T.O. 58 CONFIDENTIAL This report is limited to those members of the staff to whose work it directly relates. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE REHABILITATION PROGRAM FOR THE PACIFIC RAILROAD OF MEXICO July 13, 1954 Department Of Technical Operations CONVERSION RATES FOR MEXICAN CURRENCY U.S. $1 a Pesos 12.50 Peso 1 = 8 U.S. Cents Pesos 1,000,000 = U.S. $80,000 TABLE OF CONTENTS Paragraphs I. Introduction 1 - 3 II, Ownerslhip of The Railroad 4 - 6 III. Area Served 7 - 16 IV. The Property - General description 17 - 19 Roadway and track 20 - 22 Locomotives 23 Cars 24 - 25 Shops 26 Communications 27 Physical requirements 28 V. Management and Organization 29 - 33 VI. Financial Situation and Earnings Record 34 - 39 VII. Traffic 4o - 44 VIII. The Rehabilitation Program - Physical Program 45 - 5 Recent Developments 52 Conditions of Success 53 IX. The Cost and Financing of the Program _ Cost estimates and expenditures to date 54 - 60 Income estimates 61 - 65 Cash Requirements and sources 66 - 72 Financial conclusions 73 - 78 X. Conclusions 79 - 83 Appendices: see next page L I S T O F APPEINICES Appendix 1 : Ilap - JFerrocarril del Pacifico It 2 : LMap sLiowing Irri.gation 'Areas if 3 : Condensed Profile and Track Data it 4 : Estimated iTheiLx1t Traffic "t 5 : Esbimated Cost of Rehabilibation Cor I 954-58 Program to 6 : Estimated Income Account ti 7 : Cash Requirements and Sources t' S : List of conditions I. INTRODUCTION 1. In April 1954, the Mexican Government asked the Bank to consider a loan to meet the foreign exchange costs involved in rehabilitating the Pacific Railroad of Mexico (Ferrocarril del Pacifico, Sociedad Anonima de Capital Variable), the loan to be made to the Railroad and guaranteed by the Mexican Government. 2. The prooosed rehabilitation program is based upon the recommenda- tions of an exdaustive study prepared for the railroad by Coverdale and Colpitts, railroad consultants. Their report was submitted in December 1953, and has since been brought up to date. The program is designed to be carried out in four years. It envisages nrincipally the reconstruction of the per- manent way, and the substitution of diesel locomotives for steam. The main items which would need to be uurchased abroad would be rails, ties, diesel locomotives and freight cars. Total foreign exchange costs are estimated at P61,000,000 equivalent, and total local costs at pesos 98,000,000 ($8,000,000 equivalent), A further $7,500,000 would be needed for the purchase of freight cars in the years 1960 through 1964. 3. A Bank mission visited Mexico in May 1954 in order to investigate the nroject on the spot and to discuss it with representatives of the Govern- ment and the Railroad. TI. OiNERSHIP OF THE RAILROAD 4. The Government of Mexico decreed the formation of the Ferrocarril del Pacifico in March 1952, to own and operate the railroad system in the northwest of Mexico which it had purchased for $12,000,000 from the Southern Pacific Railroad Company in December 1951. The Southern Pacific had purchased the Droperty in 1909, and extended the lines during the period of its ownership. 5. The Ferrocarril del Pacifico was established with an initial capital of slightly more than pesos 240 million, of which the bulk (nesos 230 million) was held by the Mexican Government in the form of "B" shares, the balance of some pesos 10 million, in the form of "A" shares with a guaranteed dividend of 9% ner annum, being issued to the States of Sonora and Sinaloa (and an insignificant amount to private investors)* 6. By the end of 1953 the Government's capital stock in the railroad had increased to about pesos 260 million, the increase representing mainly the amount of equity investment required to meet deficits. - 2 - III. AREA SERVED 7. The railroad operates in the four states of Sonora, Sinaloa, Nayarit and Jalisco, in the northwest of Mexico (see map, Appendix I). The area served comprises about 18% of the land surface of the country. The railroad parallels the coastline, and the coastal plain is traversed by numerous rivers flowing from the Sierra Madre maoumtains to the Pacific Ocean and the Gulf of California. 8. This coastal nlain contains about 3,500,000 hectares (8.75 million acres) of land suitable for agriculture. It is already one of the most im- portant agricultural surplus areas of Mexico, and thle irrigation works now being constructed and planned for the future should increase its production very considerably. 9. Annual rainfall is light in the north, about 4 inches, and increases to over 40 inches in the south. It is concentrated in the summer months and if proDerly conserved is generally adequate for agricu'tural purposes, except in the north where the water level is near the surface and irrigation has been successfully developed by pumping from wells. 10. A comprehensive system of dams and canals for irrigation has been developed by the Government. Some 700,000 hectares (about 1.75 million acres) is already irrigated and projects now under construction and planned for the future should raise this figure within the next ten years to about 1.8 million hectares (4.5 million acres) (See map, Appendix 2). By this time about half the land suitable for agriculture would be irrigated, and about half the average annual flow of the rivers utilized. 11. The dominant crop in the north is cotton. Further south wheat takes first place, and exceeds 25% of the country's total production. Still further south sugar cane and winter vegetables (mainly tomatoes, of which the area prodaces more than 50% of total Mexican production) are the main crops. Corn and beans are also major oroducts. The average size of farms is large; most farms are mechanized; standards of tillage and cultivation seem to be high; and in general, the farmers show initiative and resilience. The variety of crops which can be grown makes balanced systems of crop rotation Dossible, but they are not at present in general use. 12. There is a well develooed livestock industry in the north, but else- where in the area livestock is not important. Some 85% of the total fish catch in the country is landed on the coast of the area. 13. Industry is relatively unimportant, the main products being sugar, beer and cement. - 3 - 14. The caoacity of electrical generating plants in the area is at pres- ent about 50000 kilowatts. New plants are planned to raise capacity to some 300,000 kilowatts by 1960; but some of this additional power may be transmitted to other areas. 15. The population of the four states rose from 1,087,000 in 1930 to 1,845,000 in 1950, an increase of 70%. During this period the population of the whole country increased 56%. This reflects the high rate of development in the economy of the area, There is reason to believe that this trend will continue. 16. To sum up, the area is one which produces a large and growing volume of agricultural products destined for outside markets, while most of the con- sumption of manufactured products has to be supplied from sources outside the area. Its rate of development has been and is likely to continue to be more rapid than that of the country as a whole. IV. THE PROPERTY General description 17. From Nogales on the U.S. frontier, at an elevation of about 41,000 feet, the railroad descends some 40O kilometers to sea level at Empalme (see map, Appendix 1 and nrofile, Appendix 3). From Empalme the line follows the sea coast for a little over 1,000 kilometers to Roseta. From this point it climXbs about 325 kilometers to an elevation of about 5,000 feet at Guadala- jara, where the railroad terminal facilities are located. The last 38 kilom_- tdrs of track (from Orendain Junction to Guadalajara) are the Oroperty of the Mexican National Railroads. The total length of the main line is 1,728 kilometers. The total length of branch lines is 244 kilometers. The track is standard gauge, 4 ft. 82 inches. 18. The northern stretch from Nogales to Empalme, and the southern from Roseta to Guadalajara, traverse mountainous country, and in the south in particular there is very difficult terrain, requiring maany tunnels and high bridges. The location of the line in these sections is lwell selected. Between Empalme and Roseta the central 1,000 kilometers of territory is flat. The railroad serves two excellent ports: Guaymas (9 kilometers by branch line from Empalme) and Mazatlan. Other important towns served are Hermosillo, Ciudad Obregon, Navajoa, San Blas, Culiacan and Guadalajara. The important interchanges with other railroada are Nogales (with the Southern Pacific Lines of the U.S.A.), and Guadalajara (with the National Railways of Mexico). 19. Although the line is well laid out, both it and the operating equip- ment have deteriorated to the point where the railroad can barely be operated. 4 14- Roadway and Track 20. The chart at Appendix 3 shows that 46% is in Door condition, 45% fair, and less than 10% in good condition. Most of the track is of rather light rail (65 lb. per yard), which is worn out, with joints in very bad condition. Inferior, untreated ties have been used for renewals during the last ten years. They do not hold the spikes which should keep the rails in position. Many ties are brolken. The quality of the stone ballast is good, but in most places it is laid too thinly. Bridge timbers require renewals. 21. The condition of the track slows down traffic very much. The efficiency of the service is further reduced by many accidents, more than 40% of which are due to bad track, many being the result of broken rails. In the last two years there have been more than 800 breaks in rails. 22. Large amounts have been sDent on track maintenance during the last five years. They would have sufficed to maintain a line which was in good condition to begin with. This track has deteriorated to the Doint where maintenance is uneconomic. Only complete rebuilding of the line, with ade- quate ballast, good quality ties and heavier rail can prevent complete break- down. Locomotives 23. The railroad owns 131 steam locomotives. Their average age is 43 years. More than 25% of them are normally out of service for repairs. They are most uneconomical and inefficient. Cars 24. The exact number and location of all cars owned cannot be established. As of July 1953 the best record available shows that the railway owned 1,174 box cars and 558 freight cars of other types. Their average age was about 34 years. At the time of the consultants' inspection in the fall of 1953, more than 40% of the box cars were out of service. As of the same date the rail- road owned 124 passenger cars. Though these are on the average 39 years old, they are generally in good condition. 25. In addition, there are 667 units of work equipment (ballast cars, push cars, motorcars, etc,.,) which are old but in fair condition; and about 730 old box cars used to house maintenance of way laborers, most of which are in very poor condition. Shops 26. The main shops are at Empalme. Smaller facilities exist at Mazatlan and Guadalajara. The Southern Pacific used to carry out many repairs at its shops in the U.S.A. The shop facilities of the Pacifiq Railroad have conse- quently been inadequate ever since the Mexican Government acquired the rail- road. Communications 27. The communications system is antiquated and inadequate. It needs to be reDlaced by a modern system. Physical requirements 28. If the physical equipment of the railroad is to be put into good operating condition: i. a new track must be laid on augmented ballast, using treated ties and heavier rail; bridges must be reoaired; ii. the steam locornotives must be scrapped and replaced by diesels; iii. where it is economical, freight cars must be repaired; in addi- tion, new freight cars must be purchased; iv. new shops must be built to service the diesels, and the old shops imnroved to handle the reoair of freight cars, etc.; v. a new communications system must be installed. V. MANAGENENT X,D OIGANIZATION 29. The original statutes of the Pacific Railroad provided for a board of 9 directors, of whom 5 represented government denartments, one the rail- road workers' syndicate, one the Chambers of Commerce and Industry, and two the holders of "A" shares. The seat of the board was Mexico City. These arrangements resulted in a board which was mostly "absentee" and contained too heavy a government representation and too little representation of interests from the area served by the railroad. - 6 - 30. Before the mission's visit, the management of the railroad had not been organized in the best way. Too many officers had been renorting direct to both the General Manager and the Assistant General Manager. Confusion about exact lines of authority and overlapping of responsibility had resulted. There have been changes which are discussed later. 31. In the operations of the railroad there has been a most serious lack of good supervision at every level. 32t:,, The booldkeeping and statistical departments have been operating in an efficient way, with the result that essential reports on operations and filancial results, urgently required as tools of management, have either not been available or else have been submitted too late to be of any practical use. 33. The administration of the railroad has been hampered by the fact that under the contract with the syndicate, some twenty important supervisory posts have 1had to be filled by members of the syndicate, each one by a man designated from a particular trade. -7- VI. FINTANCIAL SIrLTUATiO-1M AND EARiJINGS RECORD 34. The main headings in th¢ balance sheet as of January 31, 1954 (the latest available) are as folloas: iAssets Million pesos Road and equipment 339 Current assets 66 i;iscellaneous assets 7 Total assets 412 Liabilities Cavi[al stock and government grants 274 Export-Import Bank Loan 38 Bank of America 43 Suppliers' credits 19 100 Current liabilities 46 Depreciation reserve 23 Profit ancl loss -37 Obher liabilities and. reserves 6 Total liabilities 412 There are no mortgages on the railroad's property. 35. It is not pract-icable to cormipare this balance shieet vith the position in previous years, w,-Then the railroad vas owned by the Southern Pacific Railroad. 36. The use made of the -port-Import Bank Loan, the BaEk of America short -erm loan, and the Suppliers' credits is described in paragraph 58 below. They are, of course, included in the balance sheet at the rate of exchange current in January (i.e. 8.65 to the ). 37. Thle following table shors the net income and operating ratio for the years 1948 througb 1952: i'et Income (pesos 000) Operating Ratio 1948 - 22,600 116.6% 1949 - 4,473 92.7% 1950 - 10,623 96.6% 1951 _ 23,°71 104.4% 1952 1,306 t39.7% 38. In all years except 1952 the result was a net loss, although operating revenues almost doubled during the period. In 1952, the first year of goverrment operation, there was a substantial increase in rates wrhich are at present not unduly high. Large sums had to be spent on main- tenance during the period in order to Icaep the railroad running. Neverthe- less, the condition of the physical properties deteriorated and transporta- tion costs wYere high. 39. These f'iOures reflect the general corndition of the railroad during the period. They lhave, ho;ever, little bearing on the prospective financial results if the railroad is physically rehabilitated and the past deficiencies ih management and organizatuion are overcome. VII. TRAFFIC 40. At present about 505 of the freight traffic (by tonnage) is agricaltural prQducts, about 20, industrial products, about 10%, petroleum products . Passenger traffic is not important. 419 The tonnage of revenue freight carried has increased from an average of about 860,000 tons annually in the five yrears 1936 throug,h 1940 to about l,00,000 tons in lc51 and 1952. ThLe comparable figures for ton-kilometers are 473 million and 1,203 million. Passenger 1:ilomebers have also risen, 'Out in recent years they have been more or less stationary; they rose from about 100 million in 1936 to 400 million in 1944, but vwere only about 450 million in 1952. 42. Rather Lmore than 50,t of the total freight traffic is local. About 35,J is traffic to or froimi other iLeXican railroads, ancd the balance is traffic vrith the U.S.A. T'he voluwe of traffic with Uhe U.S.A. has not been growing recently, and is not expected to grow much. Traffic with the rest of i;exico has growirn and is likely to coatinue to do so. The average haul is tending to increase, partly because of the increasing proportion of traffic ei tih otier parts of -Ie.;ico and partly because some short-haul traffic is being lost to trucks. 43.* On the whlole, hoiwever, the improveuiient in the highway systems of the area, v^it'h ,he consequent increase in truckling activ-ity, is likely to aid the railroad by bringing in long-haul frei-ht from the proc:ucing areas more than i; irill hann it by carrying local shiort-haul traffic. There is no competition in the service area from other railroads. The local airlines give better service than first class rail travel, and passengers have shLifted accordingly; but xt iis is relatively unimportant for the results of the raili-ay as a whole. 44. A fo.ecast of braffic for ulhe next 15 years is c,iven in Ap-pendix 4. This has been prepared as the result of an analysis of the past traf`ic pattern and a stiudy of data concerning trends of population, production, irrigation anc poarer develo-pment. Tnis forecast shows a - 9 - considerable growth in traLfic, concentrated in a fevr categories, namely agricultural products, petroleum proauc-s and industrial products. Total tolls carried are estimated to rise fron about 1,800,000 in 1953 to about 3,400,000 in 1969.. VIII. * L T RT;h:!AILiTATI0N 1'ROGIRAi Physical program 45. The railroad in its present condition is inefficient and uneco- nomical; it can i..with diffCiculty operate at all; it could not possibly carry a much larger trafric. if, howi-ever, its plhysical equipment is renovated, and its deficiencies in management and administration made ,ood, it can becom.e an eff'icient carrier and should be able to earn a substantial income. 46. DurinG 1952 some attempts aere made to improve the situation, Orders were placed for some diesel locoiaotives and freight cars. iail and ties w;ere imported and laid. Teilmporary finance was obtained by short-term borro ring from tlhe Dank of America and interim advances from liacional Financiera. However, these efrorts rrere not part of a comprehensive plan of rehabilitation. ,ioney ran out and the program ground to a halt. The i,ork done on the track sh1ovws bad -.-orl1nanship and lack of good supervision. 47. The programn now. presented, which is based on the survey made by Coverdale and Colpitts, takes account of wrhat has been done already and is desi,ned to be completed by the end of 1958. The effects of the devalua- tion of tIhe peso last April and the ;general wage increase which followved in June have also oeen talcen into accouwt, 48. The program involves: i) thie relaying of the entire track with deeper ballast, treated ties and i-eavier rail, and the repair of bridges; ii) the replacemaent oi sbcarn locomotives by diesels; iii) thle construction of slhops at Guadalajara to service the diesels; iv) the purchase of freight cars, and the repair of existing frei lit cars; v) the renovation of the comlnunications system; vi) various administrative and operating improveinents. 49. The ml,ajor iteims of' equiprment and maaterials needed to carnry out the program are: 33 diesel locomoti-ves of 1,600 HP Ffor all purposes 31 diesel locoroi.ives of 00 HP for light service shop equipmzent valued at "500,000 approximately - 10 - 684 freic,7.ht cars 4 million ties, 3 ft. x & inches x 6 inches 170,000 short tois of' rail - 100 lbs. per yard otlher track material valued at i;,500,000 approximately communications equipm.ent valued at 1.700,000 approximately. 50. Part of this equipment, consisting of ten 1,600 HP diesel loco- motives, 184 freight cars, and a quantity- of track material, has been purchased w;ith the help of a lonu-tern.m loan from the Ex-port-Import Bankc. in addition, 1,100 more freil-'ht cars will need to be purchased in the years 1960 through 1964. 51. All purchases are to be made on the basis of international bid- dinal, with the exception of the diesel loconotives, -uture purchases of which ,ill be of the sane types as already ordered, to take advantage of the savings made possible by standarlization. Recent Developments 52. Liportant steps have alreacy been takcen, as the result of discus- sions betwteen the Bank missi on wrhich visited "Iexico in ;-ay and representa- tives of the Government and the railroad, to improve the management and administration: i) The compositionof the board of directors has been altered, and it now includes feirer covernment representatives and a majority of representatives of local agriculture, industry and banking. Tnhe seat of the board has been moved to Guadalajara; ii) Thle top level .-iana-emerit has oeen reorganized. Under the General p-anaver there are nowir three Assistant General lIanagers, responsible respectively for Operations, Acdinistration, and Rehabilitation. The di-ision of functions betwueen these three departments is sound in theory; it still has to be tested in practice; iii) The syndicate lias agreed that some t;Jenty supervisory posts mentioned above (paragraph 33) should in future be filled by non-members. iv) The railroad has retained consultants under a contract which runs for the rehabilitation period, both to assist the-,m in i,nprovin- administrative and operating practices and to super- vise the carrying out of the rehabilitati on program. Coverdale and Colpitts have been employed for these purposes, and vill m,iaintain a resident engineer in illexico, .vho viill be assisted by other experts both on the spot and in iNevlR York as may be necessary. Partners of blhe firm wdll w-atclh the operation closely and visit ;e--ico from time to time; - L. - v) The inana-ge-.ent and the syndicate have agreed to cooperate in the reduction of persomnel -.hich is an important part of the operating savings made possible by dieselization. In the ne;ct fewr1 years many positions must& be eliminated; there should, however, ilOt be much dif icalty in finding other eimployment for t'hose displaced, in vietd o: the rapid develop- ment of bhe area. By the end of the ne.:t fifteen years, in spite of the lar&e gro;th of traffic, total personnel should not need to be increased mituch beyond today- s level, and the number o° motive potrier persomnel should actually be less than today. Co.i6itioas of Success 53. There are furtler steps .hicih must be taken if the i)rogram is Lo be carried out successfully: i) the methiods of bookkeeping and of the collection and analysis o^ statistics must, be completely overhaauled, so that it may beco]1e possible to provide management promptly .rith financial and operating reports; ii) a progran must be establisherd to develop adeqluate supervision at all levels in all departments. The railroad must set up training schools for this purpose, and a number of senior engineers must be trainec. in up-to-date practices in rail- roads and wrorks abroad; iii) arrangements rmust be made °or the intensive training of skilled wiorkmen, especially in track -.rork; iv) arrangements must be made for the proper inspection of materials and equipment purchased. One reason for the poor quality of the ties purchased in recent years has been lack of proper inspection before delivery; v) everytiang possible m.ust be done to develop the production of treated ties in i-exico. Tiis can be done, though the scale on w-hich it is possible remains to be established, and it could result in a substantial rectuction in the amount of foreign exchange needed to carry out the program. - 12 - IX. THE COST AND FINANCING Oi' THE PROGRAM Cost estimates and expenditures to date. 54. Appendix 5 gives details of the estimated cost of the 1954-1958 re- habilitation program, showing how much money is needed each year, in pesos and in foreign currency, for the various categories of equipment, materials, etc. The estimates are based upon present prices, with contin- gency allowances of 10% on foreign exchange costs and 15% on peso costs. Interest during construction is not included. The following tables sum- marize the estimates: Foreign Exchange Pesos Total (t equivalent) (peso equivalent) ( in thousands ) Roadway Ties and ballast 10,950 42,500 179,375 Rails and other track material 25,000 6,200 318,700 Other works and equipment 1,650 33,750 54,375 Diesel locomotives, spares and facilities 7,468 2,000 95,350 Freight car facilities 80 810 1,810 _onsulting fees 600 - 7,500 Contingencies 41515 12.789 69.226 Totals _50,_26_ Pesos.22.0 Pesos 726.336 Expenditures by years 1954 4,188 14,173 66,523 1955 15,118 30,498 219,472 1956 14,748 30,786 215,136 1957 14,184 17,992 195,292 1958 2,025 4.600 29.913 Totals 50.263 98.049 726.336 55. The estimzates cover the cost of repairing some 800 freight cars now owned by the railroad. These will need to be replaced, and a further 300 cars purchased to meet the needs of growing traffic, during the years 1960 through 1964. The estimated cost of these 1,100 cars is about $7,500,000, 56. The estimates assume that all ties will be imported. Insofar as ties can be produced in Mexico, the foreign costs w¢ould be reduced and the peso costs increased. - 13 - 57. Over and above the amounts shown in paragraph 54, the following amounts (in thousands) have already been committed: Roadway v3 ,457 Diesel locomotives 2,152 Freight cars and facilities 3,725 Consulting fees 67 Miscellaneous 643 Total Z10,04L 58. The foreign exchange expenditures made to date against these com- mitments have been financed by interim advances from Macional Financiera, by short-term borrowings from the Bank of America and by suppliers' credits. In addition, a loan of $5,000,000 from the Export-Import Bank, wnich was granted to the Southern Pacific Railroad and had been partly drawn down when the railroad was purchased by the Mexican Government, was utilized to finance the cost of diesel locomotives, freight cars, and a quantity of rails, ties, etc. 59. It is proposed to finance Uhe costs of the program partly by borrow- ing from the Bank, partly by a relatively small equity investment from the Mexican Government in the first years of the rehabilitation program, and partly by the reinvestment of cash generated by the operations of the railroad. 60. The amcunt of the Benk loan (t61,ooo,000) should be sufficient to refund the interim credits obtained from Nacional Financiera and the Bank of America and to cover the amounts so far committed but unspent. Income-estimates 61. Appendix 6 is a forecast of the income account of the railroad through 1969. This shows substantial losses after fixed charges during the four years of the rehabilitation progr-am. A small profit (pesos 1.9 million) is earned in 1959, and thereafter annual profits increase steadily, reaching pesos 84.4 million In 1969. During the period freight traffic, and consequent- ly gross revenue, increase continuously to nearly twice the 1953 figures. Operating exp-enses, on the other hand, grow much more slowly, because of theeconomnies made possible by physical renovation and by improvement in operating practices. 62. Possible future wage increases have been left out of account in cal- culating these forecasts. It hap been assumed (and the Bank mission obtain- ed the agreement of the Mexican Government to this principle) that all future increases in wages and other operating costs will be offset promptly by corresponding increases in rates and fares. 63, The calculations take account of the effects of the recent devaluation and of the 10% wage increase which became effective in June. No rate in- creases have yet been granted to compensate the railroad for these additional - 14 - costs and charges. (The last increase granted was in February 1952, and raised freight rates about 20%). It is necessary to review the present rate structure, and the consultants are about to undertake such a review. When the results of this review are available, an increase will be re- quested. For the purpose of calculating the railroadts future income, it has been assumed that rates will be increased to levels which will increase gross revenues by 5%. 64. The fixed charges represent dividends on the outstanding "All shares and interest on the existing Export-Import Bank loan and on a Bank loan of $61,000,000 at 5% interest, with a term of 15 years. Included as "mis- cellaneous revenue" is the amount of the 10% government tax on gross revenue collected by the railroad from its customers. The Iexican Government has agreed that the proceeds of this tax shall be treated as income. This is in line with the procedure followed by the National Railroadl 65. It must be emphasized that these estimates assume not only the physical renovation of the railroad, but also the necessary improvements in manage- ment and administration mentioned in paragraphs 52 and 53 above. Failure to achieve these improvements would lead to higher costs of operation. Cash requirements and sources 66. Appendix 7 is a statement of cash requirements and sources through 1969. Foreign exchange payments and receipts have been included at the current rate of exchange of 12.50 to the dollar. 67. The table snows large sums of cash available every year from Maintenance of Way Charges. In the income account forecasts (Appendix 6) the amounts charged against gross revenues for maintenance of way are the amounts cal- culated, on a theoretical basis, to be spent year by year in order to maintain a roadway which is in average condition. Since the whole of the Pacific Railroad's track is to be renewed in the first four years, and amounts to be spent on rail, ties, ballast, etc., for this purpose are included in the costs of rehabilitation, the amounts which the railroad needs to spend on maintenance of way will be reduced accordingly, and the cash thus released is available to meet part of the costs of rehabilitation. Similarly, in the following years, the "normal" charge shown in the income account ex- ceeds the actual amounts which need to be spent to maintain the track, which is in new (and not in average) condition. The excess is available for re- payment of debt. It is progressively reduced as the actual amount neezed for maintaining the track increases. 68. The table s'1ows that if the estimates of net income forecast in ap- pendix 6 are achieved, the Me; ican Govelament would have to meet a cash shortage in the years 1955 and 1956 amounting in all to some pesos 43 million, but that thereafter the amounts of cash generated by the railroad's operations should suffice to meet: _ 15 - i) the operating deficits during the remainder of the rehabilitation period; ii) the remaining peso costs of rehabilitation, including the peso equivaent of the cost of the 1,100 freight cars to be pur-chased in 1960-1964; iii) the peso equivalent of the amortization instalments of the Export- Import Bank loan (last instalment 1963) and the proposed Bank loan of $61,000,000 (last instalment 1969). 69. At the end of the period the accumulated cash surplus would be about pesos 65 million. However, in each of the years 1960 through 1964, there is a cash shortage, which reduces the accumulated cash surplus from pesos 43 million at the end of 1959 to pesos 6 million at the end of 1964. This is a very narrow margin, but it must be remembered that the calculations assume that the railroad pays cash for the 1,100 freight cars purchased in the years 1960 through 1964. 70. The amortization period of the proposed Bank loan has been calculated to match the cash generation. Ih does not correspond to the eQonomic life of the corresponding assets (in particular the rail), which could justify a longer term for the proposed loan. 71. At the end of 1969, the railroad would own a debt-free property in which the following investmants had been made (including foreign exchange investments at the present rate of exchange): Pesos million Purchase from Southern Pacific RAilroad 150. * Export Import Bank loan 62.5* Increases in equity investment, through 1956 135. Cost of rehabilitation (1954-1958) 726.3 Cost of freigh-r, cars (1960-1964) _ °3.8 Total 1.167.6 72. The estimated earnings for 1969, before fixed charges, of pesos 90.1 million represent a return on this investment at the rate of about 7-3/4%. The ratio of net income to gross revenue in the same year is about 30%, and the return on capital stock is more than 20%. Financial conclusions 73. The conclusions which emerge from the study of these forecasts are: * These figures are slightly too large, as some instalments have been paid at 8.65 to the dollar. - 16 - i) the results will be possible only if the railroad's operations are conducted at a high standard of efficiency. The employment of Coverdale and Colpitts during the rehabilitation period should ensure that operating practices are brought up to the necessary standard; ii) the rate structure should be studied without delay. It would be well, in view of the rather tight liquid position, to aim as soon as possible at increases of rates which would raise the gross revenues by 10% rather than by 5% as assumed in the calculations; iii) the Government should drawr no dividends on its investment in the railroad during the period; iv) if ties can be purchased in M1exico, more pesos and less foreign ex- change would be needed during the rehabilitation period. If this happens, the pesos should be provided by the Mexican Government as equity; v) during the period in question no further "A" shares, which carry a dividend of 9% per annum guaranteed by the Mericen Government should be issued. 74. If the railroad is to reach and maintain a sound financial position during the period in question, increases in costs must be promptly compen- sated by rate increases. The Government has agreed to follow this principle. It is essential that the rate structuAre be kapt at a level adequate to produce gross revenues which will suffice to cover: i) the costs of rehabilitation not financed by the Bank loan, includ- ing the peso equivalent of the cost of 1,100 freight cars (with the exception of relatively small amounts during the first two years to be covered oy equity investment by the Mc;-ican Government); ii) operating costs; iii) maintenance costs; iv) fixed charges (i.e. dividends on the "A" shares plus charges on loans); v) the amortization instalments of outstanding loans; and vi) adequEte working capital. The amount of pesos required by the railroad for any of these purposes is liable to be increased if there is a further devaluation of the peso. Such increases must of course be compensated by appropriate rate increases if a sound financial position is to be maintained. - 17 - 75. The review of the rate structure (paragraph 63 above) has still to be made by the consultants, but in view of the exhaustive study they have already made, should not take long. Although for purposes of calculation a 5% increase in gross revenues has been assumed, the traffic should be able to bear iithout difficulty a 10% increase. 76. A 10% increase would reduce the cash shortages in 1955 and 1956 which have to be met by increased equity investment by the Government, and would eliminate the tight liquidity position in the years 1960 through 1965. It would also enable the railroad to build up reserves against fluctuations in business. It is true that it would also be possible to ease the liquidity position by financing the 1,100 freight cars to be purchased during this period, but in view of the heavy debt burden already assumed by the rail- road, and of the uncertainty whether the necessary financing facilities would be available during the years in question, it would be more prudent not to assume that this will be done. 77. Forecasts of earnings must be reviewed regularly in order to see whether the rate structure is adequate to produce the necessary gross revenues, or whether rate increases are needed. If necessary r2te increases are not granted promptly, the Government will have to increase its equity investment. This would be tantamount to subsidizing the railroad's operations and should be avoided. The Government should undertake promptly to grant such rate in- creases as may be necessary to achieve the financial objective formulated in paragraph 74 above. 78. No further borrowing should be necessary during the period, and an undertaking should be obtained that no such borrowing (except for short- term borrowing in the ordinary course of business) will be incurred without the Bankts agreement. X. CONCLUSI0I'S 79. The Pacific Railroad will break down as a public carrier unless its physical equipment is renovated and its mAnagement and administration are radically improved. The area it serves is one of the most important sources of agricultural products in Mexico, and has been developing and is likely to continue to develop at a rate faster than that of the econonm as a whole, If the railroad breaks down, the results would be disastrous. 80. The potential traffic is adeauate to produce at reasonable retes enough revenues to cover most of the peso costs of rehabilitation and to service and repay the loans recquired for rehabilitation within eleven years of the end of the four-year rehabilitation period. By this time, its earn- ing would represent a satisfactory return on investment for a railroad; they should increase during the following years. 81. The program for rehabilitation is sound and the estimated costs are reasonable. - 18 - 82. However, there are a rnumber of conditions involving action both by the Mexican Government and by the railroad which should be met in order to minimize the possible risk of failure to achieve the objectives of the rehabilitation program. For easy reference, these conditions are listed in Appendix 8. 83. Provided these conditions are met, the project is suitable for Bank financing. I, wo-ald require a loan of $61,000,000 equivalent. A term of fifteen years with a grace period of four years would be appropriate. < ~~~MAP OF E WMFERROCARRILDELPACIFICO WJGbAS?. ~~~~~LEGEND ACO # i}< ~ 8 >:t ''> ')72FERROCARRIL DEL PACIFICO |~ aLOX w-500- ELEVATION IN METERS i:; 4I CA14ANEA SCALE BEJAIN < NArCORNI J A WALL SrlCCM, NEW YORK , N 50o. CARBLEAO5 HER~~~~~~~~~5~~~~~KLL0 COVROL &C LMT HIL~~~a~\~HHAHA6 v,, _ gii 0t$1Uf 9 } T E X A S - nHERMLO C r IO A 0- °J Mci - G 0 _ / L 0~ 9 to HIHUAHUAnZ 9i2 quO RRA A LPe1 IUDAD~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. 5zio,-,~~~~~~~~~~~~~~~~~~~~'- O e, ~~~~~~~~~ Sn9)o ARE AA -.00 L C%JL ~ ~ ~ ~ ~ ~ ~ I MPLMDOANOI 0~~~~~~~~~~~ rizio C'liJ A A NOGALES MEX I CO MAS NORTHWEST REGION IRRIGATION 0D c 0 S 7 MAP OF MEXICO G/iL GUL Of MEXICO PACIFIC OCEAN STOI ARACVRB Y MPSTOI DIVE MAIN CBOUI COUNTRY RAILWAYS EMALPO R ~MASN , 4 ~~~~~~~~~~~CIUDAD X , r \ zt | L ~~~~~~~OBREO NAVOJOA IL F OF CA LIFORNIA STORAGE DAMS IN OEAIN-PACIFIC RAILWAY OF MEXICO III ;TORAGE DAMS UNDER CONSTRUCTION O" OTHER RAILWAYS RVERSION DAMS L ROADS- 'ORTS 41 STATE BOUNDARIES N- N~~~~~~~~~~ SAN AMAL BLAS8I,!A. UMUCHU1; ULAAN-' q H I~~~~~~~~~~~~~~~~~~~~ TA MAZATLAN TO POPLOBAMPO DAMS I. CUAUHTEMOC 2.LA ANGOSTURA INTERNATIONAL BOUNDARY - 3.ABELARDO RODRIGUEZ PROPOSED RAILWAYS + i4+ + 4.ALVARO OBREGON 5.MOCUZARI (UNDER CONST.) 6.MIGUEL HIDALGO (UNDER CONST.) 7. SANALONA APPENDIX 2 ~' IRRIGATED BY GRAVITY FLOW .i >3 IRRIGATED BY PUMPING IRRIGATION WORKS UNDER CONSTRUCTION /| IRRIGATION WORKS PLANNED OR STUDIED °o°o'O\ IRRIGABLE AREAS S AREAS WITH SUBTERRANEAN WATER RESOURCES IN_ FERROCARRIL DEL PACIFICO CONDENSED PROFILE AND TRACK DATA COVERDAL.E & COLPITTS CONSULTINMG EClNEER5 DIVISION S 0 N 0 R A S I N A L O A DISTRICT NGALES CARB 0 EMPALME N A V O J 0 A CU LIAC A N L A C R U Z ACAPONETA T E P I C LA QUEMADANde Km from Nogales 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1so0 1600 1700 Track Map (Brnch Lines 'i , 1 | . NW. oScali) 'I a d.- U GUAMAS U ~~ ~~ ~ ~ ~~~4 4 Baa11 a st Pits AvaO/able O O t 0 a O C. ossTies r Uf 1 f m r rI_ _ 4 District) ; -LAN ; Profile Mean . Sea Lev l) - Short Grades up to 05% nr d south BallastPits A 0 Opera6 00 0 1 | 0 0 0 0 0 Ballast 8 (Inc-hes) 2 Cr-ossTies rb e (100f000 per 3 4 Distric 2 PIeef 2 Rail (Pounds 5iz0 O per yard) 7 lI ii 0 65~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~5 66* Tmleota Cenvt.rl 1503- 23480 64s' 16.7 217 * 606' 1217' 13540 3680o I5004e 12989- 4243- First Operation 1882 1881 1906 1907 1908 1909 1910 1912 1927 1909 Track Condition Goed I Jr.; po..e, Slow Order.,.- .I- - I. . ... - -** - -* * K(m,fron, Nogales 100 200 300 400 500 600 700 800 900 1000 1100) 1200 1300 1400 1500 1600 1700 Km. fran, L~~~~~~~~~~~~~~~~~ - Nogales~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~heae Appendix 4 YUBROCABRIL D1L PACIYICO 3STLMAT3D FUGE TRAWFFIC 3955 - 1961 Classification 1953 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 (Actual)_ Cars Products of forests _6.9 1,100 i,100 1,100 1,100 1,100 1,100 1,100 1,100 1,100 1,100 Products of agriculture 28,166 30,850 33,350 35,725 37,950 40,375 42,600 45,025 47,300 49,625 51,875 Products of animals 3,401 2,950 2,950 2,950 2,950 2,950 2,950 2,950 2,950 2,950 2,950 Mineral products 2,090 2,475 2,475 2,475 2,475 2,475 2,475 2,475 2,475 2,475 2,475 Petroleum derivatives o10.484 11,675 12,425 13,175 13,950 14,750 15,500 16,250 17,050 17,825 18,600 Inorganic products 1,290 1,175 1,175 1,175 1,175 1,175 1,175 1,175 1,175 1,175 1,175 Industrial products 11,175 13,260 13,635 14,010 14,385 14,760 15,o60 15,485 15,835 16,185 16,585 Government materials 2,o60 1,225 1,225 1,225 1,225 1,225 1,225 1,225 1,225 1,225 1,225 Less-than-carload traffic - - - - - - - - - - - Total 59.335 64,710 68,335 71,835 75,210 78,810 82,085 85,685 89,110 92,560 95,985 Tons (Metric - thousands) Products of forests 23 36 36 36 36 36 36 36 36 36 36 Products of agriculture 84 926 1,023 1,115 1,202 1,290 1,376 1,464 | 1,551 1,639 1,726 Products of animals 53 47 47 47 47 47 47 47 47 47 47 Mineral products 98 114 i14 114 114 114 114 114 114 114 114 Petroleum derivatives 321 356 379 402 426 450 473 496 520 544 567 Inorganic products 54 52 52 52 52 52 52 52 52 52 52 Industrial products 332 401 410 422 434 446 458 469 481 493 505 Government materials 82 48 48 48 48 48 48 48 48 48 48 Less-than-carload traffic 15 15 15 15 15 15 15 15 15 15 15 Total 1.82z4 1,995 2,124 2,251 2,374 2,498 2,619 2,741 2,864 2,988 3,110 P tal Tona ( etreC-tbauaDda) 1965 - 3,171 1966 - 3,233 1967 * 2,294 1968 a 3,356 1969 - 3,417 FERROCARRIL DEL PACIFICO Appendix 5 UYIMhTED ODST OF REMABILITATION for, 1954 - 1958 Progran 1954 | 1955 | 1956 | 1957 I 1958 | Total Dollars Pesos Dollars I Pesos Dollars Pesos Dollars I Pesos Dollars Pesos Dollars I Pesos . (Thousands Omitted) ROADWAY Clearing roadiay 500 1,000 1,000 2,500 Grading and ditching 2,000 4,000 4,000 10,000 BTllast 5,500 2,900 10,500 3,150 12,000 3,150 10,500 1,750 4,ooo 10,950 42,500 Rail and OTM 1,000 200 8,000 2,000 8,0oo 2,000 8,000 2,000 25,000 6,200 Bridge material 200 500 400 1,000 600 1,500 Painting bridges 500 1,000 1,000 2,500 Section houses 1,000 4,oo0 4,000 2,000 lO11000 Camp cars 500 2,000 1,500 000 Culverts 25 125 50 250 50 250 25 125 150 750 Communications 700 1,500 700 1,500 Roadway equipment 200 200 Total Roadway 2,125 12,325 11,350 25,750 11,200 25,750 11,175 14,625 1,750 4,000 37,600 82,450 OPERATING EQUIPMENT AND FACILITIES Diesel locomotives 1,521 2,042 1,851 1,429 6,843 Spare parts and tools 180 180 160 520 Facilities and fueling 50 1S 500 20 750 20 750 lOS 2.000 Total Diesel 1,571 2,237 500 2,051 750 1,6o9 750 7,468 2,000 Freight car facilities 20 20 270 20 270 20 270 oO 810 Total Operating Equipment and Facilities 1,591 2,257 770 2,071 1,020 1,629 1,020 7,548 2,810 Total 3,716 12,325 13,607 26,520 13,271 26,770 12,804 15,645 1,750 4,000 45,148 85,260 Consulting fees 100 150 150 100 100 600 Contingencies 372 1,848 1,361 3,978 1,327 4,016 1,280 2,347 175 600 4,515 12,789 GRAND TOTAL 4,188 14,173 15,118 30,498 14,748 30,786 14,184 17,992 2,025 4,600 50,263 98,049 tRAUD 1TOL In PESS0 66,523 219,472 215,136 195,292 29,933 726,336 !ote: Freight car purehases after 1958 not included above are estimated as followst Dollara Pesos 1960 - 300 cars 13 23,257= 1961 - 250 care 1,550,000 19,375,000 1962 - 300 care 1,860,000 23,250,000 1964 - 250 care 1 550 000 19,375C000 Total 6 420,0 W '5Z50 C40 Contingencies 682,000 8.525 000 7T,502,0 W 3,-775,000 ?EHROCARRIL DEL PACUICO Appendix o =STINATED INCCOM ACCOUNT (A) l9SS- 1969 tThousands of Pesos) Revenues Freight 108,072 128,311 136,186 144,o54 149,602 157,033 164,357 171,782 179,168 186,573 193,958 197,625 201,291 204,958 208,625 212,291 Passenger 16,894 17,321 16,455 15,632 15,632 15,632 15,632 15,632 15,632 15,632 15,632 15,632 15,632 15,632 15,632 15,632 Express 6,129 5,742 5,455 5,182 5,182 5,182 5,182 5,182 5,182 5,182 5,182 5,182 5,182 5,182 5,182 5,182 Other (D) 8,780 9,250 9,850 10,434 10,840 11,390 11,932 12,482 12,979 13,577 14,124 1h,345 14,616 14,888 15,159 15,431 Miscellaneous (C) _ 16.062 16.795 17.50 18.126 18.924 19.710 20.508 21.296 22.096 22,890 23, 278 23,672 24 o66 24, 460 24,854 Total 139,875 176,686 184,741 192,832 199,382 208,161 216,813 225,586 234,257 243,060 251,786 256,062 260,393 264,726 269,050 273,390 ExpenLses Maintenance of way 32,458 52,296 52,011 51,727 51,444 51,159 51,159 51,159 51,159 51,159 51,159 51,159 51,159 51,159 51,159 51,159 Maintenance of equipment 35,823 34,967 33,903 32,912 33,031 31,721 29,476 30,576 32,023 33,510 35,103 33,951 35,131 35,597 36,066 36,533 Transportation 75,403 73,457 65,623 58,517 53,828 49,467 49,844 50,382 51,117 51,708 52,385 52,756 53,145 53,527 53,907 54,295 Other (D) 15 ,670 17, 864 17 804 17 829 18, 023 18 ,238 18, 459 18, 662 18,880 19,107 19,305 19,415 19,516 19,625 19,734 19,843 Total 159,354 1738,584 160,941 15055 ___17,2 1521 158,951 159,908 160, 1~3 Net Operating Revenue -19, 479 -1,898 15,400 31,847 43,056 57,576 67,875 74,807 81,078 87,576 93,834 98,781 lol,442 104,8i8 108,192 111,560 Equipment Rents - Net Payments (B) 15,137 12,134 11,475 12,611 12,322 13,772 12,603 12,863 14,995 16,755 17,139 17,360 17,688 18,018 18,346 18,674_ Railway Tax Accruals (9) 801 803 840 877 906 946 986 1,025 1,o65 1,105 1,144 1, 164 1,184 1,203 1,223 1,243 Net Railway Operating Income -35,417 -14,835 3,085 18,359 29,828 42,858 54,286 60,919 65,018 69,716 75,551 80,257 82,570 85,597 88,623 91,643 Nonoperating Income - Net Loss (G) -1,704 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 -1,519 Net Income before Fixed Charges -37,121 -16,354 1,566 16,840 28,309 41,339 52,767 59,400 63,499 68,197 74,032 78,738 81,051 84,078 87,104 90,124 Fixed Charges 2,140 20,046 27,729 35,165 39,456 39,442 37,719 35,562 33,406 31,250 27,250 23,500 19,750 15,388 l1,00oo 5,750 Net Income or Loss -39,261 -36,400 -26,163 -18,325 -11,147 1,897 15,048 23,838 30,093 36,947 46,782 55,238 61,301 68,690 76,104 84,374 Operating Ratios, Based on Total Revenues excluding Miscelleneous Maintenance of Way 23.2 32.6 31.0 29.5 28.4 27.0 26.o 24.9 24.o 23.2 22.3 22.0 21.6 21.3 20.9 20.6 Maintenance of Equipment 25 .6 21.8 20.2 18.8 18.2 i6.8 15.o 14.9 15.0 15.2 '15*3 14.6 14.8 14.8 14.7 14 .7 Transportation 53.*9 45.* 7 39.1 33*.4 29 .-7 26.1 25.3 24.6 24.o 23.4 22.9 22.79 22.4 22.2 22.0 21.8 Total 11.iiT9 111.2 9 7? - 75-6 73.5 71.9 70-.4 69. 67.1 66. 6. 65.1 Total IUQ.d__91____ A ____2 j _6_70_1 ___-_9_0 __ 7__ __________ j___5_ 5. (A) Ad.iusted for: i) Devaluation of the peso. (C) liscellaneous E_eX _: This is the 10% gross (B) EguUment Rental - )1et Payments: This consiste (G) honooerating Income - Net Loes: The expenses April 19. 1954; ii) 10% general wage in- revenae tax which the Governsent has agreed of amounts Pacific payB to other carriers as under this item are almost entirely the ex- crease, June 1, 1954. to be considered as revenue. rental for equipment, less the amount other penses inoarred by the railroad in operating roads pay for the use of Pacific's equipment. the Coopany townsite of Empalme, ar,d to some (B) Other Revenuen: Includes mail revenue, negligible (D) Othor jenaes: This includes traffic expense; Practically the entire amount covers per diem extent at Mazatlan. The charge is slightly in amount; other revenue. principally switching express operationm which Pacific operates on or mileage payments on freight cars. offset by the rentals collected at the two charges; and incidental revenue, principally its own account: miscellaneous operations, locations. demurrage and icing charges. principally the cost of icing; and general ex- (li) Railway Tax Accroals: Covers a number of mis- penses. cellaneous taxes, small in amount. FEHROCARRIL DEL PACIFICO Apendix 7 STATEMENT SHOWING CASH REQUIREMENTS AND SOURCES 1955 - 1969 1955 1956 1 957 1958 1959 1 1960 11961 1962 1 1964 199 1196 19 1967 19 F 1969 (Pesos in thousands) CASH REQUIRED For Payment of Deficit after Fixed Charges 36,400 26,163 18,325 11,147 For Rehabilitation Program - Mexican portion 30,498(A) 30,786 17,992 4,600 25,575(B) 21,313(B) 25,575(B) 21,313(B) - Foreign portion 188,976(A) 184,350 177,300 25,313 For Principal Payment - Eximbank Loan 6,250 6,250 6,250 6,250 6,250 6,250 6,250 6,250 6,250 For Principal Payment - $61,000,000 Loan 29,470 38,125 38,125 38,125 75,000 75,000 75,000 87,500 87,500 105,000 105,000 Total 262,124 247,549 219,867 47,310 35,720 69,950 65,688 69,950 81,250 96,313 75,000 87,500 87,500 105,000 105,000 CASH AVAILABLE FROM CCOPANY SOURCES From Maintenance of WIay Charges 32, 466 32, 466 32,466 31, 751 31,751 23,898 23,898 23,898 23,898 23,898 19,973 19,973 19,973 19,973 19,973 From Depreciation - Maintenance of Way 2,994 2,994 2,994 2,994 2,994 2,994 2,994 2,994 2,994 2,994 2,994 2,994 2,994 2,994 2,994 From Depreciation - Maintenance of Equipment 8,539 10,564 9,608 9,949 10,956 9,783 9,783 10,635 11,346 12,199 10,580 11,291 11,291 11,291 11,291 From Sale of Scrap 1,578 2,058 2,058 2,413 1,923 1,923 1,208 1,353 143 533 533 533 533 533 533 From Surplus in Income after Fixed Charges 1,897 15,048 23,838 30,093 36,947 46,782 55,238 61,301 68,690 76,104 84,374 Total 45,577 48,082 47,126 47,107 49,521 53,646 61,721 68,973 75,328 86,406 89,318 96,092 103,481 110,895 119,165 Cash Available fromo loan 188,976 184,350 177,300 25,313 Cash to be made Available by Mexican Government 27,571 15,117 Total 262,124 247,549 224,426 72,420 49,521 53,646 61,721 68,973 75,328 86,406 89,318 96,092 103,481 3110,895 119,165 Surplus Cash Available 4,559 25,110 13,801 -16,304 -3,967 -977 -5,922 -9,907 14,318 8,592 15,981 5,895 14 ,165 Cumulative surplus cash available 4,559 29,669 43,470 27,166 23,199 22,222 16,300 6,393 20,711 29,303 45,284 51,179 65,344 (A) Does not include 66,523,000 pesos to be spent in 1954. (B) Covers 1,100 freight cars to be purchased 1960-1964. APPSN414IX 8 LIST OF COJDITIONS MLanagement and organization 1. T'he composition and headquarters of the board of directors shloulc'. be satis,actory to the Bank9 . 2. The top level management should be satisfactory to the Bank. 3. Some trenty supervisory posts hitherto filled by syndicate members should be 'illed by non-members. 4+. Consultants sauisfactory to ths Bank should be retained both to super-ise the execution of the rehabilitation program and to assist tile railroad in improving its operating and admirds- trative practices. The period of their employment for the lat ier purpose should be sabisfactory to tlhe Bank. 5. I'he labor force should be recluced to and maintairned at the minimum necessary for efficient operations. The governmenit and the railroad have already a-reed to all these points, and have taken action on the ,irst four. 6. The methods of boolkkeeping and of t-he collection and analysis of statistics should be complotely overhauled, vith the object of proclucing prompt and accurate oporating and financial reports, 7. A program should be established to develop adequate supervision at all levels in all departments. This program should include arrangements for training staff both in Ilexico and abroad. 8. Arrangemerts should be made for intensive training of skilled viorlmnen, especially in track work. 9. Arrangements should be made for the proper inspection of materials and equipment purchased. 10. The production of treated ties in Kexico should be developed. Financial 1. The railroad should be Dermitted to treat as income the proceeds of the 10a tax on gross revernues. The government has already granted this permission, 2. A review of the rate structure should be carried out as socn as possible, and rates should be raised in the light of this study so as to increase gross revenues by about 10%. 3. The government should dratzf no dividends on its investment in the railroad cluring the life of the Bank loan. 4. Mo further "t shares should be issued duriinL -;he life of the Bank loan. 5. Any cash shortages in the years 1954 through 1958 and any increase over present esGimates in the peso cost of the rehabilitation program should. be met by additional equity Investment bDy the Mexican Government. 6. The rate structure should be maintained at a level adequate to proauce gross revenues sufficient to cover: a) the cos s of reliabilitabion not financed by the Bank loan, includin- tAie peso ecjuivalenb of the cost of 1,100 freiglit cars (with the exception of relatively si-mall anounts in the first t,fO years to be covered by equity1 investmient b-y the :',exican Government); b) operating costs; c) maintenance costs; d) fixed charges; e) amortization of debt; and f) adequate %;ro-rking capital. 7. Any Ifurther borro.,ing by the railroad (with the excen'tionl of short-ter. borrowing incurred in the usual course of business) should be suibject to Ban'c agreemrent.