Document of The World Bank FOR OFFICIAL USE ONLY Report No. 34600-IRN ISLAMIC REPUBLIC OF IRAN TRANSPORT SECTOR REVIEW AND STRATEGY NOTE L1 February 1, 2005 Finance, Private Sector and Infrastructure Department Middle East and North 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 be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective January 1, 2004) Currency Unit = Rial 1 Rial = US$0.00119 US$1 = 8,400 Rials FISCAL YEAR March 21 - March 20 ABBREVIATIONS AND ACRONYMS CAO Civil Aviation Organization CAS Country Assistance Strategy FYDP Five Year Development Plan GDP Gross Domestic Product IRI Islamic Republic of Iran IRISL Islamic Republic of Iran Shipping Lines LRT Light Rail Transit MENA Middle East and North Africa region MI Ministry of Interior MPO Management and Planning Organization MRT Ministry of Roads and Transportation PCE Passenger Car Equivalent PSO Ports and Shipping Organization RAI National Railway TEU Twenty Foot Equivalent Unit TTO Transportation and Terminals Organization Vice President: Christiaan J. Poortman, MNAVP Country Director: Joseph P. Saba, MNCO2 Sector Manager: Hedi Larbi, MNSIF Task Team Leaders: Michel Loir and Jean-Charles Crochet, MNSIF Source of photo on first page: dashakbar.tersianbloa.com/ I ISLAMIC REPUBLIC OF IRAN TRANSPORT SECTOR REVIEW AND STRATEGY NOTE Table of Content Page No. Foreword v Executive Summary vii A. Background 1 B. Current Situation in the Main Transport Sub-Sectors 4 Road and Road Transport 4 Urban Transport 5 Railways 9 Ports and Maritime Transport 10 Air Transport 12 C. Main Transport Sector Issues 14 Inefficiencies due to Price Distortions 14 Need for Institutional Strengthening 16 Slow Pace and Suboptimal Forms of Privatization 18 Severe Urban Road Congestion and Air Pollution 20 Very Poor Road Safety 22 Impediments in Logistics and Transport Facilitation 22 D. A Strategy for Modernizing the Iranian Transport Sector 25 Removing Price Distortions and Ensuring Financial Sustainability 25 Rationalizing the Role of Government and Strengthening Institutions 26 Making Effective Use of the Private Sector in Transport 31 Developing a New Urban Transport Policy 32 Improving Road Safety 36 Developing the efficiency of Logistics and Transport Facilitation 38 E. Implementation of the Strategy and Potential Role of the World Bank 41 Annexes Annex 1. Length of Roads at the End of Year 2001 and 2002 44 Annex 2. Length of Road Sections at Capacity Limit and Above (2001) 45 Annex 3. Cargo and Passenger Transportation (1995-2002) 46 Annex 4. Modules of Comprehensive Road Transport Statistical System 47 Annex 5. Peak Hour and Daily Traffic Volumes (September 2002) 48 111 Annex 6. Vehicle and Accident Information 50 Annex 7. Number of Traffic Accident Fatalities in IRI (1993-2002) 51 Annex 8. Road User Charges 52 Annex 9. Motorized Traffic Modal Split in Tehran, Mashhad, Esfahan, and Shiraz 53 Annex 10. Urban Bus Transport Performance in Tehran, Mashhad, Esfahan, and Shiraz 54 Annex 11. Tehran's Street Network Performance Indicators 55 Annex 12. Petroleum Consumption and Air Pollution in Tehran 56 Annex 13. Railway Statistics 57 Annex 14. Railway Freight Statistics by Commodity Groups and Districts 58 Annex 15. Operational Performance Indicators for RAI in 1993 and 2001 59 Annex 16. Railway Productivity (2002) - An international comparison 60 Annex 17. Railway Sector - Main Issues and Challenges 62 Annex 18. General Cargo Traffic at Major Persian Gulf Ports 68 Annex 19. General Cargo Traffic at Major Caspian Sea Ports 69 Annex 20. Annual Volumes of Cargo - All Ports 70 Annex 21. Berth Occupancy Ratio and Berth Productivity at Major Ports 71 Annex 22. Port Sector and Container Handling as Bandar Abbas - Main Issues 72 Annex 23. Financial Performance of Iran Air and Asseman Airlines 78 Annex 24. Performance of Domestic Airports 79 Annex 25. RAI's Membership of International Conventions and Organizations 82 Annex 26. Annual Development Budget for the Transport Sub-Sector 83 Annex 27. Third Five-year Development Plan (2000-2004) - Physical Targets 84 iv Foreword Over twenty years (1959-1979), the Bank supported transport development in the Islamic Republic of Iran (IRI) under five road projects, two port projects and one urban project for a combined lending of US$309 million, roughly 30% of the total Bank financial assistance to IRI during these years. This cooperation has been dormant since 1980 except for (i) a small project financed by the Global Environment Fund (GEF) and administered by the Bank, which was implemented in 1995-97 and aimed at the preparation of an action plan for reducing vehicle emissions in Tehran and (ii) a transport sector report that was issued on April 19, 1995'. Since early 2002, however, the Government of IRI has signaled its interest in renewed cooperation with the Bank in the transport sector. In order to initiate this cooperation, and since there was no comprehensive document presenting a strategic analysis of the sector, the Government and the Bank agreed that the Bank would prepare a review of the transport sector and a strategy note. This, it was hoped, would provide elements to the Government in the formulation of its sector strategy as part of the country Fourth Five year Development Plan. It would also be a basis for the Government and the Bank to analyze priorities for action and review how best the Bank could support the Government's plans for improving sector performance. It was agreed to proceed in two stages. The first one was the preparation of a broad survey of the transport sector. This was done in mid 2003 with participation of a Danish Consultant, PLS Ramboll, and an Iranian Consultant, Tahr-E-Haftom Consulting Eng., under funding from a Danish Trust Fund. This work resulted in two publications: * Transport Sector Review (final report dated December 2003): this report was meant to be an update of the 1995 World Bank report * Urban Transport Review (final report dated January 2004). The Government of the Islamic Republic of Iran produced useful comments that the Consultants took into consideration in the final version of these, two reports. However, some information was lacking, and, in some cases, given the short duration of the Consultants' field work, there was not enough time for sufficient exchange and preparation of data. More generally, the Iranian transport data base may not contain some of the statistics most useful for policy formulation and planning purposes and upgrading it may be a priority task. The second stage was the preparation by the Bank, on the basis of the above reports, of a synthetic analysis of main issues in the Iranian transport sector and of strategic recommendations. This is the aim of the present strategy note, the draft of which was discussed at a high level transport sector workshop in Tehran on April 27-28, "Transport Sector Review" Report No. . 13962 IRN. v 2004. This final version incorporates comments received during the workshops as well as additional information collected at this time This strategy note focuses on the big picture. It highlights the areas where reforms/improvements are most needed in the transport sector by comparison to other similar countries, and suggests the main directions for Government remedial action in the coming years. Working out options and proposing the best ones fell out of this note simply because too many critical factors could not be covered in the Consultants' two reports. The World Bank stands ready to further assist the Islamic Republic of Iran in formulating the action plans it needs so that the transport sector can better support economic development and poverty alleviation in the future. vi ISLAMIC REPUBLIC OF IRAN TRANSPORT SECTOR REVIEW AND STRATEGY NOTE Executive Summary I. Background The transport sector is of special importance to the Islamic Republic of Iran because of its high degree of urbanization (about 65%), its large and mountainous land area, the long distances between large cities and between these cities and the sea (1,280 Km from Tehran to the main port, Bandar Abbas), and its privileged location at the crossroad of international trade routes (from Europe to Central Asia and from Russia/Northern Europe to India). This importance is shown by the sector's share of GDP (about 10%, an unusually high share) and the freight volume per US$ of GDP (approximately 1-1.2 Ton- kin, i.e. double the amount in comparable countries). With about 67,000 Km of main and regional roads (95% paved), 7,265 Km of railway lines, three main ports on the Persian Gulf and two on the Caspian Sea, and seven international airports, IRI has a well developed transport network. This is in large part the result of a major construction effort over the past fifteen years. Yet, there are still some major sector inefficiencies and, as a result of recent economic growth, capacity bottlenecks have become serious problems with, for example, 13% of the main inter-city roads being saturated, capacity being reached in the main port of Bandar Abbas, and congestion in Tehran having reached spectacular proportions. II. Main Transport Sector Issues Inefficiencies due to price distortions. There are many instances in the transport sector where prices do not reflect economic costs. Fuel prices (US$ .08/1 for gasoline and US$.02/1 for diesel) provide the most egregious example. There are many others: bus fares in Tehran are US$ .025/trip, less than one tenth of what they are in most lower middle income countries; at US$ .01/ Ton-km, rail freight rates are probably one quarter of economic costs; road construction costs (US$ 300,000/km for a major road) are roughly one quarter of those in comparable countries. The explanation for such prices is in the high level of subsidization of both the final products (as in the case of public passenger transport) as well as the inputs, including capital costs. Capital costs, even for independent enterprises such as the railway or the urban bus companies are paid entirely by the State and there is no attempt at cost recovery. Distorted prices have numerous perverse effects. Demand for transport is propped up beyond economic justification. A more spread-out pattern is encouraged for the location of economic activities. The use of private cars is promoted at a great external cost in terms of congestion and pollution. The competition between modes of transport is not on a level playing field. Maintenance of infrastructure and equipment is discouraged. Overall, incentives are such that investments may not be made in the best interests of society. vii Need for institutional strengthening. Both at the level of Government/public administration and that of State-owned enterprises, the Iranian transport sector pays a high price for more than twenty years of isolation. The lack of exposure to international experience has made it difficult to develop the know-how necessary to design and implement sector reforms and to manage the sector with the methods and processes that, in most countries of the world, have proven key for increasing efficiency. Modem systems and procedures for programming and monitoring public expenditures have not been developed, a major problem given the sector's size and consumption of public resources. There are also structural shortcomings in the road and railway sectors that are just beginning to be addressed. Slow pace and sub-optimal forms ofprivatization. Many obstacles still hamper the sound participation of private investors and operators in the transport sector though this is essential for increasing sector efficiency. Many of the basic conditions which international experience has shown necessary for the private sector to be willing to invest and perform efficiently are not met. For example, relationships between the State and the private sector do not appear to be at arm's length and as well balanced as they should. The selection of service suppliers may not be truly competitive. Contracts may not provide for the security and adequate monetary rewards that efficient suppliers deserve and require. There does not seem to be competent regulators, free from political interference. Severe urban traffic congestion and air pollution. All major cities have serious congestion and air quality problems, but none more than Tehran. This is mainly due to the poor quality of public transport and inadequate traffic management in addition to the price distortions noted above. The structure of Iranian cities and their street networks, and the topography with mountains often surrounding cities are aggravating factors.. Air pollution in Tehran, mostly due to transport, exceeded World Health Organization guidelines 83% of the time in 2000, and 62 deaths per 100,000 inhabitants were traced to particulates. Very poor road safety. IRI is one of the world's worst performers for road safety. With close to 22,000 accident related deaths in 2002, or about 45 deaths per 10,000 vehicles, Iran is more than twenty times above the average for industrialized countries. The annual increase in road deaths and injuries has exceeded 15% over the last decade. Although a full diagnostic is yet to be done, there are indications that this crisis is due to a number of factors that reinforce each other, including, especially, drivers' attitude and behavior, insufficient enforcement of traffic and transport regulations, physical inadequacies in the urban and inter-urban road networks, shortcomings in road safety information and education, inadequate driver training and testing, weaknesses in the emergency services, and a fragmented institutional set up. The annual economic cost of road accidents may be estimated at about 2% of GDP. Accidents also have dire social implications as many of the dead or injured pedestrians and motorcyclists are the income earners of vulnerable families that are thrown into poverty. viii Impediments in logistics and transport facilitation. Notwithstanding large road, rail and port investments implemented in the last fifteen years, significant progress in customs performance, and signature of multilateral and bilateral trade and transport agreements, transit through IRI has not reached the high volumes that were aimed at. Numerous operational and organizational issues in the field of transport facilitation reduce the efficiency of logistics, increase the cost of international trade, and prevent IRI from playing an important international transit function for which it enjoys natural comparative advantages. Lack of coordination between all actors in the transport chains, heavy procedures and controls, lack of timely information on goods being shipped, and institutional weaknesses, in addition to shortcomings in the capacity of the transport system are the core problems to be addressed. III. A Strategy for Modernizing the Iranian Transport Sector As shown by international experience, a highly State owned and heavily regulated transport system will not be in a position to provide the quality of service and the flexibility that IRI's economy will require. As is well understood by the Government, a change of paradigm is necessary. Transport policies need to be re-focused on improving the sector's efficiency through increased competition, increased involvement of private investors and operators, and pricing systems that reflect economic costs. In parallel, the State needs to play a new role, that of policy maker, regulator, and manager, and no longer of operator. The main measures that the Government should consider so as to move along these lines are described below. They are articulated in six main strategic directions. Removing Price Distortions and Ensuring Financial Sustainability * Fuel prices should be adjusted gradually to reflect border prices and to include (in the case of road transport) a charge that makes users pay for the cost of road infrastructure and externalities, especially congestion and pollution. * A strategy should be designed and implemented for mitigating the effects on IRI's population of the large increases in road transport costs which the fuel price adjustment will provoke. This strategy should include major improvements in public transport. * The subsidy system should be reformed. The provision of subsidies should be limited to those transport services that fulfill an obvious social objective. Subsidies on inputs (including on vehicle and equipment investments) should be phased out. Subsidies should be concentrated on outputs through systems that establish a clear link between the subsidies paid and the services provided and ensure that service providers are fully compensated for their costs. * For all transport activities like freight transport and inter-city passenger transport, which are commercial in nature, competitive, and do not fulfill any clear social objectives, prices should be fully deregulated and subsidies should be phased out. ix Rationalizing the Role of Government and Strengthening Institutions * The Government should strengthen its capability for policy making and monitoring of the transport sector and delegate to independent but well focused State agencies the enforcement of laws and regulation, the provision of infrastructure, and the implementation of State interventions. * The new organizational structure of the road sector should be fully implemented, especially through adequate allocation of responsibilities at all levels, establishment of appropriate systems and procedures, and staff development. * The railway sector should be gradually reorganized along business lines. A contractual relationship should be established between the Government and RAI. Whenever possible, private operators should be encouraged to provide railway services. A railway regulatory body should be created for issuing operating licenses, reviewing infrastructure usage agreements, and negotiating agreements for the operations of public obligation services. * PSO should complete its reorganization along the "tool port" organizational model and review ways to increase the autonomy of individual ports. Whenever possible, further reorganization of ports as "landlord" ports should be implemented. * Information and monitoring systems should be strengthened. A modem road data base needs to be created. Performance and productivity indicators should be published systematically. Costing systems should be established in all State-owned enterprises. * Planning and budgeting systems should be greatly improved through the establishment of competent planning units, the definition of uniform methodologies that give importance to economic criteria in the evaluation of expenditure proposals, the integration of the planning process for maintenance and capital expenditures, and the preparation of master plans that are consistent with resource constraints. * Appropriate procedures and standard documents should be created for the contracting out of Government responsibilities and the provision of services under Government control in the transport sector. * An ambitious plan should be developed and implemented for the development of human resources in the transport sector and for getting the top level expertise required to implement high priority actions in the sector. Making Effective Use of the Private Sector in Transport - * A comprehensive review of options should be carried out for increasing private involvement in each mode of transport and, on that basis, strategies and x 1 implementation plans should be prepared. These would be based on the capability of Government institutions, the capability and risk framework of potential local and international investors and lenders, the specific features of each transport mode and the international experience in this mode, and the long term objectives of the Government. * The legal and regulatory framework for private participation in the sector should be adjusted in order to provide a stable and comprehensive regime that will reassure and enable investors, protect property rights, protect the public interest, and ensure consistency between the rights and duties of all parties. * A sound and competent institutional structure will have to be established with the capability to design and implement the privatization process, procure and manage contracts soundly, ensure safety and reliability of transport operations, and regulate monopolies, while keeping an arm's length relationship with the private partners, and remaining independent from political interference. * Financial policies should be adjusted to ensure a secure and sufficient revenue flow to the efficient operators. Developing a New Urban Transport Policy * Emergency plans should be implemented for improving quickly the speed and quality of bus services on the major corridors of IRI's large cities. * New medium and long term urban transport master plans should be prepared for most large cities based on realistic assessments of available resources and sound coordination with urban development strategies. These plans should reflect the new national priority given to public transport services. They should define clearly priorities and sequencing so as to ensure that investment is completed in the shortest possible time. * New traffic management plans should also be prepared in consistence with the master plans with the main goals of enhancing performance of the bus systems, improving conditions for pedestrians and maximizing vehicle flows. * The financial policy for urban public transport services should be clarified including cost sharing principles for capital and operating expenditures between central and local government and a performance-based allocation of central transfers. * Enforcement of traffic regulations should be stepped up through higher police presence, effective deterrence, and information campaigns. * Vehicle emission standards should be strengthened and an effective system of vehicle inspection established. xi * The institutional capacity of urban transport planning and implementation units should be developed. * An adequate regulatory, financial, and institutional framework for private supply of urban transport services should be put in place. Improving Road Safety * The institutional structure for tackling road safety issues needs to be improved. This includes strengthening of the National Road Safety Council and all key Government agencies involved in road safety, establishment of regional and local road safety councils, and creation of effective accountability mechanisms. * Measures should be taken to ensure better and wider understanding of the specific characteristics of the Iranian road safety problem. * A short to medium term National Road Safety Action Plan (NRSAP) should be formulated and implemented. This plan would include urgent activities at national level as well as coordinated packages of measures concentrated in high risk geographical areas. * Adequate funding should be provided in a coordinated and timely fashion to all agencies involved in the implementation of the NRSAP. * The results of the NRSAP should be carefully monitored and evaluated. On this basis, the NRSAP should be scaled up gradually to the entire country. Developing the efficiency of Logistics and Transport Facilitation * A trade and transport facilitation audit should be carried out to identify key shortcomings and measures to be taken. * Based on the results of the audit, the institutional and regulatory framework for transport facilitation should be improved, particularly by better documentary requirements and procedures, improved capability of border agencies, appropriate coordination mechanisms between all actors in the transport chains, and better information and communications technologies. * Measures should be taken to institute a continuous consultation process between Government agencies and all private stakeholders (shippers, freight forwarders, and transport operators). * The development of multimodal transport operators, especially foreign ones, should be encouraged. xii * Whenever proven economically necessary, investment in logistics facilities and equipment for multi-modal transport should be made. This includes especially railway and port investment for container transport. IV. Implementation of the Strategy and Potential Role of the World Bank Implementing the recommended strategy is a challenge that the Government of IRI has the will as well as the human and financial resources to meet successfully. However, the Government could very much facilitate and accelerate the process of change by using the vast knowledge developed in the world on the strategy's main themes. The World Bank could be a key partner in helping the Government to do that. Improving the performance and efficiency of IRI's transport sector closely fits the four major priorities that are being discussed between the Government of IRI and the Bank as backbones of the Bank's next country assistance strategy (CAS). Indeed, (a) given IRI's geography and economic structure, transport is important for achieving fast and sustainable economic growth and generating employment; (b) improvements in urban transport and road safety are essential for addressing the needs of the poor and disadvantaged; (c) reducing vehicle emissions is one of the key measures required for improving the environmental situation; and (d) given the size of State agencies and State owned enterprises in transport and the amount of public resources spent in the sector, it can contribute much to improved public sector governance. Preliminary discussions in May 2004 have shown that the partnership between the Government and the Bank could be developed along three main directions: (i) a specific program to improve road safety, (ii) a broad transport sector technical assistance program; and (iii) investment projects in important and particularly difficult areas: The road safety program would cover the strengthening of the institutional framework and the design and implementation of a short to medium term National Road Safety Action Plan. Bank technical and financial support in these areas could be most effective since the Bank has been for many years at the forefront among international organizations for helping countries across the developing world implement road safety improvement strategies. The technical assistance program would provide support to MRT, the main sector agencies, and the local governments in implementing the strategy and increasing quickly the efficiency of transport. It could cover all modes of transport and all the key measures presented in the strategy. The Bank has accumulated a vast experience on these topics over many years. Finally, the Bank could support the design and implementation of specific investments that would be important not only by themselves but would also help the Government test new solutions with a potential for scaling up. These could be for example in urban transport (for developing public passenger transport or improving traffic management) or in the field of logistics and multimodal transport. xiii  1 ISLAMIC REPUBLIC OF IRAN TRANSPORT SECTOR REVIEW AND STRATEGY NOTE A. Background 2 1. Geography. The Islamic Republic of Iran (IRI) is a country of 1.65 million km2 one of the largest in the Middle East and North Africa (MENA) region2. With a population of around 65.5 million, it is also the most populated. Its density of 39 inhabitants per km2 is 45% higher than the MENA average. Bordered to the North by the Caspian Sea (700 km of coastline) and to the South by the Persian Gulf and the Oman sea (close to 2,000 km of coastline), Iran is a neighbor to seven countries3 which makes it a natural cross-road of civilization and trade flows. Its rich history shows that for many centuries Iran has been a key land-bridge between Europe and Asia through what are known as the Silk (from Central Asia) and the Spice Roads (from India). However, Iran is crossed by several mountain ranges, which, together with contrasted and harsh climates4, is a challenge for land transport as it makes vehicle operating costs as well as infrastructure construction costs high. The Karun River, running south to Khorramshar on the Persian Gulf, is the only one navigable. Water is generally scarce but Iran is richly endowed in natural resources, from oil and gas to iron ore and copper which all require efficient transport for their production and commercialization. Two-third of the population is concentrated in the northern and western parts of the country. Iran has 28 provinces and 257 cities of which 76 with population in excess of 100,000 inhabitants. Iran has plenty of national treasures and international tourism has great potential5. 2. Economy. With a GDP per capita of about US$1,750 in 2002, Iran is in the upper range of MENA countries. The war with Iraq from 1980 to 1988 and associated damages (included in the transport sector) as well as the relative isolation of Iran throughout the 1990s contributed to a moderate economic performance. With economic liberalization, growth has picked up speed in recent years and, in 2003, reached about 7% p.a. The Iranian economy depends much on trade (with major imports of agricultural and manufactured products) and therefore on the transport sector's ability to move goods efficiently. The fast population growth which only abated in the last ten years added to pressures on available resources and nowhere more than in cities where about 65% of Iranians now live. Within 40 years, the capital city has had its population treble to about 7.5 million and over 12 million people now live in the larger Tehran metropolitan area. This sprawling urban development and the soaring demand for social services and jobs has made urban transport key to the well being of the population. Published data highlight the importance of transport in Iran. The transport sector's share of the national value-added is estimated at 10% of total in 2000 (up from 7% in 1993), well above the 5- 6% share of GDP it usually reaches in developed and developing countries. There are 2After Algeria, Saudi Arabia and Libya. From West to East clockwise: Iraq, Turkey, Armenia, Azerbaijan, Turknenistan, Afghanistan and Pakistan. 4 Very hot summers and cold winters, especially in the West. The new plan targets 1.5 million tourists in 2005. . 1 also over 1.3 million jobs in the transport sector. The road and rail freight volume per US$ of GDP is approximately 1-1.2 Ton-km, i.e. double that of comparable countries. 3. International transit. The international transport network is comprised of two main corridors: (i) the Northern one runs East-West from Mashhad at the Turkmenistan border to Tabriz near Turkey through Tehran; (ii) the Southern corridor runs from Tehran to ports on the Persian Gulf. Intent on reviving the old international transit function and building on the break-up of the former USSR, IRI expanded its road and railway infrastructure to new port terminals on the Caspian Sea (Bandar Anzali, Nowshahar and, more recently, Amirabad/Khazar) in order to develop transit from Asia to Russia and Northern European countries. New railway lines are also built between Kerman and Zahedan, and Mashhad and Bafq to shorten distance to Pakistan and Turkmenistan respectively. The recent changes of political regime in Afghanistan and Iraq offer new prospects of intensified use by these countries of Iranian transit facilities. 4. Sector management. The Ministry of Roads and Transportation (MRT) is in charge of the whole transport sector including rural roads6 but excluding urban transport which is under the Ministry of Interior (MI) and the City Councils 7. The State High Council for Traffic Coordination chaired by the Deputy Minister of Interior formulates the urban traffic and transportation policy and its decisions are binding for all ministries and agencies involved. The Management and Planning Organization (MPO), at the center of the Government apparatus, makes decision on transport project developed by MRT and MI, and provides for their funding. Decentralization has been in progress for some time albeit at a slow pace. With City Councils officials now being elected since last year (2003), the local governments should become more independent from MI but their budget constraints will remain an obstacle to their making autonomous decisions on projects that they cannot fund themselves. Twelve semi-autonomous public enterprises mostly under the MRT carry out the Government transport policy and operate key transport services. Four of them concentrate 90% of transport operations, namely: (i) the Iranian Railways (RAI); (ii) the Port and Shipping Organization (PSO); (iii) the Islamic Republic of Iran Shipping Line (IRISL); and (iv) the Civil Aviation Organization (CAO). The MRT structure is very centralized but functional divisions are rational and not unlike those in many countries. The Transportation and Terminals Organization (TTO) was established in 1994 and merged the Department for Roads and the Public Terminals for Cargo Corporation. It is affiliated with the MRT of which its chairman is Deputy Minister. TTO exerts key responsibilities in road transportation, including road safety, promotion of international trade in association with foreign partners, and development of logistic platforms and ancillary road facilities (e.g. rest and food areas). National transport master plans are approved by the Parliament. 5. Development planning. IRI will complete its third Five Year Development Plan (FYDP) in early 2005. Implementation of the first three FYDPs has been as follows: 6 Rural roads were formerly the responsibility of the Ministry of Agriculture and Jihad. The Ministries of Defense and of Mines and Metals have marginal transport responsibilities in relation to their missions. Decisions by City Councils must be approved by MI. 2 (i) The first plan covered the period 1989-1993 and focused on new construction of freeways, major roads, feeder roads and rural roads. The second highest priority was given to the railways which were allocated 36% of investments compared to 45% for roads. Some 450 km of railway lines were built. The first plan was also marked by initial moves toward privatization and decentralization. For construction of freeways, the Government would fund 20% of costs and the balance would be brought by pension funds and credit unions. Execution of the plan was slowed down by financial shortfalls and programming difficulties. Completion rate ranged from 50% for civil aviation to close to 75% for railways and roads. (ii) The second plan started late covering the period 1995-1999 and was characterized more as a list of projects than as a comprehensive program to achieve development objectives. It took over projects left from the first plan. It also gave more priority to rehabilitation and maintenance of roads, the budget of which trebled in real terms. Road construction accelerated increasing the paved road length (including access and rural roads) of about 89,000 km in 1995 by an average of around 4,000 km annually, which is very substantial compared to similar countries. Close to 300 km of freeways were also built. The pace of railway construction accelerated less in terms of budget, which actually lost relative importance, than in terms of completion with some 1,200 km of standard gauge tracks put in service during that plan. Civil aviation received increased attention collecting close to 19% of development expenses compared to about 7% in the previous plan. The number of airports rose from 47 to 61 and that of airlines from 5 to 15. Availability of the air transport fleet increased. Maritime transport lost priority as its share of expenses fell from about 11% in the first plan to less than 8% in the second. Another feature worth mentioning is the emphasis on urban public transport and expansion of the bus fleet. (iii) The third plan covered the period 2000-2004. Its thrust was on removing monopolies, furthering privatization and public-private partnerships, and facilitating the introduction of new technologies, especially in the information area. It aimed, in particular, at creating an enabling environment for private sector led activities that had developed only slowly under the previous plans for lack of true level-playing field between them and public enterprises (PEs). Resources allocated to transport were substantially increased from growing Government awareness of the sector's role in promoting growth as well as national and international economic integration. Eliminating excess staff was an important side objective. During the third plan, correction of price distortions was to be initiated starting with the elimination of the dual exchange rate subsidizing PEs' imports, which was indeed achieved in 2002. Despite gradual progress since 2000, it appears that the third plan will come short of its institutional development goals for reasons that this report will outline. 3 B. Current Situation in the Main Transport Sub-Sectors Road and Road Transport 6. Iran has a well developed road network. Not including access and rural roads, the paved road network in 2002 was 66,710 km long (see Annex 1) and comprised the following: * Freeways: about 850 km (double the pre-revolution length); * Trunk roads: about 26,760 km; * Secondary roads: 39,100km; Of this network, close to 2,300 km (3.4%) are operated at capacity and a further 1,436 km (2.2%) are congested (Annex 2). In particular, above 11% of all trunk roads are operated at capacity or congested. This signals a serious emerging capacity problem as a significant share of total road traffic is likely to use these roads. 7. The entire road network including rural roads is overseen by the Ministry of Roads and Transportation (MRT), the organization of which comprises four road infrastructure departments respectively dealing with: (i) planning and construction; (ii) maintenance and provincial affairs; (iii) transport services regulation, and (iv) freeway construction and operation9. 8. The construction of freeways, trunk roads, secondary roads and rural roads has made great strides in the past ten years. Current lengths are respectively 78%, 37%, 134% and 21% higher than those quoted in the 1995 Bank report. At the end of 2002, close to 7,000 km of roads were under construction. As for rural roads, priorities have shifted: the construction program of 35,000 km corresponding to needs assessed in 1994 is less than half completed and the MRT, now in charge of rural roads, seems to have downscaled that program, the rationale of which was revisited. The road density in Iran is around 100 km per kM2, well above the MENA country average (40-70 km per kn2). The road construction drive in Iran is of unusual strength and the Government should review whether road capacity improvement rather than road network extension should in fact have the priority. When related to population rather than surface, the road density in Iran, however, is comparable to that of Tunisia and Morocco. Road maintenance is dramatically under-funded with available budgets representing less than 20% of estimated needs. 9. The 1995 Bank report estimated the road transport shares of freight and passenger transport at 85% and 94% respectively. Recent data for freight show that road transport grew at a faster pace than rail transport raising its market share to close to 92%. For passengers, traffic grew by 1.8% annually from 1999 to 2002 compared to a target of 5.2% but the data relate to public transportation and there has been a shift from public to 8 Roughly 100,000-km long, about half of which is paved. 9 A major reorganization and consolidation of the road infrastructure departments is underway. 4 private transport. With a swift annual increase of around 6% in car registration since 1995, it is likely that the road transport share of passenger transport has not been eroded and still stands at around 94% or higher. What is clear is that transport demand grew fast over the last 10 years putting pressure on road capacity and all the more as growth was distributed unevenly across networks with a lot of the traffic concentrated on some 25,000 km around Tehran and along the main transport corridors. Road counts reveal very large increases on these links. For instance, in 1993, the daily traffic in passenger car equivalent (PCE) stood at around 30,000 on the three most trafficked roads and 27 links carried traffic in a 5,000-16,000 PCE bracket. In 2002, 6 links carried over 50,000 PCE per day and 30 others carried over 30,000 PCE per day (Annex 5). For those links, traffic grew at an annual rate of well over 10%. The private passenger car fleet in 2001 was estimated at 3.4 million (Annex 6), or 52 cars for 1000 people, which is relatively low in fact compared to Turkey and Central and Eastern European countries. With the rapid growth in traffic, the number of accidents has skyrocketed, with the annual number of deaths now above 22,000, one of the worst records in the world (see paragraphs 68- 70). 10. There are close to 3,100 trucking companies in operations of which 91% are private. The 103 State-owned enterprises and 176 cooperative companies are the largest, however. Private truckers can freely enter the market but they need to comply with regulations imposing a fleet of minimal size varying among provinces. Access to the foreign exchange needed to purchase trucks and to commercial bank loans has been difficult and time consuming (up to one year). Truckers are independent or affiliated with companies that help them find freight and secure return loads. Domestic and international freight forwarders are all private except one. They have representation all over the country. Altogether, there are some 203,000 trucks in the Iranian fleet but only 10,000 are authorized to cross borders. If data are correct, the truck fleet is very old (21.3 years on average, which is older than in any comparable country) and that may explain restrictions reportedly put on cross border trips together with restrictions on visas and authorizations. 11. Inter city passenger bus transport is mostly private. Since 2000, bus owners have been given access to loans at favorable terms to purchase new vehicles and close to 4,000 buses were added to the fleet over 2000-2004. The Government is also encouraging the creation of large bus companies, but with limited result to date. One reason may be that intercity bus operations have low profitability, given regulated low fares, and do not generate the cash flow necessary for the purchase of new buses. Owners are grouped in cooperatives helping them on the commercial and financial sides. The fact that published schedules are not adhered to with buses leaving when the passenger load is deemed sufficient, is characteristic of an activity that requires better regulation. Urban Transport 12. The size and growth of the urban population is a major challenge for IRI's development. At about 66% of the country's total, IRI's urban population is well above the average for lower middle income countries (46%), higher than the average for MENA 5 countries (58%), and at about the same level as Turkey. Since half of the urban population is age 25 or less, and unemployment is relatively high, it is a great challenge for City Councils to serve mobility needs and maintain financially viable services. Overall, urban transport is well developed in IRI cities. All 76 cities of over 100,000 inhabitants have a public transportation system and taxis and minibuses cater for needs of smaller cities. The diagnostic in this report is based on the review of four major cities: Tehran, Mashhad, Esfahan and Shiraz. Including suburbs, these cities combine for a population of close to 19 million or about 45% of the urban population nationwide and epitomize the problems of urban transport in IRI. 13. Tehran attracted a strong immigration from poor rural areas in the eighties and its population exploded with the urbanized area expanding away from the town center in a rather unstructured way. At present, the city of Tehran itself covers around 520 km2 and its population density of about 14,000 inhabitants per km2 is high by world standards. Because of very low fuel prices, the use of private means of transport (motorcycles and especially cars - see para. 16) has grown rapidly. Public transportation systems have also had difficulties adapting to growing and changing needs, leading to an urban transport crisis that combines widespread traffic jams, severe air pollution, and limited mobility. The City Council tried to address the issue as early as in 1962 when studies for the metro were initiated and in 1968 when the first urban master plan was approved. Action intensified after the Revolution with launching of the Tehran Protection and Organization Plan, construction of six townships in the suburbs, and implementation of plans to improve spatial planning in a number of districts. As will be discussed later, however, more radical action is needed to address the current problems. 14. The second largest city in Iran, with close to 3 million inhabitants, Mashhad, is strategically located on routes to and from Central Asia and Chinalo. It is also a religious center attracting 6-7 million pilgrims each year. Esfahan and Shiraz, with about 2.6 and 1.2 million inhabitants respectively, are major historic and cultural centers in Central Iran. Both are also industrial cities, the former with the largest steel complex in the country, and the latter with major production of construction materials and electronics. Like Tehran, Esfahan also has a large student population (over 90,000). All three cities have relatively recent urban development plans. Annual per capita income is low with an average of Rials 16-17 thousand in 1999 in Mashdad and Shiraz, and only about half that amount in Esfahan. In Tehran, the average annual income per capita was Rials 31.4 thousand in 2003, or about US$4,000. 15. Demand for urban transport is at the level of comparable cities and countries. With numbers of daily motorized trips per capita between 1.3 and 1.6 in the four cities, it is even on the low side. Similarly, the breakdown of trip purposes is similar to that of many comparable cities, with about 60% of all trips for occupational and educational purposes. On average, urban households spend about 10% of their non-food expenditures on transport, which, again, is rather on the low side for middle income countries. This is probably a reflection of the extremely cheap public transport fares and fuel prices. 1o The old "silk road" crossed the city. 6 16. The main features of urban transport supply are highlighted in Annex 9. This shows that the use of private cars is quite high for a middle income country especially in Tehran (29% of all trips) and Esfahan ((31% of all trips). The use of motorbikes is also important (about 15% in Esfahan and 12% in Mashhad). In addition, a special feature of urban transport in IRI is the large use of collective taxis, about 30% of all motorized trips in Esfahan and Shiraz, and about 20% in Tehran and Mashhad. As a result, public buses and minibuses transport an unusually low share of all urban passengers (only about 24% in Esfahan and about 27% in Shiraz). This is at the root of the congestion and pollution problems, as will be discussed later. 17. Between 1996 and 2002, the motorization rate in Tehran (the number of private cars per 1,000 population) rose from 104 to 122, which is rather high for a middle income country. There are about 880,000 passenger cars in the city and, from car registration data, it seems that this number is increasing rapidly, which is likely to exacerbate the congestion problem. The only other city for which motorization rates are available is Esfahan where the private car fleet was stated at 168,000 in 2002 or about 65 per 1,000 population. In order to relieve congestion, the city of Tehran has established a restricted zone in the city center covering 31 km2, which cars and motorcycles can access only with a permission purchased at a price of about USD 400 for one year. This is an interesting, if blunt, first attempt at congestion pricing, which should be refined. Enforcement is reported to be an issue, however, with estimates of 130,000 cars entering illegally the zone every day. 18. The increasing motorized traffic and growing congestion has triggered a large road infrastructure development, especially impressive in Tehran. The main network in this city includes about 3,000 km of roads today at a replacement cost of about US$350 million". The main streets network length per million population in Mashhad, Esfahan and Shiraz are respectively 220 km, 120 km and close to 400 km. Esfahan is clearly lagging and trying to catch up, in particular with construction of a below ground third ring road, a formula meant to keep away the commercial activities that multiplied along the first two ring roads and whittled down their ihitial capacity, an indication of urban planning weaknesses. 19. Development of mass-transit systems has been another response to fight traffic congestion. Tehran now has three metro lines in operation for a total length of 80 km and construction of 10 km is underway. Only about 40% of the total length is in tunnel. The metro presently carries 550,000 passengers each day. Three more lines totaling 77 km are programmed in coming years. The target is to carry 3,1 million passenger a day. Investment costs are equivalent to US$30 million per km, again low by international standards (the Tehran mix of at grade and underground line sections would normally cost at least US$60-70 million per km). The other three cities are building light rail transit systems (LRT)12. In Mashhad, construction of the first line started in 1999 and the 18 km will be commissioned to traffic in 2004. Its infrastructure cost of less than US$4 million equivalent per km is also extremely low. Construction of the LRT network in Esfahan " Road construction costs are very low by international standards 12 Tabriz, Karaj and Ahvaz are the other main cities for which LRT plans are being or will be implemented. 7 started in 2001. This mostly underground 12.5 km-long first line will be completed by 2007. The master plan provides for construction of an additional 100 km of LRT lines, with the system expected to ultimately carry 15% of passengers. Finally, Shiraz also plans to build a LRT system comprised of two lines totaling close to 30 km of which 71% would be underground. The system is expected to be operational by the end of this decade. 20. Urban bus services are provided essentially by city wide State owned monopoly companies. Private sector involvement predominates, however, in suburban areas and for minibuses operations. Shiraz is the exception as the private sector owns and operates 70% of urban buses in a very atomistic ownership pattern3. The bus fleet is 7-8 years old on average except in Tehran where it is 12.4 years old, far too much for efficient operations. Selected operational performance indicators are shown in Annex 10. They highlight the following features of the bus systems: (a) the average urban population per bus of 2,000-2,400 is normal except in Esfahan where buses seem in short supply; (b) the about 500 passengers carried per bus and per day is less than half the international norm; this shows much inefficiency in the use of buses; (c) the density of the bus network is much higher in Esfahan than in Tehranl4; (d) staffing per bus is low except for the municipal bus company in Tehran; (e) bus transport accounts for 24-30% of motorized trips except in Mashdad where its share is 39%; this use of bus transport is much lower than in comparable cities. There are few dedicated bus lanes (only 61 km in Tehran), possibly one of the reasons for the inefficient use of buses, which could be remedied rapidly. There is also legislation that mandates the use of natural gas for urban buses in large cities. As a result, purchases of new diesel buses have stopped and the existing fleet is being converted to natural gas. However, it is doubtful that the conversion can be done fast enough and that there will be a sufficient number of gas filling stations. This plan therefore needs to be reconsidered in view of practical constraints, and its implementation targets delayed. International experience should also be reviewed. It shows that the results of converting old buses to natural gas rarely achieve expected emissions reductions, as old engines, even when retrofitted, have neither the technologies nor the condition needed for low emissions. 21. Taxis play an unusually important role in urban transport in IRI. There are 2.6 licensed taxis per 1,000 resident population in Tehran. Corresponding densities for Esfahan, Shiraz and Mashdad are 3.9, 3.3 and 2.3. There are also many illegal taxis: in Tehran, as many as 200,000 cars may be occasionally used as taxis. Licensed taxis are generally shared and operate at full capacity (5 persons) over 15 hours or more, each driven by the owner and a co-driver and carrying in total between 200 and 250 passengers per day. Taxis are all private but owners must be affiliated to taxi cooperatives. The tariff is approved by local governments and adjusted once a year. The intensive use of shared taxis mitigates the shortage of more productive forms of public transportation but it also worsens traffic congestion and their service is of sub-par quality (aged vehicles shared with other patrons). Renewal of the fleet is underway including a shift from conventional fuel to light petroleum gas (LPG). 1 Bus companies rarely own more than one bus! 14 Data is missing for Mashhad and Shiraz. 8 22. A main characteristic of urban public transport in IRI is the extraordinarily low passenger fares. In Tehran, the regular flat fare for an urban bus trip, irrespective of distance, is Rials 200, or about 2.5 US cents per trip, less than one tenth of what it is in many lower middle income countries. Private buses charge about Rials 400 per trip, or about 5 US cents, and the metro Rials 650 per trip, or about 8 US cents. A 3 km trip in a collective taxi costs about Rials 900 or about 10 US cents. Such low prices are possible only because of massive subsidization of both capital and operating costs of the public transport companies. This has the effect of promoting public transport and correcting somehow the major distortions created by the very low prices of gasoline and diesel for private cars (see paragraph 42). It is a system that has a high cost in terms of efficiency, however, as will be discussed later. Railways 23. The railway network in operation consists of about 7,265 km of single-track, standard gauge, main lines (end 2002). Nearly 2,000 km were added over the last ten years (+37%) reflecting the importance given to railways by the Government. Some 3,300 km of new lines are reported under construction, two-third of which corresponds to Esfahan-Shiraz, Bafq-Mashhad, Quazvin-Anzali, and Kerman-Zahedan. The ongoing National Transport Master Plan study is expected to review the railway's economic role15. The lengths of track maintained and renewed annually in 2000-02 were close to 300 km and 140 km respectively, which may be short of requirements for elimination of the maintenance backlog reported by the Bank in 1995. Main railway statistics are in Annexes 13 and 14. 24. All locomotives are diesel powered and 193 of them are in service for main line use. The locomotive availability rate only increased from 46% in 1993 to 47% in 2001 (see productivity statistics in Annex 15). However, the productivity of locomotives greatly improved from 46.3 to 117.4 million traffic-units (+150%), which is very high by international standards and is explained in part by the nature of hauled freight16, long travel distance and an intensive use. In order to relieve pressures on available traction capacity, the Iranian railways recently ordered 100 new locomotives17, twenty of which have already been delivered. Remaining ones will be assembled in Iran. The number of freight car in service is about 16,400 (up by 22% from 1993). The passenger car fleet in service of some 872 units1 is smaller by 58 units than in 1994. The train commercial speed is rather slow at 60 km/h and 40 km/h for passenger and freight traffic respectively. On the whole, the Iranian railway's productivity appears very good by international standards (see Annex 16). 1s And strengthen its role for promoting Iran as a land-bridge for international trade (a strategy that may not have benefits worth the high investment costs it entails) 16 Of the 26.4 million tons carried in 2002, over 50% correspond to oil, minerals, grain and steel products (see Annex 14). The average freight transport distance rose from 460 km in 1993 to 553 km in 2001 (+20%). Passenger traffic had a slower growth than freight traffic (3.1% versus 4.5% in unit-ki) and travel distances were reduced by 13% to 611 km over that period. 17 From a French manufacturer. 1 The passenger fleet includes some 1,200 coaches hence an availability rate of around 73%, which is low. 9 25. An in-depth reorganization was carried out in the last ten years and steps were taken to increase railway management autonomy and to structure responsibilities along lines of business (heavy freight, general cargo, passengers). RAI, a joint-stock company, operates as a semi-autonomous entity under the MRT and its chairman has rank of Deputy Minister. RAI controls five subsidiaries: (a) RAJA was established in 1996 with responsibilities for passenger operations; (b) Rail Cargo recently took over freight operations; (c) since 1974, Wagon Pars manufactures and assembles coaches and freight cars; (d) Ballast Manufacturing was set up in 1993 for ballast production; and (e) Sleeper Mfg Co., also set up in 1993, produces sleepers and lays down rails. RAI controls the railway staff saving and retirement funds. This reorganization was a positive step and can raise performance by creating more accountability for results. However, the railway business in Iran remains mainly monopolistic. The recent decision to allow four other freight companies19 in the market is likely to instill some beneficial competition. 26. RAI is not financially sustainable. The average revenue for RAI freight traffic in 2002 was 87.2 Rials per ton-km, i.e., at the current exchange rate, about 1.1 US cents. This is significantly lower than the average revenue of North American railways (between 1.5 and 2.0 US cents as an order of magnitude), considered as the world's most- efficiently run railways. Despite a remarkably efficient use of assets by RAI, such a low level of tariffs is not compatible with financial equilibrium. Given traffic and train movements patterns, however, freight traffic in Iran should normally be quite profitable. As far as passenger traffic is concerned, the average fare of about 0.4 US cent per passenger-km in 2002 only covered a fraction of working expenses. It is less than half of the fare of the most highly subsidized railways in Central and Eastern Europe. As a result, passenger traffic accounted for 35% of traffic units but only for 15% of the railway revenue. Freight is clearly subsidizing passengers. The Government operating subsidies to RAJA amounted to US$12.5 million in 2001 or close to one-third of passenger revenues. Also, the railway entirely relies on Government subsidies to finance investments including in track renewal and purchase of rolling stock. RAI took drastic cost cutting measures including staff downsizing from close to 34,000 in 1994 to 26,673 in 2001 (-22%) and staff productivity is better than in almost all West European railways. 27. A separate note in Annex 17 discusses the Iranian railway's main issues and challenges for the future. Ports and Maritime Transport 28. Non-oil ports are managed by the Port & Shipping Organization (PSO) that operates as a semi-autonomous entity under MRT where its managing director is Deputy Minister. Four Vice-Presidencies handle: (a) planning, administration and finance; (b) technical and engineering matters; (c) ports affairs and special economic zones; and (d) maritime affairs. PSO decides on port tariff (reportedly high) and provides services such as pilotage, towage and dredging. Four main ports are located on the Persian Gulf, 19 Specialized industries are authorized to own and operate their wagons. Algeria has experimented with this model. 10 20 one on the Oman sea, and three on the Caspian sea . Total traffic in 2002 reached 73.5 million ton (MT) (see Annexes 16 and 17) of which the Persian Gulf ports handled 93% with two of them (Bandar Imam Khomeini and Bandar Abbas) totaling 65 MT. The container traffic of 6.6 MT in 2002 was 37% higher than in 2001 (Annex 18) and was largely concentrated in the Shahid Rajaee terminal (Bandar Abbas). There were 731,000 TEUs in that traffic in 2002, increasing to 965,000 TEUs in 2003. Containerization has progressed rapidly from about 5% to 65% of general cargo between 1997 and 2002, and the annual growth rate in TEU terms has been over 30% in the past decade. Containerization may now be reaching saturation and growth of container traffic may be lower in the future. This will need careful study especially in view of emerging capacity constraints (see below). Also noteworthy is the great imbalance between import and export volumes (about 65% of export containers are empty), which is the consequence of IRI's international trade structure. The port sector is a sector in complete transformation and the Government is rightly placing a high priority on increasing the capacity and efficiency of Iranian ports. 29. The non-oil Iranian port system is comprised of 100 berths today compared to 81 in 1995. Overall, the port occupancy rate in 2002 was 73%, which would normally entail significant ship waiting time, all the more constraining as ships are berthed on a first come-first served basis. The situation differs among ports and the data collected seem to indicate a tighter capacity constraint in Bandar Abbas (0.7 day of waiting or 20% of berthing time in 2001) than in the other ports including Bandar Imam Khomeini (0.5 day of waiting there or 9% of berthing time) (see Annex 19). The berth occupancy factor has reached 0.65 in Bandar Abbas, the signal of a serious potential capacity problem. 30. A recent analysis of productivity of the Bandar Abbas container terminal has shown the following: (i) crane productivity is good by international standards (about 80,000 moves per crane per year); (ii) yet, taking into account the number of cranes and the need to shift cranes' positions, the berth-hour productivity per ship is not high; (iii) ship size and call size per ship have increased enormously in the recent past (with the number of calls over 1350 TEUs increasing from only 4 in 1998 to 471 in 2003), which has helped much increase productivity but may be expected to reach limits in the near future. This analysis shows that there is still some scope for increasing capacity in Bandar Abbas, IRI's prominent container terminal, but that the maximum capacity may be reached very soon. The transformation of one bulk freight terminal into an extension of the container terminal will help. However, the technical choice that has been made for container handling equipment (use of mobile cranes rather than gantry cranes21) is questionable, and, in any case, given its limited size, this extension can only provide temporary relief. It seems therefore essential that the construction of a new container terminal make rapid progress. The first stage is under implementation. The second stage needs to be finalized and implemented soon. 31. A separate note in Annex 22 provides additional information on main port sector issues, including especially on the key subject of container handling. 20 There are 11 active ports in total. 21 With a lifting capacity of 150 Tons 11 32. Little information was available on shipping. The IRI Shipping Lines (IRISL) group is comprised of a number of entities and subsidiaries including the National Iran Tanker Company and Valfajer-8, which operate on the passenger and freight 22 businesses . IRISL operates 120 ships totaling 3.2 million DWT among which 20 containerships and multipurpose ships. Twelve container ships (half of which equipped with cranes) have been ordered by IRISL, hence the Iranian fleet is both modernizing and expanding. Some 7,000 staff works for IRISL. 33. As part of a policy to strengthen business ties with foreign countries, IRISL has entered into joint ventures with many countries, including India, Italy, Egypt, the United Arab Emirates. In most cases, it owns 51% of the equity. 34. Free trade and industrial zones (granted the statute of Special Economic Zone) have been developed at several coastal and inland locations to attract foreign investments and facilitate transit. These free zones also serve as breeding ground for new techniques and management approaches more in line with the international practice. For instance, the Khazar (Amir Abad) port complex established in 1997 and managed by PSO offers 60 hectares of land with development reserves of up to 2,000 hectares. With a rail connection through Tehran to Bandar Abbas in the South, it is at one end of the North- South international transport corridor that also uses Anzali on the western part of the Caspian Sea. Other major free zones are found in Shahid Rajaee (near Bandar Abbas), Kish Island, Qeshm Island and Chabahar on the Oman Sea. Air transport 35. 61 airports are in operation of which seven can handle international traffic, which is plenty. Corresponding data in the 1995 Bank report are 47 and 5, respectively, attesting to a significant expansion since then. In February 2004, Tehran inaugurated its second international airport, the Imam Khomeini airport. About 15% of the overall 2001 passenger traffic of about 20 million was international (Annex 21). The annual growth rate for international and domestic traffic over 1993-2001 was 7.3% and 12.5%, respectively. One explanation for the high growth of domestic traffic could be that low tariffs boosted demand. Generally, airports just cover recurrent expenses, and development costs are subsidized by the Government budget. Many airports have quite low traffic (200,000 passengers) and could hardly be meeting expenses. Air cargo rose from 61,000 tons in 1993 to about 114,000 tons in 2001. The international traffic (around 50,000 tons) is concentrated on Tehran. In comparison with other MENA countries, domestic freight traffic in IRI is quite developed probably because of the country's exceptional size. 36. The Civil Aviation Organization (CAO) under the MRT is in charge of policy definition and implementation for air transport. It manages and operates air control and airports. Traditional and constraining bilateral agreements signed with seventy countries constitute the legal framework for international transport. Iran Air and its subsidiary Iran 22 Valfajr-8 SC has 7 speed passenger boats and 3 freight carriers. 12 Air Tour are the two State-owned companies left with a combined fleet of 42 aircrafts. Asseman Airlines, which left the public sector late in 2002, operate 16 aircrafts. Twelve other private companies operate 52 aircrafts. Private airlines have entered both domestic and international markets with respective market shares of 18% and 28%. Iran Air and its subsidiary are said to have a monopoly on pilgrimage to Mecca. Plane handling has long been an Iran Air monopoly but liberalization through joint ventures with foreigners is in the plan. 37. Financial assistance used to be given to public airlines to help them buy aircrafts. For instance, subsidies to Iran Air rose from Rials 200 billion in 1995 to Rials 500 billion in 2002 (equivalent to US$60 million) when they were equivalent to 15% of the company's revenue (Annex 20). Asseman Airlines is not reporting subsidies over the same period during which it earned a small profit. Private companies are not subsidized and charge a higher tariff, meaning that they cannot compete on an equal footing with Iran Air. Lack of spare parts had in the past grounded a substantial portion of the fleet. This constraint remains but with less acuity due to the new leasing policy in effect. Given. the limited available information, it is not possible to further discuss the profitability and efficiency of air transport in Iran. 13 C. Main Transport Sector Issues 38. The transport sector has been a major area of intervention for the Iranian Government in the past twenty years. In recognition of the importance of transport, the Government has provided very large funding to the sector. Yet, despite noticeable progress on many fronts (especially in terms of infrastructure development), some key issues remain to be addressed, which are of major importance for the economy and the well being of the population. These issues, namely the inefficiencies due to price distortions, the need for institutional strengthening, the need to adapt the legal and regulatory framework, the slow pace and sub-optimal forms of privatization, the very poor road safety, the urban road congestion and air pollution, and the impediments to trade and transport facilitation, are briefly discussed below. Inefficiencies Due to Price Distortions 39. There are many instances in the transport sector where prices do not reflect economic costs. These distortions affect the efficiency with which resources are used in the sector and in the economy at large. The prices of urban public transport, as noted earlier, are striking examples. But there are many others. The average fare per km for rail passengers is less than 0.4 US cent, possibly one tenth of what the cost would normally be in a middle income country. The price of bus transport between Tehran and Esfahan (a distance of about 400 km) is about US$ 3, only one quarter of what it would normally cost. Road construction is also a case in point. A four-lane expressway reportedly costs between US$ 300-500 thousand per km depending on terrain. This is between one tenth and one fifth of what it would cost in most middle income countries (Central and Eastern Europe for example). Paved feeder road construction costs a mere US$60 thousand per km, possible one quarter of what it would normally costs. Railway track construction costs, at around US$150,000/km only for a single track, are also a fraction of what one would expect. Cost of the first LRT line in Mashhad was less than US$4 million per km. 40. The explanation for such low prices can be found in the high level of subsidization of both the final products (as is the case for public passenger transport) and the inputs, including capital costs. Bus and metro fares in Tehran cover only 30% of the operating costs and none of the capital costs. Railway passenger fares cover probably about 40% of the operating cost, the balance being cross-subsidized by freight revenues. Capital costs are paid entirely by the Central Government or the municipalities in the case of public transport, and the Central Government for rail transport, and there does not appear to be any attempt at recovery of these capital costs. Some major inputs to operations as well as investments are also priced below economic costs. The case of fuel pricing is the most obvious (see paragraph 45). There must be many others, however. Cement is one example; its price is less than US$30 a ton23 23 There are special reasons for the very low cost of construction in IRI: (i) low price of petroleum products that usually are a substantial input into construction activities and production of construction materials, (ii) low cost of capital acquired under the old exchange rate, and (iii) low cost of labor. 14 41. In such circumstances, relative prices cannot properly guide investment decisions and resources may be directed to uneconomic uses without decision makers realizing it. Investments, especially in infrastructure, are likely encouraged by these distortions while better use of existing assets would be far more economical. Traffic management,' for example, might produce better returns than road investments that low construction costs promote. Improvements in urban bus transport may also be socially better than investments in urban road capacity and mass transit systems, or, at least, a different balance of expenditures may bring better results. In general, the contrast between an infrastructure of relatively good quality and an old and obsolete land transport fleet seem to indicate a bias in the way investment decisions are taken. The fact that, for some operating enterprises, capital has no cost (in urban public transport and rail transport), also encourages them to seek investment beyond actual needs and discourages maintenance. 42. In addition, obviously, low prices for customers prop up the demand for transport and promote a more spread out pattern for the location of economic activities. They also affect the competition between different modes of transport. 43. The unification of the exchange rate system in early 2002 was a major step in the right direction as the previous dual price system subsidized imports and production of goods and services using them, while rationing the access to foreign exchange in ways that were not conducive to efficiency. The Rial is now worth about 20% of its official value in 2001. The Government intends to continue to reflect actual costs in prices. A decision was recently made for example to align air transport fares on actual costs within three years to the effect that the tariff would nearly double, showing the extent of current 24 imbalances. However, since many transport prices are still administered , some transport service suppliers have been faced with rapidly increasing costs without being able to match them with high enough tariffs. Without precise information on production costs and efficiency, price adjustments are not easy. In the inflationary context that Iran has known over the last ten years, the once-a-year tariff adjustment by the authorities, which is common in the transport sector, is another cause of pricing lagging behind costS25. For those enterprises that do not receive subsidies, or receive subsidies not sufficient to compensate for the difference between costs and regulated prices, the only alternative left is to cut on service standards. This is largely verified in Iran. 44. Because transport prices are too low, infrastructure investments bear heavily on the Government budget. Even toll roads are not generating the cash needed to pay back investors and budget funds must supplement their proceeds. In 2002, around US$50 million and US$900 million were respectively allocated to the MRT current and capital budget. Municipalities and Ministry of Interior share in various proportions the cost of 24 Trucking is the only activity where pricing freedom is granted 25 Railway freight rates increased by 23% on average between 1994 and 2003 when inflation ran at an annual rate of 18%. Here at least, the tariff rose by about 50% in real terms over that period. 15 26 development of mass transit system . Municipality are often short of cash and the Government ends up paying more than planned for projects initiated at local level. The ongoing construction of 10 km of metro line in Tehran is estimated at US$300 million and US$610 million were budgeted in July 2003 to purchase rolling stock and equipment. Subsidization of bus operations in the four cities under study was equivalent to US$55 million in 2001, nearly 50% above fare-box revenues. The government also finances 60% of bus purchases and municipalities the remaining 40%. When including urban road infrastructure, the explicit subsidization of urban transport by the central and local governments appears to be at least equivalent to US$0.5 billion per year. 45. A special and major obstacle to transport cost-efficiency is fuel pricing. The pump-price of one liter of ordinary gasoline was 8 US cent equivalent in 2003. The prices for premium gasoline and diesel oil were 11 and 2 US cent equivalent. These prices compare to border prices of around 35 US centS27. Fuel prices for gasoline were increased by about 70% between 2000 and 2003 and about 45% for diesel against a 30% inflation demonstrating the Government's intention to gradually eliminate implicit fuel subsidies before 2010. However, the pace of correction is still very slow. Maintaining prices that low means foregoing large tax revenues that could be better used on other priority public sectors. The following very rough estimate shows the magnitude of this problem. The road vehicle fleet of an estimated 5 million units may produce at least 100 billion vehicle km each year. Assuming a weighed average consumption of 0.20 liter per km and an average fuel price of USD 0.07/1, it follows that fuel expenses could be as high as US$1.4 billion. Should border pricing apply, fuel expenses per year would increase to US$7 billion for road vehicles28. The implicit fuel subsidy in the transport sector is therefore about US$5.6 billion per year and about 5% of GDP! In addition, road transport is the main beneficiary of low fuel pricing. Not only is the Government foregoing fiscal resources but inter-modal competition is also severely distorted and use of road transport promoted beyond economic justification. Need for Institutional Strengthening 46. The review prepared by the Bank and its consultants indicates that there is a large potential for improving the capability of institutions in the Iranian transport sector. This especially concerns the institutions' general organization, their information systems and processes for performance monitoring, planning, and contracting out. 47. The organization of the road sector is an important case. Until very recently, the current organization was fragmented with separate entities responsible for construction, maintenance, freeways, and planning. At the same time there was strong centralization with most of the road network administered from Tehran. A drastic restructuring is now changing this organization. All responsibilities for the main road network will be concentrated within one entity, TTO, and administration of the rest of the network will be 26 In Tehran, the municipality pays in full for the infrastructure and 50% of the equipment. In other cities, the municipality pays 20% and the government 80% of the LRT development cost. 27 Depending obviously on the highly volatile world price of petroleum products 28 Under the simple assumption that road transport demand is highly inelastic 16 decentralized to the regions. Most of the road maintenance works, presently carried out by force account, will be contracted out to private companies in the future. The plan is to downsize the staff involved in maintenance from about 16,000 to 5,000. This restructuring is a very positive step. It should allow a more integrated and effective management of the road network. Most detailed implementation measures remain to be defined, however. Doing so and taking these measures will be a major challenge. 48. Institutional changes, although of a less radical nature, are also necessary at the railway. Presently, the railway is only very partially organized along business lines although experience throughout the world has shown this to be an essential step for increasing customer responsiveness and efficiency in the use of assets. Railway management is also not fully autonomous from the State although the railway is a commercial undertaking that should best be judged on its results. Railway management for example has to get Government approval for decisions related to its internal organization, staffing levels, and remuneration systems. 49. Lack of data and objective information and lack of continuous monitoring of transport sector performance are other key institutional issues. There is a lack of data, for example, on the efficiency and quality of service of all transport modes. Detailed data on unit costs for freight and passenger services are not produced systematically. There is little information on speed of travel and waiting times for urban passenger transport. There are few systematic comparisons between urban transport system performance in different cities, or between road and rail transport, and no comparison with international benchmarks. A very serious deficiency is that there is no modern road data base with a full data set on road characteristics, pavement condition, and traffic, which would help monitor the road network and program road expenditures on the basis of objective criteria. 50. The planning, programming, and budgeting systems of transport agencies and enterprises also need to be strengthened. Planning is generally not based on detailed economic analysis and resource constraints. There also does not seem to be any strong coordination between types of expenditure 29, a key deficiency in the road sector, and between transport modes. As a result, the Government and its agencies are not able to maximize benefits for a given level of expenditures. In particular, the very large expansion of the railway network that is underway and the plans for road development, which are both exceptional among middle income countries, do not seem justified by any in-depth economic analysis. It is likely that significant parts of these plans are premature. 51. Given that, in the past, the focus has been on the provision of transport services by public entities, the Government's ability to contract out services to private suppliers has not been developed. There is little knowledge of what competitive efficient procurement entails and of the complex processes through which contracts should be managed for achieving best results. 29 Maintenance versus construction expenditures, in particular 17 52. Iranian transport experts are conscious of these problems. They have emphasized that the country has been isolated from the rest of the world for many years and has had limited access to information from countries most advanced in the transport sector. Opportunities have been rare to learn from the lessons of experience in those countries (for example on effective organization structures, modern regulatory processes, and involvement of private investors and operators in the transport sector). This isolation has severely limited the potential of Iranian institutions to develop. Slow Pace and Sub-Optimal Forms of Privatization 53. Privatization has been on the Government agenda starting with the First Five Year Plans and is a key theme of the ongoing Third Five Year Plan. The pace is slow, however, and results have often been below expectations. Current issues are reviewed hereafter in major privatization areas. 54. Toll roads. Private construction and operation of motorways under build, operate, transfer (BOT) concessions was the first attempt at attracting major private investments in the transport sector. Some 400 km of motorways have been built since 1995 under BOT arrangement, which is a significant achievement, but smooth continuation of this program (800 km are under construction) is in question because of low financial returns on private investments. For that reason, the Government's subsidy to construction has risen from 20% in early development to 50-60% at present. Typically, in IRI, private motorway concession companies are joint-ventures between the Government and the private sector. The "private" partner is generally a commercial bank30 (although the banking sector is in dire needs of cutting ties with the Government). Concession length varies (15-30 years). Motorway companies may be granted an extension when in difficulty, which is the prevalent case. 55. There are major issues, however, with the way motorway concessions are conceived and implemented in IRI, in particular the following: * There does not seem to be any arm's length relationship between the motorway companies and the Government. First, as banks do not have the expertise to operate roads, operation is the responsibility of the public sector partner that does not have the same incentive for efficiency as a truly private undertaking. Second, in most cases, the commercial risks are not borne by the motorway company which creates a high contingent liability for the Government. * Competition was generally not used for selecting the private partner. Therefore, prices may not be optimum and the State is not in a position to objectively negotiate the best possible contract. * Toll levels are fixed by contract and generally fall short of financial needs. Indeed, it is reported that they rarely cover maintenance costs and that tolls were 30 For instance, the Qazvin-Zanjan Highway National Corporation operates 186 km of motorways. The Bank Melli Iran shares its ownership with the motorway branch of the MRT. 31 The Saveh-Salafchegan motorway (60 km) was quoted as the exception. 18 discontinued on the Tehran-Karaj road because they earned too little while collecting them delayed traffic too much. * It is also unclear whether there is a well defined regulatory framework (such as a concession law, among other things) for concessioning motorways and whether the concession contract takes account of the vast experience gained in the past few decades by other countries in the area of motorway concessions. On the whole, it therefore appears that IRI is not in a position to gain most of the benefits that could theoretically be brought by private investment in the motorways sector. 56. Ports. Since 1996, most port operations have been contracted out to a total of ten private companies, the largest one being Tidewater that is owned 51% by private persons and 49% by PSO. The Government's policy is to greatly increase the share of private companies in port operations. This policy has been met with success since in 2002; about US$ 56.5 million have been invested in Iranian ports by private companies. 57. However, an appropriate institutional, regulatory, and financial framework does not seem to be in place to make large private sector growth in ports possible: * Private operators feel that the financial conditions offered by PSO are not attractive (lease fees for port facilities and equipment to be paid to PSO are deemed too high and a large share of cargo handling charges - between 40% and 80% - has to be passed on to PSO); * There are constraining and probably unrealistic operational requirements; * Some of the basic conditions which international experience has shown necessary for the private sector to be willing to invest and perform efficiently are not met; Tidewater currently operates the exceedingly important container terminal in Bandar Abbas under a six months renewable contract, an exceptionally short period that does not allow any sound investment decisions to be made; Tidewater is also in a very unusual position of conflict of interest since a high share of its private capital is owned by PSO employees. 58. PSO has also attracted local and foreign capital in developing logistic centers (free zones) and other port services. Local forwarders that are described as relatively efficient all across Iran32 are the main ones who have entered that business so far. 59. Railways. Privatization in any railway is a daunting task. Taking on this challenge has not really started in IRI. In the past years, RAI unbundled several main activities to subsidiaries (especially RAJA and Rail Cargo) which, in essence, are not private commercial companies. Much of their capital came from the railway pension fund controlled by RAI. The railway sector remains therefore firmly anchored in the public sector. The most recent initiative to let industrial users own and operate their own specialized rolling stock is a positive step. 32 There are about 7,000 forwarders registered at TTO. 19 60. Bus and metro transport. Interurban passenger transport is entirely private but fares are regulated and very low (0.75 US cent per km) making for reduced profitability, hampering investment, and delaying the Government objective of fleet renewal in this area33. Loans at favorable terms are available to bus ownerS34, however. It appears that various systems are tested to attract the private sector all of which are costly to the budget and resulting in some form of subsidization. As there is no good justification for provision of subsidies to interurban bus transport, it would be far better to deregulate prices and let the system develop by itself under the spur of competition, as has been done in almost any country in the world. In urban transport, the limited private operations that exist are barely profitable. In Shiraz, private bus transport is at a larger scale. The private bus fleet has developed through subsidization of 70% of the bus purchase price, a system that is not likely to be replicable. 61. Air transport. This is the sector where privatization has gone the farthest. There are already thirteen private air transport companies. The Third Development Plan has authorized the Government to sell 40% of Iran Air shares to the private sector. Eventually, all shares will be sold. The kerosene subsidy is being phased out. The use of concession arrangements for green field airports is being promoted. In addition, up to 35 49% of airports' asset value is said to be under divestiture Severe Urban Road Congestion and Air Pollution 62. There is a high level of congestion in IRI's major cities. As mentioned earlier, this is the result of fast increasing motorization and high use of private vehicles. In Tehran, a crisis situation has developed. As shown in Annex 11, the number of vehicle- km traveled has increased by about 15% between 1996 and 2002 and the share of this traffic under congestion has increased from about 21% to 27%. This congestion, the effects of which are shared by private cars and collective vehicles such as buses and taxis as well as pedestrians who move slowly and unsafely, imposes a heavy cost on Tehran's population. Poor workers living in the southern outskirts of Tehran are said to spend 5 to 6 hours daily just commuting to and from work. Congestion not only impairs people's access to public services and social networks, but also makes business interface and production processes more difficult and costly. It seriously constrains economic growth in IRI's main urban areas even though those account for the bulk of Iranian GDP. 63. There are many interrelated factors that explain the high degree of urban congestion in IRI. These are described in paragraphs 16 to 21 above. The following three factors are the most important. First, public transport, especially bus transport, has often been neglected and is slow and unreliable. Second, the very low price of gas and diesel de facto subsidizes car users who pay neither for the cost of infrastructure nor for the externalities that they create. Third, there are still serious shortcomings in traffic management (including poor enforcement of traffic rules and inefficient use of street 25-year old buses are still in operation. The average bus age is still around 15 years. 34 The owner pays 20% and the government provides 80% of the capital repayable over 7 years at low interest rates. 35 How this is being done is unclear, however. 20 space) despite the efforts and resources invested in modernizing the tools and methods for traffic management. 64. All major cities also have serious air quality problems but none more than Tehran which has by far the highest traffic and where the topography is an aggravating factor. In 1995-97, under Bank administration, the Global Environmental Fund (GEF) financed a series of studies to assess issues and develop a comprehensive strategy for cleaner air in Tehran 36. An action plan was proposed for implementation over 1997-2015 at a cost estimated at US$1.25 billion. The key items in that plan were the following: (i) setting standards for gas emission for new vehicles at the intemational level, (ii) retrofitting older models, (iii) producing cleaner fuels including lead free gasoline, (iv) equipping buses with particulate traps, (v) raising fuel and parking prices, (vi) developing public transport, (vii) institutionalizing coordination between land use and transportation planning with a view to slow down traffic growth, and (viii) strengthening vehicle inspection. The study pointed out that air quality was especially low with regards to particulates, nitrogen oxides and carbon monoxide. Unfortunately, the plan as a whole could not be implemented, although parts of it were taken over by several initiatives pursued by the municipality of Tehran. 65. According to the Air Quality Control Company (AQCC), an agency of the Tehran municipality, the situation has worsened notably since 1997. As shown in Annex 12, the production of the three most severe pollutants has increased between 13 and 21% from 1994 to 2000. World Health Organization guidelines are so frequently exceeded that AQCC estimated that the air in Tehran was either "unsafe" or "very unsafe" 83% of the days of 2000, making Tehran the third most polluted metropolis of the world after Bombay and Shanghai. The worse problem is that of particulates (PM10) which are reported to be the cause of 62 deaths for 100,000 population (52 of which due to cancer). 66. Transport is the main cause of the poor urban air quality in IRI. 80% of the particulates are for example produced by road traffic. As shown in Annex 12, private cars are the main source of pollution although in some cases heavy trucks also contribute a large share. In fact, heavy duty vehicles produced 42% of particulates in 2000 while they accounted for only 8% of all traffic measured in vehicle-km. Compounding the problem are: the low price of fuel that does not encourage efficient fuel use; the obsolete characteristics of a good part of the vehicle fleet7, therefore their high fuel consumption; and road congestion that is said to increase fuel consumption by about 25%. 67. The Government and the Tehran municipality have taken measures to start tackling these issues, especially through mandating the use of natural gas for new buses and converting old buses as well as taxis to natural gas, and establishing inspection centers for regular control and tuning of cars. However, as said earlier, the bus conversion program is difficult to implement and may end up having a low benefit/cost " SWECO. MTC. SMHI. Tehran Transport Emissions Reduction Project. Main report and annexes (December 1997). 3 About 50% of the vehicle fleet in Tehran is more than 15 years old. 21 ratio. Inspection of cars is also reported to have limited success, as enforcement is insufficient. Very Poor Road Safety 68. Road safety is a particularly acute issue in IRI. Indeed, IRI is one of the world's worst performers for road safety. With close to 22,000 accident related deaths in 2002 (Annex 7), or about 45 deaths per 10,000 vehicles, IRI is more than twenty times above the average for industrialized countries. It is also way above most countries in the MENA region, for example Egypt (about 20 deaths per 10,000 vehicles in 1999) and Saudi Arabia (about 15). The situation is deteriorating. The annual increase in road deaths and injuries has exceeded 15% over the last decade. The high vehicle fleet growth rate is also projected to continue in the longer-term and the traffic mix is becoming more dangerous with the rapid growth in motorcycles. Over half of fatal accidents happen in cities: Tehran, Mashhad, Esfahan, and Shiraz had a total of 8,200 fatalities in 2001 or 41 % of the national total that year. Pedestrians make an unusually high proportion of the injured. Through physical damage, health costs, permanent injuries, and loss of production, road accidents have a high economic cost. In the case of IRI, a recent study indicated that it may be as high as 3% of GDP. Road accidents also have dire social implications as many of the dead or injured pedestrians and motorcyclists are the income earners of vulnerable families that are thrown into poverty. Road safety is therefore a development problem on top of a human drama. 69. A systematic analysis of the road safety problem in IRI and of its basic reasons has not yet been carried out. However, it is likely that the crisis is due to a number of factors that reinforce each other, including especially drivers' attitude and behavior, insufficient enforcement of traffic and transport regulations, physical inadequacies in the urban and inter-urban road networks, shortcomings in road safety information and education, inadequate driver training and testing, weaknesses in the emergency services, and a fragmented institutional set up that does not allow the integrated management of road safety which past international experience has shown essential for achieving results. 70. The Government is fully aware of the problem and has started to take action. A national road safety council was created in 2003 to establish national goals and coordinate the actions of all agencies involved in road safety. Information campaigns have been carried out using the television and other media. The traffic police has improved its equipment and stepped its enforcement activities. Several hundreds dangerous spots in the road network have been improved. These actions now need to be expended, better coordinated, and well monitored, as proposed in paragraph 80 below. Impediments in Logistics and Transport Facilitation 71. IRI, because of its size and oil revenues is a significant trading nation. It imported US$ 22.3 billion of goods in 2003. Non-oil exports are only a fraction of this amount but they hold the key to the future growth of the economy. In the past two years, reforms of the foreign exchange regime and trade policies have radically improved the 22 situation for trade to and from IRI. Continued progress will depend much on the performance of transport operators and other organizations involved in the movement of international goods. These are all the more important since a key geographic feature of IRI is the inland location of most of its population far from the sea and from most international transport routes. Few countries have their capital and most important production center as far inland as IRI does38 72. IRI is also well positioned to act as a land bridge for trade between the East and the West, as well as the North (especially Russia) and the South (the Indian sub- continent). This international function has indeed thrived in the past with use of the famous "Silk road". 73. Significant measures have been taken to promote international transport. There have been strong efforts at modernizing Customs with implementation of the ASYCJDA ++ system, improvement in management techniques and equipment, and attention to service quality. Clearance of most goods is given in less than two days according to importers. Effective procedures have been established, including a custom guarantee system in the case of traffic not covered by the TIR convention. IRI has also signed a number of international conventions designed to facilitate trade and transport, as well as bilateral international transportation agreements with 33 countries in Central Asia, Middle East and Asia. In September 2000, a treaty was signed with India and Russia for development of the North-South Transit Corridor expected to reduce shipping costs by 20% and delivery time by 30% between Moscow and Bombay. The targeted traffic is 5 million tons per year. Large discounts are granted on port and railway charges for transit traffic (60-65% for the latter). The Iran Transit 2002 Forum39 showcased the potential advantages of transiting through Iran in terms of time and cost savings (expected to be of the order of 30-40%) and emphasized prospects of diverting large amounts of trade between the East and the West, which, it was hoped, would give much stimulation to the Iranian economy. The demand has not met expectations so far, however. Yet, according to TTO, the total transit traffic in 2002 was 3.5 million tons, already a sizable amount. 74. Despite the many measures adopted by the Government, numerous problems, often at the operational level, continue to make the transport chain slow and insufficiently reliable. Among the most important reported problems are the following: * The existing banking system is not able to handle transactions and international payments with the required speed. * There are many intangibles, including lack of information, making it difficult for multi-modal transport operators to fully control the speed of freight movements for goods transiting through Iran. * There is not yet any strong interest from Iranian shippers in the efficient management of supply chains; large inventorieS40 are still accepted as a fact of life. 3 Tehran is more than 1000 km from ports on the Persian Gulf 39 The international attendance at this Forum was impressive attesting to a strong potential interest. 40 Reported to be four to six months in the automobile industry 23 * Good coordination is often lacking among the various actors in the supply chains. * Few integrated logistics services are available for the multimodal transport of Iranian goods. * Procedures and controls are reported in general as heavy and cumbersome. * There are too few flatcars for railway transport of containers and operational problems in the railways can extend travel time to two weeks or more when a 3-day transit time from Bandar Abbas to Tehran or to the Turkmen border at Saraks is advertised, a compelling handicap in a business where reliable and just- in-time delivery is the ultimate virtue. * Railway gauge differences impose time consuming bogey-changing or cargo transfer operations with the former Soviet countries. * There may be insufficient capacity in the road and railway connections to some of the main ports. * Visa procedures are usually very long. Iranian truckers may need one month to get a visa to go to Russia. * TIR guarantees offer insufficient coverage and additional insurances must be contracted at relatively high cost. * Finally, foreign truckers are asked to pay a toll equivalent to the differential between fuel prices in their countries of origin and fuel prices inside Iran. This seems fair practice but the bureaucracy needed to administer the system must be taxing. 24 D. A Strategy for Modernizing the Iranian Transport Sector 75. Addressing the issues described in Chapter C is essential for fulfilling the Government's goals of modernization of the economy, development of the non-oil sectors, fighting poverty, and improving the living standards of the population. Indeed, as IRI's successful economic transformation continues in the coming years, transport demand will likely grow faster than GDP and will become increasingly diversified and complex. A highly State owned and heavily regulated transport system will not be in a position to provide the quality of service and the flexibility that the economy will require. The cost of congestion will also increase. Yet, the new exchange rate regime implemented in 2002, and the adjustment of petroleum products' prices, which is expected to make progress in the near future, will make the cost of transport capital and operations relatively much higher than in the past. The State will therefore not be able to increase transport capacity and subsidize the sector as much as before. A change of paradigm is necessary. As is well understood by the Government, transport policies now need to be re-focused on improving the sector's efficiency through increased competition, increased involvement of private investors and operators, and pricing systems that reflect economic costs. In parallel, the State needs to play a new role, that of policy maker, regulator, and manager, and no longer of operator. The main measures that the Government should consider so as to move along these lines are described below. They are articulated in six main strategic directions. Removing Price Distortions and Ensuring Financial Sustainability 76. This key challenge will need to be tackled in its following four dimensions: (i) First, the correction of low capital costs in transport (especially construction costs) is likely to be a by-product of the broad economic reforms which are now implemented or being initiated, especially the new foreign exchange regime, the deregulation of the prices of State-owned enterprises, the removal of capital subsidies in all sectors, and, more generally, the increasing competition in the economy. It therefore does not require direct action other than speeding up existing reforms and, in the manufacturing and construction sectors, increasing private sector involvement. (ii) Second, the adjustment of fuel prices is a fundamental economy wide (not only transport) measure that must be prepared by careful analysis of its impact on the population and design of an appropriate mitigation strategy. Strategic directions for fuel price adjustment were proposed in the Bank's 2003 Country Economic Memorandum41 In this regard, it should be noted that border pricing for fuel would increase direct vehicle operating costs by an order of magnitude of 50-100%42, a high but not unbearable cost, if spread over time, since many car users belong to the wealthiest group in IRI and the increase would be compensated by reduced congestion. The fuel price increase can also be mitigated to a large extent for the urban population by the greatly improved public 41 Iran - Medium Term Framework for Transition - Converting Oil Wealth to Development, April 2003. 42 Possibly less for a taxi driver who must account for his income and is better aware of his capital costs 25 transport that increased fiscal resources would make possible. However, it should also be noted that border pricing would in itself not be sufficient to bring fuel prices in line with economic costs. As in most countries, fuel prices should be a vehicle for the recovery of road infrastructure costs. Fuel prices should also include a charge for all external costs, especially congestion and pollution. Without data specific to Iran, conventional wisdom may be used to grasp the economic issues at stake. The recovery of road infrastructure costs normally requires some US$ 0.15-0.20/liter. It is also generally thought that a charge of about US$ 0.15-0.25/liter is needed to cover congestion and environmental externalities. Hence Iran would probably need to add US$ 0.30-0.50/liter to the border price of fuel in order to cover all direct and indirect road costs. Clearly, that can be an objective only in the very long term. (iii) Third, the adjustment of capital and operating subsidies for transport enterprises (especially those providing urban transport services) should only be partial and gradual. Indeed, in many instances it does make sense on social and efficiency grounds to keep a reasonable level of subsidy on specific transport services (for example to counteract the external costs that the private cars are not being charged for, or to facilitate the access of the poor to jobs and public services). Once these services are identified, the Government's objective should be to eliminate as much as possible subsidies on inputs (including capital subsidies and interest rate subsidies for vehicles and equipment) and concentrate its assistance on subsidies on the outputs. Importantly, as noted earlier, the cost of transport infrastructure (especially roads) should be fully recovered from the users. With elimination of input subsidies, not only investment and operating decisions would be based on actual costs, which is better from an efficiency perspective, but those transport services that the Government chooses to subsidize could be provided under contract equally by private operators or State-owned enterprises. Output subsidies should also be provided through systems that establish a clear link between the subsidy paid and the transport service that is provided, for example a subsidy per seat-km on a bus or a train rather than a blanket deficit filling annual subsidy. Such a system promotes efficient decision-making by the service supplier whatever the form of ownership. It also ensures that subsidies are at the right level and that transport operators are not forced to provide a service for which they are not properly compensated. (iv) Fourth, for all transport activities like freight transport and inter-city passenger transport, which are commercial in nature, competitive, and do not fulfill any obvious social objectives, prices should be fully deregulated as is the case in most countries of the world. The State should, however, keep under continuous scrutiny that there is a functioning market for these services and that there is no abuse of monopoly power. Rationalizing the Role of Government and Strengthening Institutions 77. The following steps will be key for clarifying the role of Government in transport and strengthening sector institutions: (i) At the general level, in line with trends in developed and fast developing countries, the Government should clearly distinguish between the different functions that 26 need to be played in the transport sector: (i) policy making, coordination, and monitoring, (ii) enforcement of laws and regulations, (iii) provision of infrastructure and, whenever necessary, implementation of State interventions, and (iv) operation of transport services. The Central Government should focus on the first function and aim at establishing for this purpose a lean, highly competent, and well rewarded administration. The second and third functions should be provided by independent State agencies within the frame of well-defined mandates or even specific contracts. The fourth function should be carried out preferably by private enterprises or, when there are good reasons for that, autonomous commercial State owned enterprises. The case of New Zealand in Box 1 below shows a drastic example of the way a Ministry of Transport can be reorganized. Clearly, following such a model could only be a very long term objective for IRI. However, steps, like strengthening the policy making and monitoring functions and increasing the independence of State agencies under clear mandates are priorities in IRI and' should be taken in the coming years. (ii) In the road sector, the organizational structure that was recently decided upon is sound and should be thoroughly implemented. This will involve defining the detailed responsibilities of all new units at the central and regional levels, clarifying the relationships between units, and establishing mechanisms for coordination. Appropriate systems and procedures, especially information systems, for managing the road sector within this new structure also have to be created. In addition, staffing needs should be reviewed, and staff reallocated and trained in their new roles. In order to successfully implement this complex restructuring, MRT would find it useful to establish a change management process. (iii) Reorganization of the railway sector should be approached in a pragmatic, non- dogmatic and progressive way, using the existing organization (RAI and RAJA) as a foundation on which the new organization would be built. The main thrust of the approach would be to organize the railway sector along business lines. Business units would in general be vested with semi-autonomous management freedom inside RAI or RAJA. In specific cases, the business unit could become a fully-fledged company, constituted as a subsidiary of RAI or RAJA or as a private company. In order to clarify the relations between Government and RAI and to improving RAI's accountability, a contractual relationship could be introduced, possibility in the form of a concession agreement. Finally, a railway regulatory body, to be initially located inside the Ministry of Road and Transport, is recommended. This body would (a) issue licenses to railway operators; (b) review infrastructure usage agreements signed between RAI and RAJA and between RAI and other railway operators; and (c) negotiate agreements with RAJA (or other operators) for the operation of public service obligations. More details on these proposals are in Annex 17. Specific examples of railway reforms in a public sector context are summarized in Box 2. (iv) In the port sector, PSO has successfully adopted an organizational model close to that of a tool port. PSO intends rightly to further move towards a landlord port model whenever appropriate. The next step will be to more sharply differentiate the roles of PSO's central administration from those of the main ports, and increase the autonomy of the latter, possibly with increased competition between ports. 27 (v) The strengthening of information and monitoring systems is a necessity. MRT, MI for urban transport, as well as each main transport agency and local government, should have information centres with a recognized role, appropriate means, including information technologies, and a duty to regularly produce and disseminate information. Whenever needed, systems and procedures for collection and processing of information have to be established. There are at least three priorities for this. First, a suitable road data base needs to be created. There are models for this available in many countries, which IU could easily emulate. Second, performance and productivity indicators should be selected in each transport sub-sector and published systematically at regular intervals. Third, sound costing systems should be established in all State-owned enterprises, and costs of private operators should be known and monitored. (vi) Planning and budgeting systems should be greatly improved. First a uniform process of analysis needs to be defined and applied to all proposed expenditures. Whenever possible, projects should be submitted to a detailed economic analysis. Other criteria (like environmental and social criteria) should also be considered in the planning process as part of a multi-criteria analysis. Second, planning units should be set up within each transport sub-sector and centrally within MRT to control planning quality and arbitrate among sub-sectors. Third, planning and budgeting of all types of expenditures, particularly maintenance and new construction, should be integrated and well coordinated. Fourth, in each sub-sector, it is urgent to develop medium and long term expenditure plans based on carefully prepared traffic projections and realistic estimates of available funding. (vii) Appropriate procedures and standard documents adapted to each transport sub- sector, should be created for the contracting out of Government responsibilities and the provision of services under Government control in the transport sector. (viii) Finally, there is a large need for training and technical assistance, including the following: (a) large scale training programs, including study tours and training abroad, with an emphasis on "training the trainers" programs and strengthening of local training institutions in the transport sector, given the likely very large numbers of specialists to be trained; (b) systematic participation in international knowledge networks, especially professional associations and international organizations; and (c) use of foreign experts through well specified technical assistance programs for assisting the implementation of high priority actions such as development of planning processes, improvements in cost accounting, and establishment of sound regulatory frameworks. Box 1 - Transport Sector Reforms in New Zealand Since the early 1970s, New Zealand has transformed its transport sector making it remarkably more flexible, competitive and efficient. The reform program has aimed at continued reduction in the ownership and service provider functions of central and local governments, allowing decision makers to better focus on funding, regulation and policy. Prior to the reform efforts, private transport providers in New Zealand were heavily constrained by regulation and licensing as well as by competition from major public sector providers with multiple and conflicting objectives. In the public sector, incentives to reduce costs and better identify consumer needs were weak. Mispricing of publicly provided services often distorted private 28 sector activity in significant ways. Main reforms came across in two waves, a first one in the early 1970s and a second bigger wave, commencing in the mid-1980s, within a framework of overall public sector reform, triggered by the macroeconomic and currency crisis that hit New Zealand at that time. The purpose was to address well- understood failures common to the sector. These included a lack of information on the cost of outputs and inability to assess the benefits of expenditure for users, an absence of clear agency accountability, confused and conflicting sector objectives, and undue influence of public and private interests at the Ministerial level. The thrust of the reforms was to improve the focus of government organizations through the establishment of institutions whose roles and purpose were clear and accountable through contracts or performance agreements. As a result, most of the transport sector, with the exception of the public infrastructure associated with road transport, some airports, some seaports, and Auckland rail, is now privately owned and generally privately funded. Central government remains a majority shareholder in Air New Zealand. Central and local governments continue to fund and operate the land transport network although most of the design, construction and maintenances works are undertaken by the private sector. These long term reforms have seen further developments recently. The text below describes the situation as of 2003. The government transport sector includes the Ministry of Transport and seven so-called "Crown entities". The two key functions of the Ministry of Transport are policy development and advice to the government, and contracting and monitoring government transport agencies' performance. In 2003 it had a staff of 70 people. The Crown entities are relatively autonomous organizations set up under legislation and over- sighted by statuary boards of directors appointed by the government. Their chief executive is hired by the board and has operational control over the entity. These entities are funded from a combination of general budget, the National Land Transport Fund (NLTF) and user charges. They are: * Civil Aviation Authority (CAA), including the Aviation Security Service (AvSec) * Land Transport Safety Authority (LTSA) * Maritime Safety Authority (MSA) * Transfund New Zealand (TFD) * Transit New Zealand (TNZ) * Road Safety Trust (RST). * Transport Accident Investigation Commission (TAIC) CAA, LTSA, and MSA develop and administer aviation, road, rail, and maritime standards and rules for entry, participation and exit for their respective transport modes in consultation with sector users and service providers. LTSA also manages under contract the motor vehicle registration (MVR) and revenue management. Running these functions involves the collection and refund of motor vehicle registration and licensing fees, road user charges and fuel excise duty. Transfund New Zealand's role includes funding for construction and maintenance of State highways and local roads; funding for passenger transport services, e.g., commuter trains, buses and ferries; and funding for rail freight and barging. It also includes walking and cycling projects, and funding of projects, which support regional development. Transit New Zealand organizes the maintenance and development of New Zealand's state highways, a portion of local roads, and alternative to roads including passenger transport. The Road Safety Trust provides modest funding for road safety projects at both the national and community levels, in addition to funding road safety research. Its funding source derives from royalties paid on the sale of personalized number plates. The Transport Accident and Investigation Commission is a government funded independent accident investigation agency. It investigates significant air, maritime and rail accidents for the purpose of determining cause. Each of the Crown entities is contractually linked to the Ministry of Transport through its statement of intent and related performance agreement with the Minister which set out the outputs they will deliver. They are held accountable for the delivery of these outputs in accordance with established quantity, quality and timeliness performance indicators. There are also three state-owned enterprises with transport related service provision or ownership responsibilities that are responsible to the Minister of State Owned Enterprises. These are the Meteorological Service of New Zealand Ltd, the Airways Corporation of New Zealand Ltd, and the New 29 Zealand Railways Corporation. The Airways Corporation provides air traffic control services under certification from the CAA. The Railways Corporation manages land leased to rail track operators. It should also be noted that the New Zealand Police receives funding for traffic safety and enforcement activities from the National Land Transport Fund. Finally, the local authorities have a number of regulatory roles in the transport sector as well as specific ownership interests. Regional councils or unitary authorities are required to develop regional land transport strategies under the Land Transport Management Act 1998. They also fund public transport in conjunction with Transfund New Zealand. Land transport decisions made by central government transport agencies and by district councils must not be inconsistent with the regional strategies. District councils own and operate most of the local road network. Local authorities have significant powers and responsibilities through the Resource Management Act to manage the environmental effects of land transport. They are also owners of airports, any of which are leased from the government. In addition, some local authorities are owners of seaports. Source: World Bank Staff based on various papers from the Ministry of Transport of New Zealand Box 2 - Railway Reforms: an International Challenge Many national railways in the world face the same challenges as the Iranian railway: how best to structure a state railway company to be successful in competitive transport markets; how to create incentives for railway managers to provide efficient and high quality services to the economy and the public; and how to channel public support for passenger services or network extensions in ways which will ensure cost- effectiveness. While detailed solutions vary with circumstances, nearly all railway reform programs have been built on structures which create individual business units (lines of business) with their own financial accounts, ending of cross-subsidy between the units, transparency and targeting in the financial flows between railways and the State. Pressures to allow competition on the rail network are also increasing. Three of many such examples from different parts of the world are given below. In Germany, in 1993 the national railway company adopted a lines of business structure when it was divided into subsidiary companies for infrastructure, passenger stations, intercity passenger, regional passenger, and freight train operations under a central holding company DB AG. As in other EU countries, access rights were granted to private freight companies wishing to access the system and a number now operate on the system creating strong efficiency incentives. The infrastructure subsidiary charges the various train operators for track access according to a published schedule of charges. The responsibility for subsidization of regional passenger services was moved to regional authorities operating under direct contract with regional passenger train operators. The new structures have seen big improvements in productivity and service in may areas. In Australia (Queensland), the State Railway (QR) consisting of about 10,000 route-km and major minerals, freight and passenger businesses was corporatised in 1995. The company is structured into four internal lines of business: freight and logistics, passenger services, track access and consulting services each with its own management and accounts. QR contracts with the Queensland Government for the provision of Brisbane suburban rail services and other public service obligations. QR's track access arm, called Network Access, is endorsed by the Queensland Competition Authority to make track access available to QR's own train and to private train operators on a non-discriminatory charging basis. QR has also been required to tender for provision of major coal haulage contracts in the State creating choice for users and putting pressures on QR and other companies to improve efficiency and service. Kazakhstan has recently adopted a radical reform strategy for its railway. The Ministry of Transport will take over responsibility for approving use of infrastructure by train operating companies. The traditional railway operator, KTZ, will be divided into infrastructure, freight, passenger and locomotive companies. Passenger train operations will be franchised and private freight train operators are to have access rights under non-discriminatory prices. The locomotive company will make haulage available to all train operating companies on a non-discriminatory basis, though companies retain the right to purchase their own locomotives if they wish. Taking advantage of the reforms, two Kazakh coal companies are already operating their own trains to power stations using their own wagons and hiring locomotives and crews from the Locomotive Company. Source: Bank Staff 30 Making Effective Use of the Private Sector in Transport 78. Building on the experience gained in the recent past, a new set of policies should be formulated and implemented gradually to attract wider private involvement in the transport sector. To do so would include the following: (i) A comprehensive review of options and strategies should be carried out. This review would clarify the reasons why private involvement is desirable in IRI. It is likely that the shortage of Government financial resources would not be the main driver of private involvement, as in many countries, but rather the search for increased operational efficiency and better and faster project implementation. The review would also assess the capability of both the Government institutions and the private sector (particularly the local one) to enter into the sometimes highly complex contracts and arrangements that are required for sound private involvement in transport. This capability is obviously expandable but, in the short to medium term, it may strictly limit what can be attempted. In addition, the review would analyze the financial framework for private involvement and where and how the subsidy system needs to be modified, notably in order to create a level playing field for all investors and operators, public and private. Finally, and on the basis of the above analyses, the review would clarify the features of the privatization program necessary for attracting sizable involvement by truly profit minded private partners, in particular foreign investors and operators likely to be important for achieving increased efficiency. It is doubtful for example at this stage that foreign investors would be willing to invest large amounts in fixed infrastructure without guarantees and thus major contingent liabilities for the Government. There are many other features of project design as well as of the regulatory, institutional, and financial framework that would be specific to IRI and impact the interest of investors. In total, this analysis would reveal the benefits, costs, and risks of private participation in transport. Given the complexity of the issues involved and the fact that there currently is limited expertise in IRI on these subjects, the review should be carried out with the assistance of foreign experts. (ii) Based on the review, clear strategies and implementation plans should be formulated for increasing private involvement in each mode of transport. Indeed, given that the nature of the issues at stake varies much between transport modes, it is likely that the desirable solutions and the path for increasing private involvement over time will be mode specific. In the roads sector for example, it is doubtful that the private toll road network can be increased rapidly because of problems of value of time and traffic diversion common to most countries at IRI's stage of development. On the contrary, there is great scope for contracting out road maintenance work to private firms and this should be given priority. In the port sector, there is great potential for private involvement in operations, including investment in cargo handling equipment under concessions arrangements. It is more uncertain that private investors would provide full terminals without requesting prohibitively high returns on equity and/or major guarantees. In railway, private operators could compete in niche markets (like for the transport of containers). Industries with bulk inputs or outputs may choose to transport these themselves. Such markets should therefore be opened to competition. In urban 31 public transport, there is great potential for competitive franchising of packages of bus routes to private operators, preferably under gross cost contracts. Fixed infrastructure systems (metro and LRTs) could attract the private sector under leasing arrangements43 but probably not for major investments in infrastructure or rolling stock. (iii) Once the strategies have been established, it will be necessary to review and adjust the legal and regulatory framework, in order to provide a stable and comprehensive regime that will reassure and enable investors, protect property rights, protect the public interest, and ensure consistency between the rights and duties of all parties. The legal and regulatory framework should also cover key subjects such as the methodS44 of selection of service providers, the process of establishment and adjustment of fees and tariffs, the standard contracts to be used, and the dispute resolution mechanisms. Some legal instruments may cover the entire sector (such as a concession law). Generally, regulations will vary by transport mode. (iv) As mentioned earlier, a sound and competent institutional structure will have to be established. This would include institutions that have the capability to design and implement the privatization process, and procure and manage contracts soundly, while keeping an arm's length relationship with the private partners, and remaining independent from political interference. Whenever there are issues of safety and operator competence, which are addressed by a licensing process, a competent authority will be required for handling this process. Whenever there are monopoly situation that need to be regulated (like for access to rail track infrastructure), a proper regulatory body will also need to be created. (v) Finally, obviously, in any situation where a private partner is involved, financial policies will need to provide a secure and sufficient revenue flow to the investor. Developing a New Urban Transport Policy 79. Addressing IRI's deep-seated urban transport issues will require implementation of a mix of short term and long term programs. The following steps are recommended: (i) In the short term, measures should be taken to improve as much as possible the use of the bus systems. These would include carrying out in each main city a rapid diagnostic of the bus system's main shortcomings, and, on that basis, preparing and implementing emergency plans for improving the speed and quality of bus services on the main axes, increasing in particular the number and space of dedicated bus lanes and giving priority to buses at intersections. The measures used in Santiago (Chile) described in Box 3 could be used as a model. In Tehran, at least, the package of short term measures is likely to be more complex though. To achieve maximum increase in bus use, the improvements in system performance should be linked with measures to improve the space allocated to pedestrians and the speed/convenience of trips made by walking. The 43 often called "affermage" 44 preferably fully competitive 32 bus network' configuration may also need to be improved and the coverage of bus feeder lines increased. (ii) For the medium and longer term, new urban transport master plans need to be prepared for most large cities. These plans should reflect the main Government objective of greatly increasing the use of public transport. The plans should be based on comprehensive analyses of demand based on updated information (household, customer and traffic surveys), realistic estimates of fiscal resources available for investment and for operational subsidies, and realistic assumptions for the duration of implementation of the projects in the plan. The plans should give more importance than in the past to bus services (including an assessment of bus rapid transit options). The plans should also be as clear as possible on investment priorities and necessary sequencing of expenditures so as to ensure that projects, once started, are completed in a short time and thus able to produce their full benefits. Finally, the plans should be well coordinated with urban development strategies and land use plans. (iii) New traffic management plans should also be prepared for each main city in consistence with the master plans. These plans would have a longer term horizon than the emergency plans mentioned in (i) above. They would also require deeper analysis and result in changes at a broader scale. Yet, as the emergency plans, they should enable better performance of the bus systems improved conditions for pedestrians, as well as increased flows of vehicles. (iv) The financial policy for urban public transport services should be clarified. This policy would include cost sharing principles for capital and operating expenditures between central and local governments, a system for performance-based allocation of central transfers, fare setting policies, and an obligation of coherence between local revenues and local governments' financing commitments. (v) Enforcement of traffic regulations, including on-street parking, should be stepped up. This requires higher police presence, effective deterrence, and information campaigns to sensitize drivers. (vi) Vehicle emission standards should be strengthened and an effective system of vehicle inspection needs to be established, possibly under contract with private inspection service providers. (vii) The institutional capacity to implement the above agenda should be developed at the central and especially local government levels. 33 (viii) As noted in the previous paragraph on "Making effective use of the Private Sector in Transport", there is much scope for increased private participation in the supply of urban transport services, especially bus services, which needs an adequate regulatory, financial, and institutional framework to be put in place. This could start by establishing models in two or three cities and then replicating the successful experiences nationwide. Box 3 - Urban Transport Reforms in Santiago (Chile) Greater Santiago has a population of 4.7 million and concentrates roughly 40% of the Chilean population. The total surface is around 230,000 hectares and urban sprawl has become a major concern. Santiago is served by a road and public transport system that is generally well managed and continuously being improved. Modem traffic engineering techniques are applied to the street network. The 40-km metro (3 lines) is an outstanding example of efficient mass transit management, which does not need operating subsidies and the length of which will double before 2006. It serves 785,000 passenger trips on a typical weekday. Most public transport passengers, about 4.7 million per day, travel on the 8,300 urban buses which are mostly owned by individuals or very small companies. In addition, there are suburban railway services, fixed-route taxis (15,000) and regular taxis (45,000). Main transport issues in Santiago are very similar to those of Tehran: * Explosive increase in the number of trips, especially car trips which more than tripled (+223%) between 1991 and 2001; * Steady and steep decrease of public transport modal share (83.4% of motorized trips in 1977 and 70.5% in 1991, to 51.9% in 2001); * High traffic congestion on city streets; * Relatively low satisfaction of passengers with the public bus system; * Low levels of safety (almost a quarter of deaths on the city's roads occur in accidents in which a bus is involved); * High air and noise pollution (aggravated by the fact that a thermal inversion acts as a cap over the city during fall and winter, inhibiting the dispersion of pollutants, which is further obstructed by the mountains surrounding the city); * Low affordability of transport for some of the very poor; * Neglect of non-motorized transport; * Economically inefficient overlapping and concentration of bus routes. In response to this situation, the long-term Urban Transport Plan for Santiago (PTUS) offers a holistic set of policy guidelines, long-term and short-term measures, as well as low-cost and investment intensive solutions. The immediate actions envisaged in the PTUS consisted of a package of low-cost public transport improvements implemented in March 2001. They included: * Exclusive public transport axes: From 7:30 to 10.00 am on each weekday except in summer, six radial avenues have been reserved in both directions for buses, taxis and emergency vehicles. More than 80 % of the bus lines go through these avenues. * Reversible avenues for private cars: During the same hours, but all year round, parallel avenues are operating one-way to provide the needed traffic capacity which has been taken away through the closing of the bus axes to private cars. * Segregated busway: On the ten-lane Alameda Bernardo O'Higgins, near the city center, six lanes have been physically segregated and reserved full-time for buses, and only four lanes remain accessible for taxis and cars. This cost of these measures was only US$ 1.5 million. Results have been highly successful. Travel time for bus passengers along the segregated axes and Alameda has been reduced between 14% and 35%, without causing undue delays to car users. Bus ridership on the exclusive public transport axes has gone up by 12%. PM10 emissions from public transport have decreased by approximately 10%. On the basis of the first year's experience, the measures described above were strengthened in March 2002 as follows: * The exclusive morning peak hours public transport axes were limited to inbound traffic, as congestion in the other direction did not justify exclusive busways. In pre-emergency and 34 emergency situations this measure is applied to both directions as well as to evening peak hours (5.00-9.00 pm), and a few other axes are also turned into exclusive busways; * The reversible streets network for private cars was extended, either through the inclusion of additional streets or through the extension of the stretches where this measure applies; * Heavy and more than 22-year old trucks were prohibited from circulating during peak hours within Santiago's beltway; * Additional restrictions were placed on shared taxis * Parking was prohibited on some congested streets. The full implementation of the long-term plan was expected to start in 2005/2006. The main measures are: * A package of measures aimed at greatly improving the quality of public transport, especially: > Priority to public transport vehicles; > Gross-cost contracting of 15 large bus service franchises; > Incentives to bring in high-standard bus vehicles; > Reconfiguration of the bus route network into a two-tier system, trunk lines and collector/distribution lines; > Unified fare system (including the metro); > Separate fare collection; * Coordination of land use and urban transport policies; * Improved conditions for cyclists and pedestrians; * Promotion of a culture of rational private car use; * Demand management (school location, travel blending). Source: World Bank Staff Box 4 - TransMilenio: Bus-based Mass Rapid Transport System Bogotd is the Capital and most important city in Colombia. It covers an,area of 1,737 km2 and has a density of 3,717 inhabitants per km2. It has a population of approximately 6.5 million inhabitants. TransMilenio is an integrated bus rapid transit system, using busways, stations and terminals adapted for large-capacity buses, and fare integrated operations with smaller buses on the outskirts of the city. The first phase of the system was implemented between 1999 and 2002, with operations starting in December 2000. It includes 41 km of segregated busways on three major roads (Av. Caracas, Autopista Norte, Calle 80) and 61 stations, including four terminals and four integration stations. The busways are positioned in the center of the wide arterial roads. Part of the busway system has two lanes per direction, part has one, with two lanes at stations, and minor sections run through a pedestrianized area in the city center or in mixed traffic. The system is under expansion for 40 additional kilometers, with 60 stations, including three terminals and five integration stations. The first of the three new trunk lines (Av. Americas) started operation in December 2003, and construction was about to begin on the other two corridors (Norte-Quito-Sur (NQS) and Suba). When the second phase expansion is completed by 2005, the overall system is expected to daily cater for 1.6 million passengers. TransMilenio consists of the following main components: (i) infrastructure which includes segregated busways, stations and terminals, all owned by an autonomous public entity; and (ii) an innovative public- private partnership arrangement under which buses, fare collection system, operation and control systems are all owned and operated by the private sector. TransMilenio S.A. is responsible for the overall administration of the system. Some of the main features of the system are: (i) articulated buses with a 160 passenger capacity; (ii) passengers pay their fares before entering the stations, using electronic cards; (iii) special feeder buses with a capacity of 40-80 passengers, which provide intermodal connections without requiring the payment of an extra fare; (v) fare collection operated by a private company selected through competitive bidding; (vi) busways designed for both express and local services; (vii) each articulated bus being connected to a control center, where the frequency, position and speed are controlled; (viii) buses operated by consortia of incumbent and new operators, and domestic and international investors; (ix) service concessions awarded 35 following open and competitive bidding for packages of trunk and feeder services; (x) infrastructure construction costs in gross terms of about US$210 million or US$5 million per km; and (xi) vehicle costs of about US$3 million per km. In its over three years of operations, the TransMilenio system has shown, among others, the following achievements: (i) high number of passenger per bus with a peak occupancy of 90% and an off-peak occupancy of 60%; (ii) high ridership with 900,000 weekday passengers on the system; (iii) busway peak period bus flows of about 280 buses/hr/direction; (iv) express and stopping services operating at an about 3-minute frequency in peak periods; (v) 38% average travel time reduction; (vi) considerably improved traffic safety; and (vi) commercial success with all costs financed from bus fares, which is equivalent to about US$ 0.40 per trip, thus no public subsidies, except for the initial fixed-infrastructure investment. Source: World Bank Staff Improving Road Safety 80. The Government's response to the road safety crisis should be based on the vast experience that has been gained over the past twenty years on this subject, as presented in particular in the recent World Report on Road Traffic Injury Prevention45 (see Box 5). It should cover the following areaS46 (i) The institutional structure for dealing with road safety needs to be strengthened. The recently established National Road Safety Council needs to have the authority and the capability to coordinate and monitor the activities of all agencies involved in road safety interventions. These agencies themselves need to be strengthened by improved human resources and better work methods and procedures. Coordination needs to be effective at the local level. For that purpose, effective regional and city road safety councils are required. Accountability mechanisms should be established, including in particular through the setting of targets and the dissemination of results. (ii) The specific characteristics of the Iranian road safety problem (nature of the accidents, location, transport mode involved, etc) need to be better and more widely understood, which requires improvements in the road accident data collection and processing systems, development of road safety research, and circulation of information. (iii) A short to medium term National Road Safety Action Plan (NRSAP) should be formulated and implemented. This plan would be focused on actions that are both urgent and likely to yield quick and visible results. It would include actions that should be taken at national level, such as, in addition to the measures mentioned in (i) and (ii) above, improvements in driver training and testing as well as improvements in vehicle safety standards and, possibly, vehicle inspection. The plan would also include coordinated packages of measures, concentrated in high risk geographical areas, such as road improvements (especially for removing black spots and improving road signs and marking), stronger enforcement of traffic and transport regulations, extensive public information and education campaigns aimed at changing attitudes and behavior, and 4 World Health Organization and World Bank, April 7, 2004 46 Guidelines to prepare a strategy for improving road safety are also provided in Transport Notes, Implementing the Recommendations of The World Report on Road Traffic Injury Prevention, Transport Note No. TN-1, The World Bank, Washington DC, April 2004. 36 improvements in emergency services and injury treatment. The experience of other countries has shown that there is much synergy in implementing these measures together. Yet, in the short term, this cannot be done successfully nationwide because of capacity constraints. Hence, there is the need to concentrate on high risk areas. (iv) Adequate funding should be provided to all agencies involved in the implementation of the NRSAP. This would cover the cost of necessary equipment, road improvements, training, and technical assistance. Given the importance of joint action, funding needs to be provided in a coordinated and timely fashion. (v) The results of the NRSAP should be carefully monitored and evaluated. On this basis, the NRSAP should be scaled up gradually to the entire country, first, by improving the organization, methods, procedures, and human resources of all agencies involved in road safety, and, second, by nationwide provision of adequate equipment and continued removal of hazardous section of the road network and improvement of road quality. Box 5 - The World Report on Road Traffic Injury Prevention Call for Urgent Government Action: The World Health Organization (WHO) and the World Bank jointly issued The World Report on Road Traffic Injury Prevention' on World Health Day 2004, which was dedicated by the WHO to the improvement of global road safety. The World Report urges governments to assess the current status of road safety in their respective countries and makes a set of recommendations to be used as flexible guidelines to assist this process. Low and middle-income countries lacking sufficient resources to fully apply these recommendations are encouraged to seek partnerships with international organizations and other entities to assist their implementation. Critical Success Factors: The World Report recommendations encompass all factors critical to the successful management of road safety outcomes and provide a framework to guide the preparation of country responses based on good practice. (i) Identify a lead agency in government to guide the national road safety effort: This recommendation stresses the importance of institutional leadership which derives from a designated legal authority to make decisions, control resources and coordinate efforts by all sectors of government. Lead agencies can take different institutional forms, but they must be adequately funded and publicly accountable for their performance. (ii) Assess the problem, policies and institutional settings relating to road traffic injury and the capacity for road traffic injury prevention in each country: This recommendation underscores the complexity of managing road safety across the road network and the vital role played by reliable data and effective institutional structures in sustaining safety improvements. Simple, cost-effective data systems consistent with international standards for recording and classifying road deaths and injuries should be established (iii) Prepare a national road safety strategy and plan of action: This recommendation emphasizes the multisectoral and multidisciplinary dimensions of a national road safety strategy and its requirement to address the safety of all road users and engage all stakeholders across government, the private sector, nongovernmental organizations, the media and the general public. A national road safety strategy should set ambitious but realistic safety targets, complemented by a national action plan setting out specific interventions to achieve them. (iv) Allocate financial and human resources to address the problem: This recommendation highlights the importance of setting correct expenditure priorities for road traffic injury prevention, drawing on the evaluation of interventions by countries worldwide. To achieve safety targets, new funding sources may have to be found for the required level of investments. Priority must also be given to training programs across a range of disciplines, to build the skills required to develop and implement national road safety strategies. 37 (v) Implement specific actions to prevent road traffic crashes, minimize injuries and their consequences and evaluate the impact of these actions: This recommendation summarizes the range of 'good practice' interventions that could be adopted and adapted by all countries. Specific country-based actions should be based on sound evidence, be culturally appropriate, form part of a national road safety strategy and be evaluated for their effectiveness. (vi) Support the development of national capacity and international cooperation: This recommendation calls for a substantial scaling up of international efforts to build a partnership focused on strengthening capacity at the country level to deal with the growing road safety crisis. United Nations agencies, nongovernmental organizations, multinational corporations, philanthropic foundations and donor countries and agencies all have an important role to play in increasing support for global road safety to levels provided for other health problems of comparable magnitude. Source: Peden M et al, eds. The World Report on Road Traffic Injury Prevention. Geneva, World Health Organization, 2004. Developing the efficiency of logistics and transport facilitation to promote trade and transit 81. Given the stakes IRI has in creating reliable and fast transport chains, whether it is for transit goods or for IRI's own imports and exports, measures should be taken to develop the efficiency of logistics and transport facilitation. These include the following: (i) Priority should be given to "soft" measures of an institutional and regulatory nature. Documentary requirements and procedures should be streamlined, the performance of border agencies, especially, but not limited to, customs, should continue to be improved, and mechanisms should be created to improve coordination between all entities involved in the transport chains. Most importantly, information and communications technologies and systems for data sharing and processing should be developed. To clarify exactly the areas of improvement, and the measures to be taken, a comprehensive trade and transport facilitation audit, including as much as possible, a quantitative assessment of the costs of deficiencies in facilitation, should be carried out as soon as possible. The methodology for such an audit is now well-established and international experts are available that can help in this undertaking. (ii) Continuous consultations with all those who have a stake in international trade and transport issues (including especially shippers, freight forwarders, and transport operators) will also be essential, and institutional mechanisms for doing so should be developed. These would include a National Transport Facilitation Committee and topic- specific working groups. A continuous consultation process, together with the trade and transport facilitation audit mentioned before, has proven successful in other countries to clarify where the greatest improvements can be achieved in the short term, and to guide, stimulate, and monitor actions to remove bottlenecks. (iii) The promotion of the activities of private multimodal transport companies, especially foreign ones, would further help bring expertise and dynamism to this key part of the transport sector. (iv) Whenever proven necessary, investments in logistics facilities and equipment for multi-modal transport should also be made. This includes, in particular, (a) railway 38 rolling stock for the long distance transport of containers and (b) development of the container terminal at Bandar Abbas, which is reaching capacity and could become a major bottleneck once the medium term improvements now underway have been overtaken by growing traffic. 82. Examples of various measures taken by Morocco, countries in the Balkans, Tunisia, and Peru to improve trade and transport facilitation are presented in Box 6 below. Box 6 - Trade and Transport Facilitation in Practice. With the liberalization of trade regimes in the world, the capacity of countries to benefit from trade in the global economy depends increasingly on trade and transport facilitation measures that address logistics bottlenecks and inefficiencies. Recent assessments point out that the potential impact from facilitation is in general higher than the impact from tariff reduction. Facilitation initiatives can be undertaken independently or simultaneously at the national, regional or international levels. Trade and transport facilitation reforms encompass a wide range of possible measures including: (i) customs reform; (ii) transit logistics; (iii) border crossing management; (iv) single window, simplification of procedures, automation (EDI); (v) transit and multimode facilitation; and (vi) port efficiency. Countries engaging in reforms in facilitation may tackle one or several of those areas simultaneously as shown in the examples below. Customs reform in Morocco. In recent years, many countries have tried to reform their customs services. The most common obstacles are insufficient government commitment and inadequate appreciation of problems. Morocco's success in overcoming these obstacles offers useful lessons. The reforms were based on the principle of the World Customs Organization. A code of conduct for customs officers was established with new rules for professional ethics. The IMF and bilateral partners provided technical assistance. The reform had a high level of political support. The staff was motivated through new performance indicators and salary bonuses. The traders were also involved in the process. As a result, the average processing time was under 1 '/2 hour for 85% of the declaration in 2003, compared to 5.5 days in 1997. The key elements of the reform include: (i) simplified procedures and selective control; (ii) increased use of information technology; (iii) improved management of special customs procedures; (iv) enhanced transparency; and (v) increased partnership with the private sector. Border Crossing Management for Transit: the Trade and Transport Facilitation for Southern Europe (TTFSE) Program. The TTFSE program is a regional program involving projects in eight countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Moldova, Romania, and Serbia and Montenegro aimed at reducing international transport costs and helping border agencies gradually align their procedures with EU standards. Project focus is modernization of Customs and implementation of integrated solutions to improve border crossing and clearances at selected pilot sites. Several of the projects are moving toward completion. Significant progress has been achieved in terms of reduced waiting time at border crossing points and inland clearance terminals, and improved communication with the users resulting in increased transparency and efficiency. Cooperation among the Customs Administrations within the region has also been strengthened. Over the past three years, processing times at the 24 pilot border crossing points and clearance facilities have been reduced by more than 65 percent on average. From a high of up to five hours average, waiting time for trucks at the borders is down to an average of just forty minutes per crossing. Single Window Automated Process (EDI) in Tunisia (Tradenet). Large number of procedures, multiplication of un-harmonized documentation and lack of coordination and information sharing between participants are among the main causes of inefficiency of trade transactions. Proper re-engineering of procedures and automation can address those inefficiencies. As part of a World Bank supported Export Development Project, Tunisia implemented an ambitious Electronic Data Interchange (EDI) project, "Tradenet", based on the Singapore/Mauritius experience. It created a single automated window that allows each participant (exporter, importer, forwarder, border agency, port authority, and bank) to enter and 39 retrieve information in real time. Therefore, trade procedures and payment of charges and duties can be handled in a very short time. Since 1999 the processing of import documents has been reduced in Tunis from 15 days to 3 days. Before completion of the IT infrastructure, which was conceded to a public-private company, two key steps were carried out early on which contributed significantly to project success: (i) simplification of documents, adopting international norms and standards where applicable; and (ii) simplification of procedures and process re-engineering (there used to be 19 import procedures). Peru: Improvement of Trade related Infrastructure. In 2003, the Bank approved a "Trade Facilitation and Productivity Improvement Technical Assistance" loan to Peru, which has a large sub-component for optimization of trade related infrastructure. A key part of this component is a multimodal facility at Callao, which will help reduce the present congestion at the port, which is the country's largest. The project also includes components that provide institutional support to trade agencies. Source: World Bank Staff 40 E. Implementation of the Strategy and Potential Role of the World Bank 83. Implementing the strategy outlined in Chapter D is a challenge that the Government of IRI has the will as well as the human and financial resources to meet successfully. Being a relatively late comer in many of these reforms, the Government will be able to facilitate and accelerate the process of change if it avails itself of the vast knowledge and expertise developed in the world on these subjects in the past decades. Other countries and cities faced with comparable situations have indeed learned numerous lessons on what solutions work and why. There is also a pool of international expertise with in-depth capability in all the subjects of the strategy. Using such experience and expertise would make it faster and easier for the Government to select priority measures, design action plans, implement the plans in a flexible and coordinated manner, and continuously benchmark progress and results with comparison with other countries. The World Bank can be a key partner for the Government in tapping experience and expertise. The context for such a partnership and the priority subjects on which it could cover are discussed below. 84. The elements of the proposed transport sector strategy are closely connected with the four major priorities that are being discussed between the Government of IRI and the Bank as backbones of the Bank's next country assistance strategy (CAS) for IRI: (a) achieving fast and sustainable economic growth and generating employment; (b) sharing the fruits of growth and addressing the needs of the poor and disadvantaged; (c) enhancing natural resources and environmental management; and (d) building efficient, accountable, and transparent public sector governance. 85. Indeed, the transport sector has a particularly important impact on IRI's economy because of its large and mountainous land area and the long distances between large cities and between these cities and the sea, which all make the movement of goods and passenger difficult and costly. This shows in the unusually large share of IRI's value added in transport (about 10%) and freight volume per unit of GDP (see paragraph 2). As said earlier, transport is also of great importance in employment since there are over 1.3 million jobs in the sector. Improving transport efficiency as advocated by the proposed strategy is therefore fully in line with the CAS's first objective. 86. Improving transport is also important in the context of the second and third CAS objectives. Indeed, if the Islamic revolution has achieved significant progress in fighting poverty and bringing social justice, there are still an estimated 4-5 million poor living in IRI. Poverty is a dire reality in Iranian cities. The average urban dweller in Tehran earns an annual US$4,000 equivalent, but about 10% of households earn less than one fourth of that and 5% less than $650 per year. Urban poverty is made worse and inextricable by forced reliance on deficient public transport systems and thus poor access to jobs and public services. The entire urban population suffers from the severity of air pollution, but poor workers are the ones most exposed to environmental health risks. Improving public transport, bus and metro/LRT included, is therefore essential for poverty alleviation and improving the environmental situation. 41 87. Finally since so much of the recommended transport strategy is about improving the capability and performance of sector institutions, and the sector consumes a significant part of public resources, the strategy is congruent with the CAS's fourth objective. 88. In this context, it is proposed that the partnership between the Government and the Bank be developed along three main directions: (i) a specific program to improve road safety, (ii) a broad transport sector technical assistance program; and (iii) investment projects in important and particularly difficult areas, which could have a demonstration effect and replicability. These are briefly discussed below. 89. Improving road safety is rightly seen as a national priority in Iran. Many of the annual 22,000 road fatalities and their dire social costs are indeed preventable. Using lessons of experience in similar countries will be critical, however, to adequately strengthen the institutional framework and design and implement a sound National Road Safety Action Plan. Bank technical and financial support in these areas would be most effective since the Bank has been at the forefront among international organizations for helping countries across the developing world design and implement road safety improvement strategies. 90. The technical assistance program would provide support to MRT, the main sector agencies, and the local governments in implementing the strategy and increasing quickly the efficiency of transport. It could cover all modes of transport. It would include the transfer of experience and know-how from more advanced countries, rapid development of the knowledge base, the strengthening of human resources, the preparation of action plans, and the establishment of sound regulatory frameworks, organizations, work methods, management systems, procedures, contractual relationships, and financial policies. These are areas in which the Bank has accumulated a vast experience over many years. 91. Finally, the Bank could support the design and implementation of specific investments that would be important by themselves but would also help the Government test new solutions with a potential for scaling up. These could be for example in urban transport (for developing public passenger transport or improving traffic management) or in the field of logistics and multimodal transport. These could also serve to expand public private partnerships. Generally, however, such investments need in-depth feasibility studies and preparation of engineering documents. They therefore involve a long preparation time and could advance cooperation between the Bank and the Government only over the medium term. 92. Moving towards market-based prices and/or cost recovery would be key to financial sustainability of transport enterprises and to efficient resource allocation. The worst price distortions affect fuel. Since they have huge macroeconomic and social implications, it will take a carefully crafted and coordinated reform to eliminate them over a long period of time. In particular, the impacts of their reform should carefully be managed within the transport sector for fear that they come to undermine the success of 42 reform. Removing the fuel price subsidy will cause transport prices to rise steeply. How to make this needed reform consistent with poverty reduction is a difficult task ahead. Clearly, while reform needs to be prepared by in-depth studies and TA in the transport sector, which the Bank could help carry out, the design and implementation of a reform program should be addressed at macro and not sector level. 43 Annex I Length of Roads at the End of Years2001 and 2002 (Kilometers) MRT Data, TTO Data, % of Total 2001 2002 2001 Freeways 760 847 0,4 Highways Highways (4 - Lane) 4,379 - Highways (Wide) 4,004 - Highways (Ordinary) 17,616 - Total Highways 25,999 26,764 14,9 Feeder Roads Paved (Wide) 11,152 - Paved (First Rate) 18,730 - Paved (Second Rate) 7,411 - Unpaved (Wide) 715 - Unpaved (First Rate) 1,433 - Unpaved (Second Rate) 2,504 - Total Feeder Roads 41,945 39,106 24,0 Access Roads Paved 3,838 Unpaved 8,489 Total Access Roads 12,327 7,171 7,0 Rural Roads Paved 45,332 Unpaved 48,507 Total Rural Roads 93,839 53,7 Total 174,870 73.888 1 100,0 Total Paved Roads 113,222 64,75 1) Excluding rural roads and part of the access roads Sources: MRT, TTO 44 Annex 2 Length of Road Sections at Capacity Limit and Above (2001) (Kilometers) Level of Service Freeway Highway Major Road Feeder Road TOTAL Level D (At Capacity - 18 1714 539 2271 Threshold) Level E (Critical) 37 - 1300 99 1436 TOTAL 37 18 3014 638 3707 Source: TTO, 2003 Annex 3 Cargo and Passenger Transportation (1995 - 2002) Total cargo movement Cargo movement using Total passenger Passenger movement Passenger movement Year Bill of lading movement by merchandise fleet using waybill (million tons) (million tons) (million of person) (million of person) (million person) 1995 146.6 85.2 632.9 371.8 182.6 1996 166.1 99.1 638 376.1 211.6 1997 191.5 106.7 646 384.7 218.9 1998 199.5 110.7 642 377.1 214.4 1999 226.4 125.6 657 387.6 217.2 2000 247.0 137.1 659 401.6 244.8 2001 268.5 148.9 646 394 221.0 2002 298 165.7 642.4 389 217.5 Source TTO, 2003 Annex 4 Modules of Comprehensive Road Transport Statistical System # MODULE TITLE 1 Goods movements 2 Operation indicators 3 Truck fleet 4 Truck drivers 5 Freight companies 6 Passengers movements 7 Passenger counts 8 Passenger cars 9 Bus and Taxi drivers 10 Bus companies 11 Transit 12 Truck traffic at borders 13 Passenger car traffic at borders 14 Imports and exports 15 Goods imports at borders 16 Daily movements of imported goods 17 Traffic accidents 18 Traffic counts 19 Traffic violations 20 Truck terminals 21 Passenger terminals 22 Road utilities 23 Road network 24 Road services 25 Intercity Police stations Source: TTO 47 Annex 5 Peak Hour and Daily Traffic Volumes (September 2002) Peak Hour Traffic Peak Hour Traffic Two- Two- way way No. Routes Total Total Daily Daily Peak One-way Two-way Traffic Traffic Hour Volume Peak Hour Volume (Veh) (PCU) 1 Tehran - Karaj 7-8 5,225 7-8 8,904 135,362 145,046 2 Sari - Ghaemshahr 12-13 1,953 10-11 3,740 50,682 53,220 3 Karaj - Shahriyar 18-19 1,571 18-19 3,012 42,198 50,841 4 Babol - Ghaemshahr 11-12 1,800 10-11 3,209 41,665 44,812 5 Tabriz - Seh Rahi Ahar 16-17 2,113 18-19 3,634 41,574 51,669 6 Tehran- Roudehen 18-19 1,666 18-19 3,080 40,319 51,053 7 Tehran - Robatkarim 11-12 1,410 11-12 2,743 38,804 42,458 8 Tehran - Qom 20-21 1,574 20-21 2,859 38,494 42,384 9 Sari - Neka 11-12 1,604 11-12 2,934 36,803 39,196 10 Gorgan - Kordkuy 10-11 1,863 19-20 3,214 36,583 43,635 11 Karaj - Qazvin 19-20 1,471 19-20 2,941 35,950 40,569 12 Shiraz - Marvdasht 7 - 8 1,532 10 - 11 2,824 33,480 44,240 13 Shahinshahr - Alavijeh 15-16 1,429 17-18 2,708 32,155 40,582 14 Gorgan - Ali Abad 19-20 1,384 19-20 2,668 31,296 35,534 15 Qom - Saveh 18-19 1,943 18-19 3,843 31,132 52,289 16 Bostan Abad - Ahar 16-17 1,904 16-17 3,160 30,796 42,502 17 Morajghal - Shaft 19-20 1,274 11-12 2,198 30,496 32,797 18 Rasht - Astaneh Ashrafieh 11-12 1,169 11-12 2,299 29,781 31,069 19 Babol - Babolsar 19-20 1,139 11-12 2,186 29,645 31,096 20 Noshahr - Nur 11-12 1,327 11-12 2,443 29,132 33,120 21 Rasht - Khomam 11-12 1,124 9-10 2,107 28,625 30,505 22 Shiraz - Pol Fasa 8 - 9 1,297 8 - 9 2,336 28,461 32,586 23 Chalus-- Nashtarud 19 - 20 1,178 19 - 20 2,334 28,026 30,456 24 Amol - Roudehen 18-19 2,098 18-19 3,737 27,585 52,612 25 Nur - Mahmud Abad 18-19 1,238 18-19 2,256 26,682 30,173 26 Mashad - Baghcheh 16-17 2,730 16-17 3,656 26,147 47,313 27 Babol - Darvish Khil 18-19 1,201 19-20 2,109 25,499 29,811 28 Rasht - Rudbar 19-20 1,443 19-20 2,427 25,400 30,880 29 Kolachay - Chaboksar 11 - 12 1,028 18 - 19 1,884 25,152 26,607 30 Hashtpar - Asalem 18 - 19 1,127 16 - 17 2,034 25,015 26,912 31 Rudsar - Langerud 17 - 18 991 17 - 18 1,963 24,874 27,034 32 Amol - Mahmud Abad 11 - 12 1,170 18 - 19 1,965 24,643 27,963 33 Punel - Asalem 17-18 1,374 17-18 2,693 24,355 34,017 34 Azad Rahe Kaveh 16-17 969 16-17 1,853 24,210 28,503 35 Bandar Anzali - Khomam 17-18 1,030 11-12 1,901 23,816 25,833 36 Shahryar - Robat Karim 18 - 19 998 19 - 20 1,821 23,746 26,987 48 Peak Hour Traffic Two- Two- Peak Hour Traffic way way Total Total No. Routes Daily Daily One-way Two-way Traffic Traffic Peak Hour Volume Peak Hour Volume (Veh) (PCU) 37 Meymeh - Murcheh Khort 15 - 16 1,289 17 - 18 2,395 23,585 32,945 38 Ramsar - Tonekabon 19-20 1,014 16-17 1,810 23,095 24,852 39 Babolsar - Fereydun Kenar 10 - 11 1,097 10 - 11 1,805 22,878 24,129 40 Arak - Shazand 16-17 1,566 17-18 2,991 22,828 44,813 41 Behshahr - Neka 11-12 898 11-12 1,742 22,319 24,006 42 Marvdasht - Saadatshahr 13-14 954 16-17 1,774 21,976 28,192 43 ShahidRajaee-Serahi 10-11 1,518 10-11 2,481 21,806 32,736 Shahid Rajaee 44 Neyshabur - Baghcheh 17 - 18 1,160 17 - 18 2,079 21,660 29,068 45 Delijan - Salafchegan 18-19 1,192 18-19 2,291 21,631 30,250 46 Meymeh - Varkan 18-19 1,145 18-19 2,027 21,153 26,973 47 Delijan - Varkan 18-19 1,122 18-19 2,055 21,110 26,762 48 Ardebil - Sarayn 17-18 1,323 10-11 2,141 21,109 25,562 49 Sari - Khazarshahr 17-18 1,002 17-18 1,701 21,106 21,927 50 Qazvin - Loshan 18 - 19 1,755 18 - 19 2,939 20,977 39,586 51 Kermanshah - Harsayn 9 - 10 864 9 - 10 1,610 20,602 24,057 52 Ali abad - Azad Shahr 18-19 887 11-12 1,658 20,507 23,092 53 Hamedan - Saleh Abad 17 - 18 2,060 17 - 18 3,172 20,400 40,422 54 Azadrah-e-Forudgah 10 - 11 934 10 - 11 1,767 19,966 24,751 55 Tabriz - Khaseban 8 - 9 864 8 -9 1,637 19,423 23,221 56 Shaghu - Namju 17-18 1,756 17-18 3,069 19,407 44,704 57 Behshahr - Galugah 11-12 964 11-12 1,650 19,287 22,869 58 Sabzevar - Shahrud 18-19 875 10-11 1,548 19,203 22,641 59 Karaj - Chalus 12- 13 1,238 12- 13 2,173 19,196 25,753 60 Mahmud Abad - Fereydun 19 - 20 837 11 - 12 1,527 18,923 20,393 Kenar 61 Davamand - Firuzkuh 19-20 930 18-19 1,607 18,889 26,287 62 Shiraz - Sepidan 9-10 838 9-10 1,642 18,862 25,560 63 Ramsar - Chaboksar 18 - 19 882 18 - 19 1,607 18,784 20,392 64 Tehran - Lashkarak 17-18 752 18-19 1,441 18,601 20,250 65 Hamedan - Roan 18-19 2,032 16-17 3,411 18,516 39,517 66 Ivanaki - Sharif Abad 18-19 916 18-19 1,807 18,267 24,947 67 GonbadKavous-Azad 10-11 973 10-11 1,636 18,240 18,455 Shahr 68 Bisotun - Harseyn 9-10 752 9-10 1,485 18,121 21,376 Source:: TTO 49 Annex 6 VEHICLE AND ACCIDENT INFORMATION Table 1: Accumulated Number of Vehicles Registered By Type (000) 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Passenger Cars 2,300 2,386 2,451 2,528 2,638 2,775 2,899 3,080 3,317 3,589 Buses and Minibuses 105 112 116 119 121 123 125 130 135 139 Trucks and Pickups 550 588 616 638 659 689 717 766 809 861 Motorcycles - 39 95 133 165 201 243 303 359 483 Total 2,955 3,125 3,278 3,418 3,583 3,788 3,984 4,279 4,620 5,072 Table 2: New Registrations (000) 92/93 93/94 95/95 95/96 96/97 97/98 98/99 99/00 00/01 Passenger Cars 86 65 77 110 137 124 181 237 272 Buses and Minibuses 7 4 3 2 2 2 5 5 4 Trucks and Pickups 38 28 22 21 30 28 49 43 52 Motorcycles 39 56 38 32 36 42 60 56 124 Total New Registrations 170 153 140 165 205 196 295 341 452 Percentage Change -10.0% -8.5% 17.9% 24.2% -4.4% 50.5% 15.6% 32.6% Table 3: Number of Vehicle Accidents (Inter-City and Intra-City) 1996 1997 1998 1999 2000 2001 Fatal Accidents 2,416 2,153 2,103 2,039 2,722 3,073 Number of deaths 3,531 3,079 2,982 2,834 3,816 4,381 Accidents causing injuries 39,117 34,900 35,604 36,401 189,206 65,035 Number of injuries 56,470 50,758 52,623 52,921 72,409 90,355 Accidents causing damages 188,722 189,272 181,940 182,541 239,101 278,745 Total number of accidents 230,255 226,325 219,647 220,081 292,230 346,853 Note: The statistics on fatal accidents published by the Police of IRI are generally underestimated. See following table. Source: Statistical Centre oflran and Police of the IRL Annex 7 Number of Traffic Accident Fatalities in IRI (1993 - 2002) Year Number of Injuries Number of Fatalities 1993 24,856 6,189 1994 44,216 10,545 1995 52,696 11,591 1996 62,466 12,583 1997 68,738 13,690 1998 79,208 14,984 1999 91,048 15,482 2000 108,300 17,059 2001 117,566 19,727 2002 167,372 21,837 Source: TTO, 2003. Note: Hospitals' statistics on fatal accidents indicate much higher figures than the official statistics that are based on police registrations. One important reason is that the police records deaths only when they occur at the site of the accidents, while deaths which occur later in hospitals as a consequence of traffic accidents are not recorded as a traffic accident fatality by the police. In 2002, statistics based on police registration showed a total number of traffic deaths equal to 4,381 in IRI, but data based on hospital statistics indicate that the figure is about five times as high. 51 Annex 8 ROAD USER CHARGES Customs Duties Trade Tax Basic Tax Custom duties * (Trade tax + basic tax) Passenger Cars ** Minibuses 36 4 40 Buses 36 4 40 Pickups (Double cabin) Pickups ( Single cabin) 2 - axle Trucks 46 4 50 5 - axle Trucks 46 4 50 Road Construction Vehicles 46 4 50 Knocked Down Parts 21 4 25 * Custom duties are calculated as a percentage of the CIF value of the vehicle based on the floating rate of exchange ** For passenger cars, 170% of the vehicles value up to 44,000,000 Rials, and for each extra 22,000,000 Rials additional 10% is charged *** For Pickups ( Double cabin), 165% of the vehicles value up to 44,000,000 Rials, and for each extra 22,000,000 Rials additional 10% is charged **** For Pickups ( Single cabin), 160% of the vehicles value up to 44,000,000 Rials, and for each extra 22,000,000 Rials additional 10% is charged Source: MEF Transaction Taxes on Commercial Vehicles Vehicle Type and Capacity Transaction Tax (Rials) Trucks up to 3 tons Domestic Vehicles Trucks between 3 and 6 tons 600,000 Trucks between 6 and 10 tons 1,000,000 Trucks over 10 tons 1,400,000 Trucks up to 3 tons 1,260,000 Trucks between 3 and 6 tons 1,840,000 Trucks between 6 and 10 tons 3,290,000 Trucks between 10 and 20 tons 5,330,000 Imported Vehicles Trucks over 20 tons 12,800,000 Buses ( Benz 302) 6,300,000 Other Buses 5,660,000 Minibuses 2,050,000 Source: MEF 52 Annex 9 Motorized Traffic Modal Split in Tehran, Mashhad, Esfahan, and Shiraz (Number of daily motorized trips by main mode of transport) Tehran (2001) Mashdad (2001) Esfahan (2000) Shiraz (1998) Metro, bus, minibus 4,025,000 (35.0%) 1,199,700 (41.6%) 561,000 (23.8%) 508,072 (27.5%) Taxis 2,300,000 (20.0%) 596,219 (20,7%) 712,000 (30.2%) 535,525 (29.0%) Private cars 3,335,000 (29.0%) 638,311 (22.1%) 732,000 (31.0%) 435,444 (23.6%) Motorbikes 1,035,000 (9.0%) 337,104 (11.7%) 352,000 (15.0%) 100,351 (5.4%) Pick-up 345,000 (3.0%) 97,182 (3.4%) ? ? Trucks, others 460,000 (4.0%) 14,639 (0.5%) ? 267,964 (14.5%) Total 11,502,000 (100%) 2,883,155 (100%) 2,357,000 (100%) 1,847,086 (100%) Annex 10 Urban Bus Transport Performance in Tehran, Mashhad, Esfahan, and Shiraz (Public and Private Supply) Cities Number of Number of Km of bus Staff per bus Share of public Inhabitants/public passengers line per 1,000 bus and bus per day & per dwellers minibus in the public bus total daily motorized trips Tehran 2,381 477 0.2 km 3.40 30% Mashdad 2,000 485 not available 1.95 39% Esfahan 3,448 518 0.7 km 2.07 24% Shiraz 1,923 514 not available 1.57 27% NB. The above data pertains to 2002 except for Tehran (2003) Annex 11 Tehran's Street Network System Performance Indicators (For passenger cars during the morning peak hour: 7:00 - 8:00 am) Indicator 1996 2002 Vehicle kilometer traveled, (1000) 4,070 4,779 Percentage of congested vehicle km 20.8% 26.9% Total vehicle hours traveled (1000) 135 164 Total vehicle hour delayed (1000) 65 80 Average speed (km/hour) 30.2 29 VKM based on traffic model calculations excluding traffic on minor roads. Source: TCTTS, 1996 and 2002 55 Annex 12 Petroleum Consumption and Pollutants in Tehran during the Morning Peak Hour, (1994 and 2000) Consumption Pollutants (1000 litres) (Tons) Gasoline Gas oil CO HC NOx 1994 508 93 179 25 5.4 2000 616 106 216 29 6.1 Percentage increase +21% +14% +21% +16% +13% Source: AQCC 2000. Air Pollution and Contribution by Vehicle Categories Percentage contribution by vehicle categories Density Light Motor Heavy Transit Pollutants (tons) vehicles cycles Minibuses vehicles buses C02 10307 60% 4% 8% 25% 3% NOX 104 48% 0% 5% 44% 3% HC 116 63% 27% 1% 8% 1% CO 1282 90% 9% 0% 1% 0% S02 17 0% 0% 21% 71% 8% PM1O 21 52% 6% 13% 26% 3% Source: AQCC 1997 56 Annex 13 RAILWAY STATISTICS Unit 1994 1995 1996 1997 1998 1999 2000 2001 INFRASTRUCTURE, ROLLING STOCK, STAFF Length of main lines km 5,226 5,332 5,612 5,995 6,264 6,398 6,688 7,156 Main line locomotive fleet in service - 177 167 168 177 172 170 185 193 Freight car fleet in service - 14,785 14,995 15,087 15,324 16,222 16,078 16,226 16,357 Passenger car fleet in service - 930 892 862 732 771 858 885 872 Number of staff - 33,870 3,.259 30,182 28,756 28,407 27,812 28,091 26,673 TRAFFIC Freight carloads 000 378 382 402 441 392 412 446 459 Freight tonnage 000 t 21,340 21,401 22,650 24,405 21,615 23,019 25,199 26,392 Freight volume 000 000 tkm 10,700 11,865 13,638 14,400 12,638 14,082 14,179 14,613 Freight revenue Rls million 151,813 321,004 497,029 788,831 1,016,869 1,209,226 1,289,048 1,291,034 Freight revenue per t-km R1s 14,2 27 36.4 54.8 80.5 80,9 91 88.4 Number of passenger 000 9,134 9,664 8,882 9,451 9,754 10,688 11,707 13,111 Passenger volume 000 000 pkm 6,479 7,294 7,044 6,103 5,631 6,451 7,119 8,043 Passenger revenue Rls million 38,838 41,187 62,291 52,000 136,000 - 195,718 248,014 Passenger revenue per p-km Rls 4.9 5.7 8.8 8.5 24.15 - 27.5 30.9 Total traffic volume 000 000 tu 17,179 19,159 20,682 20,503 18,269 20,533 21,298 22,656 FINANCIAL DATA Total revenue Rls million 205,874 389,122 590,273 871,551 1,246,262 1,250,961 1,393,095 1,417,975 Total working expenses Rls million Working surplus (deficit) Rls million Staff cost Rls million PERFORMANCE INDICATORS Working ratio % Staff costs / total revenue ratio % P-km revenue / T-km revenue ratio % 34.5 21.1 24.2 15.5 30 30.2 35 Staff productivity 000 tu per staff 507 594 685 713 643 738 758 850 Annex 14 RAILWAY FREIGHT STATISTICS BY COMMODITY GROUPS AND DISTRICTS IN 2001(TONS) Description South Lorestan Arak Tebtan North NErh- Khora-san Noh Azerbaijan Esfahan South-East Zahedan Hormoz- Luggage Total East West gant 21,026 617,934 1,629,648 6,457 3,448 98,461 11,044 176,606 297,278 317 0 32,444 0 3,109,094 oal 0 0 0 0 198,711 287,177 0 31,752 0 0 430,056 0 658,671 0 1,606,367 ther Mineral 74,976 44,965 0 3,339 880 693,697 0 0 0 840,070 5,725,161 0 2,072,268 0 9,455,356 laterials ub Total 74,976 44,965 0 3,339 199,591 980,874 0 31,752 0 840,070 6,155,217 0 2,730,939 0 11,061,723 ,rains 189,537 0 17,476 43,585 0 1,988 831,252 400 0 0 481 0 198,406 0 1,283,125 gricultural 321,227 1,256 0 0 891 462 322,932 0 1,002 0 0 0 110,260 0 758,030 laterials ub Total 510,764 1,256 17,476 43,585 891 2,450 1,154,184 400 1,002 0 481 0 308,666 0 2,041,155 lry Fruits 0 0 0 0 0 0 0 0 0 0 0 9,794 0 0 9,794 ugar 25,374 0 1,834 1,507 0 0 0 0 0 0 0 0 1,180 0 29,895 Ither Food 253,670 3,466 0 1,474 35,110 0 46,591 190 0 0 0 30,181 5,596 0 376,278 tuff ub Total 279,044 3,466 1,834 2,981 35,110 0 46,591 190 0 0 0 39,975 6,776 0 415,967 -on Ware 1,279,681 12,708 1,382 18,442 6,712 5,956 170,789 0 0 307,718 0 0 3,575 0 1,806,963 Ither 2,120,217 816 0 10,993 156 176,993 0 1,234 0 0 0 8,323 0 0 2,318,732 idustrial laterials ub Total 3,399,898 13,524 1,382 29,435 6,868 182,949 170,789 1,234 0 307,718 0 8,323 3,575 0 4,125,695 Vood and 1,426 110 108 1,195 163 2,077 0 0 0 0 0 0 0 0 5,079 'ooden roducts ehicles 4,612 8,128 1,824 7,975 4,096 7,167 2,678 255 0 0 215 0 0 0 36,950 rmy 0 4,014 0 1,679 0 0 0 1,975 0 6,112 1,087 0 94 0 14,961 wther Cargos 365,850 287,107 23,857 1,490,665 206,121 28,939 1,245,644 281,603 178,391 314,471 743,194 0 390,849 0 5,556,691 ub Total 371,888 299,359 25,789 1,501,514 210,380 38,183 1,248,322 283,833 178,391 320,583 744,496 0 390,943 0 5,613,681 'otal Products 4,851,001 383,596 664,415 3,210,502 459,297 1,207,904 2,718,347 328,453 355,999 1,765,649 6,900,511 48,298 3,473,343 0 26,367,315 f the District uggage 0 0 0 0 0 0 0 0 0 0 0 0 0 24,972 24,972 ;RAND TOTAL 4,851,001 383,596 664,415 3,210,502 459,297 1,207,904 2,718,347 328,453 355,999 1,765,649 6,900,511 48,298 3,473,343 24,972 26,392,287 Annex 15 Operational Performance Indicators for RAI (1993 and 2001) RAI 1993 RAI 2001 Unit Length of main lines (km) 5,022 7,156 Main line locomotive fleet 336 193 Freight car fleet 13451 16,357 Passenger car fleet 812 872 Number of staff 34,448 26,673 Freight tonnage (000 000 t) 19,8 24,4 Freight volume (000 000 tkm) 9,124 14,613 Number of passenger (000 000) 9.2 13,11 Passenger volume (000 000 pkm) 6,422 8,043 Total traffic volume (000 000 tu) 15,546 22,656 Pkm as percentage of total traffic 41 35.5 Average length of freight haul (km) 460 553 Average length of passenger trip 700 611 (km) Tu per km of line (000 000) 3,1 3,2 Tu per locomotive (000 000) 46,3 117,4 Tkm per freight car (000 000) 678 893 Pkm per passenger car (000 000) 7,9 9.2 Staff productivity (000tu per staff) 451 850 (Data not Staff costs / Operating revenue ratio 75 aabt available) Diesel locomotive availability (%) 46 47 Pkm revenue / Tkm revenue (%) 15 35 Source RAI, 2003 59 Annex 16 Iranian Railway Productivity (2002) - An international comparison Infrastructure usage density (Thousands of traffic-unit per km of line and per year) France 1997 3627 Morocco 1999 3486 Iran 2002 3358 Sweden 1997 2387 Spain 1997 2240 Tunisia 1999 1957 Turkey 2002 1061 Algeria 1999 781 Staff productivity (Thousands of traffic units per employee and per year) Iran 2002 1333 Sweden 1252 Spain 1997 756 France 1997 659 Morocco 1999 599 Tunisia 1999 543 Turkey 2002 312 Algeria 1999 235 Locomotive productivity (Millions of traffic units per locomotive and per year) Iran 2002 77.5 Morocco 1999 29.4 Sweden 1997 25.7 Turkey 2002 21.4 Tunisia 1999 18.8 France 1997 16.7 Spain 1997 15.9 Algeria 1999 14.8 60 Freight wagon productivity (Thousands of ton-kilometers per wagon and per year) Iran 2002 1070 Sweden 1997 992 Morocco 1999 664 Cote d'Ivoire-Burkina 1999 653 France 1997 508 Tunisia 1999 447 Turkey 2002 450 Spain 1997 384 Algeria 1999 197 Passenger coach productivity (Millions passenger-kilometers per coach and per year) Iran 2002 10.2 Tunisia 1999 4.56 Morocco 1999 4.54 Spain 1997 4.04 Sweden 1997 3.92 France 1997 3.92 Turkey 2002 3.89 Algeria 1999 2.18 Sources: RAI, World Bank 61 u a a Annex 17 Iranian Railway - Main Issues and Challenges 1. Should the development of the railway network be pursued? In the past decade, Iran has initiated a significant program of construction of new railway lines. 3268 km of new lines are presently under construction and will be added during the years to come to the 8813 km existing network (a 37% increase in route-km). New lines include the Bafgh/Mashad, Kerman/Zahedan, Arak/Khosravi and the Esfahan/Shiraz lines. Most of these new lines are intended to provide connections to neighbouring countries and to facilitate transit traffic with Turkmenistan, Afghanistan, Pakistan and Iraq, which is considered as a strategic option by Iran. Further important development of the railway network might be considered for the future, as more than 10,000 km of new lines are presently under study; creation of these lines would principally be aimed at creating "by-passes" for traffic and at developing general railway coverage in the country. Quite likely only a fraction of the lines under consideration could be justified on sound economic grounds. Except in the case of High-Speed passenger rail (presently under study on the Tehran/Esfahan route) and of suburban passenger rail, creation of a new railway line can be economically justified only if freight traffic prospects are substantial (several millions tons of freight as an order of magnitude). It is highly recommended that all decisions regarding extension of the railway network be subject to a strict economic analysis taking into account reasonable traffic projections. In the mean time, substantial reduction in the program of creation of new lines would make financial resources available for improvement of infrastructure on the existing network, which might significantly increase competitiveness of rail transport on selected routes. Strengthening of planning and economic analysis of railway projects would be a key element for a better allocation of resources in railway infrastructure investments. 2. Issues related to passenger services. Passenger services are presently managed by RAJA, an autonomous subsidiary company of RAI. By-and-large, rail passenger transport is a loss-making activity. Deficits are compensated by a Government subsidy (around Rials 100 billion in 2002 and Rials 220 billion in 2003) which is determined "ex- post" in view of the actual loss of the company. This arrangement does not provide a strong incentive to RAJA to curb its costs; it also does not allow Government to clearly understand what it is paying for. The deficit paid by Government is only a fraction of the deficit incurred by rail passenger activity. While RAJA uses rail infrastructure managed and maintained by RAI, RAJA does not contribute to the cost of infrastructure maintenance and does not pay for "capacity usage" of the lines (capacity - train paths - reserved for passenger trains might in some cases reduce capacity available for freight traffic). De facto, freight traffic (managed by RAI) is thus subsidizing passenger traffic. Issues related to passenger services might be addressed as follows: (a) the system for compensating RAJA for its losses should be revised. Passenger activities should be separated into (i) "commercial" activities and (ii) Public Service Obligation (PSO) activities. Commercial activities are these activities which, at least after some time, could be financially viable for RAJA; these 62 activities should be progressively deregulated (deregulation would be spread over a five-year period for instance, and competing activities, including intercity bus transport, would be deregulated in parallel), and RAJA would gain freedom to freely determine service configuration and tariffs; no subsidy would be paid by Government to RAJA for commercial services. PSO activities are these activities which cannot be managed on the basis of market rules, notably because services play a social role; suburban rail services, as well as some "regional" services are examples of PSO activities. For each of its PSO activities, RAJA47 would sign with Government (local or central) an agreement which would specify configuration of services to be offered (schedule and capacity of trains) and tariffs to be applied. The agreement would also define how deficits generated by the activity would be compensated; the compensation formula should provide incentive for RAJA to curb its costs and increase revenue, notably through better control of fraud; similar formulas have been successfully implemented in some countries; and (b) RAJA should sign an "infrastructure usage agreement" with RAI. Under the agreement, the allocation of specific train-paths would be guaranteed to RAJA. RAJA would pay to the "infrastructure manager" a fair contribution to the maintenance of the track, as well as a "capacity fee". 3. Financial relations between Government and the railway and the issue of "fair" competition between road and rail in freight transport. Apart from its specific financial contributions for rail passenger transport (operating subsidy to RAJA, investment in passenger equipment), the Government is presently bearing the costs related to (a) investment in new railways lines; (b) rail infrastructure renewal and upgrade; and (c) investment in rail freight equipment (locomotives, wagons and others). RAI is bearing current operating costs of the railway system, including infrastructure maintenance. Revenue generated by freight traffic allows RAI to finance its current expenses, but cannot make up for depreciation of assets. RAI is complaining that it is paying for maintenance of rail infrastructure, while its competitors in the road sector do not pay for road infrastructure maintenance, hence unfair competition between road and rail in freight transport; according to RAI, this unfair competition is restricting the volume of rail freight traffic. 4. With a view to ensuring "fair" competition between road and rail in the freight market, RAI is suggesting that Government also funds current infrastructure maintenance. Such a provision does not seem desirable. Traffic composition shows that a significant part of the traffic handled by RAI is in fact "captive" to rail (heavy haul traffic of iron ore, coal for example) and is almost inelastic to tariff. For non-captive freight, quality of service offered by rail and commercial approach by the railway operator plays a more important role that simply tariff in determining market share between rail and road. It is therefore very unlikely that reduction of tariffs made possible 47 Specific companies - distinct from RAJA - might also be considered for the management and operation of specific passenger PSO activities, particularly for suburban activities. In the long term, PSO operators might even be selected on a competitive basis, as practiced in some cases in Europe and North America. 63 by the take-over by Government of infrastructure maintenance cost would lead to a sizeable shift of freight traffic from road to rail. On the other hand, experience in other countries shows that relying on Government funds for rail infrastructure current maintenance might lead to poor maintenance, as funds allocated by Government might not be sufficient to implement an appropriate maintenance policy. 5. The real solution to the issue of "fair" competition between rail and road lies in fact in the reform of road infrastructure charges, in such a way that road users, particularly trucks, pay for maintenance and renewal of road infrastructure. In parallel with this reform of road infrastructure charges, financial relations between the Government and the freight railway sector should be reconsidered. If it is acceptable that Government continues to bear the cost of rail network development (construction of new lines), the railway operator(s) should pay for rail infrastructure renewal and upgrade as well as for current maintenance, and for investment in rail freight equipment (locomotives and wagons); corresponding costs would be passed to customers through tariffs. The fact that the rail operator(s) bears the cost of maintenance, renewal and upgrade of infrastructure not only will reduce the financial transfers from Government to the railway. This policy should also be conducive to a more efficient management of infrastructure maintenance and investment. As infrastructure renewal will no longer be "free", the railway will better optimize between maintenance and renewal operations. The fact that upgrade investments will have to be recouped through tariffs will give an incentive to select only those investments which make economic and financial sense; this will prevent over-investment in infrastructure, a common feature of railways for which investment is paid for by Government. 6. Tariffs are too low. The average revenue for RAI freight traffic in 2002 is 87.2 Rials per ton-km, i.e., at the current exchange rate, about 1.1 US cents. This is significantly lower than the average revenue of North American railways (between 1.5 and 2.0 US cents as an order of magnitude), considered as the most-efficiently run railways. Despite a remarkably efficient use of assets by RAI, such a low level of tariffs is not compatible with a financial equilibrium for RAI. The low level of rail freight tariffs is largely due to the low level of road freight tariffs, an issue which is addressed in other parts of this report. Beyond the level of tariffs, it is worth noting that rail freight tariffs continue to be regulated by Government, while tariffs applied by the trucking industry are largely deregulated. It is suggested that rapidly rail freight tariffs be fully deregulated; RAI would have full freedom to set tariffs and to negotiate contracts with its main customers. The strong competition from truckers will prevent any abuse of power by RAI. 7. Management autonomy and commercial orientation of RAI. Since 1990, RAI is a joint-stock company, affiliated to the Ministry of Road and Transport. It is endowed with a general assembly, a board of directors and a managing director. Despite this favourable arrangement, RAI does not yet enjoy full management autonomy. As mentioned above, freight tariffs continue to be regulated. RAI has also to get Government approval regarding decisions related to its internal organization, staffing levels, remuneration systems. These elements are not conducive to a fully commercial, 64 customer-oriented approach of railway activity. With the view to better clarifying relations between Government and RAI and to improving RAI's accountability, a contractual relationship could be introduced, possibility in the form of a concession agreement48 8. Should competition between railway operators be promoted? Introduction of competition among several freight railway operators is sometimes considered in Iran, as in other countries, as one of the measures which might improve competitiveness of the rail sector vis-A-vis the road sector. The merits and the feasibility of "intra-rail" competition should be evaluated separately for the various segments of the freight rail market. For "heavy-haul" operations (for example transport of iron ore and coal to a steel mill), for which railway enjoys a quasi-monopolistic situation and for which dedicated assets are used, competition "in the market" between operators is not really a feasible solution; competition "for the market" would be possible, in the form of a long- term concession or franchise. Competition "in the market" is possible for general cargo operations, for which, at least in part, assets (notably rolling stock) can be used for several transports. However, a prudent approach in introducing competition is recommended. Firstly, introducing competing railway operators is not really necessary to exercise a strong competitive pressure on the railway operator on this segment, as the railway is already in full competition with road transport. Secondly, and more importantly, there is a strong risk of "cherry-picking" (or "cream-skimming") attitude from railway operators: competitors will be attracted only by the most profitable operations. In a "single freight operator" configuration, these highly profitable operations provide a high contribution to the coverage of "fixed" railway costs, including most of infrastructure costs; if the operator is driven away from these profitable operations, it will be unable to cover these fixed costs 49. In practice, it seems that competition "for the market" between freight railway operators could be first introduced, on a pilot basis, on two segments of the market: container transport and transit traffic. 9. Reorganization of the railway sector. A large debate has been opened in the Ministry of Road and Transport and in RAI regarding the reorganization of the railway sector; this debate is in part related with the debate about competition in the freight sector. Our recommendation is to approach the issue of reorganization of the railway sector in a pragmatic, non-dogmatic and progressive way, using the existing organization (RAI and RAJA) as a foundation on which the new organization would be built. The main thrust of the approach would be to organize the railway sector along "business lines"; a business unit would be in general a unit vested with semi-autonomous management freedom inside RAI or RAJA. But in specific cases, the business unit could be separated from RAI or RAJA and become a fully-fledged company, constituted as a subsidiary of RAI or RAJA or as a private company. 48 A concession agreement is presently under implementation for the railways of Morocco. The concession company is a joint-stock company. The equity of the concession company is 100% owned by Government in the beginning. Government might be allowed to sell part of its shares to the public in a further step. 49 In theory, a system of infrastructure usage charge, which would be highly "discriminatory" to the users, could solve this problem. No such system is presently in complete use. 65 10. Strengthening RAJA. The passenger sector is already managed by an autonomous company, RAJA. It is suggested that RAJA's technical autonomy from RAI be strengthened. RAJA would become responsible for the traction of passenger trains; locomotives dedicated to passenger traffic and corresponding staff and maintenance facilities would be transferred from RAI to RAJA. RAJA would also be fully responsible for the management of passenger stations, including promotion of urban development operations on railway land in the vicinity of stations (creation of commercial malls or business offices). As mentioned in paragraph 2 above, RAJA would (a) sign an infrastructure usage agreement with RAI and (b) sign with the central or local Government(s) agreements for operation of services to be operated under a Public Service Obligation (PSO) scheme. On a pilot basis, a few operations of suburban or regional PSO services might be separated from RAJA and specific private companies created for the operation of those services. Tariffs for commercial passenger services would be progressively deregulated (in parallel with deregulation of bus services tariffs). 11. Business units in the freight sector. RAI activities in freight transport would be reorganized along business lines. Business units would be created for instance for heavy- haul traffic, containers, transit traffic, general cargo. Business unit would be fully responsible for commercial relations with clients, wagon management and maintenance (generally to be contracted out), formation and shunting of trains, and traction of trains (including current maintenance of locomotives). Rolling stock would be distributed among the various business units. A Central Freight Management Center (with a computerized Freight Management Information System) to be jointly used by business units would be created in Tehran. On a pilot basis, a few business units might be separated from RAI and become fully-fledged private operating companies, notably for containers and transit traffic (where competition could be introduced) and for specific traffic niches50. 12. Infrastructure management. A specialized business unit would be created inside RAI to manage rail infrastructure. This business unit (RAl-Network) would sign legally-enforceable infrastructure usage agreements with RAJA and railway operators outside RAI, and "internal" agreements with RAI business units. An option would be to erect this business unit into a company separate from RAI; however, this option is not recommended; as RAI will remain the predominant user of rail infrastructure, separation might lead to severe technical coordination problems; economic and financial arguments against this separation are also presented in paragraph 4 above. 13. Rolling stock maintenance. Current maintenance of rolling stock would be handled by transport business units inside RAI and RAJA. Heavy maintenance for wagons and coaches will be mostly contracted out, on a competitive basis, to the private sector. Heavy maintenance of locomotives would continue to be made in RAI workshops; these workshops would be constituted as a business unit. so Several private companies operating on specific niches have recently been created in association between RAI and shippers (automobile industry) 66 14. Railway regulation. Creation of a Railway Regulatory Body, to be initially located inside the Ministry of Road and Transport, is recommended. This body would (a) issue licenses to railway operators; (b) review infrastructure usage agreements signed between RAI and RAJA and between RAI and other railway operators; (c) negotiate agreements with RAJA (or other operators) for the operation of PSO services. 67 Annex 18 GENERAL CARGO TRAFFIC AT MAJOR PERSIAN GULF PORTS: 1998-2002 (Thousand Tons) Import Commodity Imam Khomeini Abbas Port (Shahid Rejai and Shahid Bahonar) Chabahar (Shahid Beheshti & Shahid Kalantari) Bushehr 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 Fertilizers 263 305 436 349 302 155 443 447 400 330 0 0 26 31 26 0 0 128 151 71 Metallic products 395 552 1,450 1,463 1,481 60 35 46 6 62 0.2 0 8 0 0 3 6 21 4 6 Barley 50 240 658 425 52 416 221 396 309 0 0 0 0 0 0 0 0 0 0 0 Protein products 926 24 27 15 16 75 67 76 47 34 0 0 0 0 1 0 0 0 0 0 Wheat 1,246 3,486 3,016 2,483 984 983 2,922 2,955 2,551 1,211 160 274 269 295 110 0 33 0 0 0 Sugar 445 681 587 577 566 262 539 364 291 112 42 97 6 54 101 72 143 54 27 58 Rice 189 396 369 602 212 215 333 325 175 235 150 123 104 97 106 121 189 103 112 155 Petroleum products 385 445 400 814 974 11,894 13,691 13,719 14,955 15,334 405 459 444 481 513 888 975 1,170 1,198 1,185 Vegetable oils 378 375 362 476 397 623 773 750 539 705 0 0 0 .0 0 0.22 1 6 5 0.8 Corn 490 1,211 739 1,382 1,561 378 414 129 357 226 0 0 0 0 0 0 0 0 0 0 Miscellaneous 2,089 4,024 4,671 4,289 5,575 3,679 5,221 5,545 6,466 6,983 33 45 27 34 41 80 63 55 52 136 Sub-Total 6,856 11,739 12,715 12,875 12,120 18,740 24,659 24,752 26,096 25,232 790 998 884 992 898 1,164 1,410 1,537 1,549 1,611 Export Commodity Imam Khomeini Abbas Port (Shahid Rejai and Shahid Bahonar) Chabahar (Shahid Beheshti & Shahid Kalantari) Bushehr 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 Oil products 11,471 14,663 12,387 1,1252 11,530 5,264 8,158 7,315 6,739 7,613 0 0 15 46 21 44 79 102 86 92 Minerals 2,557 2,313 2,281 2,577 2,451 542 1,255 1,601 1,614 1,416 0.3 0 0.1 0 0.3 61 78 689 64 63 Miscellaneous 14,028 16,976 14,668 13,829 13,981 1,771 2,433 2,518 2,934 3,114 0.1 9 874.9 34 0.7 333 645 -308 172 408 Sub-Total 15,456 19,174 17,069 16,073 15,669 7,577 11,846 11,434 11,287 12,143 0.4 9 900 80 22 438 802 483 322 563 GRAND-TOTAL 22,312 30,913 29,784 28,948 27,789 26,317 36,505 36,186 37,383 37,375 790.4 1,007 1,784 1,072 920 1,602 2,212 2,020 1,871 2,174 Source: PSO Annex 19 GENERAL CARGO TRAFFIC AT MAJOR CASPIAN SEA PORTS: 1998 - 2002 (Thousand Tons) ANZALI NOSHAUR NEKA 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002 Import commodity: Fertilizers 0 0 0 0 0 41 0 11 7 0 0 0 0 0 0 Metallic products 615 792 1,674 2,300 2,064 147 563 842 851 806 0 0 0 5 2 Wheat 11 0 6 58 62 3 0 3 82 148 0 0 0 0 0 Sugar 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Petroleumproducts 825 80 53 28 0 534 183 183 122 465 484 782 713 310 992 Others 120 173 262 194 296 131 174 246 332 240 5 1 0 7 4 Sub-total 1,571 1,045 1,995 2,580 2,422 856 920 1,285 1,394 1,659 489 783 713 322 998 Export commodity: Miscellaneous 89 98 123 76 104 14 37 39 47 38 0 0 0 0 0 Grand Total 1,660 1,143 2,118 2,656 2,526 870 957 1,324 1,441 1,697 489 783 713 322 998 Source: PSO Annex 20 ANNUAL VOLUMES OF CARGO - ALL PORTS (IMPORT & EXPORT) (Thousand Tons) 1997 1998 1999 1 2000 I 2001 2002 I 2003 2004 2005 2006 2007 TOTAL VOLUMES 5,480 6520 2509 14,910 Containers 482 2,300 2,828 3,657 4,830 6,580 9,000 11,160 13,860 16,780 27,000 3,600 3,600 3,00 3,6003,0 Liquid Bulk 2,704 3,685 3,624 3,595 3,780 3,960 4,160 4,370 4,600 4,800 6,100 2I200 2 2L0 2_400 Dry Bulk 14,330 8,950 17,630 18,314 19,300 21,300 24,000 27,000 31,000 35,000 60,000 3200 3I0_0 2,00 2,0 Miscellaneous 6,730 2,826 3,921 3,585 3,500 3,300 3,000 2,700 2,500 2,000 1,300 6300 6700 7100 7,00 Others 3,700 2,048 3,144 5,413 6,000 6,770 7,300 8,500 9,500 10,660 18,500 ,870 42020 4 0 47260631 TOTAL 28,306 19,809 31,147 34,564 37,410 41,910 47,760 53,730 61,460 69,240 112,900 Source. PSO N.B. (1) Figures beyond 2002 indicate low and high forecasts. Annex 21 BERTH OCCUPANCY RATIO AND BERTH PRODUCTIVITY AT MAJOR PORTS Abbas Chabahar Imam Khomeini ( . Bushehr (Beheshti and Anzali Noshahr Items (Rejai and Bahonar) Kalantari) 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001 1Number of shipvisitsf 1,037 1,112 1,978 2,113 183 155 54 49 690 857 359 509 ship visits 2 Average Vessel size 23.2 21.2 14.9 16.2 10.5 12 16.2 17.9 2,9 3 4,5 4,1 (1000 GRT) :3 Average shipment 39,781 40,680 17,698 19,397 1,325 1,223 1,277 1,473 2,264 2,822 2,117 2,435 (1000 tons) 4 Average ship 5.9 5.74 4.2 3.37 6.4 6.33 10 6 3 2.59 2.7 2.79 days in berth 5 Berth Occupancy Ratio% 6 Berth Productivity 3,620 3,520 3,010 3,683 990 1,041 2,018 4,546 491 487 716 496 ton/day 7 Average Waiting 0.5 0.5 1 0.66 0.7 0.39 0.4 0.18 3.2 3.68 1.1 2.74 time(day) Annex 22 Port Sector and Container Handling at Bandar Abbas - Main Issues Port Management Models and the role of PSO 1. The Ports and Shipping Organization (PSO) is a semi-autonomous organization under the Iranian Ministry of Roads and Transportation. The President of PSO has the function of Deputy Minister. The original characteristics of the system of port management in the Islamic Republic of Iran were akin to those found in the Public Service Port Management Model. The public sector, i.e. PSO, receives its funds for development of the port sector from the Central Government. All port infrastructure and, originally, all port superstructure, was owned and maintained by PSO. In the past, also, most of the cargo handling labor force was employed by PSO. Sources of income were port dues, cargo handling fees and all types of service fees. 2. But this port management system is changing. A few years ago, PSO developed a strategy to reduce its total labor force and, almost simultaneously, invited the private sector to enter into the port domain by contracting out some its functions. Following that process, the management structure slowly changed into that of a Tool Port. This implies that, basically, the public sector provides the basic infra- and superstructure in the ports, but leaves the handling of cargo to the private sector through contracts. 3. Such contracts exist in practically all the Iranian ports. At this moment in time, the majority of the private companies that have been contracted in the national ports are engaged in cargo handling and warehousing activities. Several of these private companies have invested in stevedoring equipment and superstructure. In 2002, they invested some US$58 million. The largest private company involved in ports and transport, Tidewater, is also engaged in activities such as dredging and towage through a contract with PSO. 4. It was confirmed that PSO wishes to limit its role even further and move into the direction of the Landlord Port management Model, as is the world trend. Ways to do that are, for instance, through the signing of concession agreements as Lease or Build- Operate-Transfer (BOT) contracts, as is being discussed for the major extension of the container handling facilities in Bandar Shahid Rajaee. 5. But, as is evident from the analysis of the management and contracting structure in Bandar Shahid Rajaee (paragraphs 6, 7, and 12), at this moment in time, PSO does not seem to be certain of the best ways to move into the direction of this new model. Relation between PSO and the private company Tidewater 6. The principal operator in Bandar Shahid Rajaee is Tidewater. Tidewater is a private company, of which 49% of the shares are owned by PSO. The remaining 51% of 72 the shares is owned by private individuals, some 41% of which are PSO employees. This situation may lead to conflicts of interest. 7. Tidewater had many subsequent multi-year contracts with PSO to handle the container traffic at the Container Terminal in Bandar Shahid Rajaee. However, the number of years within a contract slowly reduced and the present contract duration is only 6 months. Given the fact that Tidewater has also made substantial investments in container handling equipment and developed a comprehensive computerized terminal operations management and control system, this is, to say the least, an unusual development and confirms the uncertainty of the course that PSO wishes to take in public-private port partnership. Analysis of container handling operations in Bandar Shahid Rajaee 8. The performance of the Container Terminal at Bandar Shahid Rajaee is comparable to that of many other efficient terminals in the region and in the world, but the Terminal is approaching its capacity saturation point. 9. The present characteristics are as follows: * The Berth.Occupancy Factor is high, meaning that, if additional berthing space is not provided at short term, vessels may be confronted with the situation that they have to wait for a berth. This will lead to demurrage claims from the shipping companies; * The crane performance is quite high and has been increasing over recent years; * This year two more quay-side gantry cranes will be commissioned. This will reduce the pressure on the capacity; * The average TEU capacity of the vessels calling at the terminal and the average call size (number of boxes loaded and unloaded during a ship's call) have increased much in recent years. These two factors combined decrease the pressure on the system as well, and; * The dwell times of containers in the stacking area are far too high, compared to internationally accepted standards. This means that containers have to be stacked in more layers and / or placed and / or taken from, stacking areas further away from the quay-side operations. To keep the same flow moving, this implies that more hauling equipment must be made available, or, otherwise, vessels are served at a slower speed. Longer term solutions to cope with the increasing flow of containers 10. From the description above, it is obvious that long-term solutions to cope with the anticipated growth in container traffic in Bandar Shahid Rajaee and the limitation of the present Container Terminal are urgently needed. To this end, steps have been taken or are in the process of implementation: 73 * To provide capacity in the intermediate phase, PSO is implementing a plan to develop a dedicated berth for container feeder vessels (the smaller segment of vessels) at the place where until recently dry bulk cargoes, in particular grain, were handled. To handle the feeders, PSO is considering purchasing a total of seven heavy-duty (140 tons lifting capacity) mobile cranes. The observation regarding this plan is as follows: Mobile cranes have a lower productivity than quay-side gantry cranes, and it takes a considerable time to move them from one place to another, would this be required. Consequently, this solution, although understandable, can only be considered as an intermediate solution. * For the longer term, PSO is planning to increase the berth length and terminal area for the handling and storage of containers. The plans are identified as Development Stages 1 and 2: > Stage 1 contains the development of a new quay wall, container stacking area and Container Freight Station (CFS), including all required cargo handling equipment. The main contract for this project has been awarded. Implementation started in December 2003. The anticipated construction period is 24 months and the estimated cost of the project is US$ 150 million. > Stage 2 is a very large project. It includes construction of 3,400 m of berth and 1,000 hectares of stacking area, dredging of some 6.5 million m3 of soil and provision of all required equipment and superstructure. The estimated costs of this Stage 2 were in the order of US$ 350 million. Stage 2 was scheduled to start in April 2004 and the construction time was estimated to be some 36 months. 11. It has become clear, however, that the costs of the two Development Stages were under-estimated. The estimated costs for the two projects combined are now in the order of US$ 800 million. In addition, the start of Development Stage 2 has been postponed till March 2005. 12. The search for adequate arrangements for the facility to be developed in Stage 2 has highlighted some main issues regarding the port sector's future management form. PSO is now contemplating to follow the Build-Operate-Transfer (BOT) method for developing that facility. A first offer submitted by P&O Ports and Tidewater was rejected, mainly because the offer was not acceptable in financial terms. Yet, it appears that there is great interest in this venture from the large international terminal operators. As was mentioned to the Bank, however, one important issue is that the rate of return of the project will have to be higher than what is acceptable in similar projects in other countries. The reasons for this are the perception of higher commercial risks and the present legislation that prohibits foreign companies operating in the Islamic Republic of Iran to have a majority shareholding of their Joint Venture with one or more Iranian companies. 74 Container Handling Charges and Port Dues 13. Analysis of principal charges to cargo and ships, i.e. container handling and port dues, was made by comparing the charges of Bandar Shahid Rajaee with those of the Port of Jebel Ali in the United Arab Emirates. * It appeared that the container handling charges in Bandar Shahid Rajaee are in the order of 14% lower for most charges than those in Jebel Ali. * As for port dues, the total charges for a given container vessel, in terms of vessel characteristics and call size, was made using data provided directly and via the websites. It appeared that the dues in Bandar Shahid Rajaee, for this vessel, are about 35% higher than those in Jebel Ali. Human Resources Development 14. The Bandar Abbas Port Training Institute (PTI) was established, as an IMO project, in the period 1984-1987. Its purpose was to train port personnel in the fields of cargo handling operations, mechanical engineering and nautical skills. Today, the Institute still exists, but the topics have changed drastically: Language (English) and IT skills are the principal courses provided, as well as a limited number of short-term, part- time courses on maritime issues such as port State control and international ship and port security (ISPS). 15. Cargo handling equipment training is provided through on-the-job training. It is strongly recommended to consider the purchase of a Cargo Handling Simulator. Training on a simulator is better, safer and cheaper than on-the-job training. Investigations showed that a full package, including a Train-The-Trainers Program, will cost in the order of US$ 2 million. 16. Another recommendation is that PTI provide classroom training in topics such as Port Management, Port Reform, Terminal Operations, Hinterland Connections, etc, for which it is excellently equipped. It has been shown' that there is a considerable need for up-to-date information in all aspects of ports and transport; and this applies both to the public and to the private sectors. 17. Every year, some 150 PSO staff members are sent abroad for training or education. It also is recommended that this system be maintained. Direct exposure to other cultures and methodologies is important in the international port business environment. Market Potential 18. Container Market. Iranian ports have the potential to increase their share in the booming Gulf Region container market. A slowly decreasing percentage of containers is transshipped via Dubai/Jebel Ali and an increasing number is moved by more direct calls. 75 However, the number of transshipment containers handled in Iranian ports is still very low. A future role as a major player is potentially possible, provided that adequate facilities, services and tariffs are a reality. 19. Transit Cargo. The Islamic Republic of Iran also has potential to serve part of the import and export needs of the landlocked former CIS States north of the country, but seems to be still far from playing that role. One of the reasons is reported to be the present limited capacity and low speed of the road and rail connections to and from Bandar Abbas. Several projects are being executed already or in the planning stage to address these problems. Studies 20. Three major studies, related to the port sector have been, or may soon be, commissioned by PSO: * Integrated Coastal Zone Management Study (ICZM) * Masterplan of Iran's Trade Ports (MITP) * Port Marketing Study (PMS). 21. Information on the present status of the studies appeared to be conflicting in some aspects as far as the MITP study is concerned. * ICZM - Commissioned in March 2003 to five Iranian companies and one foreign (Danish Hydraulic Institute) - The contract sum is approximately US$ 2 million - The Project period is 36 months. * MITP - Apparently commissioned in March 2003 to an Iranian consultancy firm" - The contract sum is said to be approximately US$ 1 million - The Project period is 18 months - The Draft Reports of the First Phase of the Project are said as having been submitted. * PMS - Phase: Preparation of the Request for Proposals (RFP). 22. In particular the MITP study contents are interesting and, provided the study is indeed executed and the results match the expectations, it will provide the public and private sectors with a vast amount of useful tools and information. However, in order to develop a National Port Strategy, a SWOT (Strengths / Weaknesses / Opportunities / Threats) analysis, including a detailed assessment of future traffic demand, would be essential, but such an analysis is not a part of the MITP study, but of the PMS study. The " International consultancy firms, Royal Haskoning and Hamburg Port Consultants, are mentioned as reviewers 76 PMS study seems to be a long way from the start, leave alone from the results and recommendations. It is believed that the public and private sectors cannot wait that long. 23. Therefore it is recommended to consider the feasibility and desirability of combining the MITP and PMS studies into an overall Port and Transport Masterplan Study. If well conducted by experienced companies, such a study would lead to firm and concrete recommendations with respect to key issues such as: * National Port Policy of the Government * Optimum roles for the public and private sectors * The optimum function for each of the Ports * Types of facilities to be developed on the medium and longer term * Employment and training of the right staff in the right numbers and with the right skills * Determination of the potential and position of the Iranian ports within the wider regional context in terms of: - Port facilities - Infra- and superstructure requirements - Cargo handling operations - Hinterland connections and Multimodal transport potentials - Trade facilitation and Customs practices - Business climate, and - Cargo flows (both present cargo forecast and potential cargo flow forecasts). If it is too late to reconfigure the MITP study, the PMS study should be redesigned and expanded to cover the above issues. The study period should be kept extremely short, meaning that the expertise input should be considerable. 77 Annex 23 FINANCIAL PERFORMANCE OF IRAN AIR (Billion of Rials) 1995 1996 1997 1998 1999 2000 2001 2002 Total Revenues 1,800 2,150 2,300 2,800 2,850 3,000 3,100 3,150 Total Expenses 2,000 2,450 2,550 3,150 3,100 3,300 3,300 3,650 Grants 200 300 250 350 250 300 200 500 Net Revenue 0 0 0 0 0 0 0 0 FINANCIAL PERFORMANCE OF ASSEMAN AIRLINES (Billion of Rials) 1995 1996 1997 1998 1999 2000 2001 2002 Total Revenues 160 185 190 215 220 240 270 290 Total Expenses 160 175 185 210 210 240 265 275 Net Revenue . 0 10 5 5 10 0 5 15 Source: Iran Air and Asseman Airlines 78 Annex 24 PERFORMANCE OF DOMESTIC AIRPORTS Considering Passenger, Cargo and Post Transportation (2001) No. Arport Flight No. Airport Category Passenger Cargo(tons) Post(tons) No.of Flights Arrival Departure Arrival Departure Arrival Departure 1 Tehran Intemational 971370 1011769 24006 21643 1213 1156 7106 Domestic 3476793 3447532 6432 16937 1420 763 29776 2 Mashad Intemational 92265 91567 48 183 - - 808 Domestic 1025901 1032934 3014 2160 355 115 8067 3 Shiraz Intemational 107407 106119 318 1095 - 1 856 Domestic 619696 615039 2473 1896 426 262 5973 4 Isfahan Intemational 81014 78540 246 274 - - 525 Domestic 523861 516237 1513 931 44 59 5678 5 Kish Intemational 9583 8525 508 22 5 - 161 Domestic 444402 437768 2589 1035 14 1081 4410 6 Ahvaz Intemational 14299 15876 1 - - - 154 Domestic 453854 454709 2243 636 119 65 3586 7 Tabriz Intemational 14346 14059 75 - - - 104 Domestic 275171 273263 1359 276 23 45 1817 8 Bandar Intemational 46557 46260 180 93 - - 1085 Abbas Domestic 255822 271437 1030 677 112 116 2635 9 Kerman Intemational 16175 15765 3 3 - - 201 Domestic 190950 192580 424 71 22 6 1525 10 Zahedan Intemational 5633 6332 - - - - 123 Domestic 140405 139479 641 173 57 54 1619 11 Abadan Intemational 3709 3753 8 - - - 86 Domestic 106125 107598 298 417 5 3 927 12 Yazd Intemational 9021 8890 - 2 - - 51 Domestic 117117 118623 592 68 11 13 1310 13 KermanshahIntemational 4192 3149 2 1 - - 42 Domestic 175894 168912 830 140 14 31 1448 14 Bushehr Intemational 16378 17987 - 1 - - 296 Domestic 122756 124931 785 314 37 59 941 15 Oormiyeh Intemational 3345 3229 - - - - 10 Domestic 108439 110409 845 25 61 60 1047 16 Chabahar Domestic 71664 76553 359 541 20 15 637 17 Rasht Intemational 4156 3991 - - - - 26 Domestic 59999 58552 65 35 - - 625 18 Ardabil Intemational 1036 985 - - - - 12 Domestic 42588 42051 60 6 1 3 498 19 Khark Domestic 40040 46686 239 - - - 669 79 Flight No. Airport Cat Passenger Cargo(tons) Post(tons) No.of Flights Category Arrival Departure Arrival Departure Arrival Departure 20 Mahshar Domestic 48465 51623 - - - - 801 2: Gheshm International 18006 18050 41 40 - - 464 Domestic 16124 19795 14 18 - - 224 22 Lavan Domestic 26232 33881 545 - - - 437 23 Bandar Domestic 19931 23369 82 94 5 1 437 Lengeh 24 Sari International 14902 14496 - - - - 65 Domestic 26690 27034 9 2 4 - 411 25 Siri Domestic 19306 20897 226 3 - - 295 26 Koram Domestic 19003 16212 10 64 - - 253 abad 27 Laar International 32311 36056 - 40 - 5 908 Domestic 12408 11456 - 13 - - 278 28 Sannandaj Domestic 14555 14442 - - - - 280 29 Jahrom Domestic 44 44 - - - - 1 30 Rafsanjan Domestic 8727 8217 - - - - 153 31 Shahre kord Domestic 11644 10664 - - - - 214 32 Bam Domestic 5031 6043 - - - - 185 33 Lamard International 11112 11342 - - - - 284 Domestic 5949 6795 - - - - 157 34 Birjand Domestic 6822 6069 - - - - 141 35 Ramsar Domestic 4808 4836 - - - - 97 36 Bojnoord Domestic 3665 3526 - - - - 78 37 Bahregan Domestic 1798 1600 - 1 - - 98 38 Sirjan Domestic 3998 3964 1 - - - 129 39 Iranshahr Domestic 4119 4072 - 5 - - 151 40 Hamedan Domestic 3896 3440 - - - - 75 40 Sahand Domestic 3089 3229 - - - - 87 42 Zabol Domestic 1743 3955 - - - - 58 43 Pars abad Domestic 1535 1671 - 15 - - 45 44 Ilam Domestic 7517 6834 - - - - 154 45 Tabas Domestic 1546 1430 - - - - 63 46 Arak Domestic 101 - 1 - - - 1 47 Noshahr Domestic - 32 - 291 - - 3 48 Aslavieh Domestic 19396 20676 266 - - - 207 49 Aboo mousa Domestic 1320 1243 - - - - 23 50 Fasa Domestic 44 31 - - - - 1 51 Gorgan Domestic 7642 8296 - - - - 148 52 Jam Domestic 8149 8851 - 6 - - 196 53 Zanjan Domestic 722 670 - - - - 39 54 Kalaleh Domestic 58 124 - - - - 2 55 Shahrood Domestic 486 486 - - - - 36 56 Yasooj Domestic 2741 - 13 - - - 1 80 No. Airport Flight Passenger Cargo(tons) Post(tons) No.of Flights Quality Arrival Departure Arrival Departure Arrival Departure 57 Jiroft Domestic 40 110 - - - - 14 58 Dezfool Domestic 178 134 - 1615 - - 3 59 Payam Domestic - - 548 71 International - - 10 2512 - - 7 Total Domestic 8571017 8571017 26968 26968 2751 2751 79216 International 1476837 1516740 25985 25985 1218 1162 1162 81 Annex 25 RAI's Memberships of International Conventions & Organizations In order to facilitate international transportation, RAI has joined all major international and regional conventions and organizations to facilitate the clients' access to services. The memberships include: * International Union of Railways (UIC) * International Railway Congress Association (IRICA or AICCF) * UIC Middle East Railways Directors General Group (DGMO) * Working Group of Rail Freight Corridor of South/Southeast Asia and Central Asia through Middle-East * Working Group of Rail Freight Corridor of China, Middle - East Europe (former Silk Route freight corridor). * Intergovernmental Organization for International Carriage by Rail (OTIF) * Convention for International Carriage by Rail (COTIF) * Organization for Cooperation between Railways (OSJD) * International Agreement of freight carriage by rail (SMGS) * Middle-East Railways Tariff Conference (Iran, Turkey, Syria, Iraq, Hejaz in Jordan, Hejaz in Syria) (CMO) * Europe-Asia Tariff Union (TEA) (Iran- Turkey- Bulgaria- Syria- Greece- Former Yugoslavia- Albania- Macedonia) former BPO Tariffs Union. * International Rail Transport Committee (CIT) * Regulations for using freight cars in international traffic (RIV) * Intercontainer & Interfrigo company (ICF) For cargo and passenger transportation RAI also enjoys bilateral agreements with neighbouring countries as follows: * Direct Passenger & Cargo Transportation Agreement with Turkmenistan * Agreement on Border Point Cargo exchange with Turkmenistan * Bilateral Agreement with railway of Pakistan * Agreement on Direct Border Point Link with Former Soviet Union via Jolfa Border point * Agreement on Exchange of Cargo with Turkey * Bilateral Agreement with Russian Railways for using wagons. Following regulations should be regarded in Transportation cooperation with CIS countries: o Tariff Treaty of CIS countries based on MTT tariff o International agreement for using wagons (PPW) Source: www.iriv.com 82 Annex 26 Annual Development Budget for the Transport Sector (All amounts in Billion Rials) Plan Sector Road Rail Marine Air Total Period Budget Percent of Budget Percent of Budget Percent of Budget Percent of Year Total Total Total Total 1990 95.1 29.2 86.7 26.6 50.7 15.5 18.5 5.7 326.2 1991 123.2 26.0 125.0 26.4 55.6 11.7 30.2 6.4 473.7 FFYP 1992 172.8 29.4 135.9 23.2 65.7 11.2 41.1 7.0 586.0 1993 237.7 23.6 319.5 31.7 149.0 14.8 36.9 3.7 1007.9 1994 341.3 23.0 495.6 33.2 122.7 8.3 143.5 9.7 1483.2 1995 676.4 43.4 454.3 29.2 113.3 7.3 161.4 10.4 1558.0 1996 823.3 36.1 560.7 24.6 191.6 8.4 440.3 19.3 2277.6 SFYP 1997 961.7 41.8 392.3 17.1 179.0 7.8 393.4 17.1 2298.2 00 1998 953.1 43.5 285.5 13.0 150.6 6.9 410.2 18.7 2189.2 1999 1088.9 37.7 493.1 17.1 186.6 6.5 679.2 23.5 2886.2 TFYP 2000 1648.2 39.8 1214.0 29.3 164.3 4.0 579.6 14.0 4140.9 Source 1: MBO Budget 1991-2000 Source 2: MBO Budget 2001 Annex 27 Third Five-year Development Plan (2000-20042) Transport Sector Physical Targets, 1 - Road Sub-Sector Average Anrual 1378 1379 1380 1381 Growth Rate% (1999) (2000) (2001) (2002) (1379 - 181) Indicator Unit Perform- Plan Perfor- Accomplis Plan Perfor- Accomplish Plan Perfor- Accomplish Plan Perfor- ance Target mance hment/. Target mance ment% Target mance ment% Target mance Cargo Million 225 239 230 962 256 2685 1049 267 298 1116 5.9 9.8 Transport Ton Passenger Million 369 3882 385 992 4084 394 965 4296 3893 906 5.2 1.8 Transport Person Road Million 28 3.1 3.5 1129 3.5 3 857 4 4.8 120 12B 19.7 Transit Ton Accidents Fatal Person 32 29 33 862 26 33 73.1 23 335 543 -10.4 1.5 Rate' Medium Age Bus Year 18 16.9 173 976 165 165 100 16 145 1094 -3.9 -7 Fleet Length of Km 886 886 886 100 998 886 888 1200 996 83 106 4 Freeways Length of Km 3253 3764 3373 896 4100 3473 847 4500 3724 82.8 114 4.6 Highways Length of Main Km 2252 22990 230ffl 1004 24007 23468 978 250(l) 2384) 954 3.5 1.9 Roads4 Length of Feeder Km 3653 37453 3724) 995 38053 37700 99.1 3869D 3804 98.6 1.6 1.1 Roads Length of Rural Km 90070 92000 9210( 1002 9400 92631 985 9609D 9574 99.7 2.2 2.1 Roads Medium Age Cargo Year 20.2 20.1 21 955 20 21 95 19.9 213 93 -0.5 1.8 Fleet Surface Asphalt of Km 100 90 55 61.1 90 120 1333 100 42 42 0.0 -25.1 Express Roads5 Surface Asphalt of Km 689 800 554 693 900 331 368 1000 808 808 132 5.5 Main roads Surface Asphalt of Km 317 780 521 668 800 61 7.6 800 570 713 36.1 21.6 Feeder Roads 22000 - 2004 corespond to 1379 - 1383 Iranian calendar rDeath ate per ten thousand vehicles Construction and Ren ovation Express Roads consist of Highways and Freeways Source: TTO 84 Third Five Year Development Plan (2000-2004) Transport Sector Physical Targets, 2 - Rail Sub-Sector Average Annual 1378 1379 1380 1381 GrowthF?te% (1999) (2000) (2001 (2002) (1379-13a1) Indicator Unit Perfor- Plan Perfor- Accomplis Plan Perfor- Acccnplish Plan Perfor- Acomplish Plan Perfor- mance Target mance hment% Target mance mert/. Target mance ment/. Target mance Cargo Millbn 23 246 253 1028 263 263 100 282 265 938 7 4.8 Transport Ton Passenger Million 106 116 117 1009 127 13 1024 14 143 102.1 9.7 105 Transport Person Transit Million 0.8 0.9 0.63 70 1 0.6 60 12 0.8 675 145 0.4 Cargo Ton Transit Billion 1.7 1.9 1.1 579 22 1.1 50 2.5 81 712 13.7 1.5 TON'Km T/K Locomotive % 469 483 48 994 528 47.1 892 54.4 47 863 5.1 0.0 In service? Total no No 569 587 575 98 6.6 575 94.9 626 550 879 32 -1.1 Locomotives Renovation Existing Km - 198 330 302 915 370 329 8&9 410 256 624 275 8.9 Lines Renewal Existing Km 63 135 207 1533 150 109 727 165 96 582 378 151 Lines Total Cargo/ Ton/ Total Person 742 758 897 1183 774 9895 1278 790 14203 1798 2.1 24.2 Employee Total Passen Passenger/ ger/Per 344 360 4168 1158 376 441 1173 393 7676 1953 45 307 Total son Employee Construction Km 134 305 325 1066 330 454 1378 455 102 22,4 503 8.7 of New Lines 6 Percent ofLoconotive in Service to Total Locomotives Source: TTO 85 Third Five Year Development Plan (2000-2004) Transport Sector Physical Targets, 3 - Aviation Sub-Sector Average Annual 1378 1379 1380 1381 Giowth Rbte% (1999) (2000) (2001) (2002) (1379- 1381) Indicator Unit Petfor- Plan Perfor- Accomplis Plan Perfbr- Accomplish Plan Perfor- Accomplish Plan Perfor- mance Target mance hmnent% Target mance ment% Target mance ment% Target mance Passenger Arriving & Million 192 227 187 824 24.1 20.1 834 255 20.2 792 9.9 1.7 Departing/all Person Airports Passengers Transported Million 82 104 7.8 75 11 8.6 782 118 84 724 123 0.8 by Person Domestic flights Share of non- governmental Percent 15 25.1 18.6 74.1 289 423 1464 332 27 813 303 21.6 Sector in domestic flight Passengers Transported Million by Person 2.8 2.1 3 1429 23 3.01 1309 2.45 35 1429 -4.4 7.7 International flights Share of non- governmental Sectorin Percent 9.6 97 183 1887 106 123 116 117 14.7 1256 68 15.3 International flights Productivity Hour in ofPassenger 24 6 6.3 6.2 984 6.7 6.7 100 7.1 6.5 915 5.8 2.7 Fleet Hours Substitution & Development No 52 56 50 893 60 59 983 68 61 897 9.4 5.5 of own Fleet Passenger transport potentials Million 59 60 60 100 61 60 984 61 61 100 . 1.1 1.1 based on Person aiport facilities Rented fleet No 34 27 35 704 19 18 1053 11 22 0.0 -314 -135 Cargo transportedby 1000 70 75 64 853 80 83 1038 95 85.5 90 107 6.9 air fleet Ton Source: TTO 86 Third Five Year Development Plan (2000-2004 ) Transport Sector Physical Targets, 4 - Marine Sub-Sector AveragB Anrual 1378 1379 1380 1381 Growth Fhte% Indicaor Unit (2000) (2001) (2002) (1379-1381) Perfor Plan Perfor Acconplis Plan Perfor Accomplish Plan Perfor Accomplish Plan Perfor mance Target mance hment% Target mance ment% Target mance ment% Target mance Ports: Nominal Million 426 44.3 44 993 477 465 975 51 538 1055 62 8.1 Capacity Ton Ports: Occupancy Percent 798 82.3 85.7 104.1 843 93 1103 858 90 1049 2.4 4.1 Ratio Ports: Transit Million 2 2B 22 846 3.4 1.8 529 4.4 1.6 264 30.1 -7.2 Cargo Ton Ports: Container 1000 400 460 419 91.1 580 6165 1063 730 810 111 222 265 Handling TEU Marine Flet Million 2.5 25 25 100 2.6 32 123.1 2.7 325 1204 2.6 9.1 Capacity Ton 72000 - 2004 correspond to 1379 - 1383 Iranian calendar Source: TTO 87 .．脚口口口口口口 ! .____＿」