Documentof The WorldBank FOR OFFICIAL USE ONLY Public Disclosure Authorized ReportNo. 6959-YU sTAFFAPPRAISAL REPORT Public Disclosure Authorized YUGOSLAVIA SEVENTHRAILWAY PROJECT APRIL 26, 1989 Public Disclosure Authorized Public Disclosure Authorized Country Operations Department IV Europe,Middle East and North AfricaRegion llds docment has a resilted distrbudtnand may beused by reie only ] thepo b_muicof theiofficlm dudes lb contents may notothewise be diclosed wihodd Wankod CURRENCYEQUIVALENTS (As of December31, 1988) CurrencyUnit YugoslavDinar (Din) US$1 * Din 5218 Din 1 US$0.00019 Din 1 million a US$191.6 WEIGHTSAND MEASURES MetricSystem a British/USSystem 1 meter (m) = 3.281 feet (fc) 1 kilometer(km) = 0.621 miles (mi) 1 sq. kilometer(km 2 ) 0.386 sq. miles (mi2) 1 metric ton (m ton) = 0.984 long ton (1g. ton) 1 hectare(ha) = 2.4711acres (ac) ABBREVIATIONS BOAL - Basic Organizationof AssociatedLabor CIF - Cost, Insuranceand Freight COE - Chamber of Economy COI - Community of Interest CRO - Councilof Republicanand ProvincialRoads Organization CTC - CentralizedTraffic Control CYR - Community of Yugoslav Railways EC - European Community EIB - European Investment Bank FARP - Federal Association of Republicanand Provincial Road Organizations FSTC - Federal Secretariat for Transport and Communications GDP - Gross Domestic Product GMP - Gross Material Product GTKM - Gross Ton - Kilometer ICB - InternationalCompetitive Bidding NTKM - Net Ton - Kilometer PKM. - Passenger - Kilometer Plan - The 1986-90Medium Term DevelopmentPlan PPI - Producer Price Index RE - Railway Economy RTE - Railway Transport Enterprise RTO - Railway Transport Organization SDK - Social Accounting Service SFRY - SocialistFederal Republic of Yugoslavia SR - Socialist Republic SS & TT - Signallingand Telecommunications TSM - Transport Sector Memorandum TU - TrafficUnits (millionsof NTKM + millionsof PKM) TYH - Trans-YugoslavHighway FISCAL YEAR January 1 - December 31 FOROFFICIAL USE ONLI YUGOSLAVIA STAFF APPRAISALREPORT SEVENTHRAILWAY PROJECT Loan and Pro-iectSummary Borrowers: The RailwayTransport Organizations (RTOs) Belgrade, Ljubljana,Novi Sad and Zagreb. Guarantor: SocialistFederal Re?ublic of Yugoslavia. Amount: A totalof US$138million equivalent as follows:BelVrade - US$59.0 million, Ljubljana - US$31.9 million, Novi Sad - US$14.6million, and Zagreb- US$32.5million. Terms: Fifteenyears maturity including a five-yeargrace periodat the Bank'sstandard variable interest rate. ProiectObjectives: The pro'posedproject has as its principalobjectives: (a) supportingof a new momentumfor reformwithin the railways; (b) reducingoperating costs and increasingoperating efficiencyby phasingout low volumefreight stations, and reducingthe numberof staff,and introducingor enlargingan informationsystem for train,wagon and locomotivecontrol; (c) assistingthe Yugoslavrailways to compete wor- effectivelywith other transportmodes, particularly for internationaltraffic where they are losingmarkcet share,by improvingthe conditionof the main trunk link; (d) increasinglocomotive availability through provision of adequatesupply of spareparts; and (e) improvingthe Yugoslavrailways' financial position in an environmentof high inflationthrough timely tariff increases,reduced operating costs and better investment planning. ProjectDescription: The projectwould comp ise the investmentprogram (1989-91) of four RTOs which operateabout 85% of the main trunk This document hasa estricteddistribution and may be used by recipientsonly in theperformance of their officialduties. Its contents may not otherwise be disclosed without World Bank authoratton. - ii - line. The investment nrogram include track renewal, reconstructionof line sections, improvementof stations and junctions,change of the electric system on a line section, modernizationof signalling and telecommunicationequipment, installationof an informationsystem, provision of traction and rolling stock, track maintenance equipment, locomotive spare parts, and technical assistance. The investsentplans are sound; in particular,each major investment item has an economic return greater than 122, is covered by a satisfactoryfinancing plan, and is within the implementationcapability of the concerned RTO. The total cost of the project with contingencies is estimated at US$907 million with a foreign exchange component of US$434 million (48b). The Bank loans would cover the direct and indirect foreign exchange components of selected high priority investments- mainly materials and equipment, and the cost of technical assistance and training. The loans would be made to the four RTOs as follows: Belgrade - US$59.0 million, Ljubljana - US$31.9 million, Novi Sad - US$14.6 million, and Zagreb - US$32.5 million. Benefits and Risks: The ain project benefits derive from permittingYugoslav railways to increase their operational efficiency, particularlyon the main trunk line where capacity constraintsare developing. The track overhaul of sections of the main trunk and other key lines will increase operating speeds and reduce operating costs. The constructionof the Western Bypass and the modernization of signalling in the main station in Zagreb will overcome a serious capacity constraint in the Zagreb Junction. The constructionof the second phase of the Belgrade Junction will similarly rationalize the flow of freight and passenger trains at that junction, in addition to releasing a valuable parcel of land for other urban uses. The purchase of spare parts for locomotiveswill help increase locomotive availability,reducing the need for future locomotive pure.hases. The procurement of traction and modern rolling stock will help make the railways more competitive,and reduce the uneconomic diversion of bulk and other traffics to road transport. In addition, the project is expected to result in reductions in operating costs and institutional improvements. Most of the project involves the renewal of existing assets which have little environmental impact. The constructionof Belgrade Junction will release 11 hectares of riverfront land for the constructionof apartment buildings, parks, and other urban uses which are satisfactory. The conctructionof the Western Bypass in Zagreb will reduce congestionand noise in the city center; - iii- While Governmentand railwaysmanagement are committed to reformingYugoslav railways, implementation may prove difficult. In particular,there are threeproject risks whichare significant.First, the Government/Committees of Interestmight delayrailway tariff increases or fail to providecounterpart funds or compensationin a period of rapid inflationwhich would resultin operating lossesand a shortageof localfunds for investments. Second,traffic demand might stagnateor decreaserather than slowlyincrease as forecastif the Yugoslaveconomy deterioratesdue to lack of appropriateadjustment policies. Third,operating costs may remainhigh if railwaysdo not implementtheir action plans satisfactorily,in particularif they do not reduce theirstaff by about 2% p.a. In spite of significant risks,we feel it is reasonableto proposethese loans becauseof the Government'scommitment to economic reformas demonstratedby recentconstitutional and ordinarylaw changes,and Yugoslavrailways preparation of and commitmentto a "BusinessPlan" which is a de facto reformprogram for railways. - iv - Estimated Costs-' Local Foreign Total ............(US$ million) Completionof 81-85 Plans 30.10 18.76 48.86 Track Overhaul 88.05 79.06 167.11 Reconstructionof Lines, Stations& Junctions 137.64 95.35 232.99 Electrification 22.14 18.11 40.25 Signalling and Telecommunications 14.14 28.52 42.66 Traction& RollingStock 92.00 46.46 138.45 LocomotiveSpare Parts 7.94 29.67 37.61 Track MaintenanceEquipment 4.96 19.27 24.23 IntegratedTransport 10.49 11.43 21.92 InformationSystem 20.97 56.15 77.13 Miscellaneous 21.01 10.83 31.84 Subtotal 449.45 413.61 863.06 Physical Contingencies.' Price Contingencies 23.30 20.16 43.46 Subtotal 472.75 433.77 906.52 Technical Assistance/ TrainingEquipment 0.16 0.40 0.56 GRAND TOTAL 472.91 434.17 907.08 Financing Plan: US$ Million Percent InternalFunds 442.4 49 Governmentand 180.6 20 City Grants ProposedWorld Bank Loan 138.0 15 Sixth RailwayLoan (Loan2336-YU) 7.0 1 Other ForeignLoans 135.7 15 DomesticLoans 3.4 - Total 907.1 100 1/ Including taxes and duties, estimated at about US$165 million. 2/ Physical contingenciesare included in the above estimated costs. - v - Estimated IBRD Disburaements: IBRD Fiscal Year FY90 FY91 FY92 Annual 39.3 79.9 18.8 Cumulative 39.3 119.2 138.0 Economic Rate of Return: 17 (overall) Maps: IBRD 20806 and 20807. YUGOSLAVIA STAFFAPPRAISAL REPORT SEVENTHRAILWAY PROJECT Tableof Contents I. THE TRANSPORT SECTOR A. The Economy . ...*... 1 B. Transport System and Demand. .. ... .. .... 1 C. Transport Organizationand Policy . 4 D. PreviousBank Projects.c ................ 7 II. THE RAILWAYS A. General . 8 B. Traffic . *. 8 C. Comummityof Yugoslav Railways . 10 D. Organization. 10 E. Mnagement and Staff . 11 F. RailwayProperty .e ... a.................... 11 G. IntegratedTransport . .0. I . 14 H. UneconomicLines and Services. 14 I. Operations . .. a . .. .... .* .. 15 J. Tariffs and Compensation.. .. .. .. 16 K. Accountsand Audits.. 17 III. THE PROJECT A. ProjectRationale. ........................ 18 B. Objectives. .. 19 C. InvestmentPlans . ... .. 19 D. ProjectDescription. .. .. 20 E. Cost Estimates . .. 22 F. LendingArrangements ..en ... ....................24 G. Implementation.i.o................... 24 H. Procurement .*... ........ ...