehicles out of

S/ This number conflictswith data available from the Data Processing Department. In all probabilityneither figure accurately represents the number of vehicles licensed. Annual licenses can be sold for a minimum period of three months and each license sold is counted separately. This makes it possible for one vehicle to represent four annual licenses in the statistics.

6/ It is assumed that if a vehicle were not in running condition the owner would not purchase any portion of an annual license until the vehicle were operational. - 142 -

reach for most smaller operators.7/ Perhaps the improved supply will be taken advantage of by more affluent own-accountoperators who will then offer their used equipment for sale.

Table 4.3 Licensed Vehicles as of December 31, 1988

Private Government Total Vehicle Type Ownership Ownership Licensed

Automobile 12,202 2,442 14,646 Goods Vehicle 8,142 1,939 10,081 Bus 158 21 179 Motor Cycle 9,020 2,267 11,287 Tractor 1,374 278 1,652 Trailer 1,374 485 1,859 ConstructionMachine 255 439 694

Total 32,525 7,871 40,398

Source: Road Traffic Department

A. International

4.4 Investigationand data review indicate that 82 Malawi- registered companies or individualsclassified themselves as participating in internationaltransport. This does not mean that all these operators and vehicles are actively engaged in international transport. At this time RTD does not attempt to identify operators who hold valid permits from neighboring countries or record their individual foreign transport activity. MOTC does collect data at all border posts that quantifies the total internationaltonnage carried by the Malawi registered fleet (para. 5.1). A small amount of additional data collected at the same time could clarify the number of Malawi operators engaged in internationalactivity.

4.5 The distributionof internationaloperators by fleet size is contained in Table 4.4. As indicated, this fleet consists of 498 power units and 534 trailers. This includes approximately100 additional high capacity units (30 tons) registered and put into service by foreign investor-ownedtransport companies after October 1989 as the result of

7/ Vehicle importers indicate that the number of units on hand are the highest they have been for more than five years due to the Improved foreign exchange situation,but sales to small opera ors are rare. - 143 - changingGOM policyregarding foreign lnvestor ownership of Malawi- registeredtransport companies. The averag,fleet size is 12 units consistingof 6 trucksand 6 trailers,but this aisrepresentsthe situationsince 51 percentof the totalunits are controlledby 1l percentof the operators.

Table 4.4 FleetDistribution for Internationaland Dual Operatorswith Numberof Operatorsand Units

50

O 34 82 Operators p e 25 1032 Units r 24 a t 0 r 15 5 ~~~~~~13 11 Operators& 527 Units

5 4 3

1 5 6 -10 11-20 21-30 31-40 41-50 51-80 Numberof Units

4.6 The tonnagecapacity df this fleetis difficultto estimate due to the mannerin which RSP are issued. Each truck/roadtractor (horse)is issueda permlt,as is each trailerand semi-trailer,and no attemptis made to classifythe powerunit with, for example,one semi- trailerand/or one drawbartrailer, to establishthe maximumload capacityper powerunit. The 498 powerunits consistof 355 road tractorsand 143 trucks. The estimatednumber of equipmentunits by capacityis presentedin Table45. Assuming100 percentavailability and the dedicatedinternational use of all equipmentcontrolled by dual operators,the maximumMalawi international fleet capacity is estimated to be approximately14,033 tons. A fleetwith this capacitymaking four tripsper month at a 50 percentload factorcould carry approximately 340,000tons annually. The totalcapacity is made up of both dry and wet cargo components.Both totalcapacity and the respectivedry and wet cargo capacitiesfor variouslevels of vehicleavailability are presentedin Table 4.6. - 144 -

Table 4.5 EstimatedNumber and Capacity of Malawi RegisteredVehicles with Road Setvice Permits Held by Dual and InternationalOp,ratore

Dry and Wet Cargo

Unit Total Capacity Capacity in Tons No. Units in Tons

Trucks (Dry)

7 5 35 8 50 400 9 6 54 10 31 310 11 8 88 12 22 264 15 11 165 18 10 180

Sub-total 143 1,496

Draw Bar Trailers (Dry)

7 5 35 8 6 48 9 7 63 10 4 40 12 20 240 15 15 225 18 82 1,476

Sub-total 139 2,127

Horses and Semi-trailers(Dry)

30 295 8,850

Horses and Semi-trailers (Wet)

26 60 1,560

Total (Dry) 577 12,473

Total (Wet) 60 1,560 - 145 -

Table 4.6 Malawi InternationalFleet Capacity for Dry Cargo and Bulk Petroleum

|Dry Cargo Petroleum o

Units Tons Units Tons Units Tons

Horse and Semi-trailer 295 8850 60 1560 355 10410

Truck and Trailer 143 3623 143 3623

Total Avail 1002 438 12473 60 1560 498 14033

95? 416 11850 57 1480 473 13330 90? 394 11230 54 1400 448 12630 85? 372 10600 51 1330 423 11930 80X 350 9980 48 1250 398 11230 75? 329 9350 45 1170 374 10520 70? 307 8730 42 1090 349 9820

4.7 Foreign registeredvehicles also must be taken into account. According to MOTC data, 31,143 foreign tra-sportvehicles entered or exited Malawi in 1989. Using a conservativeestimate of two trips per month, it would require approximately650 units of 30 ton capacity to provide this service. In 1989 RTD issued 10,800 short term permits to foreign vehicles. This is equivalent to 1350 foreign vehicles with an annual permit. Based on the foreign capacity required and the number of vehicles for which permits were purchased, it appears that an adequate supply of foreign road transport vehicles is readily available for the Malawi market. The supply of foreign capacity remains easily available due to the foreign exchange earnings that these vehicles bring home for Malawi's neighboring countries.

B. Domestic

4.8 The data provided by RTD indicate that as of May 1988 there were approximately300 legal domestic operatorswho had been in possession of RSP for at least one truck after January 1, 1987. Fleet size distribution,as presented in Table 4.7 shows that 85 percent of the operators have only one vehicle and 40 percent of the total fleet consists of vehicles having a carrying capacity of less than 2 tons while 55 percent of all vehicles have a carrying capacity of less than 7 tons. The number of units with a carrying capacity of 7 tons or above is estimated at 167 with an average capacity of 10 tons. Table 4.8 presents the estimated fleet capacity for vehicles of 7 tons and above operated by domestic transportersholding a RSP at approximately1,674 - 146 - tons. This domestic capacity assumes 100 percent vehicle availability. The effect of availabilityon domestic tonnage capacity is presented in Table 4.9.

Table 4.7 Distributionof Domestic Fleet by Operators and Units

300 Operators

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

28

5 5 5

1 2 3 4 5 6

Number of Units

Note: Units include trucks, horses and trailers - 147 _

Table 4.8 Istimated Number and Capacity of Malawi Registered Vehicles with Road Service Permit Held by Domestic Operators for Units above 7 Tons Capacity

Unit Total Capacity Capacity in Tons No. Units in Tons

Trucks

7 84 588 8 17 136 9 15 135 10 11 110 12 2 24 14 9 126 16 1 16 18 2 36

Sub-total 141 1,171

Horses and Semi-trailers

9 270 9 Sub-total 18 270

Draw Bar Trailers

6 4 24 7 1 7 10 1 10 15 2 30 18 9 162

Sub-total 17 233

Total 176 1,674 - 148 -

Table 4.9 Halawi Domestic Fleet Capacity for DrZ Cargo

|Dry Cargo]

Units Tons

Horse and Semi-trailer 9 270

Truck and Trailer 141 1.404

Total Avail 1002 150 1,674

952 143 1,590 902 135 1,505 852 128 1,420 80o 120 1,340 75Z 113 1,260 702 105 1,170

4.9 The total possible domestic for-hire fleet with a capacity of 7 tons and above is composed of both domestic vehicles and those could be operated in domestic service by transportersthat operate internationally.8/ Current domestic capacity of dry cargo vehicles above 7 tons with a RSP is estimated to be a minimum of 1,674 tons, maximum of 14,147 tons and a probable capacity of 7,570 tons (Annex 3).9/ The maximum estimate includes all vehicles with RSP and assumes that the recent government policy authorizingMalawi internationaltransporters to engage in domestic transportwill not be rescinded. There is considerableconfusion on the part of smaller Malawi operators over this new policy and its definition of "Malawi transporter". Some operators expressed concern that MOTC does not adequately inform all segments of the industry concerning the implementationof new policies and regulations.

8/ Units available for domestic service include vehicles that also can be used internationally. No data exist to quantify the tonnage split of dual operators and the correspondingcapacity that will continue to be used for internationalservice.

9/ This includes domestic operatorswith RSP and 80 percent of the capacity held by dual operators, and are based on vehicle availability of 100 percent and do not take into account informal transport operators. - 149 -

4.10 The domestic fleet is characterizedby a large group of legal operators and what is considered by knowledgeable industry personnel to be a substantialnumber of informal (illegal) operators.10/ A list of 290 transporterswho have participated in the food aid distributionprogram administeredby the United Nations High Commissioner for Refugees (UNHCR)was cross-referencedwith the information on RSP holders supplied by RTD. Only 48 transporters,16 percent of those who had worked for UNHCR, can be positively identified from the information supplied by RTD. A similar list provided by ADMARC indicates that 428 individualsor companies (46 more than the total number of RSP holders) provided for-hire road transport services in 1989. These data appear to validate the general industry view regarding informal operators, but this cannot be confirmed given the current data collection, compilationand analysis impediments facing RTD.

4.11 Major domestic users of road transport such as ADMARC and donor food aid distributionindicate that the supply of domestic transport has increased since late 1989 and especially after the maximum domestic rate was increased to MK 0.4/ton-km. Many shippers state that they do not pay the maximum rate but instead negotiate a rate in the range of MK 0.26 to MK 0.35 per ton-km. However, two major shippers, ADMARC and donor food aid, are currently paying the maximum rate, and both have been reluctant to experiment with reducing the rate in an attempt to find the least cost acceptable to transporters. This indicates that the controlledmaximum rate is a "price setter'. Given the adequate supply offered to many shippers at rates below the maximum, there would appear to be no good reason to set rates at all.

4.12 At the same time, ADMARC has indicated a continuing gap in the supply of smaller capacity vehicles for rural collection and distribution in remote areas with poor road access, even though a small additional premium is sometimes offered as an incentive. Given the maximum rate set by GOM, it is difficult for ADMARC to offer private transportersthe substantiallyhigher rates that would be required to attract smaller trucks. Instead, ADMARC uses trucks supplied by MOW Plant and Vehicle Hire Organization (PVHO) and other government agencies at rates that end up to be higher than the controlled maximum rate.

4.13 Other shippers expressed concern over the business knowledge and practices of smaller Malawi transporters. In particular they cite difficultiescaused by a misunderstandingof the maximum rate policy. The use of the maximum rate by ADMARC and food aid adds to the general confusion. Smaller transportersthink that if these major shippers are using the maximum rate, then all shippers must be required to do so. The reliabilityof the equipment offered by small operators, especially in the lower capacity range from 7 to 10 tons, is also a major concern for domestic shippers, and in some cases has led shippers to enter the ranks of own-account transport operators. This type of investment is an inefficientuse of foreign exchange and shifts scarce financial

10/ Informal operators are those without a business license or RSP, and very often their vehicles have neither an annual license nor certificate of fitness. - 150 - resources away from the main function of the own-account operator to the purchase of transport equipment that has reotricted and therefore limited utilization.

V. DEMAND

A. International

5.1 Internationalroad freight is well documented by a data collection system administeredby MOTC that captures tonnage information at all Malawi border crossings. These records show that international demand is divided into a high and low season consisting of seven months (June-December)and five months (January-Hay)respectively. Over the last few years there has been approximately20,000 tons per month more cargo carried during the high season than during the low season. Import tonnage is consistentlylarger than export tonnage and the imbalance has grown over the last five years (Annex 4). This imbalancemeans that many transportersmust run empty for at least some portion of either the inbound or outbound trip. These empty hauls lead to increased costs due to reduced load factors.

B. Domestic

5.2 Domestic demand and tonnage moved are poorly documented,and there are no organized data collection activities to quantify this segment of the market. The largest sources of domestic transport demand, such as ADMARC, cement, sugar, food aid, and the tobacco industry, can be estimatedmore accurately than other sources that include building materials, manufacturedproducts, processed food, ground maize, beverages and consumer products. Given the limited data available, domestic demand has been estimated to be about 200 million ton-kms.

5.3 ADMARC records show domestic demand to be seasonal,with the high and low seasons correspondingto that observed for international transport demand. June through December is the high season, and January through May is the low season. In addition ADHARC records indicate that during the last four years the lowest demand occurred in April or May and the highest demand usually occurred in September or October. In 1989 approximately540,000 tons, 90 percent of ADMARC's total transport tonnage, was moved by truck. Since 1987 the average for-hire road transport demand generated by ADMARC has been approximately500,000 tons and is the result of collecting crops and distributingagricultural inputs in all three administrativeregions of Malawi. The logistical challenge of moving this amount of tonnage within the ADMARC network is substantial. This cargo is moved within the 12 divisions ana between any number of origin and destinationpairs made possible by the 88 parent markets and 1,249 seasonal markets operated by ADMARC.

5.4 Routine collection and compilationof data classifying the origin, destination and type of cargo carried by domestic operators should be a priority for MOTC and could be a fairly straightforward - 151 -

exercise if properly planned and coordinated. These efforts could be combined with ezisting activities, such as axle load enforcement, traffic counts, certificate of fitness inspections and field exercises, possibly in conjunctionwith the transport economics program at the University of Malawi. The informatiorngained could facilitate policy and planning activities aimed at supporting and improving the domestic transport system. Such informationand data will become increasingly important as the traditional rail lines serving Malawi's import and export traffic return to regular service. At that time the domestic pick up and delivery system will find itself doing double duty and must be prepared. For example, the export of su-ir now takes place on internationaltrucks that move from Nchalo end Dwangwa. When the Nacala rail route is fully operational,this sugar would move by truck from the production facilities to the MR terminals.

VI. INDUSTRY SUPPORT NETWORK

A. Road Transport Operators Association (RTOA)

6.1 The RTOA has as its goal the support and improvement of the Malawi road transport industry. It is staffed and directed by a full time secretariat,and its operation is recognized by MOTC as a legitimate industry function. As of June 1990, RTOA had 67 individual or company members, of which over 80 percent were dual or international operators. In the past RTOA focused its efforts primarily on the internationalaspects of road transport due to the business interests of its members. Recently the transport section of the African Businessmen'sAssociation (ABA) has been absorbed by RTOA, with ABA's correspondingfocus on domestic transport intact. The membership in RTOA has ample room for expansion given that there are approximately 382 Malawi individualsor companies holding RSP at this time. The new personality of RTOA suggests that it could provide the forum necessary for an industry-wideexchange of views, participation in training, institutionaldevelopment, technology transfer and response to policy and regulatory decisions from both the private and public sectors.

B. Goods Vehicles

6.2 The main sources of goods vehicles, major parts and components are the manufacturers'authorized dealers. There are no less than 12 truck manufacturers'represented in Malawi. Although this would seem to be an ideal technical and competitive situation,many of the dealers receive poor technical support from the manufacturer they represent due to the low levels of vehicle and parts sales. In turn, truck purchasers often do not receive adequate support from the dealer. In the past five years, tight foreign exchange allocations limited the number of units that could be imported for resale. Dealers tended to import smaller trucks and automobileswith a lower initial cost upon which they could realize a larger percentage markup. During this period it was not uncommon for a dealer to import and market vehicles for which there was little or no parts support immediatelyon hand. Nonetheless, - 152 - these vehicles were purchased at universallyhigh prices due to the scarcity of supply.

6.3 By mid 1989 a series of governmentactions had liberalized foreign exchange and removed the duty and surtax on all imported goods vehicles with a gross vehicle weight of 10 tons or greater. Given the number of dealers it was expected that these actions would substantially reduce the cost of new trucks. In the past, dealers had claimed high markups were necessary to offset strict exchange control, currency devaluation,inflation, added cost of offshore credit guarantees and the uncertainty of the market. These factors for the most part no longer exist and still the high markups remain as evidenced by the examples in Annex 5. As indicated,direct importationof vehicles by transporters can reduce the cost by 40 percent over comparableequipment.

6.4 A small number of Malawi internationaloperators have directly imported vehicles, parts and tires in an attempt to minimize costs. These transportersusually have expatriatemanagement and/or foreign investor ownership,which provides the personnel and financial resources to undertake these activitiessuccessfully. Initially this practice was not questioned,but lately questions about why transporters do not purchase these items in the local market have been raised by the Reserve Bank. Any attempt to restrict the wholesale purchasing ability of Malawi transporterswould weaken their ability to compete with foreign operators.

6.5 The ability to import used and reconditionedvehicles also provides an opportunity for the reduction of vehicle cost, and would be of particular benefit to domestic operators. The Reserve Bank has indicated that such vehicles now would be considered for foreign exchange approval. However, to date no mechanism has been established to estimate demand, facilitate importation,ensure technical quality and compatibility,and provide local credit. The logical group to explore this possibility,i.e., existing motor dealers with established relationshipswith the Reserve Bank, does not appear to have any interest in importing used vehicles.

C. Vehicle Parts

6.6 Vehicle suppliers and other traders dealing either totally or partially in vehicle parts provide adequate coverage for automotive parts and materials. In response to the liberalizationof foreign exchange, the supply of fast moving and generic parts has improved, even though duty and surtax continue to be levied at rates that increase the c.i.f. cost by approximately100 percent before any markup is applied by the seller. In general, the cost of spare parts available through traders is less than those from a vehic.e supplier. The lower cost structure results from sourcing parts in South Africa or other developing countries instead of the United States or Europe. However it is impossible for traders to obtain proprietaryparts and difficult for them to obtain major interchangeablecomponents, both of which comprise about 60 percent of the parts purchased over the normal life of the vehicle. - 153 -

6.7 Malawi transportersindicate that the availabilityof most parts is no longer a major operating constraint except for very old vehicles (over 15 years) that should be retired from continuous revenue service anyway. However, as the result of high markups, duty and surtax, the cost of parts remains a serious operating constraint for domestic transporters. Fortunately,Malawi internationaloperators are eligible for a program that rebates 80 percent of the duty and surtax paid on parts and tires against a credit for internationalmileage. Since the beginning of the rebate program in 1987 through financial year 1989/9G, MK 4.8 million has been returned to internationaltransporters. This program is not available to domestic transportersat this time.

D. Tires

6.8 There are several major tire dealers representingcertain brand names and a large number of general goods traders also selling tires. The cost of tires has decreased dramaticallyas a result of the recent foreign exchange liberalization. In 1988 tires were considered the major variable operating cost item for many transporters,even higher than fuel on a cost per km basis. It was not uncommon for the cost of an 11:00 x 20 bias ply tire to be in the range of MK 2,500-3,000 when purchased from a local supplier. Today, this tire can be purchased for MK 1,200 or less, depending on source and quantity. Direct importation of tires by transportersfurther reduces the cost. The same size tire with superior radial constructioncan be directly imported for approximatelyMK 1,000 per tire depending on the source and quantity.

6.9 Like parts, new tires, retreaded tires and retreading material are still subject to high customs duty and surtax rates that increase the c.i.f. cost of these items by approximately80 to 100 percent depending on the applicable tariff heading. Tires are not manufactured in Malawi, but there are three companies that retread tires. The supply of retreaded tires has also improved as the result of the increased importation of retreadingmachinery, materials and supplies.ll/ Transporters indicate the availabilityof retreaded tires is adequate, and the quality of the product has improved.

E. Vehicle Repairs

6.10 The number of facilities engaged in heavy vehicle repair is unknown, but they are numerous. However, excluding the vehicle suppliers, it is estimated that only 10 facilities exist that are properly equipped and staffed to perform major maintenance and component rebuilding for heavy vehicles. In addition, all of the adequate facilities are located in or near Blantyre and Lilongwe. The lack of

11/ As a result of liberalizedaccess to foreign exchange, one tire retreader has purchased machinery and is manufacturing precured tread rubber using Malawi natural rubber as the major raw material. This domesticallyproduced tread rubber has been substituted for the more expensive imported version for a net saving of foreign exchange. In addition as a direct foreign exchange earner, 10 tons of Malawi precured tread rubber is being exported to countries in the region each month. - 154 - proper maintenance facilities,especially in the rural areas, is a major constraint to business expansion in these areas.

6.11 Normal running repairs, such as belts, hoses, bulbs, along with routine preventive maintenance,can be and usually are done by the transport operators themselves regardless of fleet size. Some operators engage in all aspects of vehicle maintenance and repair, while others rely on outside maintenance facilities to supplement their own capabilities. The marginal quality of many maintenance facilitieshas a negative impact on the efficiency and productivityof the transport operator. The underlying cause of inadequatemaintenance facilities is the lack of professional supervisionand maintenance personnel, coupled with obsolete tools and equipment. The liberalizationof foreign exchange could help to address the hardware shortage, but competent Malawi personnel can only result from the establishmentand promotion of technical training programs within Malawi.

F. Petroleum Supply

6.12 The domestic fuel supply and the network of petrol/diesel fuel stations appear adequate to support the current domestic road transport industry.12/ Internationaltransporters usually purchase fuel outside of Malawi and to date have not had any supply problems. The cost of domestic diesel fuel at MK 1.90 per liter is higher at this time than in the surroundingcountries except Zambia. This is due in part to the high c.i.f. cost of Malawi fuel for which the transportation element ranges from 29 percent to 65 percent of the c.i.f. cost and 32 percent of the retail cost.13/

G. Insurance Companies

6.13 There are four companies registered in Malawi that provide insurance coverage for road transportvehicles. The insurance sold is either third party or comprehensive. Third party is liability coverage required by the RTA in order to obtain an annual vehicle license. It is relatively inexpensive,say in the range of MK 500-1,000 per year, and does not present an operating constraint for transportersholding a RSP. Comprehensiveinsurance provides coverage on the vehicle against loss due to accident, fire, theft or other physical damage. It is not required by law, but usually is required by the credit facility financing the equipment purchase.

6.14 Comprehensivecoverage is expensive and is based on a fixed percentage of the vehicle replacementcost. It is not unusual for the cost of comprehensiveinsurance to equal 10 to 15 percent of the vehicle cost. This same type of coverage in neighboring countries ranges from a low of 7 percent up to 15 percent. Insurance rates are based on past history, risk assessment and geographic conditions with the resultant

12/ In November 1990, domestic operators indicated that fuel availabilitywas not a problem, only the cost of fuel.

13/ National Energy Plan 1988-1997, OPC, pp. 166 and 169. - 155 -

rates varying considerably. Insurance rates in Malawi tend to be at the high end of the scale and present an opportunity for cost reduction, possibly through cooperativeor off shore underwriting,to operators who purchase comprehensiveinsurance.

6.15 The number of trucks insured by Malawi companies is not known. Insurers collect and compile data on the basis of policies sold, and one policy may cover a number of vehicles. Up to now the individual vehicle informationwhich is available by policy has not been compiled or analyzed by the insurance industry. Information relative to the number of vehicles insured and their physical characteristicscould be very useful to MOTC. Given the small number of vehicles involved, this should not be a difficult exercise for the insurance companies to complete on an annual basis.

H. Credit Facilities

6.16 Malawi's comuercial banks consider road transport to be a high risk business and consequ.entlydo not have a history of making loans for the purchase of operating equipment. These lenders indicate that the classificationof poor risk stems from the perception that Malawi operators lack a professionalapproach to transport, and the seasonal nature of transport demand found in an agriculturaleconomy. In addition they cite the large sums that must be paid for equipment on an annual basis from revenues that are usually sufficient only during the seven month period of high demand.

6.17 Historicallythe only credit available to Malawi operators was extended by vehicle suppliers and often was the basis for any purchase decision. Supplier credit usually had very harsh terms, requiring a down payment of up to 30 percent, a repayment schedule of 24 months, and an interest rate above prime. Many operators who accepted supplier credit could not meet the financial obligation and defaulted on the debt. When this happened, the debt was rescheduledwith the result that the operator took on additional debt or pledged additional security. Finally, when the rescheduledpayments could not be met, the transporterwould cease operation and the vehicle was repossessed.

6.18 In 1988 the Leasing and Finance Company of Malawi (LFC) began to extend credit to Malawi transporterswith more reasonable terms based on the operating environmentexisting in Malawi. Interest rates were still high, but the down payment was usually a maximum of 20 percent with a repayment schedule of up to 60 months. Malawi operators soon realized that a debt structure of this type was manageable and could be retired successfully. As a result LFC has become the leading credit source for the transport industry and the old system of supplier credit virtually has disappeared. While LFC impro'vedthe access to credit, its very success led to a credit crisis. Alproximately 50 percent of the LFC portfolio now consists of leases for heavy goods vehicles, and LFC does not anticipate taking on any Lew clients for vehicle leases at this time. LFC indicated that increasing its vehicle portfolio, purely on a commercial basis, would leave it over-extended in that market segment. This leaves the transport industry with virtually no access to credit at a time when new vehicles should be purchased and - 156 -

are readily available as a result of improved foreign exchange allocations.

6.19 A small amount of credit assistance has been forthcoming from the Investment and Development Bank of Malawi (INDEBANK)and the Investment and Development Fund of Malawi (INDEFUND). INDEBANK recently made its first loans to indigenousMalawi transportersfor transport equipment. INDEFUND has approved and is processing funding for three vehicles. Both of these institutionshave indicated that the loans are pilot projects and there are no plans to expand loan facilities to road transportersin the near future. If the road transport industry is to provide efficient and effective service, it must lower fleet age and increase fleet reliability. This requires the purchase of new equipment and is not possible without an expansion of existing credit facilities or creation of new institutionscapable of supportlig the credit needs of the road transport industry.

VII. INDUSTRY PERFORMANCE

A. InternationalOperators

Tonnage Moved

7.1 It is clear from the traffic informationshown in Table 7.1 that the share of wet cargo (petrol, diesel fuel, jet fuel, aviation gas and paraffin 14/) moved by Malawi transportershas steadily increased from 27 percent in 1987 to 66 percent in 1990. This increase is mainly due to an increase in vehicles owned by indigenousMalawi transporters. The dry cargo share decli;iedfrom 32 percent in 1987 to 18 percent in 1989, but again increased to 29 percent in 1990 mainly due to the registrationand operation of approximately100 additional heavy capacity dry cargo vehicles put into service during 1990 by foreign investor-ownedMalawi-registered transport companies. The overall share first decreased from 31 percent to 23 percent in 1989 and has increased to 34 percent in 1990.

14/ There have been experimentswith the export of liquid molasses but the tonnage is very small. - 157 -

Table 7.1 Market Share in Percent for Malawi and Foreign Transportersby Cargo Type, 1987-1990

Malawi 2 Foreign 2

Cargo Type Cargo Type Wet Dry Total Wet Dr Total 1987 27 32 31 73 69 69 1988 NA NA 24 NA NA 77 1989 40 18 24 61 82 77 1990* 66 29 34 34 71 66

Note: This table constructedfrom MOTC reports in Annex 4 * 1990 figures are for three quarters only

7.2 Discussionswith the operators of the newly registered equipment and other Malawi transportersengaged only in international transport indicate that they are averaging from three to seven trips a month depending on the route with a load factor of 90 percent or better. Given this level of traffic activity and the increase in capacity, the Malawi share for the 1990 season should be even higher than the records indicate. Malawi market share has not increased in proportion to the added capacity due to the withdrawal of Malawi registered vehicles from the internationalmarket by many Malawi dual operators, those that were engaged in both internationaland domestic transport.

7.3 Dual operators indicate that they are reducing their participationin internationaltransport due to the increasing competition froimboth larger Malawi internationaloperators and foreign operators. Further evidence of their withdrawal is found in the duty and surtax rebate returns to Malawi operators working internationally. Size of the rebate claim is based on the amount of internationalmileage operated. In the 1989-90 financial year 16 Malawi dual operators submitted claims for duty and surtax rebate, but only five had claims totaling more than MK 20,000, which indicates a reasonable level of internationalmileage for one truck.

7.4 The continued dependence on foreign transportersto move high value exports is easily seen in Table 7.2. In 1989, 56,900 tons of tobacco were exported, but only 5,900 tons or 10.4 percent moved in Malawi trucks with the destinationbeing Harare where it was transferred to rail for its movement to the Port of Durban. During the same period 41,400 tons or 73 percent was moved in South Africa and Botswana trucks with the destination being inside South Africa, usually Johannesburg. - 158 -

This foreign dependence is a result of three major factors: (i) the imbalance of import/exporttonnage, (ii) easy access to high value import cargo, and (iii) continued use of c.i.f. importing and ex-factory exporting.

Table 7.2 1989 Export Commodity in Tons by Registrationof Carrier Vehicle

Malawi Zambia Zimbabwe S.Africa Botswana Tanzania Total

Tobacco 5902 994 4126 3657 37717 4468 56864 sugar 16396 6401 7100 1800 18700 50397 Tea 5606 1993 772 27426 1947 37744 Produce 1348 83 716 195 5060 174 7576 Cotton Seed 382 142 400 2435 3359 cotton 59 108 190 1972 2329 Ground nuts 322 48 51 28 1662 108 2219 Other/Mixed 8850 518 2524 1089 9533 932 23446

Total 38865 8044 16,760 8131 104505 7629 183934

Note: This table constructedfrom data contained in Annex 4

7.5 The import/exportimbalance is a structural problem that can be mitigated to some extent in the long term by import substitutionand export promotion. At this time the imbalance is magnified by the importationof approximately150,000 tons of maize for Malawi and refugee food aid programs. The structure of negotiated rates for round trip service Blantyre/Johannesburgcan be up to 100 percent higher in favor of the import leg of the trip. Published rates also reflect this difference, but usually the maximum import rate does not exceed the export rate by more than 50 percent.

7.6 The rate differentialhas greatly benofitted clearing and forwarding agents and transportersin South Africa 15/ and Malawi firms having corporate ties with these foreign companies. In effect the rates paid for import cargo have been subsidizingexports to the benefit of the major export industries. This fact is not lost on exporters and, along with their minimal confidence in the ability of indigenous Malawi transporters,explains their continued use of foreign transporters.

15/ Botswana registered transport companies are usually owned and controlled by South African interests. - 159 -

7.7 Traditionally,imports have been ordered c.i.f. Malawi, which lesves the transport component includingpricing in the hands of the supplier not the importer. The major suppliers are either off shore or in South Africa and tend to utilize clearing and forwarding agents and road transporterswho reflect this linkage. Continued dependence on the system of c.i.f. importingwill keep the door to high rate cargo closed for most Malawi transporters. This is a serious constraint of indigenousMalawi transport operators and strategiesmust be devised and implementedto address this imbalance. One possible course of action is to improve the professionalability of indigenous Malawi transporters. This in turn will increase their capacity to successfullymarket their services to both Malawi importers and exporters.

Operating Performance

7.8 The private and competitivenature of road transportmakes the collection, analysis and comparisonof financial and operating data a sensitive issue. No uniform operating or financial records are kept by internationaltransporters; however, such records could make transport policy decisions and planning much more effective. The RTA stipulates that transporterswith a RSP keep records in a form acceptable to GOM. However MOTC has never required transportersto submit any operating or financial data, and there are no standards or filing procedures in place. What informationhas been obtained from Malawi operators is of a proprietary nature and supplied with the understanding that it not be published or shared with other operators.

7.9 Tonnage moved by these operators as a group is quantified, but ind.4vidual company tonnage moved is not available. This information could eaiily be obtained at the same time the current MOTC data concerning import and export tonnage are collected at each border post. It is difficult to determine accurate levels of availabilityand utilizationwithout detailed operating records. Internationaloperabors estimate that their equipment availabilityranges from 85 to 95 percent with an average annual utilizationof 90,000 km and a load factor of approximately90 percent. Dual operators, on the other hand, estimate that their equipment availabilityranges from 70 percent to 85 percent, with an average utilization of 70,000 km and a load factor of 50 to 70 percent.

Operating Cost

7.10 In the last two years the operating environment for the Halawi transportershas improved greatly due to the GOH actions. Consequently,major elements of fixed and variable costs have declined for Malawi internationaloperators with the resources to directly import vehicles, parts and tires. Operating costs for all Malawi transporters' are still higher than those of the market leaders, South African- controlledtransporters registered in both Botswana and South Africa, mainly due to the differential in the prices of spare parts and tires.

7.11 Unfortunatelymost of these costs have not declined for Malawi dual operatorswho have no ability or resources to import equipment and supplies directly. The Malawi dual operators prefer to - 160 -

continue working internationally,but realize that they are not and cannot become cost competitivewith either the Malawi internationalor foreign operators given their leve..of professionalability and cost structure.

7.12 It is not possible to compare actual operating costs among Malawi and foreign operators engaged in internationaltransport due to varying business structures,different vehicle types. However, it is possible to construct a comparisonbased on representativedata supplied by Malawi operators and foreign operating associationsusing new vehicle prices and accepted industry practices. The cost structure presented in Table 7.3 for the foreign operators representsthe market leaders, companies registeredin Botswana and South Africa. Cost data relative to the operations of transportersregistered in other regional countries such as Zambia and Zimbabwe are unreliabledue to the critical shortage of foreign exchange and the substantialdifference between the official and parallel rates of exchange. For example, in early 1990 the delivered price of a 30 ton capacity horse and semi-trailerin Zambia could have varied from ZK 3 million to ZK 7 million, depending on the source of foreign exchange if available at all.

7.13 It is impossibleto collect any meaningful cost data for comparison in that type of economic atmosphere. As Table 7.3 indicates, the operating costs including profit margin for the Malawi dual operators are approximately33 percent higher than those of the other operatorsworking internationally. It also appears to support the idea that foreign operators no longer possess an operating advantage over the Malawi internationalonly transporters,but, in practice, the utilization levels of foreign transportersare higher than 90,000 km/year, between 120,000 and 180,000 km/year. Foreign transporters (Case I) in Table 7.3 indicates costs for a utilization level of 150,000 kms/year and is seen to be 30 percent lower than for a utilization level of 90,000 kms/year. - 161 -

Table 7.3 estimated Annual Vehicle Operating Costs in 1990 Iwacha for Foreign Operators and MalawL International and Dual operators, Payload of 30 Tons

Investment Costs Forelgn Foreign Intl. Dual Case I Case II

Road Tractor (6x4) 365,000 280,000 370,000 SemL-traller (3 axle) 72,000 127,000 127,000

Total 437,000 437,000 407,000 497,000

Utilization (kma/yr) 150,000 90,000 90,000 90,000 Insurance (% of Lnv.) 11 11 7.5 1S Tire Cost (MN/km) .15 .15 .40 .70 Var. MaLnt. (MK/km) .25 .25 .52 .72 Fuel Cons. (lt/10Okm) 65 65 65 65 Fuel Price (3K/lt) .94 .94 .94 .94 Lubr/Oil (% of fuel) 5 5 10 10 Lease Term (months) 60 60 60 60

FLxed Annual Costs Depreciation 87,400 81,400 99,400 Intere-t 60,500 56,350 68,800 Licenses 10,000 9,000 9,000 Insurance 48,120 30,525 74,550 Wages 30,000 18,000 18,000 Fixed Maintenance 13,600 9,000 14,000 Administration 27,800 20,000 20,000

Total FLxed Costs 277,420 277,420 224,275 303,760

Varlable Annual Costs Fuel 54,990 54,990 54,990 Lubr/OLl 2,750 5,500 5,500 Tlres 13,500 36,000 * 63,000 Maintenance 22,500 46,800 64,800

Total Var. Costs 156,250 93,740 143,290 188,290

Sum of Costs 433,000 371,160 367,565 492,050

Total Costs Lncl. Margin of 20% 519,600 445,400 441,100 590,460

Costs 3K/km 3.46 4.95 4.90 6.56 Costs HI/ton-km Load Factor 100% .115 .165 .163 .219 90% .123 .183 .181 .243 80% .144 .206 .204 .274 70% .164 .236 .233 .313 60% .192 .275 .272 .365 50% .230 .330 .326 .438

Note: See Annex 6 for lease terms and exchange rates - 162 -

Financial Performance

7.14 Internationalroad transport rates are very fluid at this time. Freight forwarders and transportersboth indicate that rates are now frequently being negotiated on a trip by trip basis. Although this makes the estimation of revenue generation very difficult, an estimate of road transport rates by route based on discussionswith shippers and transportersis presented in Table 7.4. A comparison of these estimated rates with the operating costs outlined previously indicates that both Malawi and foreign internationaloperators can make a profit.

Table 7.4 Estimated InternationalCargo Rates Expressed in 1990 MK/km for Common Destinations

Blantyre/Harare 7.33 Round Trip Loaded 4.75 One-way Empty

Blantyre/Jburg 5.05 Round Trip Loaded

Blantyre/Dar 5.84 Round Trip Loaded

Note: Rates are expressed in MK/km due to the container and breakbulk cargo mix. When negotiating a rate the transporter is concerned with round trip revenue regardless of cargo carried within reason.

7.15 Malawi dual operators, as expected, do not fare as well. Running the most popular route empty one way, their usual position, the revenue geneiated can only cover 87 percent of operating cost before the inclusion of the 20 percent margin. This helps partially to explain their shift from internationalto domestic operations. Dual operators indicate that the recent increase in the maximum domestic rate to MK 0.4/ton-km is very attractive to them and has contributed to their decision to reduce their participationin internationaltransport.

7.16 By their own admission some Malawi operators are able to make a reasonable return on their investment. The better organized, managed and financed transportershave reported a return on capital in the range of 30 to 40 percent before taxes. Smaller operators are generally unable to provide estimates of return on capital or profit and loss, but given their higher operating costs, it is doubtful that these smaller operators are experiencingcomparable rates of return.

Strategic InternationalCapacity

7.17 If the Nacala corridor were to become fully operationalby 1993, the total export/importtraffic on the remaining routes would be reduced to 600,000 tonnes. The amount of cargo that would continue to - 163 -

move overland by truck is uncertain and depends on the import and export routes actually used. At the very least, some level of direct importation from South Africa, either completely by truck or by rail and truck, is likely to continue given the changing regional political situation and the already firmly entrenched trading linkages between Malawi and South Africa. If the Malawian-registeredvehicles retain their capacity and improve utilizationof their fleet, their share of the traffic would automaticallybe more than 50 percent. This of course may not be easy in the face of the efforts of the foreign transporters also trying to maintain their share.

7.18 The existing impedimentstu improving and expanding the number of indigenousMalawi operators capable of competing successfully in the internationaltransport industry are numerous and complex. These include lack of skilled management and operating personnel, high cost of locally purchased vehicles, high operating costs, low vehicle utilization,undersized fleets, limited access to high revenue import traffic, limited access to credit facilities and unlimited competition from transportersin surroundingcountries. The strength of these impediments begs the question whether this industry can or should expand through the use of small indigenousMalawi transportersor follow tk recent path that has increased capacity by the use of foreign investor- owned Malawi transport companies. The later approach yields road transport capacity controlled by Malawi through the registrationof vehicles in Malawi and also provides for payment of road transport services in Kwacha and not foreign exchange.

7.19 As long as there is minimal GOM interferenceand sufficient demand, it is unlikely that foreign investor owned companies will cease operations under Malawi's control. When demand falls, foreign investor- owned companies will either disband or reduce their operations in line with the financial opportunities. In the mean time, training and technical assistance programs to improve the professionalability of indigenous Malawi operators should be vigorously pursued so that Malawi will have the necessary institutionaland personnel resources to safeguard future road transport strategicneeds. This approach provides Malawi controlled capacity in the short term through the foreign investor-ownedMalawi companies and prepares the indigenous Malawi road transport industry to compete successfullyin the medium and long term.

7.20 Malawi transporterscurrently move approximately60 percent of all petroleum imports. This high market share is made possible because the PCC is the only importer of petroleum and the transport demand is relatively stable. The broker working for PCC can and does give preference to Malawi operators over foreign operators. This control, along with available capacity, assures the high Malawi market share. However, increasedMalawi participation is beginning to meet with stiff resistance from foreign transportersbased in those countries where the road transport of petroleum originates. This type of control is not possible in the dry cargo segment with its many buyers and sellers.

7.21 The recent increase in dry cargo market share up from 18 percent to 29 percent for Malawi transportersis due to an increase in - 164 -

the vehicle supply and marketing efforts of professionallymanaged Malawi registered transport companies, and not the result of market control. Transportersfrom siz neighboring countries are now operating into Malawi, including the three bordering countries of Tanzania, Zambia and Mozambique, along with South Africa, Botswana and Zimbabwe. What Malavi has gained, these foreign operators have lost. Further reduction of market share for transportersfrom either the bordering countries or Zimbabwe could have serious consequences for Malawi transportersgiven their country's land-locked status. To retaliate for loss of market share, surroundingcountries could restrict in some manner the operating permits of Malawi transporters. South Africa also will not let its transportersbe denied market share for cargo originating or sourced in South Africa. This leaves Botswana registered vehicles, which have the least claim to Malawi traffic but enjoy the largest market share. If RSP for Botswana registered vehicles were restricted as a matter of policy to try and shift market share to other foreign operators, the existing Botswana operatorswould in all probability change company and vehicle registrationto South Africa and continue to operate normally.

Foreign Exchange Saving

7.22 The companion argument for strategic capacity and using Malawi transportersinstead of their foreign counterpartsis that it produces a net saving of foreign exchange. Table 7.5 presents the annual foreign exchange and local currency components of the Malawi internationaltransporters' estimated operating cost. As indicated, the expenditure of foreign exchange is an amount equal to MK 198,000. A foreign transporterworking on the prime route, Blantyre to Harare, with a load factor of 90 percent and making six round trips a month would generate annual revenue in foreign exchange of MK 570,240. If the Malawi transporterwere capable of achieving the same operating performance and displaced the foreign operator, there would be a net saving of foreign exchange equal to what the foreign operator earned minus the amount of foreign exchange spent by the Malawi operator, which in this case would amount to MK 370,000 annually. In addition, some Malawi internationaloperators have additional foreign exchange costs due to expatriate employees and externalizationof dividends, but the magnitude of these costs can not be quantified at this time. - 165 -

Table 7.5 Foreign Exchange and Local Currency Components of a Malawi InternationalTransporter's Operating Cost Each Expressed in 1990 Malawi Kwacha

Total Local Foreign

Fixed Annual Costs Capital (lease) 137,750 63,750 74,000 Licenses 9,000 4,000 5,000 Insurance 30,525 30,525 Wages 18,000 18.000 Fixed Maintenance 9,000 3,000 6,000 Administration 20,000 20,000

Variable Annual Costs Fuel 54,990 4,990 50,000 Lubr/Oil 5,500 1,500 4,000 Tires 36,000 9,000 27,000 Maintenance 46,800 14,800 32,000 Margin 73,535 73,535

Total 441,100 243,100 198,000

Notes Prevailing exchange rate US$l/MK 2.6

7.23 In this analysis, the amount of foreign exchange spent by the Malawi transporter is not as important as the assumption of achieving the same operating performance. Unfortunately the assumption of equal operating performance is valid only for a small group of Malawi operators, which includes those with expatriate management, foreign investor ownership and indigenous operators transportingpetroleum products. The remainingMalawi operators do not achieve the same level of performance and as a group suffer from the lack of locally available professionalmanagers and supervisorsand exhibit inadequate operational planning, technical support and business discipline.

7.24 The expenditureof scarce foreign exchange to establish and support indigenous Malawi transporterswho were only 50 percent as productive as foreign operatorswould quickly diminish any net saving of foreign exchange and substantiallyincrease the total expenditure^ necessary to move the same amount of cargo. A productive and efficient indigenous Malawi road transport industry requires the development of professionallycompetent road transportmanagers and supervisors. Any attempt to increase either the internationalor domestic road transport capacity controlled by indigenous Malawi operators must have at its foundation training and support activities specificallydesigned and implemented to improve the discipline and skills of industry personnel. - 166 -

7.25 On the whole the internationalmarket has been and continues to be self regulating,and GOM's policy of minimal regulation and interferenceseems to be working well. Since the rates for internationaltransport are not controlled,the market has decided the best alternativebased on price. The Malavi operators that continue to operate competitivelyin the internationalmarket will be stronger as a result of the market adjustment. With continued government support, these remainingoperators can provide Malawi with a soli.dand reliable strategic internationalroad transport capacity.

B. Domestic Operators

Tonnage Moved

7.26 Accurate figures on domestic road tonnage moved are not available, with the exception of ADMARC and food aid, which in 1989 accounted for approximately540,000 tons and 100,000 tons, respectively, and for 65 million ton-km. Total dowestic road transport demand has been estimated at 200 million ton-km. However it cannot be assumed that demand equals tonnage moved as in the case of internationalcargo. Without an institutionalizeddata collection effort by MOTC it will remain impossible to make realistic assessments of domestic cargo movements.

Operating Performance

7.27 Informationreceived from domestic operators confirms that operating records containing data on vehicle availability,utilization, turn-aroundtime and other useful performance indicators are not available. This is not due to reluctance to share information on a confidentialbasis, but rather the result of no data being recorded at source. Domestic transport industry sources put availabilitybetween 70 percent and 85 percent, average utilization at 45,000-90,000km depending on vehicle size, and load factor from 50-70 percent. A survey of domestic operators could quantify the existing situation, and support the developmentof training and technical assistance programs aimed at improving the professionalskills of Malawi transporters.

Operating Cost

7.28 The lack of data makes it necessary to estimate operating cost. as detailed in Table 7.6. These costs are based on the purchase of new equipment and operation on surfaced roads in good condition. The use of 7 ton and 10 ton vehicles on poor road surfaces, such as required by ADMARC to service their poorly accessible markets, could increase the per km cost of maintenance and tires by as much as 50 percent and increase the fuel consumption by up to 20 percent. The break-even transport rate that covers fixed and variable cost but not profit for various load factors is presented in Table 7.7 and clearly shows that a single rate is not appropriate,given the wide range of cost structures, even through the figures in Table 7.7 are only estimates and useful primarily for comparativepurposes. When the increased cost resulting from rough road operations are considered on top of the already inadequate rate, it is easy to understand ADMARC's inability to attract small capacity vehicles for remote routes. -167-

Table 7.6 Estimated Vehicle Operating Costs in 1990 Kwacha for Malawi Domestic Operators without the Resources to Directly Import Vehicles, Parts and Tires

7 Ton 10 Ton 15 Ton 30 Ton

New Vehicle Investment Cost 146000 206000 250000 497000

Utilization (kms/yr) 45000 45000 60000 90000 Insurance (% of inv.) 1S 15 1S 15 Tire Coat (MK/km)* .25 .27 .45 1.00 Var. Maint. (MK/km)* .30 .35 .55 1.15 Fuel Cons. (lt/100 km) 30 35 40 65 Fuel Price (MK/lt) 1.9 1.9 1.9 1.9 Lubr/Oil (% of fuel) 10 10 10 10 Lease Period (months) 60 60 60 60

Fixed Annual Costs Depreciation 29200 41200 50000 99400 Interest 20215 28520 34610 68810 Licenses 900 1200 1800 5000 Insurance 21900 30900 37500 74550 Wages 2400 3000 3000 6000 Fixed Maintenance 5000 8000 9000 15000 Administration 10000 15000 15000 20000 Misc. Expenses 2500 3500 4000 7500

Total Fixed Costs 92115 131320 154910 296260

Variable Annual Costs

Fuel 25650 29925 45600 111150 Lubr/Oil 2565 2990 4560 11115 Tires 11250 12150 27000 90000 Maintenance 13500 15750 33000 103500

Total Var. Costs 52965 60815 110160 315765

Sum of Costs 145080 192135 265070 612025

Total Costs incl. Margin of 20% 174100 230560 318080 734430

Costs MI/km 3.87 5.12 5.30 8.16

Costs ME/ton-km Load Factor 100% .553 .512 .353 .272 90% .614 .569 .392 .302 80% .691 .640 .441 .340 70% .790 .731 .504 .389 60% .922 .853 .588 .453 50% 1.106 1.024 .706 .544

* Reflects full duty and surtax paid

Note: See Annex 6 for lease terms and exchange rates - 168 -

Table 7.7 Estimated Break-even Transport Rates in 1990 MK/Ton-Km by Vehicle Capacity and Load Factor

Vehicle Capacity

7 Tons 10 Tons 15 Tons 30 Tons Load Factor

100Z .461 .427 .295 .227 90Z .512 .474 .328 .252 soz .576 .533 .369 .283 702 .659 .610 .421 .324 60Z .768 .712 .492 .378 50Z .922 .854 .590 .454

7.29 As indicated, the current rate can cover operr:ing costs for 15 ton and 30 ton units, depending on load factor. Clearly, increasing load factors (reducingempty backhauls) has a substantial effect on revenue generation, improving truck productivityand reducing total transport costs. Reducing empty backhauls is accomplishedby balancing cargo flows with a coordinateddispatching strategy. However, formulatingand implementingsuch a strategy requires a transportbroker with detailed knowledge of the cargo on offer and the transport requirements. In the absence of such a brokerage activity, dispatching efforts require road transport operatorswith a high level of professionalability.

7.30 ADHARC performs a brokerage function of sorts for crop collection and agriculturalinput distribution. However, the activities of ADMARC are limited to the agriculturalsector, and it has neither the structure nor the capacity to provide a national dispatching service. An organized private sector cargo broker could work across all segments of the economy to provide a national coordinated road transport dispatching strategy. Matching cargo with transport capacity on a real time basis could also significantlyreduce idle time.

7.31 Idle time as a result of both overcrowded loading and unloading facilities,and poor coordinationbetween buyers and shippers, is beyond the control of the transporterand represents a serious operating constraint. The idle time component further complicates fixed cost recovery for operators of smaller capacity trucks. Operating costs for both 7 ton and 10 ton trucks for various short trip distances are presented in Table 7.8. As indicated, the rate necessary to recover fixed and variable cost for one round trip per day with a lad factor of 50 percent is above the current maximum rate. However, if idle time is limited and the trips increase to two per day, the rate necessary to cover cost decreases substantiallybut still is not below the current maximum. Fixed cost recovery and its idle time component are operating constraints that must be addressedby both transportersand shippers, as well as be reflected in the structure of transport rates. - 169 -

Table 7.8 Break-even Rate in 1990 MK/Ton-Ku for 7 and 10 Ton Capacity Trucks Mbking 1 or 2 Round Trios with 50 Load Factor

Round Trip Distance (Ku)

50 100 200 7 Ton Fixed Cost(l) 370 370 370 Variable Cost 60 120 240

Total Cost 430 490 610

Break-even Rate for No. Trips 1 2.46 1.40 .87 2 1.40 .87 .61

Round Trip Distance (Km)

50 100 200 10 Ton Fixed CostCl) 525 525 525 Variable Cost 70 140 280

Total Cost 595 665 805

Break-even Rate for No. Trips 1 2.38 1.33 .81 2 1.33 .81 .54

(1) Fixed cost based on annual operation of 250 days

Financial Performance

7.32 Domestic transportersare more likely to keep financial records of some kind than records of operating performance. Financial records provided in confidence by small domestic operators usually included revenue and some elements of variable costs with the positive excess, if any, characterizedas profit. Many of the small operators work solely on the basis of cash flow. Basic concepts such as proper costing, replacem nt reserves and depreciation,fixed as opposed to variable costs, and the calculation of profitable rates are not well understood. Both the larger and better organized operators tend to keep accounts that are more complete and often have their annual records audited by outside accountants. These accounts give a better picture of - 170 - the firm and usuallyinclude profit and loss based on accepted accountingpractices. 7.33 Informationsupplied in confidenceby largeroperators Indicatesthat a returnon capitalbefore taxes in the range of 16 percentto 40 percentis possible(para. 7.17). While the numberof operatorsmaking an acceptablereturn is unknown,it is clear that some operators aiakeprofits adequate to ensurecontinued operation. Unfortunatelyeven these operatorsdo not allocateoperating costs on a per vehicle-kmor ton-kmbasis. Informtion of this type could improve their understandingof cost elementsand facilitateoperating changes designedto improvefleet efficiencyand productivity. 7.34 The domesticmarket has experiencedan improvementin supply broughtabout by a marketadjustment in the internationalsector. There is no reasonto believethis same situationwould not occur to address the short supplyof smallercapacity trucks in the domesticmarket given the right circumstances.Access to creditfor qualifiedoperators could enablethem to purchaseadditional smaller capacity vehicles. Competitivetransport rates, free to reflectcosts accurately,could encouragethe more professionaldomestic operators to respondand increasethe supplyof smallercapacity trucks. This would improvethe supplyin the short term and providea largerpool of used vehiclesfor smalleroperators in the long term. In addition,the improved reliabilityassociated with more professionaloperators could influence own-accountusers to reduceor discontinuetheir own transport operationswith the effectof increasingthe efficiencyof the road transportsector as a whole.

VIII. ROADTRANSPORT CONSTRAINTS

A. Ministryof Transportand Communications 8.1 Malawi'smulti-modal and multi-routeoptions for the transportof its internationaldomestic freight transport underscore the importanceof the planning,monitoring and supportingfunctions undertakenby MOTC.16/ To performthese functionseffectively, MOTC requirespersonnel of the highestprofessional ability supported by adequateresources. In addition,the role of MOTC must shift from detailedmanagement of the transportoperating environment, e.g., the settingof maximumrates, to monitoring,planning and policyreview. A completeoperational review of functionsand organizationwould identify and documentthe actionsneeded to improveand strengthenthe institutionalstructure of MOTC. Under this reviewparticular attention shouldbe paid to the organizationand operationof RTD and the outdated statusof the RTA.

161 MOTC'svarious functions include policy, planning, performance evaluation,economic analysis, project evaluation, database construction,data analysisand distribution,international agreements, road trafficdepartment and inter-governmentliaison. - 171 - B. InternationalTransport 8.2 In summary,the major constraintsfacing international transportersrange from the difficultyin gainingaccess to more lucrativecargo to variouscauses of Malawitransporters' higher costs, as reviewed below. 8.3 Accessto high value cargo. The practiceof importingon a c.i.f.basis puts the controlof road transportplanning and cost in the hands of the sellerand not the buyer. Transportis contractedfor with an operatorclose to the supplier. This processexcludes all but the best Halavioperators from any accessto high value importcargo. Improvementin the professionalability of Malawi transportersand a possibletraffic shift to the northerncorridor could improvethis situation. 8.4 High initialcost of vehicles. Directimportation of vehicles,parts and tiresby Malawitransporters is necessaryif Halawi transportersare to be competitivewith foreignoperators who have accessto these commoditieson a factorydirect basis. The prices chargedby localvehicle suppliers continue to be high in spite of the removalof duty and surtaxfrom most goodsvehicles. This does not presenta problemfor the few transporterswho have the personneland financialresources for the directimportation of vehiclesand parts. Unfortunatelythe majorityof Malawi transportersdo not have the resourcesfor directimportation. The practiceof importingused and reconditionedheavy goodsvehicles to lower fixed costs has been approvedin principleby the ReserveBank and would lead to reducedcost of vehicles. 8.5 Access to credit. With the currentlimits on credit availablefrom LFC, no other financialinstitutions are exhibitingany interestin providingcredit to road transporters.Despite the operatorsstrong interest in both replacingthe old fleet and expanding fleet size they are constrainedby the lack of credit. 8.6 Professionaltraining. Discussionswith operatorsand a reviewof operatingand financialrecords indicate a lack of understandingof basic conceptssuch as propercosting, depreciation and replacementreserves, fixed cost recovery,calculation of profitable rates,operational support and equipmentmaintenance are not well understood. 8.7 Local parts and tire costs. Parts and tires purchased withinHalawi have a heavy duty, surtaxand suppliermarkup. It is not uncommonfor the c.i.f.cost of parts and tires to be increasedby 150 percentbefore the end user receivesthem. Internationaltransporters receive80 percentrelief from the duty and surtax,and if they import directly,they also avoid the local suppliers'markup. However,here again,most of the Halawianoperatore do not have the resourcesfor directimportation. 8.8 Local insurancerates. At 15 percentof replacementvalue, insurancecosts are high. Recentlya pool was formedby some membersof - 172 -

RTOA, which was successfulin negotiatinga rate for comprehensive insurancethat is 50 percentbelow the going rate. This is a trial arrangementthat could be expandedif the claim experienceis positive for all parties. 8.9 Possibleexcess capacity of petroleumtransport equipment. In 1989 Malavi registeredvehicles moved 39 percentof petroleum imports,and preliminarydata indicatethat duringthe first three quartersof 1990 this figurerose to 60 percent. Even with this high marketshare, indigenous Malawi operators are stillplanning to purchase additionalvehicles for petroleumtransport. Such actioncould easily resultin excesscapacity, given the alreadylarge Malawi market share and concernsof foreigntransporters that they are not receivingtheir fair share of the trafficoriginating in their countrymoving through from some other source. C. DomesticTransport 8.10 Many of the issuesfacing domestic transporters are shared with internationaltransporters, such as accessto credit,lack of professionaltraining, high costs of insurance,local vehiclesand local parts and tires. However,issues that pertainspecifically to domestic transportare summarizedhere. 8.11 Tr3nsportrates. The currentmaximum domestic road freight transportrate is set at MK 0.4/ton-km.This rate is problematic, becausea singleton-km rate, when appliedacross the board to vehicles of differentcapacity used on variousroutes, must overcompensatesome and under-compensateothers. Shippersand transportersmust have the abilityto negotiaterates that are fair to both parties. Controlling rates in an effortto perpetuatethe businesslife of marginal transportersor providepreferential treatment for selectedshippers helps neitherthe transportersnor the shippersin the long run. 8.12 Fleet supply. The numberof goodsvehicles imported during the last 10 years has not kept pace with the normalvehicle replacement requirements.By all accountsthis has resultedLn an aging and unreliabledomestic for-hire fleet. The replacementof aging vehicles, althoughnecessary, is constrainedby the currentlack of credit facilities,and the many other factorsdiscussed above. However,if additionalcapacity is necessaryin the short run, a possiblesolution rests in the large numbero; goods vehiclesregistered and under- utilizedby own-accountoperators. 8.13 Businessdevelopment. The high fixed costs experiencedby Malawidomestic operators requires them to keep the vehicleengaged in revenueservice as much as possible. This means correctoperational planning,vehicle scheduling and the maximizationof returnloads. These operatorsspend a large portionof their time marketing,looking for a backhaul,or queuingfor work given on a first-comefirst-served basis. Unlike internationaltransporters who have a networkof forwardingagents and brokersto solicitbusiness from, there is no clearinghouse for domestictransport requirements. This type of coordinateddispatching requires a transportbroker with intimate - 173 - knowledge of cargo and destinationsand who is in close contact vith and trusted by both shippers and transporters.

IX. RECOMMENDATIONS iX1 These recomendations are presented for the considerationof GOM and reflect actions that should be undertaken by MOTC and other agencies as followss

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

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

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

,i) Origin, destination and commodity type of domestic cargo; (ii) Fleet, operating and performancecharacteristics of own-accounttransport operations;and (iii) Fleet, operating and performance characteristics of domestic for-hire transporters;

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

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

(e) Undertake, with the assistance and cooperation of MOF, to establish within the private sector a development-oriented pilot revolving kwacha credit program. The administration and operation of the credit program should be the responsibilityof a recognizedprivate sector financial institution,and the funds should be available for use by - 174 -

Malavi transportersto pirchase transport equipment and provide working capital. Possible sources of funding could be existing counterpart funds lodged in several donor- financed transport-relatedspecial accounts or future donor funding containedwithin yet to be developed projects designed to improve the professionalexpertise of Malawi transporters;

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

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

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

(i) Remove all controls on domestic transport rates after proper notification to the industry and sufficient time to allow shippers and transportersto adjust contract terms. - 175 -

Annex 1

GUIDELINES FOR GRANTING EXEMPTIONS FOR FOREIGN HAULAGE VEHICLES TO PLY BETWEENLILONGWE AND BLANTYRE

1. The rationale for giving exemption is that Halawi Railways are, for whatever reason, unable to carry the required haulage. Exemptionsmay be given for the following goodst-

Jet A-1 Fuel Tallow Edible oils in tanks Radio-active materials Certain chemicals in bulk Glass (sheets, bottles etc.) Electronic equipment (radios, cassette players etc.) Large electric transformers Large earth moving equipment Tanks which exceed railway clearances

2. Urgent consignments,where it can be shown that the goods must travel from (to) Mchinji or Mwanza to (from) beyond the stated limits within 4 days.

3. In addition, there may be occasionswhen Malawi Railways is not able to move the goods within a reasonabletime limit. In the event of application for exemption on theses grounds, consultationswill be made with Malawi Railways.

4. Applicationsmay also be made to add additional commoditiesto this list. Such applicationswill require a convincing,detailed justification,and must be referred to this Ministry for decision. This will not be a rapid process.

5. Where an exemption has been granted, the vehicle concerned will be allowed to carry a back-haul.

Sourcet MOTC, May 30, 1983 - 176 -

Annex 2

INFORMALOWN-ACCOUNT FLEET INVENTORY

Petroleum Distributors

OILCOM 19 Trucks 8 Trailers

TOTAL 3 Trucks

CALTEX 4 Trucks

MOBILE NA

TOTAL 34

SOO)THERNBOTTLERS

Bus 2 Tractor 4 Pickup/Auto 26 Sales Truck 65 Bulk Truck 47 Trailer 71

TOTAL 215 _ 177 -

Annex 3

CALCULATIONSOF DRY CARGO DOMESTIC ROAD TRANSPORT CAPACITY

MINIMUM DOMESTIC TONNAGE CAPACITY (1674 TONS)

TRUCKS 1,171 TONS

TRAILERS 233 TONS

HORSE/SEMI 270 TONS

TOTAL 1,674 TONS

MAXIMUM DOMESTIC CAPACITY (14147 TONS)

INTERNATIONAL/ DOMESTIC DUAL OPERATORS TOTAL

TRUCKS 1,171 TONS + 1,496 TONS 2.667 TONS

TRAILERS 233 TONS + 2,127 TONS 2,360 TONS

HORSE/SEMI 270 TONS + 8,850 TONS 9,120 TONS

TOTAL 1,674 TONS 12,473 TONS 14,147 TONS

PROBABLE DOMESTIC CAPACITY ( 7,572 TONS )

MAXIMUM DOMESTIC CAPACITY - INTERNATIONALAND 20S DUAL 14,147 TONS - 6,575 TONS - 7,572 TONS - 178 -

Annex 4 Page 1 of 7

MAL A WI I MP OR T AND EX PO R T BY BO RD ER PO ST

I M P O R T S 1 9 8 9

KAPORO MCHINJI MWANZA T 0 T A L

FERTILIZER 30,245.0 17,722.0 118,836.0 166,803.0 MACHINERY 1,713.0 517.0 3,683.0 5,913.0 SALT 270.0 813.0 15,438.0 16,521.0 WHEAT/FLOUR 795.0 1,066.0 20,434.0 22,295.0 IRON/STEEL 1,820.0 1,016.0 19,302.0 22,138.0 PAPER 90.0 93.0 5,313.0 5,496.0 LIME/CEMENT 5,387.0 16,707.0 241.0 22,335.0 TALLOW 1,168.0 4,965.0 6,133.0 PETROL 27.0 40,521.0 3,220.0 43,768.0 GAS.OIL(DIESEL) 22,024.0 35,241.0 29,642.0 86,907.0 LUBRICANT 283.0 133.0 4,318.0 4,734.0 JET A-1 8,670.0 4,954.0 5,411.0 19,035.0 MAIZE 423.0 52,989.0 96,898.0 150,310.0 COKE/COAL 2,646.0 1C,459.0 13,105.0 OTHER/MIXED 16,657.0 7,293.0 96,035.0 119,985.0

SUB. TOTAL 89,572.0 181,711.0 434,195.0 705,478.0 -= m inmminmm ummU"--a:s-inU "aminm XaUin-tSinm2a---ms- m-amn u=n

E XPO RTS

KAPORO MCHINJI M'TA?ZA T 0 T A L wommom ==Maun=i ===am======on== SUGAR 10,636.0 39,761.0 50,397.0 TOBACCO 4,941.0 10,636.0 41,287.0 56,864.0 TEA 3,189.0 561.0 33,994.0 37,744.0 MAIZE 0.0 MAIZE SEED 0.0 G/NUTS 236.0 48.0 1,935.0 2,219.0 PRODUCE 296.0 209.0 7,071.0 7,576.0 COTTON SEED & CAKE 3,359.0 3,359.0 COTTON 31.0 2,298.0 2,329.0 OTHER/MIXED 1,148.0 2,611.0 19,687.0 23,446.0

SUB. TOTAL 9,810.0 24,732.0 149,392.0 183,934.0 ___------_-.------__------__ TOTAL TRANSIT 99,382.0 206,443.0 583,587.0 889,412.0 …------__------S H A R E S (Tonne) 11.2 23.2 65.6 100.0 - inminaaa"wswtmmmminuminminininUinu"w"=^winUm"win*inum3samm - 179 -

Annex 4 Page 2 of 7

S A L A W I I M P O R T A N D E X P O R T B Y B 0 R D E R P 0 S T

I M P O R T S 1 9 8 8

KAPOR.O UCHINJI 4WANZA T 0 T A L

FERTILIZER 22,488.0 16,448.0 100,539.0 139,475.0 NACHINERY 1,845.0 1,080.0 4,185.0 7,110.0 SALT 112.0 824.0 18,440.0 19,376.0 WHEAT/FLOUR 71.0 1,787.0 22,185.0 24,043.0 IRON/STEEL 1,056.0 1,959.0 23,991.0 27,006.0 PAPER 45.0 836.0 9,071.0 9,952.0 LIVE/CEMENT 2,720.0 21,458.0 764.0 24,942.0 MAIZE 48,735.0 139,172.0 187,907.0 PETROL 672.0 43,206.0 859.0 44,737.0 GAS.OIL(DIESEL) 14,572.0 47,598.0 22,394.0 84,564.0 LUBLICANT 105.0 538.0 4,666.0 5,309.0 JET A-1 5,734.0 9,177.0 3,418.0 18,329.0 TALLOW 65.0 4,606.0 4,671.0 COKE/COAL 2,059.0 14,462.0 16,521.0 OTHER/WIXED 14,533.0 8,961.0 74,188.0 97,682.0

SUB. TOTAL 64,018.0 204,666.0 442,940.0 711,624.0 - in ms Zaasoass=UstaQa: sw== SaX=a:isn:amU:seaini-=s=2===

E X P O R T S 1 9 8 8 mmin= .mm s=...in ... s

KAPORO UCHINJI UWANZA T 0 T A L

SUGAR 2,015.0 22,245.0 45,575.0 69,835.0 TOBACCO 775.0 18,136.0 47,491.0 66,402.0 TEA 6,298.0 753.0 27,746.0 34,797.0 WAIZE 30.0 30.0 G/NUTS 190.0 272.0 32,363.0 32,825.0 PRODUCE 5,259.0 556.0 17,006.0 22,821.0 COTTON & SEED CAKE 45.0 2,563.0 2,608.0 COTTON 589.0 589.0 OTHER/MIXED 1,112.0 782.0 16,402.0 18,296.0

SUB. TOTAL 15,694.0 42,744.0 189,765.0 248,203.0 …------.--.__------.------TOTAL TRANSIT 79,712.0 247,410.0 632,705.0 959,827.0 …___-______.______.______.__.______,_____.______SHARES (Tonnes) 8.3 25.8 65.9 100.0 - 180 -

Annex 4 Page 3 of 7

M A L A W I I M P O R T A N D E X P O R T B Y B O R D E R P O S T

A N N U A L T O T A L S I M P o R T S 1 9 8 7

KAPORO MCHINJI MWANZA T 0 T A L FERTILIZER 2,307.0 35,396.0 62,668.0 100,371.0 MACHINERY 3,160.6 1,372.6 2,425.0 6,958.2 SALT 553.0 12,039.0 12,592.0 WHEAT/FLOUR 1,671.0 900.0 13,433.0 16,004.0 IRON/STEEL 254.0 2,245.0 9,074.0 11,573.0 PAPER 42.3 2,159.1 5,950.0 8,151.4 LIME/CEMENT 368.0 10,204.0 728.0 11,300.0 TEXTILE MATERIALS 217.0 217.0 TALLOW 2,415.0 2,415.0 PETROL 1,220.0 33,385.0 223.0 34,828.0 GAS.OIL(DIESEL) 4,164.0 42,892.2 19,338.0 66,394.2 PARAFFIN 364.0 95.0 459.0 LUBRICANT 36.0 410.0 1,855.0 2,301.0 JET A-1 3,228.3 7,162.0 2,060.0 12,450.3 AV.GAS 95.0 31.0 126.0 MAIZE 61.0 8,876.0 24,900.0 33,837.0 COKE/COAL 3,235.0 17,957.0 21,192.0 OTHER/MIXED 7,813.1 13,655.1 60,428.0 81,896.2

SUB. TOTAL 24,325.3 162,904.0 235,836.0 .423,065.3

E X P O R T S 1 9 8 7

KAPORO MCHINJI MWANZA T 0 T A L am is mmwmmmu wm#mm =uftm= SUGAR 207.0 25,448.0 60,192.0 85,847.0 TOBACCO 2,336.5 31,940.8 27,476.0 61,753.3 TEA 5,836.7 2,563.7 24,168.0 32,568.4 MAIZE 2,900.5 368.0 1,256.0 4,524.5 MAIZE SEED 305 G/NUTS 27.0 756.0 10,449.0 11,232.0 PRODUCE 3,146.3 1,802.0 20,010.0 24,958.3 COFFEE 105.5 67.0 340.0 512.5 COTTONSEED & CAKE 30.0 1,144.0 1,162.0 2,336.0 COTTON 778 778.0 OTHER/MIXED 375.0 3,321.5 24,014.0 27,710.5

SUB. TOTAL 15,269.5 67,411.0 169,845.0 252,220.5

TOTALTRANSIT 39,594.8 230,315.0 405,681.0 675,285.8

S H A R E S (Tonne) 5.9 34.1 60.1 100.0 - 181 -

Annex 4 Page 4 of 7

M A L A W I I M P O R T A N D E X P O R T B Y B O R D E R P O S

I MP O R T S 1 9 8 6

KAPORO MCHINJI MWANZA T 0 T A L

FERTILIZER 3061.0 27563.8 74913.3 105538.1 MACHINERY 531.8 1276.6 2529.1 4337.5 SALT 313.3 2442.8 7763.0 10519.1 WHEAT/FLOUR 3191.9 10101.7 13293.6 IRON/STEEL 5.3 3287.2 7981.6 11274.1 PAPER 119.4 3112.7 4491.6 7723.7 LIME/CEMENT 307.1 17999.6 2156.6 20463.3 TEXTILE MATERIAL 34.7 403.4 466.5 904.6 PETROL 37298.6 37298.6 GAS.OIL(DIESEL) 44.2 52706.2 18162.3 70912.7 PARAFFIN 493.7 26.0 519.7 JET A-1 825.0 12422.6 36.0 13283.6 AV. GAS 50.0 289.0 102.0 441.0 COKE/COAL 3698.3 15511.5 19209.8 OTHER/MIXED 2714.1 19180.8 58611.0 80505.9

SUB. TOTAL 8005.9 185367.2 202852.2 396225.3

E X PO R T S 1 9 8 6

KAPORO MCHINJI MWANZA T 0 T A L umu=u -imm=wumm =m=== mmuu SUGAR 25.0 39300.1 37032.3 76357.4 TOBACCO 252.3 31428.0 27040.8 58721.1 TEA 2209.7 5456.8 28870.9 36537.4 MAIZE 10558.6 9859.0 11130.9 31548.5 G/NUTS 950.6 30.0 5170.4 6151.0 PRODUCE 12.0 1116.7 12748.1 13876.8 COFFEE 749.0 138.0 576.6 1463.6 COTTON 82.6 578.3 6743.2 7404.1 OTHER/MIXED 400.1 3165.3 27057.7 30623.1

SUB. TOTAL 15239.9 91072.2 156370.9 262683.0 …------__------TOTAL TRANSIT 23245.8 276439.4 359223.1 658908.3 …------__---_------SEARES (Tonne) 3.5 42.0 54.5 100.0 ,--m-----m---um---um-m------uuuuuuauu----mu-w-u-u---u--u------182 -

Annex 4 Page 5 of 7

M A L A W I I M P O R T A N D E X P O R T B Y B O R D E R P O S T

I M P O R T S 1 9 8 5

KAPORO MCHINJI MWANZA T O T A L

FERTILIZER 2399.1 61328.3 71640.0 135367.4 MACHINERY 859.0 1649.9 1377.2 3886.1 SALT 245.9 7094.8 18293.2 25633.9 WHEAT/FLOUR 7074.6 13663.2 20737.8 IRON/STEEL 300.9 10464.6 12486.5 23252.0 PAPER 72.5 6264.8 4688.1 11025.4 LIME/CEMENT 0.0 TEXTILE MATERIAL 0.0 PETROL 370.8 35312.2 35683.0 GAS.OtL(DIESEL) 57062.6 17074.4 74137.0

PARAFFIN 449.2 449.2 ' JEr A-1 1096.0 9500.7 10596.7 AV. GAS 741.8 741.8 COKE/COAL 11620.4 21373.5 32993.9 OTHER/MIXED 7423.3 43484.1 66143.9 117051.3

SUB. TOTAL 12767.5 252048.0 226740.0 491555.5

E X P O R T S 1 9 8 5 mmutsuinmmin a =m=

KAPORO MCHINJI MWANZA T 0 T A L

SUGAR 4638.5 35044.6 95882.0 135565.1 TOBACCO 428.3 37354.3 33309.4 71092.0 TEA 1775.7 17509.7 21338.3 40623.7 MAIZE 540.7 51086.7 7450.2 59077.6 G/NUTS 196.3 1687.2 5387.8 .271.3 PRODUCE 393.2 3002.6 8373.2 11769.0 COFFEE 0.0 COTTON 4004.6 2273.8 1986.2 8264.6 OTHER/MIXED 1322.7 5222.0 12472.4 19017.1

SUB. TOTAL 13300.0 153180.9 186199.5 352680.4

TOTAL TRANSIT 26067.5 405228.9 412939.5 844235.9

SHARES (Tonnes) 3.1 48.0 48.9 100.0 mminminmmassS""Xwmmt"amminuminininSSswwtst""ininin ws - 183 -

Annex 4 Page 6 of 7

M A L A W I I M P O R T A N D E X P O R T B Y B O R D E R P O S T - U UUUUUUUUUU mm. mmmin am.. mm.in.in. 2===== I M P O R T S 1 9 8 4

KAPORO MCHINJI MWANZA T 0 T A L

FERTILIZER 64436.8 12725.6 77162.4 MACHINERY 1516.8 72.0 1588.8 SALT 32.4 3755.6 1583.7 5371.7 WHEAT/FLOUR 9306.4 1578.2 10884.6 IRON/STEEL 249.5 7024.4 2174.8 9448.7 PAPER 3827.7 1486.9 5314.6 LIME/CEMENT 0.0 TEXTILE MATERIAL 0.0 PETROL 26809.9 26809.9 GAS.OIL(DIESEL) 57071.9 57071.9 PARAFFIN 0.0 JEr A-1 96.0 4016.4 4112.4 AV. GAS 127.6 127.6 COKE/COAL 14441.1 4956.2 19397.3 OTHER/MIXED 827.6 46426.4 10266.9 57520.9

SUB. TOTAL 1205.5 238761.0' 34844.3 274810.8

E X P O R T S 1 9 8 4 -m..am. ~Umm.... .w,

KAPORO MCHINJI MWANZA T 0 T A L

SUGAR 142.1 35673.7 3648.1 39463.9 TOBACCO 42890.2 9768.1 52658.3 TEA 18010.9 3720.2 21731.1 MAIZE 198.8 89766.1 15615.5 105580.4 G/NUTS 245.7 135.4 381.1 PRODUCE 426.0 612.0 1038.0 COFFEE 0.0 COTTON 1528.7 86.3 1615.0 OTHER/MIXED 161.0 8266.8 2419.3 10847.1

SUB. TOTAL 501.9 196808.1 36004.9 233314.9 …------____------__------TOTAL TRANSIT 1707.4 435569.1 70849.2 508125.7 …_.______--______-______SHARES (Tonnes) 0.3 85.7 13.9 100.0 - .waamamaamaaammmmnaaama.UUaaass"wtswwwsammmmmaaammmaamainmammmmmi - 184 -

Annex 4 Page 7 of 7

M A L A W I I M P O R T A N D E X P O R T B Y B O R D E R P O S T

I M P O R TS 1 9 8 3

RAPORO MCHINJI MWANZA T 0 T A L

FERTILIZER 30534.0 5881.1 36415.1 MACHINERY 177.3 93.9 271.2 SALT 29.3 29.3 WHEAT/FLOUR 4033.8 544.4 4578.2 IROR/STEEL 3120.6 2016.9 5137.5 PAPER 2099.8 1065.1 3164.9 LIME/CEMENT 0.0 TEXTILE MATERIAL 0.0 PETROL 1204.9 1204.9 GAS.OIL(DIESEL) 4612.4 4612.4 PARAFFIN 0.0 JET A-' 0.0 AV. GI 0.0 COKE/COAL 6203.7 4542.8 10746.5 OTHER/MIXED 15450.0 8052.1 23502.1

SUB. TOTAL 0.0 67465.8 22196.3 89662.1

E X P O R T S 1 9 8 3

KAPORO MCHINJI MWANZA T 0 T A L ... mum *m.uau uuinu S UGAR 16359.6 4679.9 21039.5 TOBACCO 10758.1 4146.3 14904.4 TEA 6826.0 1328.0 8154.0 MAIZE 47012.8 185.1 47197.9 G/NUTS 91.0 177.9 268.9 PRODUCE 1155.6 962.3 2117.9 COFFEE 0.0 COTTON 0.0 OTHER/MIXED 4790.9 2617.9 7408.8

SUB. TOTAL 0.0 86994.0 14097.4 101091.4

TOTAL TRANSIT 0.0 154459.8 36293.7 190753.5

S H A a E S (Tonne) 0.0 81.0 19.0 100.0 -...... m...... mmu..wumiunnuumuinmimuiunu - 185 -

Annez 5

RETAIL PRICES IN 1990 MALAWI KWACHA FOR 6X4 TRACTOR, OBTAINED IN MALAWI, UNITED KINGDOM AND THE UNITED STATES

RETAIL PRICE RETAIL PRICE DESCRIPTION IN MALAWI OFFSHORE + FREIGHT MB 2635 480,000 340,000*

SCANIA P113EC 430,000 330,000*

DAFILEYLAND3300 360,000 360,000*

MACK MH613 410,000 240,000**

* UK RETAIL PRICE + FREIGHT TO MALAWI,EXCHANGE RATE B.POUND/MK5 ** USA RETAIL PRICE + FREIGHT TO MALAWI,EXCHANGE RATE US$/MK 2.8

NOTE: TRANSPORTERSINDICATE DIRECTLY IMPORTING COMPARABLE VEHICLES FOR MK 280,000, DELIVERED TO MALAWI - 186 -

Anne: 6

The leasing terms used for TABLE 7.3 and 7.6 are based on rates and schedules provided by the Leasing and Finance Company of Malawi. Lease Period is 60 months Effective Interest Rate is 242 Flat Interest Rate is 13.841 Monthly Payment Factor (MPF) is 28.2039 per MR 1000

EXAMPLEPAYMENT CALCULATION

Monthly payment - (Investment cost) x (MPF)

MK 11,478.99 - MR 407,000 x .0282039

Annual payment - Monthly payment s 12

MK 137,750 - MR 11,479 x 12

Total payment - Monthly payment x 60

MK 688,750 - MK 11,479 x 60

Total interest - Total payment - investment cost

MK 281,750 - VA 688750 - ME 407,000

Foreign Currency Unit ME Eauivalent

1 British Pound 5.00

1 German Mark 1.70

1 South African Rand 1.08

1 United States Dollar 2.80 - 187 -

MALAWI

TRANSPORT SECTOR REVIEW - SELECTED ISSUES

VOLUME 2

WORKING PAPER NO. 4

ROAD PASSENGER TRANSPORT

I. INTRODUCTION

A. Overview

1.1 Road passenger transport 1/ continues to assume an increasinglysignificant role in the transportationinfrastructure of Malawi. The expansion and improvementof the road network provides the possibility of access to road passenger transport for an increasing share of the population. Bus service, perceived as a relatively cheap and convenient transportmode, is providing effective competition to the passenger services of the rail, lake and domestic air modes.

1.2 Despite its growing significance,the road passenger transport industry as it exists in Malawi today is seriously deficient in its ability to meet the transportationdemands imposed upon it. There is considerableunsatisfied demand for the urban and inter-city services and the rural areas of the country. where the majority of the population lives, receive only minimal transportationservices.

B. The Passenger Transport Subsector

1.3 The commercial passenger consists of bus, rail, lake service and air, with 91, 8, 0.8, and 0.2 percent shares of the legally carried domestic passenger traffic, respectively. Buses presently transport an estimated 23 million passengers per annum. The illegal transport of passengers in vehicles not licensed for passenger service, commonly known as matola, is widespread, and may be nearly as large a supplier of passenger transportas bus. Only bus and matola provide service in all areas of the country.

1.4 Malawi Railways (MR) operates passenger service in mixed trains on its entire systems, serving a number of points en-route, the most important of which are Blantyre, Nkaya, Chipoka, Salima, Lilongwe and Mchinji. The railway transportedan estimated 2 million passengers in 1989/90. A division of MR, Lake Services (LS), also provides passenger service on Lake Malawi with three passenger vessels. The vessels provide both a north/south service over the length of the lake

1/ The phrase *road passenger transport,* for this study, refers to the legal or Illegal transportationfor hire of passengers in motorized vehicles. - 188 - and a cross-lakeand islandservice. In FY 1989/90LS transported 211,000passengers.

1.5 Air Halaviplays a relativelysmall part in domestic passengertransportation. In 1989 therewere 61,500domestic passenger trips by air, of which 43,000were part of an internationaltrip, and 18,500were purelydomestic. This low levelof domestictraffic is attributable,at leastin part,to non-stopbus servicethat has operatedbetween Lilongwe and Blantyre,and betweenLilongwe and Zomba for severalyears.

I. STRUCTURE

A. Bus IndustryStructure

2.1 Threemajor typesof servicesare operatedwith *large* buses. These include:(i) ruraloperations, largely on unpavedroads also called *country"or *local servicein rural areas,with no advance ticketsales; (ii) intercityoperations covering most of the unpaved road network;and (iii)urban/periurban services in the four main cities. All threetypes are subjectto a regulatoryfare structure basedmostly on distancetraveled for intercityand rural servicesand on a recentlyexpanded zone systemfor certainurban areas. 2.2 The largestoperator, Stagecoach Halawi, Ltd. (SM),formerly 'UnitedTransport - Halawi",operates a rangeof service*brands* within the previouslydescribed types of services. Intercityoperations are conductedunder the *Intercity","Expresslinemand uCoachline* brands. Intercityis almostexclusively on paved roadsbut withoutadvance ticketsales. The termscountry and intercityare used interchangeably by variousoperators; SY describesa serviceas countryif the operation is off the tarmacand intercityif on a paved surface,while other operatorsdescribe their paved road operationsas countryas well. 2.3 On variousroutes the intercityservice of some companiesis similarin speedand comfortto the more expensive,pre-bookable limited stop "expressline. 3Coachline is a deluxeall-reserved-seat service with air-conditionedand lavatory-equippedbuses in non-stopservice betweenmajor cities. Urban/periurbantransit-type service is provided as Ocityline. Coachlineand nearlyall countryservices on unpaved roads are operatedexclusively by SM. Until recently,all other companiesoperated only countryservice, mostly on paved roads. Several applicationsfor road servicepermits filed by other operatorsin the latterpart of 1990 soughtexpressline and citylineauthority. Service in a few areas,generally overlapping the large bus routes,is provided by a numberof minibusoperators.

2.4 The standard"large' bus in servicethroughout Halawi has a capacity ranging from 72 to 100 seated passengers depending on the service for which it is configured.These buses are generallyimported as chassisand have bodieslocally built by P.E.W.Ltd., body builders at Blantyre. There are also double-deckbuses of 117 seat capacity - 189 - being operatedin city serviceat Blantyreand Lilongwe. The double deckswere importedfrom Hong Kong as used vehiclesby SM. 2.5 Some additionallicensed passenger transportation from certainurban centersis providedby minibusesof 16 to 26 seat capacity. Until recentlythe minibuseswere limitedto operationon specifiedroutes of no more than 25 kilometersin lengthfrom Blantyre/Limbe,Lilongwe, Mzuzu and Zomba. In early 1990 the Road TrafficCommissioner liberalized minibus regulations to permit operationsfrom any urban centerover specifiedroutes not exceeding40 kilometers.This changein regulationhas not been published. Minibuserstill cannotprovide service within an urban area. 2.6 Both governmentofficials and comnercialoperators are of the opinionthat matola (privateautomobiles, pickup trucks, large trucks and all manner of governmentvehicles) is providing a significant portionof ell road passengertransportation in Malawi. There is a well developedsystem of pick-uppoints and routesin most areas. Only matolaand SM serve all three (urban,intercity and rural)passenger transportationmarkets. 2.7 The presentstructure of the bus industryis the productof both regulatoryand institutionalconstraints experienced during its development.The combinedeffect of these constraintshas been the developmentof insufficientcapacity and limitedpotential for self- correctionunder the currentenvironment. Supply, demand, regulation, institutionalconstraints, policy issues and recommendedactions are discussedbelow.

Supply 2.8 The commercialfleet of largebuses consistsof fewer than 450 buses operatedby approximatelytwelve companies. SM, the largest firm, operatesa fleet of 370 buses2/across all servicetypes. SM is 51 percentowned by StagecoachHoldings Ltd. of Perth,Scotland, UK. Since the late 19709,the remaining49 percentinas been held by the Governmentof Malawi (GOM)with 35 percentcontrolled through the parastatalAgricultural Development and MarketingBoard (ADMARC)and 14 percentdirectly held. StagecoachHoldings acquired their ownershipin the companyin 1989 from UnitedTransport International, a subsidiaryof BritishElectric Traction. 2.9 The SM fleet allocationas of September1990 was 13 coachline,37 expressline,40 intercity,84 country,128 cityline including57 double-decksand 35 undifferentiatednorthern region buses with 33 additionalvehicles in variousstages of preparationto enter serviceor awe3itingdelivery.3/ The other two of the largercompanies are TuwicheBus ServiceLimited with 18 buses and Yanu Yanu Bus Company

2/ As of October1990 including8 undeliveredERP Trailblazerchassis.

3/ StagecoachMalawi Limited, Management Accounts - Period5, 4 weeks ended 15th September1990. - 190 - with 22 buses; both primarily operate paved road country service. I. was estimated by government officials and the major bus operators that another 10 to 12 bus companies operate paved road country service with one to four buses each. This is approximatelyone bus per 18,000 population. inly SM and the matola are active in all three service markets. Figure 2.1 shows the bus route network and approximate service frequencies as of October 1990.

2.10 There do not appear to be significanteconomies of scale in the bus industry. The smaller operators tend to perform maintenance in a more labor-intensivemanner, e.g., less use of pits in favor of jacks and simply sliding under the bus, than the large firm. However, the generally lower cost structure of the small operators and low labor costs more than offset this difference. The relative lack of independentmaintenance facilities does favor the operator who can institute sufficient service in an area to justify establishing maintenance depots. The lack of a trained management pool also inhibits expansion of the smaller carriers and to some extent even that of SM.

2.11 The size of the currently operating minibus fleet is unknown although there is general agreement that it is old, in poor mechanical condition and declining in size. Minibuses tend to operate only in the urban areas and in head-to-headcompetition with the large buses. Nationally there are estimated to be not more than 50 minibus operators, some 14 in the Blantyre/Limbearea, with an average of two vehicles in service per operator. In 1986, 65 minibuses were registered in Blantyre/Limbe,4/whereas today the estimated number is 28.

2.12 Existing minibus operators reportedly are reluctant to venture into the more rural areas where less competition exists in part because they are primarily in other businesses in the urban areas and the minibuses have gradually become less important parts of their business activities. Route and fare constraintshave reduced their ability to compete for passengerswith the large buses or to go where the large buses offer little or no service. Most minibus owners are simply using up their existing stock of equipment; when a vehicle suffers a significant mechanical failure it is likely to be discarded with no replacement. The problem of limited industry expansion may be accentuated by GOM's failure to publish the recent changes in the minibus regulations allowing the initiation of services from additional areas. Potential entrants into the industry may not be aware of the recent changes (para. 2.5).

4/ Road Passenger Transport Study. Prepared for the Ministry of Transport and Communications,Malawi, by GOPA-Consultants,March 1986. - 191 -Pase Fi&ure 2.12 MALAWI \ w:;;^R *> t Transport Sector Review fc"!z/a a . 1v .. .! ~~~~~~~~~October1990 N-- .. NOtlOI Boundory I CL/f/l I m~~~~~~ladPmpassngr rnat

C:Co shuin. L /5 's; 8 Counrglilne 1MLU Intercltv and/or ;Epressilne (IC/w Citghlnolurben) bus serules operate in (Init/v 11 111j1togre,LhlengWe end I4auzu. (CL/VD) &S~~~~~~~~~~~ServiceLevels each- 4 ( IN/2/ SJ ) ;nt ;{ |1 C¢t/s / W*u per deg / week

1 Chhlumhe. Se)ruie lueel on Ceuntrillne Seruice not otiwruhse Indicatedeto I ch-weg per day

1i tte« : :l;\n^ nOther Surface P1ssegrrTnsnrngort_ Lake Seruice f./A.t.. …- - (Malawi RR)

IC I I of 2

( L /. P ...... 1 XeU2zrY b et A. -iqe;

I CL/4/1UI ...

!I / XCL/20} U tL/ 7 .....

4', rts,ct/l

- {I4/1:(: s

(ICi j >lpthI ch . .,/ * - - 192 - Figure 2.1 Pase 2 of 2

1Z: I . : ~;~ : 1 . IC~~~~~t/Iw I . . . .ct@. A\.8e . = I~~~~~~~~~~V8t~~~~~~~~N E-8SD1 7 - / ; ) l-E§

> StER"t t | ( t"8~~~~CL2/AD .~~~~~~~~~~~~~~~~~~~~{aC/2/0[}X> 1 CLS2/|gI /OÂŁ/1/

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2.13 In part, the minibus restrictionsreflect two concerns: (i) the quality of service would deteriorate if minibus operators were allowed to conduct remote optrationswhere the owner is not physically present to oversee; and (ii) the number of minibuses allowed per owner should be limited. Five to fifteen were often quoted as the maximum allowable number of minibuses under single ownership. Although there are no limitationsof this nature embodied in statute or regulation, there was no example found of an operation exceeding these constraints being granted a permit and no evidence that a formal applicationhas ever been received for such an operation. However, existing operators did reiate specific instances of being informed that applications for permits beyond the number they currentlyheld would not be approved.

2.14 Although specific data are unavailable,matola reportedly provides the majority of all road passenger transportationin many rural areas and is a major source of transport even in urban areas and on primary tarmac roads. There is a well developed system of pick-up points and routes in most areas. One bus operator estimated that 55 percent of the pickup trucks in Malawi were obtained for the specific purpose of operating matola. A pickup truck sells for approximately20 percent of the price of a new full size bus, MK 60 thousand versus MK 300 thousand. Traffic surveys conducted in 1986 tend to support this estimate in that between 48 and 56 percent of all pickup and larger trucks observed at various survey locationscarried matola passengers. Private passenger cars, trucks of up to two tons and even some closed vans with seats are all used by exclusivematola operators. In addition there is the matola provided by vehicles in use for other purposes, e.g., cargo, mixed use or private passenger transport, at the same time.

2.15 The supply of commercial road passenger transportationin the rural areas is extremely limited. Rural service over the npaved roads by operators of large buses seldom exceeds one or two _rips-per- day and many areas are simply unserved. A number of factors, including high operating costs, wide seasonal demand fluctuationsand low revenues, provide little incentive for the operators of road passenger transportationservices to operate over the unpaved roads in the rural areas; in fact, SM is attempting to withdraw service. Constraints on rural transport are discussed in more detail in the section examining policy issues.

Demand

2.16 Specific information on the demand for road passenger transport is limited and thus informationon passenger demand must be derived from transport experience in general. As of March 31, 1984 there was only one registeredpassenger car per 491 population; in 1988 the ratio was one licensed passenger car per 571 population. Both estimates are based on the number of licenses sold, although in practice the annual license is sold for incrementalperiods of as little as 3 months. Each license sold is recorded a issued and one vehicle could represent 4 licenses sold during the - An attempt is made to rationalize the incremental licenses %-. .e statistics are generated. Nonetheless,using licenses sold as a_. .acator of supply most likely overstates the number of passenger vehicles in service. Taxi vehicles - 194 -

are in poor condition and very few. Taxis appear to hava little role to play in the current transportationinfrastructure as they are too expensive, even when available, for most Malawians.

2.17 The road passenger transport industry is serioubly deficient in its ability to meet current demand. The conclusion to be drawn from meetings with operators of both large buses and minibuses, government representativesand casual observation is that a severe shortage of road passenger transport exists in all areas, with the situation most extreme in the rural areas. Each day large numbers of passengers wait at busy stops, sometimes for hours while bypassed by full buses. Also indicative of the shortage of legal supply is the flourishing system of matola. Operators of large buses and various government officials alike have said that they believe demand currently exists to support a bus fleet of triple the current size.

2.18 Demand for minibus service is less well defined for several reasons. Minibus operators tend to serve dense routes where high levels of service are also provided by large buses and so, althojughoffering generally faster service along these routes, the minibv6es only find high demand during the pe&.cmorning and afternoon travel periods when the large buses are extremely overcrowded. The minibus operators claim demand is suppressed because they are prohibited from lowering their fares to the level charged on large buses. There is disagreementwithin the government about the actual fare regulationconcerning minibuses. Various officials stated that minibus fares were ti) required to be MK 0.1/trip above the bus fare; (ii) regulatedbut not tied to the bus fare; or (iii) had not been regulated in several years. There would appear to be potential demand for minibus/smallvehicle service on routes in the less densely settled areas surroundingurban centers and in the rural areas not receivinghigh levels of large bus service.

2.19 The demand for matola is, by any available test, very high. In some areas there are well defined points for pickup on various matola 'routes',many of which are at or adjacent to bus stops. Crowds at the 'matola stop' are often observed to be even greater than those at the adjacent bus stops, reportedly because people seek service on routes infrequentlyserved by the buses and areas where buses do not operate. Regarding the former, matola often supplementsscheduled services, in particular on routes with one bus-per-day inbound and outbound. Further, during peak periods the legitimate bus services are overcrowded on all routes and matola is sought as an alternative. Frequent breakdowns and delays, even on the more densely served routes, also tend to shift demand to matola.

2.20 Ninety percent of the population of Malawi lives in the rural areas. With the present lack of trading establishmentsin many such areas, has come an urgent need for longer distance travel. Nevertheless,road passenger transportationin many rural areas is extremely limited and largely unresponsiveto the needs of the people in those areas. One early bus-per-dayoperating into the rural center and a return trip in late afternoon is the maximum service available on most rural routes that receive bus service. Some routes receive one trip each-way one or two days each week. Rural passenger demand is - 195 - constrainedby several factorscommon in many rural transport considerations.The rural populationis relativelysparse, cash availabilityfrom crops is seasonal, the generally unpaved roads are susceptibleto weatherdamage, and demandfalls off duringthe monthsof field preparationand planting.

111. FINANCIALASPECTS

3.1 Since operationsof the bus industryare totallywithin the privatesector, much of its financialinformation is proprietary. However,it was possibleto obtainan overviewof its financial conditionthrough discussions with the industryand data as provided, mainlythrough SM. AlthoughGOM is a 49 percentshareholder in SM, this firm is treatedthe same as any other operatoras far as financial arrangementsare concerned,i.e., it is liablefor taxation,receives no operatingsubsidies or capitalfinancing from GOM, and is not subjectto any financialobjectives determined by GOM. As such, SM is expectedto cover all costs and providefunds for shareholderdividends and business expansion. GOM does not intervene-u day-to-dayoperational matters and investmentdecisions, but insteadhas reliedon the Prime Route Policy (PRP)and regulationof maximumtariffs to encouragelow-cost transport throughoutthe colntry. The effectof these two policieson the financialsituatira of SM and the otherbus operatorsis discussedin this section. A. FinancialPerformance (1986-1989) 3.2 Most of the informationavailable concerns the "largebus" subsector,accordingly, this discussionconcentrates on this group. Althoughthis segmentof the industryhas generallycontinued to maintainpositive profit margins, most operatorsestimate that the generaloutlook is not promising. One reasonis that while the industry earns its incomein kwacha.a largeportion of its operatingcosts are incurredin foreignexchange and thus adverselyaffected by successive devaluations. This, combined with lack of ready access to credit, has had a negativeeffect on maintenanceexpenditure needs and expansionof productivecapacity. 3.3 Accordingly,SM estimatesthat its operatingratio has deterioratedfrom 83 percentin 1987/88to 89 percentin 1989/90. In the face of generallystagnant bus kilometertraffic growth, operating costs have grown slightlyfaster than revenuespartly due to inflation pressuresand devaluationeffects on importedinputs (para. 4.8). Duringthe period,for example,route revenuesincreased approximately 25 percentper annum,while correspondingoperating costs increasedmore than 30 percent. Revenues 3.4 Route revenuesaccount for virtuallyall industryturnover (SM is an exceptionin that it receivesabout 9 percentof its income from advertising,etc.). There are three typesof route revenueof - 196 - which intercityoperations provide the underpinnings.Operators other than SM concentratetheir operationsin this category. SM operations are spreadout among the variousrevenue categories thus: (a) intercity*national' brands which are estimatedto acccLAt fc; about 36 percentof total route revenuesand 26.5 percent of total costd; (b) rural wcountry'stage servicesvith about 32 percentof route revenuesand 36.5 percentof costs;and (c) urban 'cityline'se'rvices which accountfor about 30 percent of route revenuesand 37 percentof costs. SH considersthat the profitableoperations are concentratedin the nationalbrands because of their characteristicallyhigher revenuesper passenger-km.longer routes, good drivingsurfaces and fasterspeeds. Costs 3.5 The passengertransport operating cost structurein Malawi has a significantportion of non-laborcosts (about60 percentof total operatingcosts). Typically,direct wages (crewand maintenancelabor) represent10-15 percentof total operatingcosts; maintenance materials, about 20 percent;tires 10-20 percent;and fuel 25 percent. As indicatedabove, major factorsin expenditureincreases have been the effectsof inflationand currencydevaluation on price levelsin general and importprices in particular.Within the bus industry,imported inputs(parts, tires and fuel) accountfor over 80 percentof variable costs. Importcosts were significantlyaffected by externalinflation and a seriesof devaluationsof the kwachaagainst its major trading currencies.In 1986/87the MKsUS$exchange rate was about 1.8:1, whereasby 1989/90it had depreciatedto 2.8sl,a 552 changein three years.

Financing 3.6 The passengerbus industryfaces severalconstraints when seekingexternal funding from the financialsector for fleet replacement and expansion(paras. 4.31-4.41). As a result,investment strategy dependsheavily on internalfinances, and/or dealer financing with relativelyshort repaymentperiods and high interestrates. The heavy relianceon internalfunds for asset replacementand expansionin Malawi has renderedthe bus operators'capacity for expansionsensitive to route revenuesand profitcontributions and thus, improvedproductivity and timelytariff revisions. This in part underliesthe pressureto eliminateunprofitable routes and/or to requestfinancial subsidies, e.g., for duty, surtaxand spare parts. In this environment,SM's financingstrategy in the past appearsto have been one of relianceon internallygenerated funds (includingintra-group loans from its parent company)for capitalacquisitions, a side effectof the prevailingtight monetarysituation. The other major operatorshave reliedon a mixture oi financingand owner funds and cite frequentcash squeezescaused by tight creditterms. - 197 -

IV. CONSTRAINTS

A. Regulation

4.1 A number of forms of direct and indirect economic regulation have an impact on the road passenger transportationindustry.

Road Traffic Act

4.2 The Road Traffic Act (RTA), Chapter 69*01 of the Laws of Malavi and initially adapted in part from the pre-independenceMotor Traffic Ordinance, is the princip&l legal instrument of economic and safety regulation for the road passenger transportationindustry. The non-safety related sections of bus regulation are contained in Part VI of the Act (Road Service Permits) and created through subsidiary legislationunder Part XII Section 170. These pertain to the control of entry, exit, routes and fares. The sections with particular application to road passenger transport services are as follows:

Part VI - Road Service Permits and Private Carrier Permits

Sections 73 & 74 relate to the constitutionof the road transport panel and its sitting to hear applicetions. Section 75 prohibits for-hire operationwithout a permit.

Section 78 sets forth a number of factors that the Co-missionershall have regard for in reaching his determination. Among these are the extent that the route already receives some form of transportation,the public interest and necessity, the needs of Malawi as a whole including the eliminationof unnecessary and uneconomic services and the coordinationof all forms of transport. It is also provided that the Commissionermay at any time lay down or vary the rates and fares on any route and for any service.

Sections 79 and 81 refer to the issuance of short-term and special journey road service permits. Section 81 was used as the basis for authorizingthe single-vehicle goods/passengeroperation proposed under the Rural Transport Pilot Project.

Under Part VI the Commissioneris given broad discretion to vary the terms of the a road service permit through either the addition or removal of conditions. Section 100 grants general powers to the Minister of Transport and Communicationsto make regulationsfor any purpose for which regulationsmay be made under this part.... - 198 -

Part XII - Miscollaneous

Section 170 provides that the Minister may set forth regulationsfor carrying the Act into effect, in particular, "(i) prescribinganything which by this Act may or is to be prescribed." Additional examples of such areas of regulationare given in 44 subsections.

4.3 The RTA is administeredby the Road Traffic Commissioner under the authority of the Ministry of Transport and Communications (MOTC). In recent years the disseminationof requirementsfor the submission of rate and route applicationsanu other administrative procedures has been primarily oral in nature; written cescriptionsof requirementsand procedures are generally unavailable.

4.4 Rural transportationregulftion is embodied in the PRP. This policy, adopted in 1982, requires road service permit holders to operate a minimum percentage of their operations on roads not oesignated as "prime" routes. It originally required at least 50 percent non- tarmac operation, later reduced to 40 percent, and a 30 percent level has been discussed during the past several years. The policy further provides that certain lucrative 'prime" routes will be protected from competition so that a part of the profits from these routes may be used to subsidize artificiallysuppressed fares on the non-prime routes in the rural areas. In practice the routes declared as prime routes were, and continue to be, those routes operating over paved roads. The eliminationof the PRP is under consideration,as it has proven difficult to administer and enforce and has contributed little to the goal of improved transportationin rural areas. The only carrier with significant rural operations, SM, is continuing a policy of withdrawal from rural areas because of bigh operating costs and suppressed fares; at the same time, new entrants are not moving into rural service to any significant degree.

Fare Regulation

4.5 Bus fares are regulated through a country-wideuniform fare system. GOM has relied on a combination of this system and the PRP to encourage bus operations in rural areas where operating conditions imply loss-making activities. The cross-subsidiesimplicit in this arrangementmean that the bus operators (and ultimately the travelling public) carry the costs of any loss-makingoperations and GOM avoids having to provide direct subsidies to rural bus operations. However, the end result has been limited service coverage and proliferationof illegal, potentiallyunsafe alternatives. Given the difficulty of enforcing the policy, this is the logical outcome of a clash between GOM's social objectives and the operators' financial concerns.

4.6 The present system takes some cost factors into account in that fares are determined according to distance travelled (on non-urban routes) and class of service. The current fare levels are 6.7t/km (express),5.St/km (intercity, country, or stage), and flat rates of MK 34 and MK 42.0 from Lilongwe to Zomba and Blantyre, respectively (coachline). The fare regulation system is based on the submission of tariff revision applicationsby bus operators, individuallyor - 199 -

collectively,to the RTC. There is no limit co the number of applicationsthat can be made in any one period. The general principles are:

(a) fare increase decisions are based on supportingdocuments, i.e., operationalcost data, annual budget etc., provided by the operators; and

(b) in accordancevith the cross-subsidizationrequirement, fare levels are supposed to encompass an allowance for loss- making operations in the rural areas as well as a profit margin. However, it is not clear to the industry what basis is used, e.g., net assets, or whether it allows for inflation.

In practice, operators of large buses other than SM rely on the submissionsmade by SM, while the minibus industry fares are customarily required to be lOt/trip higher than those approvel for the omnibuses (intercity and country). In recent months, the function of rate approval has shifted from the Road Traffic Commission (RTC) to MOTC, and applicationsare now reviewed and decided at the Principal Secretary level.

4.7 In order not to inhibit provision and expansion of acceptable transport services, it is importarntthat fare regulatory systems encompass the need for ti) full recovery; (ii) operating cost differentials;and (iii) timely revision to reflect changing circumstances,especlally in operating costs and patronage.

4.8 Inflation. Until sufficientcompetition is built into the industry to permit reliance on market forces, there will be a need for a clearly defined policy on periodic reviews of tariffs, i.e., so that the financial viability of the bus industry is not eroded by increases in price levels. Timely review also is important, as evidenced by the Gulf crisis in late 1990. A fuel price increasewas announced soon after the onset of the Gulf crisis in late 1990, but the bus industry had to submit a formal application for an associated fare increase which was not approved umtil one month later. The inflation impact was worsened by the fact that bus fares cannot be retroactive and the delays in tariff revision approval inherent in any bureaucraticsystem. This delay has steadily increased from a,aaverage of 2 months in 1986 and 1987 to 4-5 months in.1988 and 1989, an appreciable time span given prevailing inflation levels.

4.9 Cross-subsidies. Operator informationconfirms that the cost of rural operations on non-paved roads in Malawi can be much higher than on tarmac roads. Therefore under a uniform fare system, many such routes do not produce enough revenue to cover their operating costs. In theory, the uniform fare approved is deliberatelyset higher than the comparable financial operating costs on tarmac roads so that the extra income earned on these routes can be used to offset the operating deficits on loss-makingroutes. The operating deficits thus incurred are supposed to be financed by operator cross-subsidiesfrom the relativelymore profitable intercity routes and not by direct government subsidies. - 200 -

4.10 A significantdrawback with cross-subsidiesis that they often have undesirable and uncontrolledside effects. First, cross- subsidies ofton distort as wvll as inhibit other more competitive operations. In the case of Halawi, users of intercitybuses have to pay fares that are presumably higher than warranted by the associated relatively low cost, tarmac road operations,which provides a disincentiveto potential users. Second, bus operators are naturally not keen to provide loss-makingservices. It is estimated that rural coverage in Malawi has declined from 147 buses in 1978 to 131 in 1985 (or from a bus:rural population ratio of 1:35,400 to 149,300), the PRP notwithstanding. Third, cross-subsidysystems require anti-competitive practices in order to work. SM considers that, if it is to continue operations in the rural areas, it will require a degree of protection from competitionon the profitable intercity routes. Fourth, there is a tendency to underestimatethe extent of monitoring required since no direct public funds are involved. The difficultiesexperienced in trying to enforce the PRP are illustrative.

4.11 It is generallyheld that w.heresubsidized services are deemed appropriate,they should be made explicit and administered through direct reimbursementby the authorities. There have been successful variations of subsidy, e.g. in Britain, unprofitableroutes are put up to tender and awarded to the transporterwith the most attractive package. Where sufficient firms exist to permit competition, this has the advantage of getting the private sector involved and providing relatively efficient services. However, this would appear to be a premature option in Malawi, given the present lack of both competition and administrativecapacity to implem3nt competitive bidding. It is timely that another option, which is being investigated in Halawi through a UNCDF-fundedRural Transport Pilot Project, concerns the provision of owner-operated"mixed carriage", i.e. joint passenger/freightveh'"les in the rural areas as an attempt to encourage least-cost transport by lowering overheads and increasing vehicle utilization (para. 5.19).

4.12 Inflexibilities. Regulated fare systems often encourage the perpetuationof inflexibilitiesthat inhibit the developmentof least- cost travel alternatives,such as:

(a) H4ostfinancial criteria used for determiningfare levels (e.g., the operating ratio), have drawbacks that may affect industry efficiency. Thus bus operators may find it possible to pass operational inefficiencieson to the consumer, as long as they can be justified to the regulatory body. For instance, if the criteria used in Malawi is the rate of return on investment, it may encourage operators to increase their capital base (includingnon-vehicular assets) so as to justify larger profits, or alternativelya rate of return as a percentage of total revenue might discourage cost minimization. This contrastswith a competitive situation in which fares are decided by the balance of supply and demand, as well as the operational efficiency of individual operators. - 201 -

(b) Available capacity is often not put to beut use, e.g., in the Malavi context, minibuses suffer many empty backhauls and are not fully utilized outside the rush hours. This is a result of the confusion about a fare premium.

(c) Economic rents may be captured by some operators. For instance, to the extent that the uniform fare covers the cross-subsidy,it is likely that some of the other bus operators have lower costs on average than the major carrier, SM.

4.13 AdministrativeDifficulties. When evaluating applications for tariff revision, authorities face inherent difficultiesin trying to keep up rith changes in the cost structure of the industry in general, and with incorporatingthe cost differentialsof various operating circumstances. For instance, the cost of spares and other inputs (and the associated duties and surtaxes) are much affected by changes in foreign inflation. Average operating costs vary by bus size and age, route characteristicsand demand patterns, e.g., a 12-year old country bus operating on poor surface roads in a sparsely populated area will have a higher cost profile than an express bus on a tarmac road in a high demand area. Average load factors,which vary from 40 percent to 80 percent, also affect the cost per seat. Annual kilometers per bus (quotedbetween 60,000-150,000km per year) also affects the impact of fixed costs, since seat-kilometeris the base over which these costs are spread. The range in costs quoted by the bus industry, e.g., from MK 3.0lbus-km to MK 9.0/bus-km, could in principle be attributed to such diffekdnces in operating costs.

Currency Regulation

4.14 The regulation of foreign exchange by the Reserve Bank of Malawi and, until recently, the relative scarcity of foreign exchange were significantfactors in planning for the timely acquisition of buses, equipment and spares. This has changed with the elimination of the foreign exchange allocation system.

Duties and Surtaxes

4.15 The bus industry, along with many other transport operators, considers the level of duties and surtaxes to be one of their biggest problems, contributingto the high cost of equipment and operation. Almost all transport inputs are imported (apart from local labor). Thus the impact of import duties and surchargeson bus operational costs is significant,estimated as ranging up to 40 percent of recurrent or 10-15 percent of operating costs.

4.16 The present level of duties and surcharges can effectively double the c.i.f. cost of equipment and parts and thus increase the fixed cost component to be covered by operational revenues. Tires carry duties of 35 percent on c.i.f. cost and a tax of 35 percent on c.i.f. ard duty combined;most parts carry duty and surcharge of 45 percent and 35 percent, resuectively;and vehicles, includingbuses carry 40 percent and 35 percent, respectively. For example, one operator reported that - 202 - between 1982 and 1990 the average cost of a 15-seat minibus has increasedby 300 percent from MK 20,000 to MK 80,000, while fares rose by only 150 percent from MK 0.2 to MK 0.5 per passenger-trip. Given the incentive structure,one outcome has been the preferenre to import chassis and have them *bodied' locally. This results in duties and surchargesof about 10 percent on the chassis and 35 percent on cost of bodying, compared with charges of about 90 percent on c.i.f. cost to import a complete bus. In the case of buses manufactured in PTA countries,duty and surtax vould be considerablyless based on the percentage of total equity manufactured in PTA countries.

4.17 In addition, a possible safety-relatedrepercussion is the clear incentive for operators to use tires that have been retreaded more times than recommended and to defer essentialmaintenance. Operators report that the high cost of spares is responsible for the poor condition of a considerablenumber of vehicles and for "grounding"many others. The adverse effect on the cost of maintenance needs in particular, and transport services in general, is a significant contributoryfactor to the industry'sreluctance to operate in the remote areas. Furthermore,due to long supply chains from overseas sources and a considerableimport lag (estimatedbetween 3 to 6 months), SM as a direct importer, for example, keeps its parts stock at any one time to about 6 months equivalent,or about MK 10.0 million.

4.18 These problems were in part mitigated when the Reserve Bank of Malawi stopped setting sectoral allocationsand left the decision to the commercialbanks on the grounds that the latter were more familiar with the needs and capabilitiesof their clients. This reduced the lead time for import allocation approval from about two months to a few days. Further, increased availabilityof spares is now observed. Some of the large operators can now import directly and bypass the local dealers. However, smaller operatorswith more modest requirementshave to make their purchases locally and pay the dealer margin as well.

4.19 Recently, the Bus Operators Association of Malawi has petitioned GOM for inclusion in the duty and surtax rebate program in effect for Malawi-registeredinternational truckers. Under this program, these truckers receive rebates of 80 percent of the duty and surcharges paid on parts and tires against an internationalmileage credit in an effort to increase their competitivenesswith operators from other countries. If granted, the bus industry estimates that the subsequent improvement in cash flow would facilitatepurchase of essential parts and other inputs and contribute towards fleet expansion and rehabilitation.

4.20 It is possible that such a move would offer high returns in terms of increasing available bus capacity at relative low cost by preventing premature scrapping of equipment. Judging by the extent of unsatisfied demand even on the more popular routes, an increase in bus capacity would be most timely. With this in mind, the Economic Planning and Development Department (EPD) reportedlyhas recommendedto 0OM that the duty and surcharge rebate be extended to include buses of 10 tons and above. While there is general agreement that a reduction in the duty and surtax burden would assist passenger transport operators, this - 203 - reductionshould be in a phasedmanner consistent with GOM's overall programto reducedomestic protection. B. InstitutionalConstraints Accessto Credit

4.21 A first-timeentrant into the bus transportindustry can expectproblems obtaining external financing; existing operators also indicatethat their abilityto expandis similarlyconstrained. There are anecdotesthat the resultantdependence on equityhas discouraged entry and contributedto establishmentof firms that quicklygo out of businessdue to under-capitalization.The three traditionalchannels, i.e., internalcash generation,dealer financing, and loans from the financialsector all have problemsthat are discussedin more detailin the followingparagraphs. 4.22 FinancialInstitutions. It appearsthat the financial sector,which consistsof only a few institutionsand is dubbedvery conservative,is especiallycautious in its approachto the transport sector. Its high risk image is becausebuses and trucks,as 'moving property*or 'wastingassets", are not consideredto be collateral;real estateor gold is preferred. At the same time, signatureloan limits are reportedas low as MK 5,000 comparedto reportedcapital costs per bus of MK 275,000and above. Anotherdisadvantage of the transport sector,as far as the financialsector is concerned,is the seasonal natureof bus revenuesand their effecton reliabilityof repayment schedules. Further,the reluctanceto financeused or reconditioned vehicles(on the groundsof reducedequity) has meant that entrepreneurs have been unableto explorethis potentialavenue for cost savings. The implicationsfor fleet capacityare illustratedby the estimatesthat the Blantyrearea minibusfleet has contractedfrom about 50 in 1988 to about 25-30 in 1990. 4.23 As a resultof the aboveperceptions, some development financeinstitutions (Indebank, for example)require owner participation as high as 35-50percent of the total amountand collateralrequirements as high as 150 percentof the amountto be financed. For example, financingof a bus worth MK 350,000would involvedthe applicantputting up MK 175,000towards the cost and collateralof MK 525,000. The comuercialbanks offer only short-termloans (3 years or less, 16-18 percentper annum)and only to preferredclients such as SH and the other big firms. 4.24 Other institutionsset up to deal especiallywith small businesseshave loan limitsbelnv what a bus operatorwould require, e.g.,MK 300,000ceilings, as comparedto averagenew bus pricesranging betweenMK 300,000and MK 450,000. In fact, a start-upsituation would requireat leastMK 900,000for a minimumof three buses. The financing dilemmacaused by the relativelyhigh cost of transportequipment can be illustratedby the anecdotethat a B-2 house costs,on the average,MK 100,000-150,000.Minibus prices are also relativelyhigh, rangingfrom about MK 80-90,000(15-seat) to aboutMK 130,000(26-seat). On the - 204 - other hand, the cost of trucksis lower,e.g. about MK 206,000for a 10- ton truck. 4.25 One financialinstitution, the Leasingand FinanceCompany of Malawi (LFC),has successfullychanneled funds to the road transport sectorby adaptingto fit the circumstances,e.g., offeringsuch innovationsas re;aymentschedules geared to the client'scash flow patterns,stipulating maintenance contract clauses aimed at safeguarding the investmentor insertingdouble declining depreciation methods for vehiclesdestined for dirt-roadoperations. LFC is now the leading creditsupplier to the road transportindustry, and its very successhas added to the creditcrisis. Approximately50 percentof the LFC portfolionow consistsof road transportvehicles. LFC indicatedthat, on a purelycommercial basis, increasing its road transportportfolio would lead to overextensionin that market segmentand not be prudent businesspractice. 4.26 Anotherfactor to be consideredis the relativelack of liquidityin the financialtector. For instance,expectations of an imminentreturn to higherinterest rates cause investorsto be reluctant,at the presenttime, to providethe long-termfunds (4-5 years)needed by the transportsector. A successfuldebenture issued now would need a yield of about 15.5 percentand providefunds costing about 20 percentper annum to the entrepreneur. 4.27 Owners'Funds. The relativelylarge capitaloutlays requiredfor start-upof a bus companyrange from MK 900,000upwards for a recommendedminimum of three buses (two for regularoperation and one as standbyfor reliabilitypurposes). This requirement,plus the limitedaccess to affordablefinancing, has meant that the bus industry in Malawi,unlike in other countries,is not a "firstgeneration' employmentopportunity. Rather, aspiring entrepreneurs have to rely on funds obtainedfrom pensions,tobacco farming and other familyresources as initialcapital. This necessarilylimits entry. 4.28 As far as existingoperators are concerned,the combination of limitedaccess to creditand regulatedfare levelsreportedly set by GOM to reflectits view that fleet expansionshould not be financedfrom route revenuesmakes it difficultfor operatorsto generatesufficient funds to cover replacementand expansionneeds. This has contributedto a shrinkingand poor qualityfleet. For instance,SM estimatesits replacementneeds alone as 8 percentof its total fleet,or MK 6.25 millionin 1990 (25 vehiclescosting MK 0.25 millioneach). At the same time, accumulateddepreciation for this capacitywas estimatedat about |MK1.3 million (straight-linedepreciation for 12 years,excluding revaluation). 4.29 DealerFinancing. As a resultof liberalizationof foreign exchange, many dealersare sufferingfrom over-stockingcaused by an initial rush to replenish inventories during the perceived 'window of opportunity'. Concurrently, sales are suffering from the credit constraints discussed above. Average dealer markups are relatively high, which also may contributeto depressedsales. Althoughthe markups vary widely, a typical margin on faster moving items, e.g., - 205 - tires or comon parts,could be about 35-40percent on c.i.f.cost, with highermargins for less frequentpurchases. For instance,SM estimates that it savesalmost half of the c.i.f.cost by dLrectlyimporting its tire requLrements.However, the dealerscite severalfactors for the high markups,including the diseconomiesof scale given the smallmarket size, the cost of holdinginventory and variousfinancial guarantees required by external suppliers. Furthermore, current margins are lower than pre-liberalization levels and are expected to reduce further. 4.30 Given the creditsqueeze, some dealers have experimented with their own financing schemes. There are a variety of hire-purchase or leasing arrangements on offer. The terms are not particularly favorable, e.g., 50 percent down, 12 months and 18-21 percent per annum, as compared to 0-20 percent down, 4-5 years and 12-14 percent per annum (LFC) or 3 years and 16-18 percent per annum (comercLalbanks). Even so, late payments and bad maintenance of vehicleshave led some dealers to withdraw from financing vehicle purchases. 4.31 Many operators have an erratic record as far as basic transport administration skills are concerned. Among the smaller operators, there appears to be a pervasive attitude that the bus industry is a source of funds for other activities, rather than an ongoing enterprise that requires careful organization and reinvestment of funds. Owners often do not have sufficient knowledge of the bus industry and/or professional management experience. It has also been observed that there is a lack of umaintenance ethic* to keep vehicles roadworthy, inadequate tracking of cost trends due to sketchy bookkeeping records, and poor cash flow management. These factors all contribute to significant downtime and premature retirement of vehicles (expected useful life of minibuses is as low as 1-2 years),reduction in effective bus capacity and high turnover in the industry. All this reinforces the financial sector's reluctance to get involvedin passenger transport.

V. POSSIBLESOLUTIONS

A. Policy Issues Regulation of Entry, Exit and Fares 5.1 The RTA containssections written and/or rewritten over nearly30 years. As with many complexand long-livedlegislative documents, inconsistencies have been introduced and rules perpetuated that may have better served another time. The non-safety related regulation contained in the Act or prescribed under its authority, including the control of entry, exit, routes and fares,are examplesof this perpetuation. As the RTAhas become increasingly outmoded, it has been increasingly necessary for the administration aad interpretation of the Act to depart from the written Act. This divergence is claimed to have reachedsuch an extentthat there is no publishedbody of regulation,parliamentary or administrative,where (a) the procedures and evidentiaryrequirements involved in the filing of various - 206 - applicationsmay be found; nor (b) from which the probable outcome of an application,based upon the written law, may be reasonablydetermined.

5.2 The regulationof entry, exit and route. based upon economic rationale is generally not constrainingin Malawi, except in the case of cityline application.. In general, the regulationof entry and exit are intended to protect existing industry members from excessive competition,in particular that which might be harmful to service quality and safety. In the Halawian context, Section 78 of Part VI of the RTA sets forth a number of factors that the Commissionershall have regard for in reaching his determination. Among these are the extent that the route already receives some form of transportation,the public interest and necessity, the needs of Malawi as a whole, including the elimination of unnecessary and uneconomic services, and the coordination of all forms of transport (para. 4.2).

5.3 The Halawi Act appears rooted in the concerns, which are characteristicof many regulatory schemes throughout the world, of destructive competitionon the one hand and the belief that public service companieswith monopoly powers will be stronger and better able to serve the public on the other. With respect to the former, destructivecompetition describes an industry structure in which (i) fixed costs are large relative to total product cost, and (ii) there are sustained and recurrent periods of excess capacity; under such conditions,marginal cost can be below average cost for extended periods. This would not appear to be the case in Malawi, where demand greatly exceeds supply and where it is widely held that a large increase in the fleet could be absorbed with little impact on load factors, even though the fixed costs are large.

5.4 With respect to the latter, there is little to suggest that the bus industry is inherently monopolistic;rather, what market power exists has been conferred by regulation. As discussed, there do not appear to be significanteconomies of scale in the bus industry (para. 2.10). Because of the absence of independentmaintenance facilities,an operator does need sufficient levels of service in particular areas to justify its own maintenance facilities in the area it serves. However, cooperativefacilities have been successful in many areas of the world and there is no reason that the same would not be true for Malawi, although some time would be required for their development.

5.5 The absence of any threat of entry was an essential part of the system of cross-subsidizationunder the PRP (see para. 4.5). The policy is still declared to be in effect and its primary impact is the suppression of rural fares and endorsementof excessive fares in some areas of the intercity and express services. The PRP contributes to the inefficientallocation of Malawi's transportationresources by attempting to require non-compensatoryrural operations that are dwindling in spite of the policy, and discouragingthe efficient use of the buses operating on the paved roads by mandating artificiallyhigh fares and suppressingcompetition.

5.6 In addition to the imbalancesinflicted by the PRP there is a growing consensus that the fare-settingmechanism and approval - 207 - criteria, if justified at all, require significantadjustment to reduce processing time and facilitate informed decision-makingon a cost- recovery basis. It has been seen in many countries that the setting of compulsory passenger transport rates, especially outside urban centers, is often counterproductive. Contributoryfactors includes (i) the inherent difficultiesexperienced by authoritiesin trying to keep up with changes in the cost structure faced by the industry: (ii) difficultiesin incorporatingthe cost differentialsof various operating circumstances.(iii) the negative impact on industry cash flow caused by the combinationof inevitable administrativedelays in granting rate increases and prevailing inflationarytrends. Indeed the industry asserts that the delays and uncertaintiesinherent vithin the present system, coupled with inflation,have a negative effect on internally generated cash flow with subsequent implicationsfor asset replacementand expansion. In the Malawian context, the rationale for government involvementin rate-settingis further reduced by the unenforceablenature of the PRP.

5.7 One option under discussion has been to allow the bus companies to get together and jointly decide upon routes to be operated, service frequency, costs and fare applications. The current procedure of using SM as the cost leader for rate-makingis already one example of joint decision-making. Under this approach the other operators are permitted to adopt -he same rates as SM without submitting individual cost data. Independent operators,with their lower operating costs, now successfullycompete with SM and each other in many areas of Malawi. This competition is currently based upon service frequency, speed, comfort and reliability. However, there would be a significantdanger in allowing operators to collude, as this could undermine the benefits of efficiency and low cost that derive from a competitive system. At the same time, not allowing joint decision-makingneed not preclude cooperation among carriers for the sharing and coordinationof schedule informationthrough a bus association.

Anti-CompetitiveConsiderations

5.8 In advocating the deregulationof road passenger transport in Malawi the problems of potential anti-competitiveactivity need to be recognized and remedied. Discussionswith government officials in both MOTC and the Ministry of Justice confirm that there is no mechanism embodied in the present Laws of Malawi, nor in legal tradition, to control anti-competitiveactivity in the marketplace. The RTA (Sections 78 and 100 of Part VI) grants specific and/or general powers to the Road Traffic Commissionerand to the Minister of Transport and Communications to set and regulate fares. These sections do not refer to the control of anti-competitiveactivity, but the mechanism for control is provided through them. The preferable solutionwould be a general anti-trust power residing with the Ministry of Justice. However, the creation of such a power would comprise a major policy change that would affect considerablymore than road passenger transport.

5.9 The organizationof other areas of the economy and the Malawian legal heritage do not favor anti-trust activity. The opposition caused by an attempt to introduce such broad authority might - 208 - severely hamper the immediate goal of the reform of transport regulation. A less satisfactoryalternative, but one with greater prospects of enactment,would be a residual power of fare regulation for the MOTC restricted to the suspension of fares of a clearly anti- competitivenature. Until sufficient competitionexists to police the market, non-compensatoryfares introducedby an operator w'ch substantialmarket power for the purpose of driving a weaker competitor out of the market would fall under this limited fare regulation. While placing this limited power for the regulation of buses with MOTC would seem a reasonable alternative,this would require the Ministry to field the necessary expertise to successfullyadminister such a regulation.

Duties and Surtaxes

5.10 In the Government'son-going review of the taxation policy, there is a case for critical examinationof the transport sector, given its potential for employment creation and labor mobility. The bus industry is heavily dependent on imports for its recurrent needs and the present level of duties and taxes is substantial,almost doubling the border price in many cases. The recent decision to facilitate importationof reconditionedvehicles could lower the capital costs of entry into the industry (para. 5.15). Individual and smaller firms will be able to obtain lower-costvehicles in the same way as larger firms with access to external resources. If the rebate program for parts, tires, etc., were extended to the bus industry, operating costs could reduce appreciably,i.e., as much as 40 percent of variable costs and 20 percent of total costs. These figures do not include the fuel taxes, a distance-relatedcharge whose removal would be harder to justify. Another advantage would be the reactivationof capacity presently lying idle for lack of spare parts.

5.11 However, several concerns would have to be addressed first for maximum benefits to be derived. First, high capital costs constitute a barrier to entry of new participantsand expansion of existing operations, thus acting as both a capacity suppressantand catalyst for monopolistic practices. Second, it is necessary that sufficient competition exist to ensure that the benefits of such an initiativewould be passed on to the ultimate consumer, but also that the impact of this measure would not be significantlydiluted by the rapid turnover of bus operators (as is presently observed among the smaller operators). Again, facilitationof a competitive environment and transportmanagement skills enhancementwould be the best tools for this purpose. Although there is no guarantee that operators would not try to hold back some benefits, a competitive situation whereby the travelling public were able to judge participantsby their operational efficiency (presumablytranslated into lower transport fares) would be the best way of minimizing this risk.

InstitutionalConstraints

5.12 Access to Credit. GOM is currently assessing the financial system and how best it can be modified to assist in development of the country. In particular, the Government is committed to paying special attention to generation and mobilizationof finance and easing credit - 209 - accessto mall and medium-scaleoperations, i.e., 70 percentof all small and medium-scaleenterprises cited lack of creditaccess as an impedimentto growth. The transportsector can be classifiedwithin the medium-scaleenterprises, which are definedas havingan average investmentceiling of aboutMK 2.0 million (or about 5-6 buses equivalent).Therefore the problemsof the transportsector would have to be addressedwithin this broaderframewovk. The creditaccess issue cannotbe resolvcdin the shirt-term,e.c. the Bank'sFinancial Sector Study pointsout that a long-termincremental approach is necessaryto allow enterprises to grow, accumulate retained earnings and to improve their asset bases. However,in the short-term,it recommendsproject interventions, e.g., venture capital and credit guarantee schemes. 5.13 One such initiativethat could supporttransport industry developmentis the FinancialSector and EnterpriseDevelopment Project (Report No. 9096-MAI)which is aimed at fillingexisting "gaps* in the financial structure. Under its investment finance component, funds would be provided (about Us$20.0 million) for equipment purchase, among other things. Another recent innovation is that one of two commercial banks has recently purchased a leasing company and intends to enter the leasing business. At the same time, the Reserve Bank is coordinating an investigation into the possibility of improving financial flows through creation of a capital market. As far as existing projects are concerned, it has been decided that two revolving funds will be opened under the Rural Motorized Transport Project so that the proceeds of the project will be directly re-applied to the purpose of increasing funds available to rural transport series. However, improved communication between the financial and transport sectors is essential for long-term success. One useful channel would be for the credit institutions to introduce management advice services for their clients. 5.14 Lack of Management Expertise. One way of addressing this issue would be to initiate a skills enhancement program similar to that run by the Developmentof MalawiTraders Trust (DEMATT)for the USAID/KfW-funded Trucking Project. Under this program, Malawi truckers were given grounding in the basic tenets of business administration, as well as safety and simple mechanics. Improving management skills could h,avea major impacton increasing bus availability,as well as the abilityto keep essentialoperational and financialrecords, costs assessment and cash flow management.These trainingprograms cotld dovetail with other management advisory services and includesupport to the Bus Operators' Association. Such institutional strengthening could also serve to increase the confidence of the financial sector. These transport administration courses could be offered through DEMZTTandlor such institutions.GOM's role could thus be confinedto encouraging participation,possibly making it a conditionfor obtainingan operator'slicense.

5.15 Importation of Reconditioned Vehicles. The importation of reconditioned commercial passenger vehicles into Malawi, while not strictly illegal, has in the past been strongly discouraged by government agencies. This near prohibitionwas justifiedon the basis that Malawidid not want to becomea dumpingground for the world's worn-outvehicles. In many countries the importation of vehicles under - 210 - varioussystems of proof of age and roadworthinesprovides a supplyof clean and safe vehLcls for the provisionof transportationat significantlylower costs than new vehicles. For thLs reasonGOM has reacheda decisionto permitsuch importation. Hatola 5.16 The most significantindicator of the inadequacyof traditionalroad passengertransport is the existenceof a flourishing systemof matola. The dedicatedmatola vehicle is usuallya pickup truck. A pickuptruck costs approximatelyMX 50-60,000,while a minibus,depending upon capacity,is MK 80-130,000and a full size bus some MK 300,000(para. 2.14). The truck'scost, handling characteristicsand carryingcapacity are well sultedto ruralroad conditionsand the limiteddemand present at any given time. The governmentis placedin an unenviableposition concerning matola. Matola is illegal,removes profits from the reach of legitimate taxation,is claimedat least by some criticsto be inherentlyunsafe and yet obviouslyfills a largevoid in the provisionof passenger transportationin Halawi. In areaswhere the levelof demandis below that neededto justifya responsivelevel of bus servicethere is little likelihoodthat largebuses, nor perhapseven the minibus,could be the principalmeans of transport. 5.17 The developmentof a policythat vould permitthe integrationof the economicviability, adaptability and responsiveness exhibitedby matola,giving due concernto legitimateissues of safety, into the rural transportationinfrastructure would representa significanttransportation breakthrough. Such a policywould need to providelegal accessinto the passengertransportation market for servicessimilar to the 'dedicated'matola operators now functionlng throughoutthe country. The primaryconcern of such a policywould be safetyand financialresponsibility for injuryor damages. In the rural areas the vehiclesinvolved would probablyresemble the specialized cargo/passengervehicles being developedunder the Rural TransportPilot Project. In the urban areas and alongthe tarmacroads, the vehicleof choicewould primarilybe the minibuswith few mixed vehiclesas describedabove. The generalelimination of route and fare controls, alongwith an improvedcredit climate for transportvehicle acquisition and a rationalpolicy towards imports of second-handvehicles, could providethe incentivesfor a rejuvenatedminibus industry. Rural PassengerTransport

5.18 Passengertransportation in the ruralareas is besetwith a numberof specialconditions in additionto the variousindustry-wide challengesthat have been mentionedbefore. Effectivelyall of the transportin the rural areas is on unpavedroads that are at various levelsof maintenance.Operation of motor vehicleson such roads entailssignificantly higher operating costs and shortenedlife of the units. Estimatesprovided by operatorsfor overalloperating costs in the ruralareas are, on average,at least 50 percenthigher than those for tarmacoperation. Road deteriorationduring the rainy seasonmakes operationin many areas impossible.Demand for servicein the rural - 211 - areas also is significantlymore cyclical than that on the intercity and urban routes. The shortage of cash incom in the rural areas also constrains the ability of people to pay even the fares charged at the current artificiallysuppressed fare levels. It is estimated that in 1978 there were 35,400 rural population for each bus allocated to the rural areas and by 1985 this had risen to 49,500 rural population per bus.

5.19 Various proposals have been made in the search for methods to lessen the severe shortage of rural passenger transport. The Rural Transport Pilot Project is sponsoring the development and operation in five areas (Phalombe,Neno, Rumphi, Mitundu and a Central Region location) of combined goods/passengertransportation in specially adapted vehicles. This UNCDF-sponsoredundertaking, resembling an upgraded and legalized matola, required special authorizationunder the specific authority granted to the Minister in Section 81 of the Road Traffic Act. Although the vehicles and spares of the Pilot Project are receiving an exemption from the payment of duties and surtaxes, calculationscontained in the appraisal report estimate that the duties and surtaxes on the vehicles and three years' spares would have been the equivalent of from six months to two years projected net income per vehicle depending on the route considered.5/

5.20 These and other estimates suggest that operators c_ motorized transport in rural areas will not be able to cover their costs at affordable fare levels. In many of these areas, improved non- motorized transportationmay be better suited to the demand patterns and cost structure of rural areas.61 Other, and not mutually exclusive, possibilities for assisting bus operators to reach levels of reasonable financial return for rural operations include the relaxation of tariff- setting restrictionsand/or provision of some type of kilometers- operated-basedaid in the form of a targeted subsidy such as a rebate of some portion of the duty on fuel or some other consumable that can be related directly to a particular operation. Easing of entry, route and vehicle type requirementsalso could permit pooling of resources and joint use of vehicles, and thereby encourage voluntary entry into the rural transportationmarketplace. It is probable that no single answer to the rural passenger transport problem exists and that a collective package of actions will ultimately be required.

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

6/ See, for example, Kanyhama Dixon-Fyle, "A New Look at Transport in the Rural Areas of Developing Countries', InternationalLabour Organisation,December 1987, and John D.N. Riverson and Steve Carapetis, *The Potential of IntermediateMeans of Transport in Improving Rural Travel and Transport in Sub-SaharanAfrica*. - 212 -

VI. SUIMHARYAND RECOMMENDATIONS

A. Summary

6.1 Road passenger transport is a relatively cheap mode that can access communities all over the country unlike rail, lake and air transport services. In view of the perceived advantages of bus transport over other passenger modes in Malawi, as well as the substantialpublic sector subsidies required by the other modes, it is necessary to reduce and ultimately eliminate constraints to the smooth running of the sector. The many claims on available public sector financing and human resources, as well as Government'swillingness to encourage free market operations,make it timely to encourage private sector participationand introductionof innovative services that may be lower-cost than existing alternatives.7/

6.2 This need is particularlypressing, given the ineffectivenessof the PRP in facilitatingthe spread of affordable and reliable transport services. Deregulationand increased competition cannot guarantee lower fares in all instances, but the anticipated improvementand expansion of services may then compensate travellers for any fare increases, especially in the context of Malawi where there is presently a big constraint on services and innovations.

6.3 Examples of African countries where the private sector operates road transport services with no non-safety related regulation by the authoritiesinclude the intercitybus services in Ghana and the minibuses in Nairobi, Kenya. Although observers indicate that this has led to better service and wider coverage, there is little prior formal informationto provide a "before and after' comparison. One better documented example is that of Sri Lanka vhere, in order to alleviate overcrowdingand inadequate service, private operatorswere allowed to enter, largely free of fare and route regulation,alongside the public bus company. Subsequently,ridership has increased significantly,even in the face of increased fares. This was partly due to the substantial increase in capacity and bus frequency stimulatedby deregulation.

6.4 In the Malawi context, the focus will need to be on removal of both direct and indirect barriers to entry, including the dearth of transport administrationskills, the high level of duties and surcharges,and limited access to credit. Any program of deregulation must be well crafted. If, for instance, fares were deregulatedwithout sufficient entry, there would be a high risk of collusion between the major existent firms. When deregulationwas introduced in Santiago, Chile, potential benefits were reduced due to suspected anti-competitive

7/ For example, a 1987 study by EPD estimated the total operating costs of a full-size bus and a 26-seat minibus at 100 percent load factor as MK 0.0171/seat-kmand MK 0.023/seat-km,respectively. However, if there were a 40 percent load factor on the full-sizebus, the same 26 passengerswould have to pay MK 0.042/pass-kmfor the service to break- even, roughly twice the amount required for the minibus. - 213 - practicesof some route associatioswho colludedin settingfare much higher (about100 percentincrease) than estimatedoperating cost increases (about20 percent). Accordingly,these associationsdid not experiencethe patronageincrease observed in those areas where collusionwas not practiced. In order for deregulationto be effective, theremust be competition. B. RecommendedActions 6.5 This sectionidentifies actions that may be taken to aid in the developmentof road passengertransportation industry so as to meet the passengertransport demands of Malavi. These actionscannot be expectedto be effectiveif adoptedin a piecemealmanner. The present inabilityof the road passengertransport indus:ry to respondto the demandsbeing placedupon it are rootedin a numberof areaswithin Malawi'sgovernmental and institutionalfabric. The successful development of a responsive road passenger transport system is not a problemsoluble by a singleministry or institution.A coordinated approachand commitmentat high levelsof governmentare essentialto the successof this effort. 6.6 To begin the process,it is recommendedthat MOTC, in conjunctionwith the Officeof the Presidentand Cabinet,organize and providethe leadershipfor the developmentof a coordinatedstrategy in supportof nationalroad passengertransportation requirements. Design of the strategyshould be the resultof participationby all appropriate GOM agenciesand interestedparties within the road passengertransport industry,including providers, users and supporters.The strategy shouldbe clearlydocumented with unambiguousassignment of the responsibilityfor actionand the inclusionof executiondeadlines. Among the items to be consideredas componentsof the coordinated strategyare: (a) Reducethe duty and surtaxburden on road passenger transportoperators in a phasedmanner consistent with the government'soverall program to reducedomestic protection.

(b) Also consistentwith the government'songoing program, improveaccess for small-scaleand rural operators. At the same time, provideshort-term training courses in transport administrationand management,possibly linked to credit availabilityand oversight. (c) Encouragealternatives to the 'largebur", such as combinationcargo/passenger vehicles, to enter servicein rural areas. If a subsidyis judgednecessary to provide rural transportationthen such subsidyshould be made explicit. (d) Implementthe recentlyannounced decision to permitthe importationof used and reconditionedbuses. This will entailagreement by the responsibleagencies of government to verifythe roadworthiness before importation into Malawi. Given the cost structureof the industry,the importationof such vehiclesis essentialto the - 214 - rejuvenationof minibusoperations and generalroad passengertransport expansion. 6.7 MOTC shouldimmediately develop a terms of reference for a total revisionof the RTA to bring it up-to-date both technically and procedurally.It is specificallyrecomended that the revisedversion shouldnot containany non-safetyrelated regulation of the road passengertransport industry such as entry,exit, routes,vehicle size and fares. A phasedreduction of fare-makingregulation, e.g., over a tvo or three year period,may be desirableto allow small carriers enough time to learn to evaluate their own cost of operation. The use of expandingzones of rate freedomover the transitionperiod is one establishedapproach to this process. This would involveestablishing over the transitionperiod a seriesof expandingfare rangesbased on a percentageof the establishedfare at promulgationof the regulation. These zones then would providewider and wider zones of fare increaseor decreasewithin which changesmay not be challengedexcept as anti- competitive.At the end of the transitionperiod the only basis for challengingany fare changewould be anti-competitiveness. 6.8 MOTC shoildofficially abolish the PRP so that the existing fare and serviceallocation discrimination may be eliminated.