Document of The World Bank FOR OFFICIAL USE ONLY Report No: 26232 IMPLEMENTATION COMPLETION REPORT (IDA-22670) ON A CREDIT IN THE AMOUNT OF SDR 56.1 MILLION TO THE UNITED REPUBLIC OF TANZANIA FOR THE RAILWAYS RESTRUCTURING PROJECT June 30, 2003 Transport Africa Region 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. CURRENCY EQUIVALENTS (Exchange Rate Effective ) Currency Unit = Tanzanian Shilling Tsh 1.0 = US$ 0.005 (as of March 1991) US$ 1.0 = Tsh.194 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ADB = African Development Bank ADG = Assistant Director General CAS = Country Assistance Strategy CIDA = Canadian International Development Agency DANIDA = Danish International Development Agency DCA = Development Credit Agreement DFID = Department of International Development, UK DG = Director General EARC = East African Railways Corporation EP = Emergency Rehabilitation Program for TRC ERP = Economic Recovery Program ERR = Economic Rate of Return EU = European Union GOT = Government of Tanzania ICEP = Interim Capacity Enhancement Program KfW = Kreditenanstalt fuer Wiederaufbau MCT = Ministry of Communications and Transport MOU = Memorandum of Understanding MTR = Mid Term Review OIP = Operations Improvement Plan PSRC = Presidential Parastatal Sector Reform Commission QAG = Quality Assurance Group TA = Technical Assistance TRC = Tanzania Railways Corporation Vice President: Callisto E. Madavo Country Manager/Director: Benno J. Ndulu/Judy M. O'Connor Sector Manager/Director: Maryvonne Plessis-Fraissard/Praful C. Patel Task Team Leader/Task Manager: Simon Thomas UNITED REPUBLIC OF TANZANIA RAILWAYS RESTRUCTURING PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 5 5. Major Factors Affecting Implementation and Outcome 8 6. Sustainability 10 7. Bank and Borrower Performance 10 8. Lessons Learned 12 9. Partner Comments 12 10. Additional Information 14 Annex 1. Key Performance Indicators/Log Frame Matrix 15 Annex 2. Project Costs and Financing 17 Annex 3. Economic Costs and Benefits 18 Annex 4. Bank Inputs 22 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 24 Annex 6. Ratings of Bank and Borrower Performance 25 Annex 7. List of Supporting Documents 26 Project ID: P002757 Project Name: RAILWAYS RESTRUCTURI Team Leader: Simon Thomas TL Unit: AFTTR ICR Type: Core ICR Report Date: June 30, 2003 1. Project Data Name: RAILWAYS RESTRUCTURI L/C/TF Number: IDA-22670 Country/Department: TANZANIA Region: Africa Regional Office Sector/subsector: Railways (88%); Roads & highways (12%) Theme: Regulation and competition policy (P); State enterprise/bank restructuring and privatization (P); Rural services and infrastructure (P) KEY DATES Original Revised/Actual PCD: 11/26/1986 Effective: 04/30/1992 04/30/1992 Appraisal: 06/30/1990 MTR: 12/31/1993 02/03/1995 Approval: 06/13/1991 Closing: 12/31/1999 12/31/2002 Borrower/Implementing Agency: GOVERNMENT OF TANZANIA/TANZANIA RAILWAYS CORPORATION Other Partners: STAFF Current At Appraisal Vice President: Callisto E. Madavo Edward V. K. Jaycox Country Director: Judy M. O'Connor Robert Hindle Sector Manager: Maryvonne Plessis-Fraissard Isaac Sam Team Leader at ICR: Simon Thomas Yusupha Crookes ICR Primary Author: Yoshimichi Kawasumi 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome:U Sustainability:UN Institutional Development Impact:SU Bank Performance:S Borrower Performance:S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The main objectives of the Project (RRP) were to (i) strengthen the organization of the Tanzania Railways Corporation (TRC), eliminate regulatory bottlenecks to its effective operation and set it on the path to commercially viable entity; and (ii) rehabilitate infrastructure assets, replace obsolete and uneconomic operational assets and provide limited new investments consistent with the prospects for traffic growth. The attainment of these objectives was expected to increase TRC's effective haul capacity consistent with the demands of the growing economy, improve its capacity to handle transit traffic to the benefit of both Tanzania and its landlocked neighbors, and improve its financial performance. The objectives were well justified, given the conditions at project appraisal and the widely acknowledged railway restructuring best practices. Railways Performance: The highest tonnage carried over the network was 1.7 million tons, in the early 1970s, when the railway was part of the East African Railways Corporation (EARC). Effective capacity began to decline in the mid-1970s and reached 0.8 - 0.9 million tons by the 1980s, despite considerable additions to the asset base after the establishment of TRC in 1978. The decline in capacity resulted from: (i) the disruption during the collapse of EARC; (ii) poor operational management; (iii) low availability of locomotives and wagons; (iv) unreliable operational and infrastructure assets; and (v) lack of commercial and managerial autonomy. The under-utilization of assets and restrictions on tariff increases led to a deteriorating financial performance. Best Practices: The RRP was expected to address this situation by: (i) restructuring TRC's organization and operating practices and systems; (ii) changing the relationship with the Government of Tanzania (GOT), and introducing management autonomy and commercial orientation through a performance contract; and (iii) providing the investment required to enable TRC to meet the demand for freight transport. This was fully in line with the Bank's policy focusing on the commercialization of the railways operation (refer to -" Sub-Saharan Africa Transport Policy Program - SSATP - Working Paper No.7: Railway Restructuring Seminar for Anglophone and Lusophone countries in Sub-Saharan Africa, Bulawayo, Zimbabwe, June 1992"). (Hereafter, the original objectives will be referred to as "Objective A" to distinguish from the revised objectives which will be referred to as "Objective B".) 3.2 Revised Objective: Objective B: The Objective A was maintained, but the implementing strategy was fundamentally changed midway through RRP. Until the mid-1990s, GOT considered TRC as a strategic parastatal and the project was designed within this framework, using the best practice of a performance contract. By 1996/97, it had become clear that the project was failing to attain its development objectives. The TRC experience was similar to the failure of other rail projects which had also attempted to transform public sector railways while remaining within the parastatal framework, for example in Kenya. Before a final decision could be taken on continued support for the project, GOT announced to the donors in October 1997 that it had decided to concession TRC as the only feasible means of meeting the commercial and operational objectives. Hence the project was restructured with a revised objective of concessioning the TRC (Objective B). Paradigm Shift: The Government's decision to concession TRC mirrored the clear paradigm shift towards railway restructuring, among donors, based on the very limited positive experiences of railway restructuring within the parastatal framework, and the increasing numbers of successful concessioning practices in Latin America as well as in African countries (refer to: "Sub-Saharan Africa Transport Policy Program -SSATP- Working Paper No.32: Seminar on Railway Concessioning in Sub-Saharan Africa, Abidjan, Cote d'Ivoire, October 1997"). RRP was restructured in February 1999 to include concessioning assistance as a specific disbursement category in the restructured Credit, and all the donors shifted support to maintaining operations until the concession, originally anticipated by the end of 2000. - 2 - 3.3 Original Components: In line with the Objective A, RRP consisted of the following two major components: 3.3.1 Organizational Development and Operational Support Component: To ensure that TRC would achieve the improvements and efficiency envisaged, a major program of management strengthening was planned and implemented. The program provided extensive inputs of long term Technical Assistance (TA) to: (i) improve TRC's operations through the implementation of efficient methods of planning and control; (ii) help implement the physical components of the Project; (iii) upgrade TRC's financial management and accounting practices; (iv) improve TRC's management and operations information systems; and (v) improve employee incentives through a revised salary and wage structure and a productivity-based incentive scheme. 3.3.2 Physical Investments: Based on the assessment of major infrastructure and operating constraints, the following components were included mainly responding to the second development objective: (i) relaying of about 200 km track, rehabilitation of 1000km track, re-ballasting and thermit welding of rails; (ii) rehabilitation and strengthening of 22 bridges; (iii) establishment of one stone quarry for ballast; (iv) procurement of equipment for track maintenance; (v) construction of a central plant maintenance and permanent way workshop; (vi) procurement of accident relief equipment; (vii) procurement of about 40 trolleys and service vehicles; (viii) renewal of the Tanga and Link line overhead communications wires and provision of equipment and spare parts for the TRC telecommunications system; (ix) rehabilitation of about 1,750 wagons; (x) rehabilitation of 100 coaches and procurement of 27 new passenger coaches. (xi) rehabilitation of 31 locomotives; and (xii) upgrading of the mechanical engineering workshops. The total cost of RRP was estimated at US$275.2 million: TRC $109.6 (million) IDA $ 76.0 (million) ADB $ 31.2 EU $ 18.0 CIDA $ 10.3 KfW $ 18.3 DFID $ 8.5 WFP $ 3.3 3.4 Revised Components: The IDA Credit was revised twice: (i) Emergency flood repairs were included after the El Nino (DCA Amendment dated February 23, 1998); and (ii) in line with the Objective B, the concessioning assistance was included when the project was restructured and SDR8.1 million cancelled (DCA Amendment dated June 13, 2000). The other donors (CIDA, DFID, KfW) also modified their assistance with additional funding for the interim Capacity Enhancement Program (ICEP) which was formulated after the concessioning decision and was designed to increase locomotive availability through the provision of spare parts and line-management at the Morogoro Diesel Workshop. During the implementation of RRP, the Government of Belgium also provided support for tank-wagons, weightbridges, Isaka terminal, handling equipment, technical assistance and turnouts. - 3 - Table 3.1 Comparison of Components (US$ million) CATEGORY COMPONENTS ORIGINAL REVISED-1 REVISED-2 FINAL (SAR) (EL NINO) (RESTR.) ACCOUNT Track renewal, maintenance 47.3 52.1 43.5 44.5 PHYSICAL depot., signal & telecom., office equipment. Management support, workshop 17.6 12.2 7.5 8.5 TA support, supervision, assets evaluation, training, studies. PPF PPF 1.5 0.7 1.1 1.0 EMERGENCY Civil works, goods & equipment, - 6.5 7.7 7.8 supervision. CONCESSION Services. - - 4.0 2.8 UNALLOCATED - 9.6 4.4 1.3 0.0 TOTAL 76.0 76.0 65.0 64.6 (SDR56.1) (SDR56.1) (SDR48.0) (SDR46.4) CANCELLED - - SDR 8.1 SDR 9.7 3.5 Quality at Entry: Recognizing the pervasive problems of TRC, RRP was designed as a comprehensive approach to the key constraints: the organizational structure, operating and management systems and procedures, GOT-TRC relationship, and physical and human resources. The quality at entry is rated as "satisfactory", given the conditions of the railway at project appraisal and the widely acknowledged railway restructuring best practices (the accepted paradigm for parastatal reform). The "Quality at Entry" was not assessed by QAG. Emphasizing commercial and managerial autonomy: RRP supported greater autonomy for TRC in decision making, particularly with regard to tariff setting, rationalization of internal authority and communication structures, and rationalization of staff strength. During the appraisal stage, an Operation Improvement Plan (OIP) was agreed with the GOT. The Ministerial Directive No.1 and the Memorandum of Understanding (MOU) were signed in May 1991. The GOT - TRC relationship was thus given a revised status and a formal system for the monitoring of operational performance was established. This was fully in line with the Bank's policy focusing on the commercialization of the railways operation. Improving systems and procedures: RRP supported the upgrading of key management systems, particularly those related to operations, costing, train operations information, and monitoring of operational performance. Improving productivity of human resource: Emphasis was given to improving the capability and productivity of human resources through staff rationalization/reduction, innovative training methods, and exposure of the management to advanced railway systems. Improving availability and reliability of physical assets: RRP focused on ensuring that locomotives, rolling stock, and infrastructure would not be constraints. Aged, obsolete and unproductive assets were to be scrapped, line locomotives were to be overhauled and refurbished, and railway track was to be renewed. Incorporation of lessons and past experience: RRP was designed after detailed consultations with stakeholders and in cooperation with all the interested donor agencies. The Project design included the concept of joint supervision missions and joint Aide Memoires. The experience of the Emergency - 4 - Rehabilitation Program (EP), launched in 1987, provided valuable lessons. It had become apparent that the GOT needed to (i) allow TRC management and commercial autonomy; (ii) strengthen TRC's capacity to manage its resources efficiently, and (iii) set explicit financial and operational targets and hold TRC accountable. These lessons were incorporated into RRP. CAS: RRP was in line with the CAS goals which concentrated on supporting the medium term economic development of Tanzania through providing the basis for sustainable growth. The strategy was to assist Tanzania to: (i) develop and implement policy and institutional reforms to underpin the medium-term objectives, (ii) rehabilitate key infrastructure and services, and (iii) eliminate the critical longer-term constraints to development in the social and environmental sectors. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: RRP was restructured midway through the Project implementation, reflecting: (i) the recognition by the Government of the limitation of the operational improvement within the parastatal framework, and (ii) the paradigm shift among donors in railway restructuring policy. The overall outcome of the RRP was, therefore, rated primarily based on the revised development objectives, Objective B. 4.1.1 Objective A: The main objectives of the project were partly achieved and its achievement is rated as "marginally satisfactory". The physical investment was highly successful despite the damages and disruptions caused by El Nino in 1997. However, in terms of financial and freight transport performance, the Project failed to accomplish the objective to assist TRC's transition to becoming a commercially viable entity. The corporate performance improvement attained in the initial stage of the Project was not sustained. The Project strengthened the management and operational basis throughout the Project, but it was eventually realized that there were problems and constraints inherent in the railways operating within the public sector framework and its relationship with the Government of Tanzania (GOT) that made it very difficult for the railways to exploit its full potential. It was only after the decision was made by GOT to privatize TRC, and the donors focus shifted from the advisory TA to direct line management that the potential operational capacity was effectively orchestrated and TRC's record high performance was made. The freight traffic of 1.60 million-tons in 2002 is still below the Mid Term Review (MTR) target of 1.83 million-tons by 2000. However, overall performance trend in the past 5 years showed a steady improvement in freight traffic. 4.1.2 Objective B: The concessioning of TRC, despite all well intended efforts and good progress in transaction preparation, was not achieved. The Presidential Parastatal Sector Reform Commission (PSRC) was the implementing agency for the concessioning component. Though the concessioning process took much longer than expected, a new Railways Act, providing the legal basis for the new railway structure, was enacted, and the SUMATRA Act, establishing an economic and safety regulator for surface transport, was also enacted. The concession bidding documents were issued in September, 2002. Unfortunately, the bidding process was completed, but there were no bids. The GOT is still committed to concessioning and has decided to restart the transaction process. GOT is currently seeking new transaction advisors to assist with the preparation of revised bidding documents. Had the concession been awarded, the achievement of the Objective B would have been rated as "highly satisfactory". As the matters stand, a "moderately unsatisfactory" rating is considered appropriate. 4.2 Outputs by components: 4.2.1 Under Objective A: Outputs under Objective A were rated as "satisfactory". The organizational support has improved - 5 - various management and operational elements of TRC, and the physical investment was more than fully accomplished, despite damages caused by El Nino in end-1997. 4.2.1.1 Organizational Development and Operational Support: Intensive input of technical assistance (TA) experts, combined with various studies and trainings, was the core of the Organizational Development and Operational Support. At the peak, in December 1994, the number of long-term TA experts totalled 37. The details of accomplishment of the individual components are as follows: Management Development Program - Supervisory Staff Development and Training: Initial 830 person-months reduced to 516 person-months. Coordination achieved through Management Committees in departments and an Inter-Department Joint Meeting chaired by the Director General. A 360 degree performance evaluation system was introduced, under which the TA were evaluated by their counterparts and vice-versa (CIDA, EEC, KfW, DFID, IDA). Implementation support for physical components: Initial 346 person-months reduced to 264 person-months. Support included (i) locomotive maintenance; (ii) wagon and coach rehabilitation; (iii) bridge construction; and (iv) track rehabilitation (ADB, CIDA, DANIDA, DFID, EU, KfW, IDA). Financial management & accounting systems: A number of studies were undertaken on the financial and accounting systems, as well as an asset revaluation study (DFID). A computerized financial accounting system was introduced (IDA). TRC routinely produces financial reports, detailed accounting data, etc., in a timely and professional manner. Commercial Department: In 1992, a Commercial Department was established and the commercial management study was completed in 1994 (DFID) and a commercial strategy formulated. TRC introduced Railtracker (wagon/freighter tracking system) (EU) and it has become the primary tool for improving wagon allocation management and utilization. IT Support: An IT strategy study was completed in 1994 (DFID). An integrated financial and materials management system was installed, together with a computer network covering all the major TRC centers. The system was fully operational by 2001, and all but the materials management system have superseded the previous systems (IDA). TRC Incentive scheme: An incentive study was completed in 1994 (IDA), and an incentive system was introduced. By 1996, the cost of the incentives had reached US$4 million, almost 40% of the basic salary cost. While work unit targets were reached, there was no improvement in corporate performance. The scheme was suspended and then replaced by a system which required both the unit and corporate performance to be achieved. No incentive payments have been made under the new scheme, since the overall corporate target was never met, but a flat-rate bonus of Tsh. 20,000 was paid to all staff in 2001. 4.2.1.2 Physical Investment Components: The physical investments which constituted some 83% of the total project costs, were highly successfully completed by the end of December 2001. The details of individual components are as follows: Relaying of 200 km track, rehabilitation of 1,000 km track, and thermit welding of 560 km rail: all were implemented by September 2000 (IDA). Ballast: (i) The Tura quarry contract was successfully completed by 1997 (EU); (ii) Pangani quarry was dropped, following a re-assessment, and 100,000 cu.m of ballast was procured by tender (IDA). Reconstruction of 22 bridges: Initial 22 bridges increased to 52 bridges as part of El Nino emergency works and were completed by December 2001 (KfW). Emergency Flood Works for Central and Link Line: The El Nino floods in December 1997, washed away the Central line at 16 places (totaling 5 km) over a 31 km section between Kidete and Kilosa. Major damage to culverts also closed the Link Line. With remarkable efforts from the TRC engineers and force account works, the Central Line was re-opened in 10 months in August 1998, and the permanent structures were completed in December 2001 (IDA). Operation of the Link Line was restored in January 1999, and major culvert repairs, which required extensive tunneling, were completed by December 2001 - 6 - (IDA). Construction of a central plant maintenance & permanent way workshop: At the MTR it was agreed that equipment and plant would be maintained by the private sector. Track maintenance machines and tools, motor trolleys, and accident relief equipment: Delivered by 1997 (EU). Communication systems: It was decided that there was insufficient traffic to justify the renewal of the overhead communication system on the Tanga and Link lines. A high capacity fiber-optic cable was installed between Dar es Salaam and Dodoma, completed in early-2003 (KfW). Four PABXs were purchased for the major stations (IDA). Rehabilitation of wagons: Some 2,400 wagons were overhauled by 1996 (DANIDA, ADB, DFID) and 67 new tank wagons were procured (EU). Rehabilitation of locomotives: 15 mainline locomotives and 11 shunting locomotives were overhauled by 2000 (CIDA, DFID, KfW). However, most of the mainline fleet is 25+ years and reliability remains a major problem. In 1998, 10 Class 73 locomotives were leased from India, and the Trans-Africa Rail Corporation was given traffic rights to move cement from Tanga and Ugandan transit traffic to/from Kidatu. Equipment for track maintenance and upgrading of the workshops: Delivered by 1994 (EU, IDA). Rehabilitation and purchase of coaches: Rehabilitation was more costly than originally estimated and only 50 coaches were rehabilitated. 27 new coaches were delivered by 1997 (ADB). 4.2.2 Under Objective B: Outputs under Objective B was rated as "satisfactory". The concessioning preparation and process was well advanced, and the TRC's operational performance regained record highs. However, the concessioning process was not completed as a result of insufficient private sector interest. 4.2.2.1 Support for Concessioning The IDA Credit financed the cost of the concession transaction advisor and a number of supporting studies: asset valuation, pension liabilities, environmental and social liabilities, etc.. In addition, a public awareness campaign of the need for railway concessioning was also conducted. 4.2.2.1 Interim Capacity Enhancement Program (ICEP) This program was developed by the donors (CIDA, DFID, KfW) to support line management, locomotive maintenance and spare parts supply until the concession. The program provided a management team (10 experts), with full responsibility for locomotive maintenance and spare parts for all classes of locomotives (excluding Class 87). Record locomotive availability was achieved. The two year program was subsequently extended, with a reduced management team to the end of 2002 (DFID, KfW, IDA). 4.3 Net Present Value/Economic rate of return: NPV (12%): US$29.0 million; and ERR: 14.4% (for details, refer to Annex 3, Section A 3.1 Economic Rate of Return). 4.4 Financial rate of return: Financial NPV (12%): -US$49.5 (negative); and FRR: 4.1% (for details, refer to Annex 3, Section A 3.2 Financial Rate of Return). 4.5 Institutional development impact: The institutional development impact of RRP is rated "substantial" in the following two major aspects: Operational Performance of TRC: RRP resulted in greater management autonomy, a more commercial approach and a more customer oriented focus. The operational statistics show a substantial initial improvement, especially in freight transport, as illustrated in the Fig. 4.1- TRC Freight Traffic & TA - 7 - Experts Input. After the peak in 1995, however, the freight transport declined implying: (i) the structural weaknesses of the parastatal framework to sustain the development, and (ii) the limited effectiveness of advisory TA experts. RRP was failing to achieve its objective of developing a commercial and financially sustainable railway. However, the revised TA focus on line management, since 1998, supported TRC's own core of competent and dedicated managers which, along with the intensive support to locomotive maintenance and spare parts supply, improved the operating performance substantially. Observed in wider view, the overall performance tendency showed a constant improvement in freight traffic despite the decreased level of physical investments and TA inputs (ref. dotted lines). Figure 4.1 - TRC Freight Traffic, TA Experts & Investment 1800 100 1600 90 80 1400 70 mil.) 1200 ($ ton) 60 1000 Investment ($ mil.) (1,000 50 Freight (1,000 tons) 800 Investment/ TA Experts 40 No. Freight 600 30 400 Experts 20 200 10 0 0 1991 1992 1993 1994 1995 1996 1997 El Nino 1999 2000 2001 2002 Year Institutional Transformation: Though RRP failed to achieve its original objective of developing a commercial and financially sustainable public sector railway, it assisted in facilitating the fundamental paradigm shift to private sector management through a concession. Throughout the concessioning process, TRC management proved its customer oriented behavioral change, fully cooperated with the concessioning process, and maintained its focus on improving performance despite the uncertainties. This is altogether a fundamental institutional transformation and its institutional development impact is substantial. If the TRC is successfully concessioned, it will have a profound impact on the Tanzanian transport sector, and the institutional development impact will be very "high". 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: 5.1.1 Under Objective A: Political Development: TRC serves not only Tanzania but also the surrounding landlocked countries. Transit cargo is significant and generally the most profitable traffic. Turmoil in the Democratic Republic of Congo, Burundi and Rwanda made both transit and relief cargo more erratic. - 8 - El Nino: The floods in end-1997 cut both the Central and Link lines. A road-rail transshipment operation was quickly organized at Dodoma and the rehabilitation works were completed with remarkable speed, but the interruption to freight services had a very adverse operational and financial impact on TRC. 5.1.2 Under Objective B: Inadequate Private Sector Interest in Concessions: GOT decided to concession TRC, but this also required private sector demand for the concession. Concessioning was delayed because only one of the pre-qualified bidder was prepared to submit a bid, and that bid would not have been compliant, and eventually was not submitted. GOT is now considering what changes to the terms and conditions are required to increase private sector interest. 5.2 Factors generally subject to government control: 5.2.1 Under Objective A: Difficulty within parastatal framework: While TRC was progressively provided with commercial and managerial autonomy through Ministerial Directive and MOU/Performance Contract, TRC was failing to achieve its objective of developing a commercial and financially sustainable railway. The unresolved issues such as the lack of GOT's commitment to fully implement MOU, surplus staff, resettlement policy, regulatory constraints, and especially the lack of market oriented management culture and skill responsive to the ever progressive market environment, were the fundamental impediments. GOT commitment to cost recovery business principle: Initially, TRC management failed to claim compensation for non-commercial services, but when it was claimed, GOT failed in honoring compensation for TRC's social services, and little compensation was paid. In 2002, GOT agreed to offset compensation claims against debt service arrears. GOT also failed to establish a level playing field between the road transport and the railways. The investment in rail infrastructure should have been treated in a similar fashions to road investment, especially as TRC was required to pay the fuel levy to fund road maintenance. In retrospect, it could be argued that the on-lending arrangements for infrastructure investment were flawed. The lack of GOT's commitment partly obstructed the financial performance and cultural change of TRC. 5.2.2 Under Objective B: Long decision making processes with parastatal constraints: Concessioning was slow partly because of the lengthy decision making processes. The Cabinet decision on the preferred concessioning option took over 12 months. 5.3 Factors generally subject to implementing agency control: 5.3.1 Under Objective A: The SAR identified a number of potential risks, mainly related to management and operations. RRP tried to strengthen these areas with TA, studies, and investments. Management commitment to restructuring: Initially, there was limited commitment to restructuring, e.g., TRC failed to raise compensation claims for social services. More commitment, in the early years, might have led to greater institutional development and improved finances. Following changes in top management, attitudes were transformed, and TRC began to make the necessary difficult decisions. TRC agreed to contract out locomotive maintenance, and later accepted contracted management. To reverse the declining operational performance, TRC took the initiative to bring back an external railway manager as an Assistant Director-General (ADG) to coordinate operations. There has been a marked improvement in TRC performance, since the assignment of ADG and the ICEP, however it was doubtful whether management could ever overcome the basic flaws in the parastatal institutional framework. 5.4 Costs and financing: Total Project Cost: The SAR estimate was US$275.2 million, with US$165.4 million funded by donors and US$109.8 million by TRC. Actual donor funding was US$193.3 million, a 17% increase. TRC's contribution was US$29 million. - 9 - IDA Credit: The IDA disbursed US$64.6 million, US$11 million (-15%) less than SAR estimate of US$76.0 million. Disbursements included US$7.9 million for the El Nino works and US$2.0 million for concession assistance. SDR 8.1 million was cancelled at the time of restructuring of the Project. Savings came from streamlining technical assistance and cost saving in civil works. 6. Sustainability 6.1 Rationale for sustainability rating: Under the current situation, neither GOT budget allocation nor donor support is yet secured to enhance the TRC's operation beyond 2004. The sustainability of the Project is, thus, rated as "moderately unlikely" despite the current record high performance of TRC. Since the RRP was restructured, the direction of the project shifted to the concessioning of the railway, and donor support focussed mainly on the line management TA along with the intensive support to locomotive maintenance and spare parts supply, TRC's performance improved substantially and freight traffic set records in both 2001 and 2002. To these underlying improvements, the concessionaire was expected to bring private sector management, incentives/sanctions and investments which would have ensured the sustainability of the improved railway operation. However, the concession process will take longer than expected due to the restarting of transaction process. Currently there are sufficient spare parts for locomotive maintenance until end-2003, and TRC is also seeking short-term partnerships with its major customers for wagon rehabilitation. However, no additional donor support has yet been agreed, and GOT's budget allocation is yet to be secured to enhance the TRC's operation beyond 2004. Thus, no guarantee of sustainability exists after 2004. 6.2 Transition arrangement to regular operations: While the concessioning process was advanced and the bidding process was completed, there were no bids. The GOT is still committed to concessioning and has decided to restart the transaction process again. GOT is currently seeking new transaction advisers to assist with the preparation of revised bidding documentation. TRC management will maintain operations until the concessionaire takes over, but with minimal donor assistance beyond some very limited transitional management support in the workshops and operations. However, no substantial transitional arrangement has yet been concluded with donors. 7. Bank and Borrower Performance Bank 7.1 Lending: Overall performance was " satisfactory". The project was consistent with Government's overall policies to rehabilitate the seriously deteriorated transport sector to establish the basis for sustained economic growth. The Bank fielded several missions and coordinated well with other donors, resulting in committed donor funding, totaling US$165 million, at the time of project appraisal. The team incorporated lessons from past experience and "best practices" for railway reform and technical assistance into the design of the project. The appraisal team had a comprehensive range of skills and were joined by representatives of other major donors. 7.2 Supervision: Supervision was generally "satisfactory" and, at times, "highly satisfactory". The Bank met its formal supervision requirements, providing timely responses and action letters to requests, meeting internal reporting deadlines, timely audit reviews, etc. RRP was ambitious and institutional capacity building was a major determinant of success; supervision was focused on the TA management and coordination and the 360 degree TA management system, designed during supervision, was designated "best practice". The Bank and other donors could have adopted a stronger approach with respect to implementation of the MOU (though such arrangements have consistently failed in developing countries). However, when it - 10 - became clear that RRP was failing, the main donors maintained a common approach throughout the Joint Supervision Missions led by the Bank to support the Government's decision to concession TRC, which was highly evaluated. The Bank was flexible in its approach, responding to the changing policy environment as well as emergencies. The Bank revised in the early stage (1992-93) the scale of the TA and the physical investment reflecting the revised operational forecast & targets. Following El Nino, the Bank assisted TRC to hire construction equipment, select consultants and procure gabions within weeks rather than months, maintaining Bank procurement principles but agreeing emergency procedures. 7.3 Overall Bank performance: The Bank's overall performance was "satisfactory". The Bank responded quickly for the concessioning of TRC when the parastatal frameworks showed its limit. Also, the rapid and flexible response to the El Nino crisis substantially improved the overall credibility of the World Bank with GOT, and the Bank was specifically recognized by the President of Tanzania in his speech at the re-opening of the Central Line. Borrower 7.4 Preparation: The Borrower's performance was " satisfactory". There was close cooperation with the Bank in establishing the revised GOT-TRC relationship through the Ministerial Directive No.1 and the Memorandum of Understanding (MOU). 7.5 Government implementation performance: The Government's performance is assessed as "marginally satisfactory". GOT failed to implement the financial provisions of either the MOU or the subsequent Performance Contract (which included provision for equal treatment of the road and rail sectors). This contributed significantly to TRC's financial problems and its inability to get on the path to financial sustainability. However, faced with the sharp decline in TRC's performance after 1995, GOT took the right decision to privatize management and operations through a concession. The process of concessioning has been protracted, but there is no doubt that concessioning remains GOT policy, i.e. the substantial institutional transformation. 7.6 Implementing Agency: TRC: TRC's performance in implementing a complicated project with many donors and components was "satisfactory": procurement was efficient; reporting was regular and, for each supervision mission, a comprehensive report was prepared, detailing both TRC and project performance; financial management was excellent and the Project was selected as the pilot project for LACI in the Africa Region; and general cooperation with the Bank was extremely close. Unlike the experience in some other railways, TRC management fully cooperated with the concessioning process. The present management proved its customer oriented behavioral change. It also substantially improved operational performance despite the uncertainties, but this is not sustainable without a continuing inflow of resources to update both the infrastructure and operating assets. PSRC: The performance of PSRC was "marginally satisfactory". The agency is responsible for the privatization/concessioning of a very large number of enterprises. This resulted, at times, in significant delays in procurement and a number of important activities were not implemented. Given the delays in concessioning, however, these activities were not on the critical path. The delays resulted from the combination of (a) initial poor performance by the transaction adviser; (b) the complex decision making process within GOT; and (c) exogenous political problems which delayed Cabinet approvals. 7.7 Overall Borrower performance: Overall borrower performance was "satisfactory" and the decisions made are likely to result in a sustainable railway sector in Tanzania. - 11 - 8. Lessons Learned Commercialization/Privatization of parastatal enterprises: RRP confirms the experience elsewhere. In fact, RRP succeeded much better than many similar projects and freight traffic over the network has risen by over 75% and TRC has now a much more commercial approach. However, unless the basic incentives/sanctions structures are changed, TA and training will have little sustained impact as the institutional culture is not substantially modified. Effective Capacity Building: Substantial emphasis was given to capacity building and some success was achieved, but: (i) The institutional capacity building will not necessarily be reflected in corporate performance without strong management leadership to orchestrate the whole entity; (ii) The corporate culture will not be easily or quickly changed within a continuing institutional framework. A new framework to allow fully private management practice was required, as demonstrated by the success of the Dar es Salaam Container Terminal since its leasing to the private sector. TRC Incentive scheme: While work unit targets were reached, with the incentive payment reaching US$4 million, almost 40% of the basic salary cost, no improvement in corporate performance was observed. The incentive system needs to be carefully designed to be linked with corporate performance. Operation Line Management: Since the commencement of ICEP and the assignment of external manager as Acting Director General, de facto Chief Operation Officer (COO), a rapid and remarkable recovery of the operational performance was recorded. The rapid improvement during ICEP is a proof how the impact of experienced and motivated management is important to orchestrate the potential capacity of an organization and deploy it into the corporate operational performance. Concession bid design: There was only one potential bidder pre-qualified for the TRC concession. This limited private sector interest may be partly the result of the conservative criteria which required an experienced railway operator to have a substantial equity participation. Risk aversion is understandable, given the importance of the railway, but more interest may be generated by more flexible criteria which would allow other interests to bid for the concession, on the basis of a long-term management contract with an approved rail operator. 9. Partner Comments (a) Borrower/implementing agency: TRC Comments as Implementing Agency: PROJECT REVIEW FROM IMPLEMENTING AGENT'S PERSPECTIVE A. Objectives The objectives of the Project were: 1. To strengthen the organization of TRC, eliminate regulatory bottlenecks to its effective operations and make it a commercially viable entity; and 2. Provide for the rehabilitation of TRC's infrastructure assets, replacement of obsolete and uneconomic operational assets and limited new investments consistent with the prospects for growth in domestic traffic. B. Project Design In our view the project design was comprehensive in that it covered the physical investment, organizational development and operational support of a railway system. The results expected were to increase capacity with the growing demands and improve financial performance. C. Works and Goods - 12 - Items purchased under works and goods were worthy investments. Both economic and financial returns should accrue for years to come. Training Management exposure to leading international management schools was a morale booster and resulted in good decision-making. Both training outside and in house were very successful as the training were result field oriented D. Consultancy Short term Technical assistance showed better results as those were under studying the expert manage to take over without any problems. The long-term Technical Assistance for general Management and Technical Management raised high expectations, but produced an average results. The amount spent would have had a better result if used for staff training. E. Key Performance Parameters during the Loan Period TRC PERFORMANCE INDICATORS 2000 2000 TARGET ACTUAL Freight Traffic (Mn.T) 1.832 1.165 Rail Operating Margin 22% 10% Rate of Return on assets 4% 0.9% Staff Productivity (000 U.T.s/employee) 339 170 Loco Availability (based on serviceable fleet )% 75 76 No. of 88 cl. Eq. For major wreck repairs (non-serv.) 2 2 Main line loco utilization (km/day/loco in use) 470 317 Loco Reliability (88 class) (000km/failure) 30 14 Wagon Availability % 90 77 Wagon turnround (days) 10.5 13 Coach Availability % 92 93 Although TRC failed to meet the operations targets initially established, there are major improvements that have taken place during the period. Progress Indicators Indicator 1991 2001 TRC Freight traffic (million tons) 0.921 1.351 Wagon turnaround (days) 19 12 Staff 13790 8892 Rail Revenue (US$ million) 40 64 Debt Collection (days) 172 39 In other areas, TRC have freedom to set tariffs without Government interference; and it is now a restructured railway concentrating on its core business of freight and passenger on rail only. - 13 - F. Donors The multiple investments of other donors in the project were very successful under the eying of the World Bank. Protocols and procurement procedures in future should be stream lined to shorten the procurement period. G. Joint Supervision Mission Joint support from the Donors mission was excellent. Relationship with Staff on Mission was very good as there was continuing on both the Donors and TRC staff during the course of the period. H. Overall General Assessment of Project On a scale of 1-10 the, rating for the project would be 7, a higher score would have been achieved had there been more support from the Government of United Republic of Tanzania on level playing field and compensation for noncommercial services. The 1997 El-Nino also affected the economy and TRC in general. As a result, financial self-sustenance was not achieved. The project met some of its objectives and in our view was a success. (b) Cofinanciers: DFID's Comments as Major Cofinancier: A. The success of the technical assistance varied widely from the very good to the very poor. The original project demonstrated the problems of maximizing the performance of technical assistance when they are in an advisory role and the difficulties of achieving institutional development in the short term. B. Notwithstanding the satisfactory quality of the inputs overall, the project demonstrated quite clearly that the rate of change to a parastatal framework required to achieve Objective A through institutional development is very difficult, if not impossible to attain. The decision to change the implementation strategy to Objective B was the correct one. C. The project benefited considerably from the high level of donor cooperation and coordination. D. The failure to achieve objective B is very serious because the benefits of RRP and ICEP could evaporate very quickly without further donor assistance. The inadequacy and poor performance of the transaction advisers was one of the contributing factors in the failure to concession TRC. E. The outstanding achievement of the project was the progress made in the commercialization of TRC with the new focus on customer service, exemplified by the record levels of traffic now being carried and the performance of TRC during the El Nino floods period. (c) Other partners (NGOs/private sector): 10. Additional Information - 14 - Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Freight Traffic (million tonnes) 1.89 million-ton, 1995 Mid Term (MTR) 1.23 million-ton in MTR 1.60 million-ton in Dec. 2002 Rail Operating Margin 22% in Dec. 2002 1 % in MTR, 6% in Dec. 2002 Return on Assets (replacement cost) 4% in Dec. 2002 negative at MTR, negative in Dec. 2002 Mainline Locomotive Availability 75 % in Dec. 2002 66 % in MTR, 76% in Dec. 2002 Wagon turnaround (days) 10 days in Dec. 2002 15 days in MTR, 12 days in Dec. 2002 Most of the targeted performance indicators showed substantial improvement, although not reaching their target levels. Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate 1 End of project Table-A1-3 SAR & MTR Targets and Actual Performance Year 1991 1992 1993 1994 MTR 1996 1997 1998 1999 2000 2001 2002 Indicator 1995 El Nino 1989 SAR forecasts 1100 1470 1660 1890 2160 2160 2160 2160 2160 2160 - - freight traffic (1,000 t) 1995 MTR targets - - - - 1360 1451 1539 1598 1685 1832 - - freight traffic (1,000 t) Actual 920 920 1210 1234 1342 1244 1090 955 1127 1292 1505 1600 freight traffic (1,000 t) 1989 SAR forecasts (2,300 N/A - - - - - - - - - - Passenger No.(1000) in 1989) Actual 1714 1442 1747 1517 1251 1009 557 570 617 631 728 684 Passenger No.(1000) 1989 SAR forecasts 9% 15% 15% 20% 20% 20% 20% 20% 20% 20% - - Rate of return on assets Actual return on assets 11% 14% 14% 13% 9% 5% 4% 2% 8% 4% 4% Historic cost 1995 MTR targets 1% 1% 1% 1% 2% 4% - - Rate of return on assets Actual return on assets -% -% -% -% 0% -% 0% - Revalued cost 1989 SAR forecasts 58 64 70 70 70 70 70 70 70 70 - - Loco availability (%) 1995 MTR targets - - - - 75 75 75 75 75 75 - - Loco availability (%) Actual - 59 63 69 66 68 66 56 73 73 72 - Loco availability (%) 1989 SAR forecasts 83 86 89 92 92 92 92 92 92 92 - - Wagon availability (%) 1995 MTR targets - - - - 82 85 88 90 90 90 - - Wagon availability (%) Actual - - - - 82 85 86 68 75 77 76 - Wagon availability (%) (i) Freight Traffic: Table-A1-3 SAR & MTR Targets and Actual Performance shows that 2002 was the best performing year with significant increase of the freighter traffic (0.92 million-ton in 1991, 1.60 million-ton in 2002). The rapid freight traffic increase in the 4 years since El Nino apparently proves the enhanced operational capacity of TRC, improved performance of the locomotive and wagon fleet as a - 15 - result of the launching of the Interim Capacity Enhancement Program (ICEP). (ii) Passenger Traffic: The Table shows that passenger traffic has slightly increased in the last 4 years, however, it remains less than half of the volume of 1991 (1.7 million in 1991 and 0.7 million in 2002). With the acquisition of 27 new coaches in 1990s, the average coach availability was 90% in 2001, mostly accomplishing the target. The improvement of the competing road system and the current policy not to allow standing passengers, reduced both the demand for passenger transportation on some routes and the supply on others. (iii) Locomotive and wagon availability: While the availability of locomotives meets the MTR targets, the availability of wagons still remained low around 76%, below the targeted 90%. Some 2,400 wagons were overhauled by 1996, but some were reported not fully overhauled, which may explain the relatively fast decline of the wagon availability. - 16 - Annex 2. Project Costs and Financing Table - A2 : Comparison of Project Cost by Components and by TRC & Donors (Estimated & Actual) Appraisal Appraisal Actual Costs by TRC & Donors (US$ Estimate Percentage Project Cost by Components Estimate (US$ million) (Contingecy of Appraisal million) Allocated) TRC Donors Total Track Rehabilitation 75.3 106.2 7.3 55.7 63.0 59.3% Bridge Strengthening 24.7 34.8 1.9 14.8 16.7 48.0% Quarry 3.9 5.5 0.1 2.1 2.2 40.0% Plant Maintenance Depot 6.0 8.5 0.0 5.0 5.0 59.1% Locomotive Rehabilitation 9.2 13.0 4.9 30.6 35.5 273.7% Wagons 5.8 8.2 1.0 14.0 15.0 183.4% Passenger Coaches 11.1 15.7 0.6 13.1 13.7 87.5% Maintenance/Accident Equipment 15.8 22.3 0.7 3.9 4.6 20.6% Signals & Telecoms 4.6 6.5 2.1 9.6 11.7 180.4% Service Vehicles 5.2 7.3 0.2 2.3 2.5 34.1% Office Equipment 3.9 5.5 0.1 1.8 1.9 34.6% El Nino Civil Works 0.0 0.0 4.0 7.0 11.0 NA Sub Total (A) 165.5 233.4 22.9 159.9 182.8 78.3% Technical Assistance/Studies 23.5 28.9 3.7 26.3 30.0 103.7% Training 7.5 9.2 0.8 1.8 2.6 28.2% Track Rehabilitation Support 3.0 3.7 1.4 3.2 4.6 123.8% TA for Concession 0.0 0.0 0.0 2.1 2.1 NA Sub Total (B) 34.0 41.8 5.9 33.4 39.3 93.9% Total Base Costs (A)+(B) 199.5 275.2 28.8 193.3 222.1 80.7% Physical Contingencies 29.7 0.0 0.0 0.0 0.0 - Price Contingencies 46.0 0.0 0.0 0.0 0.0 - Total Project Cost 275.2 275.2 28.8 193.3 222.1 80.7% - 17 - Annex 3. Economic Costs and Benefits Table - A3-1 Economic Rate of Returm Investment (US$ Million) Traffic (million-ton x km) unit cost cost saved net benefit Donors TRC Total with project without diverted difference (US$ million) (US$ million) project traffic from (US$/t.km) road 1991 1992 12.0 2.0 14.0 937 937 0 0.035 0.0 -14.0 1993 17.0 2.8 19.8 1263 909 354 0.034 12.2 -7.6 1994 12.5 2.0 14.5 1108 882 226 0.034 7.7 -6.9 1995 17.0 2.8 19.8 1354 855 499 0.033 16.7 -3.1 1996 20.5 3.4 23.9 1218 830 388 0.033 12.8 -11.1 1997 20.0 3.3 23.3 1108 805 303 0.032 9.8 -13.4 1998 18.0 2.9 20.9 708 490 218 0.032 7.0 -14.0 1999 11.5 1.9 13.4 1185 757 428 0.031 13.5 0.1 2000 12.0 2.0 14.0 1342 746 596 0.031 18.5 4.5 2001 11.0 1.8 12.8 1543 723 820 0.031 25.0 12.2 2002 13.0 2.1 15.1 1644 702 942 0.030 28.4 13.2 2003 1644 681 963 0.030 28.6 28.6 2004 1595 660 934 0.029 27.3 27.3 2005 1547 640 906 0.029 26.1 26.1 2006 1500 621 879 0.028 24.9 24.9 2007 1455 603 853 0.028 23.8 23.8 2008 1412 585 827 0.027 22.7 22.7 2009 1369 567 802 0.027 21.7 21.7 2010 1328 550 778 0.027 20.8 20.8 2011 1288 533 755 0.026 19.8 19.8 2012 1250 517 732 0.026 18.9 18.9 2013 1212 502 710 0.025 18.1 18.1 2014 1176 487 689 0.025 17.3 17.3 2015 1141 472 668 0.025 16.5 16.5 2016 1106 458 648 0.024 15.8 15.8 2017 1073 444 629 0.024 15.1 15.1 2018 1041 431 610 0.024 14.4 14.4 2019 1010 418 592 0.023 13.8 13.8 2020 -41.0 -6.7 -47.7 980 406 574 0.023 13.2 60.9 Total 124 20 144 Total 366.6 NPV 29.0 ERR 14.4% A 3.1 Economic Rate of Return: The assumptions used to calculate the ex-post economic returns on the Project are as follows: (1) Only economic investments and benefits have been included in the analysis. The investments made by ADB in the passenger services have thus been omitted from the analysis. (2) Only donor investment is included; TRC had to repay the cost of a proportion of CIDA spare parts to GOT within 12 months and cannot be considered as long-term investment. (3) Investments made in the fixed infrastructure are assumed to have a 50 year life and a residual value has been included in the analysis (4) The Credit became effective in April 1992 and 1992 is taken as the base level of traffic. Without the - 18 - project investment, it is assumed that effective freight capacity would decline at an average annual rate of 3%. (5) Without IDA assistance, it would have taken TRC two years to open fully the rail network after the El Nino floods. (6) Without additional investment, after 2003, TRC capacity will decline at 3% per annum, reflecting the increasing age of the assets and the deteriorating track between Itigi and Tabora. (7) Transport cost savings from additional rail traffic are estimated at US$0.035/ton-km in 1992. The unit savings will decline by 1.5% per annum throughout the evaluation period; reflecting initially declining road transport costs as the road network is improved and subsequently increasing TRC costs. (8) The very substantial potential benefits from concessioning TRC to the private sector have not been included in the analysis. These benefits are expected to include: lower TRC costs from better management and lower staffing levels, improved service levels and higher system capacity (at present, TRC cannot carry the level of traffic on offer, estimated at about 2 million tonnes). The overall economic rate of return (ERR) is estimated at 14.4%, with residual values (11.9%, without) and a Net Present Value (NPV) of US$29.0 million (12%). The economic returns from the project are rather lower than those estimated in the SAR, which estimated an ERR of 18%. Compared, however, to projects of a similar concept (Kenya Railways II, for example), freight traffic increased substantially (but less than the SAR forecast) and marginally acceptable economic rates of return were generated. A 3.2 Financial Performance of TRC: While the operating performance of TRC has increased substantially over the life of the project, there has been no sustained improvement in financial performance. Despite the level of investment, the rail working ratio has remained largely unchanged at about 70%. Table-A3-2 TRC Income Statement (Tsh billion) Year 1990 1991 1992 1993 1994 MTR 1996 1997 1998 1999 2000 2001 2002 1995 El Nino Operating Revenue Rail 4.1 8.7 14.6 19.4 23.6 32.3 33.9 32.4 26.5 42.1 48.4 56.5 58.1 Total 5.5 10.0 15.9 21.4 25.6 34.5 26.1 36.4 29.6 44.7 48.5 56.6 58.1 Other Income 2.3 2.0 2.0 4.6 3.3 3.2 2.6 3.8 5.0 9.9 5.1 2.1 0.7 Total Income 7.8 12.0 17.9 26.0 28.9 37.7 38.7 40.2 34.6 54.6 53.6 58.8 58.9 Operating Costs Rail 3.7 6.4 8.2 14.3 14.4 21.0 22.4 23.5 20.4 30.3 35.6 38.9 41.5 Total 4.7 7.7 9.4 15.9 16.6 24.2 25.4 26.5 23.1 32.5 35.6 38.9 41.5 Depreciation Historic cost 0.1 0.1 0.5 0.6 1.1 1.3 1.5 1.6 1.5 2.3 2.1 3.3 3.0 Revalued cost 12.5 10.0 10.1 10.3 10.3 10.6 8.3 8.6 8.7 Administrative Costs 0.6 0.8 1.7 1.6 2.0 2.7 3.2 3.1 3.2 3.8 3.6 3.9 4.5 General expenses 0.5 1.1 1.8 1.6 2.0 2.7 4.0 5.0 4.7 6.2 6.7 7.2 6.5 Financial expenses 2.1 1.6 2.6 2.0 4.5 4.9 2.6 1.8 2.2 7.2 4.8 4.4 1.9 Total Costs Historic cost 8.0 11.3 16.1 21.8 26.2 35.7 36.8 38.0 34.8 52.0 52.7 57.7 57.4 Revalued cost 37.5 44.4 45.4 46.6 43.6 60.4 58.9 62.9 63.1 Financial Indicators Rail working ratio 0.90 0.73 0.56 0.74 0.61 0.65 0.66 0.73 0.77 0.72 0.74 0.69 0.71 Gross operating ratio Historic cost 1.07 0.98 0.85 0.92 0.85 0.89 0.95 0.99 1.10 1.00 0.99 0.94 0.95 Revalued cost 1.29 1.15 1.18 1.23 1.40 1.19 1.12 1.03 1.05 Total operating ratio Historic cost 1.02 0.94 0.90 0.84 0.91 0.95 0.95 0.94 1.01 0.95 0.98 0.98 0.98 Revalued cost 1.30 1.18 1.17 1.16 1.26 1.11 1.10 1.07 1.07 ACP (days) 157 107 61 37 61 40 48 39 58 52 32 33 Average freight tariff 1.57 3.09 4.40 3.22 3.49 3.33 3.88 4.03 4.69 3.81 4.27 3.91 3.63 (USc/ton-km) - 19 - Railways are normally assumed to be an industry with declining average costs (substantial fixed costs and low marginal costs); such a situation is not reflected in the financial performance of TRC. Operating revenues increased substantially, during the project period, but TRC's costs increased at approximately the same rates: Annual average growth: Rail revenues 16.1% Rail operating costs 17.2% Depreciation 26.7% Administration 13.3% General expenses 18.9% Part of the cost increases reflect the revisions to wage and salary rates, which were extremely low at the start of the project, and part reflect the increasing age of TRC's asset base and higher maintenance costs. While it might be argued that TRC management could have kept a tighter control over costs, for example by further reductions in staffing levels, TRC's financial control improved substantially over the life of the project. There was a very marked improvement in the accounts receivable and much greater credit control. A 3.2 Financial Rate of Return (FRR): The assumptions made in calculating FRR were as follows. 1. Revenues only include TRC freight charges, they do not include the small revenue from TARC wheelage charge. 2. The same traffic assumptions are made as in the economic analysis: Without situation - there is a gradual decline in traffic, as in the economic analysis. With situation - actual traffic to 2002, constant in 2003, and then gradual decline, as in economic analysis. 3. Cost assumptions: Locomotive/rolling stock maintenance, locomotive running and traffic are variable costs, other costs are assumed fixed. Depreciation costs are not relevant to the analysis. 4. All other conditions are those outlined in Section A 3.1 Economic Rate of Return. These assumptions are approximate - there will be an element of fixed costs in the variable costs and vice-versa, but more or less balance out. The overall financial internal rate of return (FIRR) is estimated at 4.1%, and a negative Net Present Value (NPV) of US$49.5 million. The financial internal rate of return of the project was not estimated in SAR. - 20 - Table - A3-3 Financial Rate of Returm Investment (US$ Million) Traffic (million-ton x km) Average Revenue Revenue Costswith Costs Incremental Net Financial Donors TRC Total with without Additional tariff with without Project without Revenue Benefits project project freight ton-US$/ton- Project Project US$million Project Surplus US$million kms km US$million US$million US$million US$million 1991 1992 12.0 2.1 14.1 937 937 0 0.044 41.2 41.2 45.3 45.3 0.0 -14.1 1993 17.0 3.0 20.0 1263 909 354 0.032 40.7 29.3 48.7 42.2 4.9 -15.1 1994 12.5 2.2 14.7 1108 882 226 0.035 38.7 30.8 42.5 36.4 1.8 -12.9 1995 17.0 3.0 20.0 1354 855 499 0.033 45.1 28.5 51.4 42.0 7.2 -12.8 1996 20.5 3.6 24.1 1218 830 388 0.039 47.3 32.2 56.3 47.6 6.4 -17.7 1997 20.0 3.5 23.5 1108 805 303 0.040 44.7 32.4 55.4 48.0 4.8 -18.7 1998 18.0 3.1 21.1 708 490 218 0.047 33.2 23.0 45.6 39.5 4.1 -17.0 1999 11.5 2.0 13.5 1185 757 428 0.038 45.1 28.8 53.4 43.5 6.4 -7.1 2000 12.0 2.1 14.1 1210 746 464 0.043 51.7 31.8 57.3 44.8 7.3 -6.8 2001 11.0 1.9 12.9 1380 723 657 0.039 54.0 28.3 56.2 41.3 10.8 -2.1 2002 13.0 2.3 15.3 1487 702 785 0.039 58.0 27.4 55.3 38.3 13.6 -1.6 2003 1487 681 806 0.039 58.0 26.5 55.7 38.0 13.7 13.7 2004 1442 660 782 0.039 56.3 25.7 54.7 37.5 13.3 13.3 2005 1399 640 759 0.039 54.6 25.0 53.8 37.1 12.9 12.9 2006 1357 621 736 0.039 52.9 24.2 52.9 36.7 12.5 12.5 2007 1316 603 714 0.039 51.3 23.5 52.0 36.3 12.1 12.1 2008 1277 585 692 0.039 49.8 22.8 51.1 35.9 11.8 11.8 2009 1239 567 672 0.039 48.3 22.1 50.2 35.5 11.4 11.4 2010 1201 550 652 0.039 46.9 21.4 49.4 35.1 11.1 11.1 2011 1165 533 632 0.039 45.5 20.8 48.6 34.7 10.7 10.7 2012 1130 517 613 0.039 44.1 20.2 47.9 34.4 10.4 10.4 2013 1097 502 595 0.039 42.8 19.6 47.1 34.0 10.1 10.1 2014 1064 487 577 0.039 41.5 19.0 46.4 33.7 9.8 9.8 2015 1032 472 559 0.039 40.2 18.4 45.7 33.4 9.5 9.5 2016 1001 458 543 0.039 39.0 17.9 45.0 33.1 9.2 9.2 2017 971 444 526 0.039 37.9 17.3 44.4 32.8 8.9 8.9 2018 942 431 511 0.039 36.7 16.8 43.7 32.5 8.7 8.7 2019 913 418 495 0.039 35.6 16.3 43.1 32.2 8.4 8.4 2020 -41.0 -6.7 -47.7 886 406 480 0.039 34.6 15.8 42.5 31.9 8.2 55.9 Total 124 22 146 Total 114.7 FIRR 4.1% NPV ($49.46) - 21 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 08/12/1988 2 FINANCIAL ANALYST (1); RAILWAY ENGINEER (1) 01/30/1989 2 FINANCIAL ANALYST (1); RAILWAY ENGINEER (1) 07/24/1989 3 FINANCIAL ANALYST (1); RAILWAY ENGINEER (1); OPERATIONS ANALYST (1) Appraisal/Negotiation 06/29/1990 4 FINANCIAL ANALYST (1); RAILWAY ENGINEER (2); OPERATIONS ANALYST (1) 01/29/1991 2 FINANCIAL ANALYST (1); RAILWAY ENGINEER (1) 04/03/1991 3 FINANCIAL ANALYST (1); RAILWAY ENGINEER (1); OPERATIONS ANALYST (1) Supervision 11/04/1992 3 TRANSPORT ECONOMIST (1); 2 2 FINANCIAL ANALYST (1); RAILWAY ENGINEER (1) 05/12/1993 3 TRANSPORT ECONOMIST (1); 2 2 FINANCIAL ANALYST (1); RAILWAY ENGINEER (1) 02/02/1994 4 SR. INFORM. SPECIALIST (1); 1 2 TRANSPORT ECONOMIST (1); SR. RAILWAY ENGINEER (1); FINANCIAL ANALYST (1) 07/22/1994 2 SR. RAILWAY ENGINEER (1); S S FINANCIAL ANALYST (1) 02/06/1995 3 SR. TRANSP. ECONOMIST (1); S S SR. RAILWAY ENGINEER (1); FINANCIAL ANALYST (1) 08/25/1995 2 SR. RAILWAY ENGINEER (1); S S FINANCIAL ANALYST (1) 03/08/1996 3 SR. TRANSP. ECONOMIST (1); S S SR. RAILWAY ENGINEER (1); FINANCIAL ANALYST (1) 08/21/1996 3 TRANSPORT ECONOMIST (1); U S RAILWAY ENGINEER (1); FINANCIAL ANALYST (1) 03/21/1997 2 FINANCIAL ANALYST (1); U S - 22 - TRANSPORT ECONOMIST (1) 10/01/1997 3 SR. RAILWAY ENGINEER (1); U S SR. FINANCIAL ANALYST (1); TASK TEAM LEADER (1) 04/22/1998 1 TASK TEAM LEADER (1) U S 10/06/1998 2 TASK TEAM LEADER (1); U S SR. RAILWAY EXPERT (1) 02/16/1999 1 TASK TEAM LEADER (1) S S 10/06/1999 2 TASK TEAM LEADER (1); S S RAILWAY SPECIALIST (1) 02/16/2000 1 TASK TEAM LEADER (1) S S 10/06/2000 2 TASK TEAM LEADER (1); S S RAILWAY SPECIALIST (1) 10/06/2000 3 TASK TEAM LEADER (1); S S RAILWAY SPECIALIST (1); FINANCIAL SPECIALIST (1) 11/19/2001 1 TASK MANAGER (1) S S 02/12/2002 1 TASK MANAGER (1) S S 02/12/2002 1 TASK TEAM LEADER (1) S U 11/11/2002 2 TASK TEAM LEADER (1) S U SR. HIGHWAY ENGINEER (1) ICR (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation 81.1 205.4 Appraisal/Negotiation 57.8 163.5 Supervision 224.1 912.1 ICR Total 363.0 1,281.0 Note: Supervision includes ICR as these are not reflected separately in the system. Data as of January 6, 2003. - 23 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA - 24 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 25 - Annex 7. List of Supporting Documents 1. SAR Tanzania Railways Restructuring Project, May 24, 1991 2. TRC Reports "Joint Supervision Mission", from January/February 1994 through October 2001 (issued semiannually), and Joint Donor Supervision Mission reports. 3. TRC Mid Term Review Mission Report, January/February 1995 4. TRC Rehabilitation of Flood Affected Bridges and Culverts on the Link Line, August 2002 5. TRC Railways Restructuring Project: Review of Accounting Systems and Internal Controls Report (El Nino Emergency Civil Works), Tanzania Audit Corporation, August 26, 1998 6. TRC Railways Restructuring Project Audited Accounts for the Year Ended December 31 from 1996 through 2002, Tanzania Audit Corporation 7. TRC Railways Restructuring Project Monthly Report from August 1997 through December 2002. 8. Sub-Saharan Africa Transport Policy Program -SSATP- Working Paper No.7: Railway Restructuring Seminar for Anglophone and Lusophone countries in Sub-Saharan Africa, Bulawayo, Zimbabwe, June 1992. 9. Sub-Saharan Africa Transport Policy Program -SSATP- Working Paper No.32: Seminar on Railway Concessioning in Sub-Saharan Africa, Abidjan, Cote d'Ivoire, October 1997 - 26 - - 27 -