Report No. PID9176 Project Name Zambia-Railway Restructuring Project Region Africa Sector Transport Project ID ZMPE3227 Borrower(s) The Government of the Republic of Zambia (GRZ) Environment Category C Date this PID Prepared April 25, 2000 Projected Appraisal Date June 2000 Loan Negotiations August 2000 Board Presentation September 2000 Country and Sector Background 1. The geographical setting of Zambia makes ZR a critical link in the logistic chain for international traffic of Zambia, the Democratic Republic of Congo (DRC), and now also of Tanzania and Uganda. Much of this traffic originates from or is destined to the ports in South Africa, Mozambique, Tanzania, and Angola but quite a lot is inter-country regional traffic. ZR has a total track length, all single track, of 1,273 Kms, out of which 848 Kms is main line. The ZR rail system links with the Zimbabwe rail network at Livingstone/Victoria Falls and onwards to the ports in South Africa and Mozambique, Tanzania-Zambia Railways (TAZARA) at Kapiri Mposhi and onwards to the port of Dar-es-Salaam, and the Democratic Republic of Congo (DRC) at Sakania. 2. The traffic volumes of ZR have been falling for many years. Freight traffic exceeded 6 million tons in 1975, representing over 1.4 billion net ton- kilometers (ntkms). By 1988, the traffic had declined to 4.5 million tons, and by 1998 to 1.4 million tons. This precipitous decline in ZR's performance can be attributed to the inefficiency, excess employment and low productivity, waste, lethargy of operations, lack of incentives, and inadequate accountability normally associated with the railways managed as parastatals. The performance worsened even more rapidly after the liberalization of the Zambian economy during the 1990s, in particular the liberalization of the transport sector which resulted in demand for high quality service and emergence of a powerful trucking sector. Traffic on offer also declined due to decline in Zambia's economy, Zambia Consolidated Copper Mines's (ZCCM's) performance, collapse of DRC's economy, and slowing down of the economy of the neighboring Zimbabwe. The declining traffic and revenues and the continuing retention of staff at an unnecessarily high level and, consequently, the resulting high costs of operations have left ZR in a financially precarious condition. Inadequate maintenance has led to ZR being a worn out system. Derailments are an almost daily occurrence and ZR has a bad record of accidents. Vandalism of signals has badly affected traffic control. As a result, the railways are failing to carry all the traffic on offer. 3. In spite of the deterioration of the ZR system in recent years, quick revitalization of ZR is possible. As a first step, an expatriate management group, financed by SIDA, commenced work in March 1998 and has already taken some steps in this direction. Within two years, staff has been reduced from about 5,500 to a little less than 3,300. The morale of the remaining staff has shown a visible improvement. Locomotive and rolling stock availability has improved. As a result, the declining trend of traffic has been reversed. The freight traffic for the year 2000 is projected at 1.8 million tons but is likely to be around 1.65 million tons. A specially designed and speedily- executed package of about US$5.6 million under the proposed ZRRP would be targeted at further improvement of critical inputs, viz., track, locomotives, and rolling stock. Execution of three or four such specifically designed and targeted packages in the course of the next few years would make the system reliable enough for handling all the traffic on offer. However, for sustainability, radical restructuring of ZR and its privatization is urgently needed. 4. The main thrust of the Government's restructuring strategy is to seek private sector participation in the operation and management of the railways, mainly through private concessioning of infrastructure and selling/leasing of locomotives and rolling stock. To facilitate concessioning, the GRZ strategy is also to further reduce the number of employees in the railways to whatever number is required by the concessionaires (estimated at no more than 1,650). Establishing a regulatory framework and restructuring/winding up of the existing Zambia Railways would also be essential as a consequence of the concessioning of the railways. Objectives The Project development objective is to enable ZR, through restructuring and privatization, to substantially increase its operating efficiency, reduce its cost of operations, and configure its freight services and tariffs to meet customers' requirements and expectations, and, consequently, to increase its share of the local, international, and transit freight traffic. Efforts of a privatized and efficiently-functioning ZR to increase its share of freight traffic are expected to result in: Heightening of rail-road competition and, consequently, overall reduction in transport costs leading to the Zambian economy becoming progressively more competitive and growth-oriented. Balancing of the respective share of freight traffic between rail and road modes and a significant reduction of traffic on road, particularly the long- haul and bulk traffic, leading to a significant reduction in the ideal budgetary allocation of funds for the maintenance, rehabilitation and expansion of the road network in Zambia. (Note: Due to funding constraints, the budgetary allocations for road maintenance and rehabilitation in the recent years have been grossly inadequate. As cost recovery improves as a result of mechanisms being put in place under the Road Maintenance Project, the budgetary allocations for road maintenance are expected to increase, but the levels to which these need to increase would be much lower.) The ZR-linked international rail corridors becoming more efficient and cost effective leading to more trade between countries along these corridors, viz., South Africa, Mozambique, Zimbabwe, Zambia, Zaire, Botswana, Uganda (after the - 2 - setting up of inter-gauge transshipment facilities in Tanzania), and Angola (after the reopening of the Lobito rail link); ZR becoming financially self-sustaining and being in a position to reward its capital providers; GRZ being able to reduce its budgetary deficit through receipt of receipt of concession fees, taxes, and hire and lease charges; and Zambia generating more foreign exchange through shift of considerable transit and international traffic from mostly foreign road hauliers to ZR. Description 6. The project would consist of six main components: Railway Concessioning Staff Rationalization Staff Redundancy Unfunded Pension Scheme Contribution Staff Retraining and Redeployment Social Mitigation Assets Rehabilitation and Environment Mitigation Works Regulatory and Legal Framework Winding Up/Restructuring ZR MoCT Strengthening 7. The Project would finance: (a) advisory services that are proposed to be provided under the Project for implementing the agreed concessioning proposal, establishing a regulatory framework and strengthening the Ministry of Communications and Transport; (b) severance payments for the retrenched staff, as well as staff retraining and assistance in redeployment effort; (c) targeted investments in track, locomotives, and wagons; and (d) advisory services for the restructuring/winding up of Zambia Railways Limited after concessioning. Financing 8. The proposed restructuring is expected to cost US$33 million. The Restructuring Plan proposes that ZR would cover US$2 million and the rest would be financed through an IDA Credit in the amount of US$31.0 million Project Preparation and Implementation 9. The details of the program were worked out on the basis of the recommendations of three studies, which have since been completed: (a) Private sector Participation Study; (b) Assets Valuation Study; and (c) Environment Audit. In addition, a social impact assessment study is about to commence. Considerable work was done by ZR towards identifying investment needs, developing a staff rationalization plan, and estimating staff retrenchment costs. Project Sustainability 11. The long-term sustainability of the rail system in Zambia would be considerably enhanced under the Project, which aims at: (a) long-term private concessionsing of Zambia railways; (b) reorienting ZR's remaining operations to their most competitive and productive advantage; (c) transparent selection - 3 - of the private concessionaire in order to optimize the value of the concession; (d) addressing implementation issues in sufficient detail in the concession agreements so as to preempt any possible legal action; and (e) setting up of a credible, independent, and fast system for the settlement of disputes. 13. Compared with the alternative of continuing with ZR as it is and relying solely on normal retirement and attrition, the concessioning of the railways and the accelerated downsizing will pay for itself through increased traffic, reduced labor costs year by year as well as other operating costs and its beneficial effect on the climate within the enterprise for change and innovation. Lessons from Previous Bank Involvement 14. One important lesson from previous Bank involvements has been that a parastatal framework within which most railways currently operate in sub- Saharan Africa is inappropriate for an environment that is progressively becoming more competitive. Private sector participation in the operation and management of railways is considered essential for improving their performance and making them operate as financially self-sustaining entities. Second, the railways are unlikely to become financially viable unless surplus staff in the railways, generally 50- or more, is retired/retrenched. Third, investments in infrastructure, locomotives, rolling stock, and communication systems should better be left to the concessionaires in order to reduce the time and cost of execution. Fourth, it is better that the tasks of running the railways and restructuring it be separated and managed by separate entities. Under the project, Zambia Privatisation Agency (ZPA) will implement the concessioning part while ZR will continue to manage the railways. Finally, a change in the legislative framework affecting the railways is important for successful restructuring. Poverty Category 15. Not applicable. However, the Project would require the concessionaires: (a) to be sensitive to the provision of rail services to the poor and also be involved in the social programs at the community level wherever possible. The concessionaires would also be required to be actively involved in the containment of aids and provision of aids-related attention to the staff and families. Environmental Aspects 16. An environment audit has drawn attention to inadequate compliance with environmental standards. The Project would support: (i) complete liquidation of the past accumulated liabilities; and (ii) ensuring that the concession agreements require the concessionaires to fully comply with all safety, health, environment-related legislation and standards. neglect t applicable. Program Objective Categories 17. None. Contact Points: -4- Public Information Center The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Task Manager Yash Pal Kedia, AFTT1 Telephone: (202) 473-4544 Fax: (202) 473-8326 Note: This is information on an involving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending May 26, 2000. - 5 -