CIRCULATING COPY RESTRICTED TO BE RETURNED TO REPORTS DESK Report No. TO-420a IN CENTRAL FILES Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized APPRAISAL OF THE 1964-73 MODERNIZATION PROGRAM OF THE SPANISH RAILWAY Public Disclosure Authorized (RENFE) July 21, 1964 Public Disclosure Authorized Department of Technical Operations CURRENCY EQUIVALENTS 1 U.S. dollar = 60 Pesetas 1, 000 Pesetas = 16.67 U.S. dollars SPAIN APPRAISAL OF THE 1964-73 MODERYIZATION PROGRAM OF THE SP,AXNISI. RAI.AY (RENFE) Table of Contents Page SUIA1'ARY I. INTRODUCTION 1 II. TRANSPORT IN SPAIN 1 A. Background 1 B. The TransDort System 2 C. Traffic 3 D. Transport Coordination 4 III. THE RAILIJAY SYSTEM 5 A. Organization and Management 5 B. Labor Force and Wages 7 C. Facilities 8 D. Operations 9 E. Traffic 10 F. Tariff Policy 11 G. Financial Situation 13 IV. THE INVESTYENT PLAN 15 A. Introduction 15 B. The Investment Plan 15 C. The Project 17 D. Financing the Plan 17 V. ECONOMIC JUSTIFIQATION 18 A. Introducytion 18 B. Increa.swd-ef.fi-ciency 18 C. Traf-ifc-zur6vtAh 20 VI. FUT-URE FINANCES 20 VII. CONC q IAT -IONS 23 ANNEX A:K PlaThn of Action ANNEX B: RENFE Organization Chart ANNEX C: RLNFE's Future Traffic, 196h-73 Table of Contents 2 List of Tables 1. Freight Traffic, by Mode of Transport, 1953-63. 2. Passenger Traffic, by Iviode of Transport, 1953-63. 3. RENFE Motive Power Stock, December 31, 1962. 4. RENFiE Passenger and Freightcar Stock, 1963. 5. RENFE Freight Traffic 1950-63. 6. REi\WE Coimmercial Freight Traffic, by IIajor Commodities, 1953-62. 7. RENFE Passenger Traffic, 1950-63. 8. RENFE Balance Sheet, December 31, 1963. 9. RENFE Revenues and Expenses, 1958-63. 10. RENFE Investment Plan, 1964-73. 11. Estimate of Futuire RENFE Freight Traffic, 1964-73. 12. Estimate of Future RENFE Passenger Traffic, 1964-73. 13. RZENFE Estimated Revenues and Expenses, 1964-73e 14. RENFE Estimated Balance Sheets, 1964-73. 15. RENFE Estimated Cash Flow, 1964-73. Map: REITE Lines. SPAIN APPRAISAL OF THE 1964-73 MODERNIZATION PPOGRAM OF THE SPANISH RAILWAY (RENFE) SU14ARY i. The Government of Spain has asked the Bank for a loan of US$65 million equivalent to help finance the 1964-73 Modernization Program of the Spanish Railway (RENFE). The loan would be made to RENFE and guaranteed by the Government. The project would consist of the first two years of the Program and the proposed loan would finance about one-third of the commit- ments during this period. ii. The 1964-73 Modernization Program, drawn up with the assistance of French consultants, is designed to transform RENF'E from an antiquated enter- prise operating at a large deficit and providing inadequate service into an efficient ari modern railway system earning a reasonable return on its in- vestment. The Program includes not only large new investments, but also a reorganization of RENFEts management, modernization of operations and a re- duction in staff, the closing of unprofitable lines and stations, a rate and fare structure more closely related to costs, improved transport coordination, and many other measures. Agreement has been reached with the Government and REN\FE on the measures to be taken to carry out this Program. iii. The cost of the investments included in the Program is estimated at Pts 62 billion (about US$1 billion equivalent). Major items include the renovation of track (more than Pts 15 billion), diesel locomotives (Pts 11 billion), rolling stock (about Pts 8 billion) and electrification (Pts 6 billion). the Investment Plan is technically sound, its financing is reason- ably assured and RENFE is well able to carry it out. RENFE plans to use consultants to help in its implementation. iv. The Program has a sound economic justification. A significant part of Spaints traffic can be carried most economically by railway; this traffic is likely to increase in the next 10 years and, most important, the Program will make it possible to carry the traffic at substantially lower costs and improve the quality of service. The rate of return on the investment is in the order of 15 percent which is satisfactory. v. RENFEts financial position is not sound. The Modernization Program includes, therefore, measures to reduce costs, adjust rates and fares, revalue assets, reorganize the debt structure, install a modern accounting and costing system and others. As a result of these measures it is estimated that RENFEts revenues will in 1968 be able to cover its cash expenditures (including inte- rest but excluding depreciation); depreciation will be covered, in addition, in 1971 and thereafter RENFE will begin to earn a return on its investments. - ii - vi. The proposed Bank loan would finance primarily freight cars, passenger cars, diesel shunting locomotives and ties for track renewal, All goods financed under the loan would be acquired through international compe- 7 titive bidding. In evaluating bids, Spanish manufacturers would be granted a 15 ? percent margin of preference in lieu of customs duties. vii. The project provides a suitable basis for a Bank loan of USk65 million equivalent to RENFE for a term of 20 years, including a 4-year period of grace. I. INTRODUCTION 1. The Government of Spain has requested the Bank for a loan of US$65 millior equivalent to help finance the 1964-73 Modernization Program of the Spanish Railway (Red Nacional de los Ferrocarriles EspanolDs, or RENEE). Th! project would consist of the first two years of the Program, and the proposed Bank loan would finance about one-third of the commitments during this period. The loan would be made to RENFE and guaranteed by the Government. 2. The Bank has worked closely in recent years with Spain in the trans- port field. In 1960, the Bank assisted in the recruitment of consultants to survey organizational and administrative problems in railway and highway transportation. In 1961, at the request of the Spanish Government, the Bank organized an economic survey mission. Its report, which was published in 1962, dealt extensively with the proolems of transportation. It found that RENFE faced many difficult problems and recommended major improvements, in- cluding a large investment program. 3. In November 1962, a Bank mission discussed with the Government the basic policies which would have to be pursued to make RENFE an efficient rail- way which could in time earn a reasonable return on its assets. Full agree- ment on the broad lines of these policies was reached in an exchange of memo+. randa in which the Bank indicated its willingness to consider a Loan to RENFE when agreement on the content and timing of a detailed master plan had been reached. In March 1963, RENFE requested the French consulting firm OOFRERAIL to draw up a 10Qyear Modernization Program (1964-73) which would cover all steps necessary to make RENFE efficient and financially sound. This Program was reviewed by RENFE and the Bank, and on the basis of discussions held in October 1963 RENFE made certain modifications. The Prograr was reviewed in Spain by an appraisal mission in January 1964, as a result of which further modifications were agreed to. To implement the Program, a detailed Plan of Action (see Annex A), as well as measures concerning a new statute for RENFE, a 10-year Investment Plan, the future financial viability of RENFE, and the discontinuance of service on uneconomic lines have been agreed to between the Government, RENFE and the Bank. 4. The proposed loan would be the second loan to Spain, following a highway loan in 1963. If the experience during the next two years indicates that RENFE is making favorable progress, consideration would then be given to further Bank assistance to the Program. The Program assumes votal ex- ternal borrowing of about US$200 million. II. TRANSPORT IN SPAIN A. Background 5. Spain, with an area of about 500,000 sq. !in, is only slightly small~ er than France and nearly 70 percent larger than Italy. The population of about 31 million is growing at less than 1 percent annually, and population density is about one-third of that of Italy and three-quarters of that of France. 6. Spain's gross national product reached about Pts 830 billion in 1963 (nearly US$lh billion equivalent), with a per capita income of some US$450 equivalent. The real growth of the economy in the last three years has averaged a high 7 percent annually. The transport sector accounted for 6-7 percent of national product in recent years and absorbed about 5 percent of its labor force. B. The Transport System 7. Spain's transportation system is heavily influenced by three im- portant geographic factors: the rugged mountainous terrain, the wide disper- sion of the major centers of production and population, and an extensive coastline forming about two-thirds of its periphery. The mountains increase construction and operating costs of land transport and the large distances between the major economic centers - averaging more than 500 km between the seven most important ones - require longer hauls than in most other European countries. These hauls traverse areas of low population which do not gene- rate much traffic but add to transport costs by requiring local train ser- vice. The effects of geographical dispersion are illustrated by the fact that the mileage of Spain's railway and highway network in relation to gross national product is more than twice that in Italy and France.