Document of The World Bank Report No: 21073-ZM PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 21 MILLION (US$27 MILLION EQUIVALENT) TO THE REPUBLIC OF ZAMBIA FOR A RAILWAYS RESTRUCTURING PROJECT OCTOBER 18, 2000 Transport Africa Region CURRENCY EQUIVALENTS (Exchange Rate Effective September 20, 2000) Currency Unit = Zambia Kwacha (ZMK) = Us$ US$1 = ZMK 3330.00 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy CDF Comprehensive Development Framework DRC Democratic Republic of Congo ECZ Environmental Council of Zambia EMP Environment Management Plan ERR Economic Rate of Return FRR Financial Rate of Return GRZ Govenument of the Republic of Zambia ICB International Competitive Bidding IDA International Development Association IFAC International Federation of Accountants MCT Ministry of Communications and Transport MCTI Ministry of Commerce, Trade and Industry MFED Ministry of Finance and Economic Development MLSS Ministry of Labour and Social Security NCB National Competitive Bidding NTKM Net Ton Kilometer NPV Net Present Value NSSN National Social Safety Net PAS Project Accounting System PIP Project Implementation Plan PMR Project Management Report PHRD Policy and Human Resource Development Fund PSO Public Service Obligation ROADSIP Road Sector Investmnent Program RWUZ Railway Workers Union of Zambia SA Special Account SADC Southern Africa Development Community SATCC Southern Africa Transport and Communications Commission SDR Special Drawving Right SIDA Swedish International Development and Cooperation Agency SOE Statement of Expenditure ZCCM Zambia Consolidated Copper Mines Limited ZPA Zambia Privatization Agency ZR Zambia Railways ZRL Zambia Railways Limited ZRRP Zambia Railways Restructuring Project Vice President: Callisto Madavo Country Manager/Director: Yaw Ansu Sector Manager/Director: Maryvonne Plessis-Fraissard Task Team Leader/Task Manager: Yash Pal Kedia ZAMBIA RAILWAYS RESTRUCTURING PROJECT CONTENTS A. Project Development Objective Page 1. Project development objective 3 2. Key performance indicators 3 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 3 2. Main sector issues and Government strategy 4 3. Sector issues to be addressed by the project and strategic choices 6 C. Project Description Sumnmary 1. Project components 7 2. Key policy and institutional reforms supported by the project 12 3. Benefits and target population 12 4. Institutional and implementation arrangements 12 D. Project Rationale 1. Project alternatives considered and reasons for rejection 12 2. Major related projects financed by the Bank and other development agencies 14 3. Lessons learned and reflected in proposed project design 15 4. Indications of borrower commitment and ownership 16 5. Value added of Bank support in this project 16 E. Summary Project Analysis 1. Economic 17 2. Financial 17 3. Technical 18 4. Institutional 19 5. Environmental 22 6. Social 23 7. Safeguard Policies 25 F. Sustainability and Risks 1. Sustainability 26 2. Critical risks 26 3. Possible controversial aspects 27 G. Main Credit Conditions 1. Effectiveness Condition 27 2. Other 27 H. Readiness for Implementation 27 I. Compliance with Bank Policies 28 Annexes Annex 1: Project Design Summary 29 Annex 2: Detailed Project Description 32 Annex 3: Estimated Project Costs 43 Annex 4: Cost Benefit Analysis Summary 44 Annex 5: Financial Summary 50 Annex 6: Procurement and Disbursement Arrangements 52 Annex 7: Project Processing Schedule 59 Annex 8: Documents in the Project File 60 Annex 9: Statement of Loans and Credits 63 Annex 10: Country at a Glance 64 Annex 11: Social Impact Analysis 635 MAP(S) IBRD 31135 ZAMBIA RAILWAYS RESTRUCTURING PROJECT Project Appraisal Document Afiica Regional Office AFTTR Date: October 18, 2000 Team Leader: Yash Pal Kedia Country Manager/Director: Yaw Ansu Sector Manager/Director: Maryvonne Plessis-Fraissard Project ID: P003227 Sector(s): TW - Railways Lending Instrument: Specific Investment Loan (SIL) Theme(s): Private Sector; Transport Poverty Targeted Intervention: N Project Financing Data [ Loan 3 Credit O Grant El Guarantee OI Other (Specify) For Loans/Credits/Others: Amount (US$m): 27 Proposed Terms: Standard Credit Grace period (years): 10 Years to maturity: 40 Commitment fee: not exceeding 0.5% Service charge: 0.75% GOVERNMENT 4.00 0.00 4.00 IDA 19.20 7.80 27.00 Total: 23.20 7.80 31.00 Borrower: GRZ Responsible agency: ZRL, ZPA, MCT, NSSN Zambia Railways Limited Address: P.O. Box 80935, Kabwe, Zambia Contact Person: L. Janesson, Acting Managing Director Tel: 260-5-221197 Fax: 260-5-224411 Email: Other Agency(ies): Zambia Privatisation Agency Address: Nasser Road, P.O. Box 30819, Lusaka, Zambia Contact Person: S.A. Cruickshank, Chief Executive Tel: 260-1-22-3859 Fax: 260-1-225270 Email: zpa@zpa.org.zm Ministry of Communications and Transport Address: P.O. Box 50066, Lusaka, Zambia Contact Person: B. Nonde, Permanent Secretary Tel: 260-1-254158 Fax: 260-1-253260 Email: National Social Safety Net Address: Fourth Floor Lusaka House P.O. Box 32186, Lusaka, Zambia Contact Person: Ngosa Chisupa, Director Tel: 260-1-237981 Fax: 260-1-237983 Estimated disbursements ( Bank FY/US$M): Annual 16.0 .4.0 Cumulative 16.0 23.0 27.0 Project implementation period: January 2001 - December 2003 Expected effectiveness date: 01/15/2001 Expected closing date: 06/30/2004 OCS PAD F- R. UP, 200 -2- A. Project Development Objective 1. Project development objective: (see Annex 1) The Project development objective is to enable Zambia Railways (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. Additionally efforts of a privatized and efficient ZR to increase its share of freight traffic are expected to result in: 1. Heightening of rail-road competition and, consequently, overall reduction in transport costs, leading to the Zamnbian economy becoming globally more competitive and growth-oriented; 2. Balancing of the respective shares of freight traffic between rail and road modes; this would result in a significant reduction of traffic on road, particularly the long-haul and bulk traffic, and therefore 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 budgetaly 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 on-going Road Sector Investment Program (ROADSIP), the budgetary allocations for road maintenance are expected to increase, but the levels to which these need to increase would be lower.) 3. 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, Democratic Republic of Congo (DRC), Botswana, Uganda (after the setting up of inter-gauge transshipment facilities in Tanzania), and Angola (after the reopening of the Lobito rail link); 4. ZR becoming financially self-sustaining and being in a position to reward its capital providers; 5. The Government of the Republic of Zambia (GRZ) being able to reduce its budgetary deficit through receipt of concession fees, taxes, and hire and lease charges; and 6. Zambia generating more foreign exchange through a shift of considerable transit and international traffic from mostly foreign road hauliers to ZR. 2. Key performance indicators: (see Annex 1) Key indicators of success would be: 1. The speed with which concessions negotiations are commenced and concessions operationalized, the target dates being June 30, 2001, and three months after signing of the concession agreements, respectively; 2. Freight traffic on rail, the targets for the years 2000 to 2003 being 1.65, 1.8, 2.00, and 2.4 million tons, respectively; 3. Transit traffic on rail, the targets for the years 2000 to 2003 being 200,000; 220,000; 240,000; and 260,000 tons, respectively; 4. Progressively increasing arnount of income tax paid by the concessionaires; and 5. Progressively increasing total cash flow from the concessionaires to GRZ. B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 19889 Date of latest CAS discussion: 11/17/99 The Country Assistance Strategy (CAS) addresses three strategic priority areas, based on consultations with GRZ: (i) the removal of constraints to sustainable, diversified growth; (ii) improved govemance; and - 3 - (iii) better access to basic services and direct poverty interventions. These strategic areas provide the basic building blocks for the current working version of the Comprehensive Development Framework (CDF) matrix. The challenge articulated in the CAS is to help Zambia move to a sustainable growth path that directly leads to more rapid growth and poverty reduction in the future. Underscoring the importance of diversified growth, two thirds of new operations and 75% of IDA lending under the CAS period concentrate on removing constraints to diversified growth. Inadequate infrastructure has been identified as a major bottleneck for private investment and diversified growth. The CAS states that, "reducing transport costs will help increase competitiveness and underpin growth in agriculture, tourism, manufacturing, and mining." The CAS states that IDA will support a project to facilitate private participation in the operation and management of ZR, to enable the railways to increase operating efficiency and, consequently, its share of the freight market. By creating the conditions necessary for the efficient and sustained operation of the railway system, the proposed project would enable the rail operators to increase their gross and net revenue. In particular, project funds will facilitate private concessioning of ZR and retrenchment of surplus railway staff. In addition, the Project can be seen as a critical element in the overall framework of economic and structural reforms being undertaken by the Zambian Government. An efficient rail transportation network is key given the landlocked situation of the country, the need to leverage past investment, and the challenge of high costs of road transportation. An efficiently managed and financially viable railway network is also fundamental to the future success of the recently privatized copper mines. Finally, given the recent trends in restructuring of railway enterprises in Sub-Saharan Africa, the Bank's strategy to support railway concessioning in Zambia is not only timely but also essential. Indeed, there is a market opportunity for railways at this time, and ZRRP has the elements to assist GRZ in leveraging this interest and attracting niche players by providing the right incentives. 2. Main sector issues and Government strategy: The main transport sector issues are: (a) the high cost of transport; (b) perceptions of an uneven playing field between rail and road; (c) the high level of financial support from the Govemment to all transport sub-sectors; (d) the poor condition of rail and road infrastructure; (e) the high rate of accidents and poor record of safety; and (f) the slow rate of regional consolidation. High Cost of Transport. The overall cost of transport in Zambia continues to be excessively high. Road tariffs range from US$0.07 to 0.10 per net ton kilometer (ntkm). Although still lower than the average road tariff, the average rail tariff (about US$0.04/ntkm) is almost twice the level of efficiently run railways, such as in USA. Moreover, ZR rail users currently have to face costs induced by unpredictability of operations, frequent delays, improper handling and storage of goods, derailments, and accidents. The abnormally high transport costs are eroding the global competitiveness of most commodities and adversely affecting exports. The main reason for the continuing high transport costs is the absence of effective inter-modal and intra-rail competition. The absence of competition is in tum the result of the railways' declining performnance and its inability to provide an acceptable level of services. The Government's strategy to reduce these costs is to create conditions that would enhance inter and intra-rail competition within the country. Inter-modal competition is proposed to be enhanced by enabling both the railways and the road hauliers to operate more efficiently, the railways through the involvement of private sector in the operation and management of key railway functions, and the road hauliers through provision of improved roads, facilities for training of entrepreneurs and staff, and easing of border crossing facilities. Intra-rail competition is proposed to be enhanced by opening the railway infrastructure to more than one operator after an agreed period of exclusivity for the concessionaires. - 4 - Perceptions of an Uneven Playing Field. ZRL has for many years been stressing the absence of a level playing field for the rail and road sub-sectors, arguing that: (a) road user charges amount to only a fraction of the entire cost of road maintenance, whereas the railways are required to maintain their infrastructure by themselves without any financial support from the Government; and (b) the road user charges for the large-capacity road vehicles, which are the railways' main competitors, do not adequately reflect the relationship between high axle loads and the resulting road degradation. This situation, according to ZRL, has so far given an unfair advantage to the road hauliers and has been the main cause of the railways' declining traffic. The fact, however, is that in spite of the road user charges being low, the road tariffs in Zarnbia have continued to remain substantially higher than the corresponding rail tariffs. An efficiently performing and customer focused ZR could have maintained its share of fl-eight traffic at a considerably higher level in spite of the stated disadvantage. Even so, the Government's strateg' is to increase road user fees to cover short term maintenance and upkeep of all roads. This would definitely benefit the railways. However the projections of traffic, and hence the concession fees, are based on the current cost recovery levels for roads. High Level of Govemment Financial Support to the Sector. The Govemment currently provides substantial financial support to all the transport sub-sectors. In the road sub-sector, despite GRZ's efforts to improve cost recovery, revenues continue to lag behind the road network's capital and maintenance requirements. In the railways sector, although the Govemment is no longer providing a direct operating subsidy to ZRL, it has from time to time been forced to write off its loans as ZRL has never been in a position to service them. Continuous neglect of maintenance of assets by ZRL has caused those assets to deteriorate to such an extent that a substantial injection of private or public capital would be necessary to prevent the railways from collapse. The Government's strategy to reduce its financial support to these sectors is to continue improving cost recovery from road users and to open the rail sector to private sector participation. Deteriorating Condition of Inftastructure. Despite the high tariffs and substantial past investments, the rail infrastructure is in very poor condition. Three reasons account for this: (a) the poor quality of maintenance, which has resulted in faster-than-normal deterioration of the infrastructure; (b) concentration of huge amounts of funds on certain sections of the infrastructure and development of these sections to unnecessarily high standards while starving others of even the minimum basic maintenance; and (c) adoption of highly sophisticated technology both in track and signaling and high dependence on imports of parts and skills. The road infrastructure has similarly suffered due to the shortage of funds caused by inadequate cost recovery from road users, lack of enforcement of axle load regulations, and inefficient maintenance. As the Government's capacity to finance the required capital expenditure remains poor, the transport infrastructure is at considerable risk of further deterioration. The Government Strategy to improve the infrastructure is to open the rail sector to private participation and increase the road user charges to cover at least the short-term marginal cost of roads. High Rate ofAccidents and Poor Record of Safety. The rate of accidents on both roads and railways remains very high. Inadequate safety consciousness, lack of investment in safety equipment and training of staff, and inadequate enforcement of safety regulations have been the main reasons for the high rate of accidents. The Government's strategy is to emphasize improved traffic management as well as improve and enforce safety regulations. Inadequate environmental management. An environmental audit of the railways has shown the absence of an environmental policy and environmental management plan, as well as non-compliance with the established environmental and safety standards. The Environmental Council of Zambia (ECZ) has limited - 5 - capacity to enforce these standards. The Government Strate2v with regard to railways is to strengthen ECZ so that it monitors compliance with the environmental and safety standards. Slow Rate of Regional Integration. In spite of expressed intentions, the railways in the region have not yet taken concrete steps to integrate their functions and activities and thereby take advantage of the economies of scale and specialization necessary to achieve the high levels of efficiency and productivity expected of railway systems. There is marked reluctance on the part of individual railways to give up any facilities or functions. The concessioning of the railways could trigger regional integration, as the private sector seeks to gain from advantages of scale by entering into appropriate contractual agreements with the neighboring railways and other service providers. The Govemment does not yet have a clear strategy in this regard except to make ZR a strong link between South Africa and DRC. The Govemment's expectation is that the private operators, in their search for efficiency and productivity gains, will be more likely to work with the neighboring railways to integrate many of the railway functions. Governmnent Strategy for the Rail Sub-sector Privatization. To address the issues described above, GRZ has decided to seek private sector participation in the operation and management of the railways. The agreed mode of private sector participation would be private concessioning of infrastructure and selling or leasing of locomotives and rolling stock. Private sector participation is aimed at dealing with problems normally associated with public ownership and management, viz., inefficiency, over investment, waste, excess employment, financial losses, and at providing capital to address issues of deferred maintenance. StaffRationalization. Staff rationalization is a key component of the GRZ strategy to improve efficiency and cost effectiveness of public enterprises in general and the railways in particular. On July 1, 1998, ZRL had a staff of 5,082 plus 800 "casual" workers. This has progressively been brought down to 3,293 by natural attrition as well as retrenchment. The optimal staffing level for ZRL, however, is much lower. According to the ZRL management, the optimal level is 1800, while according to the consultants the railways can be run efficiently by only 800 staff. The potential concessionaires would probably settle on a staffing level between 800 and 1800, thus requiring retrenchment of staff of between 1400 and 2400: Regulatory Framework. The responsibility for safety and environment-related regulation for the railways is currently exercised in an informal and unsatisfactory manner by ZRL itself. To avoid the inherent conflict of interest, GRZ's strategy is to strengthen the existing regulatory bodies within and outside MCT, and to enforce technical, environmental and economic regulation more effectively. The regulatory bodies would be expected to deal with many of the issues discussed above, such as uneven playing field, inadequate competition, and fair trade practices. The Govemment plans to explore the need for further development of the regulatory framework and/or institutions. ZRL Restructuring/winding up. Eventually ZRLwill hand over the freight and passenger business to concessionaires. The future role of ZRL as an entity has still to be defined. ZRL may have need to continue operating as a downsized state owned company with the responsibility of spinning off the remaining commercial and non-commercial activities (i.e., not taken over by the concessionaires such as guest-houses, clinics, football teams and police), discharging all its liabilities, selling off the remaining assets, and finally winding itself up. ZRL may also have to be retained if: (i) no proposals are received for the passenger concession and ZRL is required to continue operating these services; and (ii) ZRL is required to serve as a holding company holding the infrastructure assets on behalf of the government. - 6 - 3. Sector issues to be addressed by the project and strategic choices: The proposed project will assist GRZ and ZRL in the: 1. Finalization and operationalization of private concessions for ZR's freight and passenger operations, with the objective of reducing transport costs, improving the condition of infrastructure, contributing to the Government's revenues, reducing accidents and improving safety, and improving compliance with environmental standards; 2. Rationalization of staff through: (i) retrenchment of surplus staff; and (ii) counseling, retraining, and re-deployment of retrenched staff, with the objective of reducing costs of operation and facilitating the successful operationalization of the concession; 3. Strategic maintenance of key assets during the concessioning process and until the take over by the concessionaire with a view to improving the performance of the railways during the concessioning process and enabling the concessionaire to maximize performance in the shortest possible time after takeover; 4. Development of an appropriate cost-effective regulatory franework with a view to improving compliance with environmental and safety standards; 5. Appropriate winding up/restructuring of the residual ZRL after take over of the core railway system by the concessionaire and spin-off of the remaining assets/activities; and 6. Strengthening of the Ministry of Communications and Transport (MCT) with a view to enhancing its conceptual and analytical capacity and the refinement and elaboration of the transport sector policy. C. Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The project would consist of the following components: (A) Railway Concessioning (B) Staff Rationalization * Staff Retrenchment * Pension Obligations (C) Assets Rehabilitation (D) Environment Mitigation (E) ZRL Restructuring/Winding Up (F) Regulatory and Legal Framework (G) MCT Strengthening (H) Social Mitigation Project Component A: Railway Concessioning Cabinet, at its meeting on March 7, 2000, considered and approved the concessioning of ZR as recommended by ZPA. To implement this decision and facilitate the private concessioning of the railways, the following studies have been completed: (i) environmental impact assessment and audit study; (ii) asset valuation study; (iii) in-house social impact assessment study of the staff retrenched so far by ZRL; and (iv) social impact assessment study by external consultants. The concessioning proposal finalized by ZPA envisages three separate concessions as follows: - 7- * a geographically separated but verfically integrated short-haul, inter-mine freight service concession comprising the Ndola-Chingola section plus branches; * a geographically separated but vertically integrated long-haul freight service concession comprising the main line (Sakania-Livingstone); and * an operating concession for a specified set of passenger services, being operated as public service obligations. This component would finance advisory services to implement the agreed concessioning proposal, including: (i) advisory services, which ZPA may require to design, negotiate, implement and monitor the concession agreements; (ii) legal assistance required for preparation and negotiation of concessions, articles of incorporation and shareholder agreements, as well as for contract interpretation and dispute resolution; (iii) assistance in addressing questions of finance, accounting, asset valuation, and resource mobilization; (iv) assistance in specialized technical matters, including those pertaining to the environment; and (v) assistance in market intelligence and assessment. Inputs for this component would comprise consultant services and technical assistance. Project Component B: Staff Rationalization This component has two sub-components: (i) Staff Retrenchment; and (ii) Pension Obligations. StaffRetrenchment. Based on the concessioning experience so far and confirmed by the estimates produced by ZRL as well as the consultants who undertook the Private Sector Participation Study, the concessionaires are likely to engage only between 800 to 1800 staff out of the current 3,300. To be on the safe side and to avoid a situation of shortfall of funds to finance retrenchment, the allocation of funds for this component is based on an estimated staff employment of 900 by the concessionaire and a corresponding staff retrenchment of about 2,400 staff. ZRL has recently negotiated with RWUZ a retrenchment package which comprises 3.2 months of salary for every year of service. Using this package and assuming that all staff (3,300) would be retrenched, ZRL has estimated the cost of retrenchment to be about US$21.0 million. The proportionate cost of retrenchment of 2,400 staff would come to about US$15.2 million. A contingency of 15% has been provided in addition to cope with any variations in the package or the number and categories of staff to be retrenched. The sequence of retrenchment, as developed in agreement with ZPA/ZRL/GRZ, is as follows: (a) 700 staff would be retrenched immediately after the Credit becomes effective, the criteria to be used for identifying the surplus staff having already been agreed with the unions; (b) the remaining staff would be retrenched after the concessionaires have selected the staff according to their requirement. Pension Obligations. In the past ZRL has defaulted on transferring pension contributions from staff to the Pension Fund. Consequently the staff, who are entitled to pension benefits under the Zambia Railways Pension Rules (either a refund of contributions or a defetred pension on reaching the retirement age), cannot be paid their dues by the Pension Fund. The responsibility for this accumulated liability lies with ZRL. It is quite certain that the retrenchment efforts will get stalled unless ZRL meets this liability prior to commencement of the retrenchment process. ZRL has assured that the balance, about US$1.0 million equivalent, would be paid to the Pension Fund by December 31, 2001. This component would finance the severance payments of permanent staff to be retrenched, and would be implemented by ZRL. -8 - Project Component C: Assets Rehabilitation The component would finance three key components to address simultaneously the three major operating constraints, viz., inadequate availability of locomotives, poor condition of track, and excessive sidelining of wagons on account of non-availability of wheels. The items to be financed comprise: (a) materials and equipment for the overhaul of five main line locomotives; (b) strengthening of track by replacing a certain percentage of sleepers for the 377 kms of track that is fitted with wooden sleepers and replacing wooden sleepers in poor condition with concrete sleepers to complete the rehabilitation of the Chisamba-Lusaka section; and (c) procurement of about 2,000 wagon wheels. Locomotives. The overhaul of five mainline locomotives is overdue, and the longer the overhaul is postponed the more expensive this would become. The cost for rehabilitation is estimated to be US$240,000 per locomotive. Allocation: US$1.2 million (IDA). Track sleepers. Replacement of one in every four sleepers is the most economical way of improving the track condition in the short-term. Accordingly the project would include US$0.9 million for 60,000 sleepers (IDA) and about US$2.0 million (GRZ) for fastenings, ballast, rails, and crossings. The component would also include 35,000 concrete sleepers to complete the rehabilitation of the Chisamba-Lusaka section at a total cost of US$1.5 million (IDA). This section of track is important as it has accounted for a large percentage of total derailments in the recent past. The section already has concrete sleepers and use of wooden sleepers is not compatible. Allocation: US$2.4 million (IDA) and US$2.0 million (ZRL). Wagon wheels. Many wagons are running on wheels that have reached their technical limit of wear and need to be replaced. The interchange loss on account of detention of defective wagons amounted to about US$ 1.0. million during 1999. About 2,000 wheels are proposed to be procured at a cost of US$ 1.1 million to be financed by IDA. Project Component D: Environmental Mitigation This component would comprise procurement of pollution-control equipment, such as oil separators and fume extractors, with the objective of bringing the railways into compliance with national and international standards for pollution control. These items have been identified and costed in a Environment Study Report. Project Component E: ZRL Restructuring/Winding up The future role of ZRL as an entity has yet to be defined. It is possible that ZRL may need to continue operating as a downsized state-owned company with the responsibility of spinning-off the remaining commercial and non-commercial activities (i.e., those not taken over by the concessionaires such as guest houses, clinics, and police), discharging all its liabilities, selling off the remaining assets, and finally winding itself up. ZRL may also have to be retained if: (i) no proposals are received for the passenger concession and ZRL is required to continue operating these services; and (ii) ZRL is required to serve as a holding company to hold the infrastructure assets on behalf of the government. This component would comprise a study on the new role of ZRL and the hiving off of core and non-core businesses and technical assistance for the implementation of the study recommendations. Inputs for this component would comprise consultancy services and technical assistance. -9- Project Component F: Regulatory and Legal Framework This component would include assistance to assess/identify the effectiveness of the existing scope, functions, and instruments of the regulatory framework; (ii) recommend the sectoral coverage and accountability relationships for the regulatory institution(s). The component would also include the provision of equipment and technical assistance services to enable the launching of the identified agency(ies) and the preparation of its staff. Additional finance provided under this component would cover the technical aspects of the regulatory framework. Consultant services for technical assistance and studies would be targeted at the development of the required capabilities within MCT or any other institution identified for this purpose, to enable that institution to discharge its role in an effective manner as a supervisor of the concession contracts. The component would also include provision of technical assistance services for the setting up by the Borrower of an Escrow Fund to be used for the payment of: (i) the retrenchment benefits pertaining to the service of eligible employees of ZR; (ii) operating expenditures of any residual part of ZR in the event of winding up, reorganization or privatization; (iii) debt service obligations; and (iv) costs of environmental mitigation measures required. Project Component G: MCT Strengthening This component would include a study to (i) review and refine the framework for developing and overseeing transport policy; (ii) define the new functions of MCT to discharge its role; (iii) assess MCT's organizational structure in the framework of this evolving role; and (iv) determine staffing requirements, taking into account GRZ's civil service reform program. The component would also include the provision of consultant services for technical assistance to enable the implementation of the reconmmendations of the study. Inputs for this component would comprise consultancy services and office equipment. - 10 - Project Component H: Social Mitigation As indicated earlier, between 1400 and 2400 staff could be retrenched during the next one year. ZRL plans to retrench 700 workers as soon as the Credit becomes effective and funds are available. While the retrenchment payments will help, the loss of employment could have a seriously adverse impact on workers unless the retrenchment process is carefully planned and implemented. Previous experience of retrenchment in ZRL has not been encouraging, as about 5% of the retrenched workers have found formal employment, another 20% have opened small enterprises, and another 5% have moved to the villages and presumably smallholder agriculture. The project has been designed to provide a comprehensive professionally organized approach to mitigating the social imnpact of retrenchment. The component would be implemented by the National Social Safety Net (NSSN), within the Ministry of Labour and Social Security (MLSS), which has substantial previous experience in mitigation and training activities, and is being developed using the results and recommendations of a major social mitigation assessment study. Counseling will be undertaken by experienced professional organizations well in advance of actual retrenchment in order to prepare workers for the initial period, especially with regard to the use of retrenchment compensation. Retraining and re-orienting workers to altemative employment will utilize approved public and private training institutes, and assistance in resettlement will be considered. It has also been agreed that additional mitigation measures will, if necessary, be funded through the concession escrow account. Project Cost Summary Railway Concessioning Privatization 1.00 3.2 1.00 3.7 Staff Rationalization Public Enterprise 16.90 54.5 15.20 56.3 Reform Assets Rehabilitation Railways 6.70 21.6 4.70 17.4 Environmnental Mitigation Pollution Control 0.30 1.0 0.30 1.1 / Waste Management ZRL Restructuring/Winding up Public Enterprise 0.50 1.6 0.50 1.9 Reformn Regulatory and Legal Framework Privatization 0.80 2.6 0.80 3.0 MCT Strengthening Institutional 0.50 1.6 0.50 1.9 Development Social Mitigation Safety Nets 1.00 3.2 1.00 3.7 Contingencies 3.30 10.6 3.00 11.1 Total Project Costs 31.00 100.0 27.00 100.0 Total Financing Required 31.00 100.0 27.00 100.0 - 11 - 2. Key policy and institutional reforms supported by the project: The focus of the Project is on institutional reform. Key institutional reforms include: (a) private sector participation in the operation and management of the railways; (b) staff rationalization and re-deployment of redundant staff, (c) corporate restructuring of ZRL to enable it to spin-off the residual functions/assets after take over of the main railway operations by the concessionaire and its eventual winding up; (d) restructuring of MCT and enhancement of its conceptual and analytical capacity; and (e) establishment of a regulatory framework. 3. Benefits and target population: The proposed restructuring, downsizing, and concessioning of ZR is expected to result in a significant improvement in the railway's operating efficiency and quality of service benefiting all stakeholders. Specific benefits for various stakeholders are expected to be as follows: a) for the customers - reduced transport costs; better quality and predictability of services; improved national and international competitiveness; reduced accidents and lesser darnage to goods and life; b) for the govemment - a better return on its investment in railways; increased revenue from the concession fees and taxes; improved quality of infrastructure; and lower spending on road rehabilitation and maintenance; c) for the concessionaires and investors - an opportunity to get handsome returns on their investments; and d) for the neighboring countries - reduced transport costs on their international traffic passing through Zambia. 4. Institutional and implementation arrangements: Implementation period. The project would be implemented over a period of 36 months, i.e., from January 1, 2001 to December 31, 2003. A mid-term review will be carried out jointly with IDA and the following implementing agencies, no later than 18 months after the effective date of the Credit. Executing Agencies: (i) for Concessioning of Railways component: ZPA; (ii) for Staff Rationalization, Assets Rehabilitation, Environmental Mitigation, and ZRL Restructuring/Winding up components: ZRL; (iii) for Regulatory Framework and MCT Strengthening components: MCT; and (iv) for Social Mitigation component: NSSN. MCT will be responsible for the overall coordination of the Project. This will involve the overall supervision of the components, preparation of project reports, coordination of the mid-term review, maintenance of special accounts, and ensuring timely replenishment of the three special accounts by their respective implementing agencies. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The altematives for the revitalization of ZR have been under consideration for quite some time. The Private Participation Study financed through the PHRD grant discussed a number of options before recommending the selected option (see detailed discussion in Annex 2). Of the many options considered, the option of outright sale of the railways was rejected on account of serious political concerns. The following five options were considered and the first four were rejected. However, some features of the third - 12 - and the fourth options were integrated into the option that was finally recommended, viz., the fifth one. The options considered were: (a) Restructuring but no privatization; (b) Restructuring and strengthening the railways prior to concessioning; (c) separation of infrastructure from operations and concessioning of infrastructure and licensing of multiple operators; (d) one integrated concession for the freight and passenger services; and (e) separate concessions for the freight and passenger services as well for the inter-mine and inter-city freight services. 1. Restructuring but no privatization. Privatization of railways in the developing world being a recent phenomenon, the track record of success is still in the process of building up. Combined with many other concerns over private participation in a strategic institution such as railways, ZRL (under the previous management) had suggested that the restructuring of the railways along with staff reduction be undertaken, but its privatization be postponed to a later date. The main argument of ZRL management was that a downsized and restructured railway could achieve the same type of results as expected from a private railway, while avoiding the dysfunctional aspects that are associated with private management such as asset stripping, undermining of public service obligations, profiteering etc. This suggestion was, however, rejected mainly for two reasons. First, the lessons of the Fourth Railways Project and of other railway projects in sub-Saharan Africa have been that improvements in operational and financial performance within the parastatal framework are slow and unsustainable. Even though compared to past railway projects, the "restructuring but no privatization" would have sought more intensive restructuring of the railways and substantial staff retrenchment, the problems normally associated with parastatals, i.e., inadequate motivation and accountability, government interference, lethargy, bureaucratic rules, would have proved major constraints to any effective improvement in operating efficiency. Second, inherent in the suggestion was the need for injecting substantial fresh capital for the rehabilitation of infrastructure and other assets, estimated between US$60 million to US$100 million. Not only could the railways not afford such a high level of investment, but also GRZ was in no position whatsoever to mobilize resources of this order. The private sector on the other hand could be expected, first, to develop a more pragmatic and phased programn of investment, and, second, to mobilize the optimal level of funds required. 2. Strengthening the railways before concessioning. The rationale for this alternative has been that a restructured and improved railway could prove to be more attractive to potential concessionaires leading to a higher value of the concession overall. This altemative was, however, rejected for two reasons. First, the attractiveness of a railway for a potential concessionaire depends less on its current condition or performance than on its potential. In any case, the condition of the infrastructure and its assets would have been reflected in the concessionaires' offer. Second, the claim that the railways' performance could be improved within a parastatal framework even with substantial inputs has not been proved by past experience. The focus of most past railway projects was on rehabilitating infrastructure, creating adequate operational capacity; developing operations and management support systems, organization restructuring, assets rationalization, performance indicators; and performance contracts between the railways and the governments. However, in spite of substantial inputs, these projects generally have failed to improve the railway performnance. In most cases, the railway performance actually deteriorated. In some cases, the railways have deteriorated to such an extent that their revitalization has become more difficult and expensive. 3. Separation of infrastructure from operations. Such an arrangement is expected to lead to intra-rail competition and, subsequently, to increased operating efficiency and reduced costs. Even so, the option was rejected because of the somewhat uncertain and controversial outcome of such a separation in UK, the only country to do so. Zambia was assessed to be too small a railway system for such expernmentation. - 13 - 4. Single integrated concession for freight and passenger services. The option was assessed to be quite appropriate for ZR and eventually may be preferred by the potential bidders. However, since ZRL's three key businesses, viz., inter-mine freight, inter-city freight, and passenger traffic, have very different characteristics, a single concession might not be of interest to one concessionaire. If the issue was forced and the bidders were required to bid for all the three businesses as a single concession, the price offered by the concessionaires could have turned out to be sub-optimal. Inter-mine freight operations are characterized by substantial tonnage but have a very short haul. The locomotive and wagon characteristics are more appropriate for shunting (switching) operations, the customers are almost always the same, competition is low, and the operational schedules need to be decided in very close consultation with the customers. Average speeds are generally quite low and there is a need to keep the costs low by using innovative methods particularly for track maintenance and assets utilization. Inter-city freight services are generally long-haul operations, particularly for transit and intemational freight. Both marketing and operations require maintaining close coordination with the neighboring railway systems. Customers' expectations of the quality of service are quite high. The range of goods, customers, origin-destination combinations, quality of service, and tariffs is normally very wide and requires complex planning and scheduling capabilities. The operations are required to be carried out in a highly competitive environment. The passenger services are perceived to be loss-making and are being provided as public service obligations. The utilization of the assets is generally low, but tariffs have to be kept low. Even so, the visibility of the quality of service is high, tolerance for accidents is very low and risks are high. 5. Separate integrated concessions for the inter-mine freight and inter-city freight services and operating concession for the passenger services. In view of the concems with a single integrated concession, it was decided that three separate concessions would be offered and the bidders would be given the opportunity to bid for one or more of these three concessions. The question of whether one or three concessions, would thus be decided by the preference of the bidIders and the value of their bids. This option has the potential of maximizing the value of the concession (s). 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Implernentation Development Bank-financed Progress (IP) Objective (DO) Rehabilitation of ZRL assets Fourth Railway Project S U (completed) Reforn of the road sector policy and Road Sector Investment S S institutional framework, strengthening Program of the local construction industry and rehabilitation and maintenance of the road network Other development agencies SIDA - Formulation and implementation of a Restructuring Program for ZR and immediate improvement of ZR performance - 14 - IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Lesson 1: The performance of most railways in sub-Saharan Africa has been characterized by inefficiency, loss of market share, back-log of infrastructure maintenance, and consequently, huge recurring losses. Intemal reforms - corporatization, performance contracts, internal organizational restructuring - business and profit center approach or functional integration, and many other combinations of functional and divisional units, geographical decentralization - have failed to stem the declining trend. It is quite apparent that a parastatal framework within which most railways currently operate - inadequate authority, motivation, commitment, and accountability; continuing govemment interference; and politically-motivated investment and operating decisions - is inappropriate for an environment that is progressively becoming more competitive. Private sector participation in the operation and management of railways (henceforth referred to as privatization) is considered essential for improving their performance and making them operate as financially self-sustaining entities. GRZ's eventual commitment to privatizing the railways in Zambia has been the main factor in the Bank agreeing to support GRZ through ZRRP. Lesson 2: Every railway in the sub-Saharan African region is over-staffed (some to the extent of about 200 to 300 percent). Whether managed as it is or through private participation, the railways are unlikely to become financially viable unless surplus staff is retired/retrenched. Even though retrenchment of staff is a politically and socially sensitive issue and difficult to implement, the issue has to be addressed. To minimize the adverse social impact of the change, it is important that the staff rationalization scheme is designed in close consultation with the staff and their representatives, with in-built steps for staff counseling, retraining, and assistance in their re-deployment. The proposed Project staff rationalization component has been designed keeping the above considerations in mind and with full formal and informal consultations with the unions. Lesson 3: Massive investments in infrastructure, locomotives, rolling stock, and communication systems have generally been ineffective in improving reliability or efficiency, pardy because the investments were not always directed at removing the most critical constraints, and partly because the publicly-managed railways could not effectively manage big projects, modem technology or complex equipment. The proposed Project would, therefore, leave it for the concessionaires to take and implement key investment decisions. Lesson 4: Railway managements generally find it difficult to effectively manage commercial operations while simultaneously restructuring/privatizing the system. Separation of these tasks can lead to better implementation. To a large extent, these tasks are already separated in as much as ZRL is focusing on operations and ZPA is managing the concessioning process. The Project would continue to support these two separate tasks until the core operations are transferred to the newly incorporated concessioning companies. The concession design would also ensure that the concessionaire is not forced to manage the disposal of left-over assets and activities along with managing the core operations. These residual activities would be the responsibility of ZRL. Lesson 5: A change in the legislative framework affecting the railways is important, as most past legislation has been generally restrictive of their autonomy, particularly with regard to organizational restructuring, commercialization, and privatization. A lot of changes in the legislative framework have already been made. However, the framework would need further modification to enable effective privatization of railways, removal of any restrictive clauses, separation of infrastructure from operations and introduction of competition on rail, and effective regulation. The Project includes review and modification of the current legal and regulatory framework. - 15 - 4. Indications of borrower commitment and ownership: (a) The approval of the privatization option went through the following steps, which demonstrate significant borrower commitment and ownership: 1. Based on the pleas of the customers, encouraging results of privatization within Zambia and intemal consultations, the Govemment asked ZPA in 1998 to examine the feasibility and options for privatizing the railways; 2. the privatization of the railways was approved by the Board of ZRL; 3. ZPA engaged intemational consultants to examine various options and make recommendations; 4. simultaneously, SATCC engaged consultants to study options for concessioning ZR and make recommendations; 5. these recommendations were discussed in a meeting comprising representatives of ZRL, ZRL's Board of Directors, the Ministry of Finance and Economic Development (MFED), MCT, MCTI, ZPA, SIDA, the World Bank, and the consultants; 6. the selected option was then sent to the Cabinet for approval; and 7. the option was commented upon by all the concemed Ministries of the Government before being approved by the cabinet. (b) In spite of a crippling cash constraint, ZRL started implementing in March 1998 a retrenchment program and has already reduced its staff from 5,882 to a little less than 3.300 and paid off the retrenchment benefits by borrowing the needed amount on commercial terms. ZRL backed by its Board and MCT is fully committed to the implementation of the restructuring and privatization of ZR. 5. Value added of Bank support in this project: For the past ten years or so, the Bank has been intensively involved in promoting the restructuring and privatization of railways through concessioning all over the world. In termns of consensus-building, the Bank's main efforts have been: (i) arranging two high profile seminars, one on restructuring of railways in Bulawayo, Zimbabwe in 1992, and the other in Abidjan on railway concessioning in 1996; (ii) active participation in seminars arrnged by regional institutions and individual railways, round-table conferences, study tours and exchange visits; and (iii) publishing articles and books relating to railway restructuring/privatization. The Bank has supported a number of railway projects in Latin America, sub-Saharan Africa, Eastem Europe, and Asia to restructure and privatize the railways. The comprehensive support included financing of advice on privatization, consultants and advisory services for bidding process, staff retrenchment and rationalization measures, setting up of regulatory bodies, and key investments in infrastructure. As a result, drawing from this vast experience, the Bank can add considerable value to the GRZ's efforts to restructure and privatize ZRL. Additionally, the Bank has supported four railway projects in Zambia and is familiar with the performance history of the railways, the problems it has faced and the successes and failures of the past. Even after the closing of the last Railways IV Project, the Bank has been assisting GRZ through a PHRD grant in: (i) clarifying and concretizing the concepts behind restructuring and concessioning; (ii) providing continuous analysis of project features; and (c) coordinating with the donor agencies to develop an integrated approach towards the railways. By continuing its involvement and extending its assistance to the areas not covered under the previous projects, and by making available to GRZ its vast experience worldwide, IDA would be able to assist GRZ and ZRL in bringing the process to a successful conclusion. - 16 - E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$47.9 million; ERR = 28.1 % (see Annex 4) O Cost effectiveness O Other (specify) Key Issues Transport costs. One of the expectations from the private concessioning of the railways is that the efficiency gains will be shared by the key stakeholders. As a key stakeholder, the customers would expect the transport costs to be reduced, either in the form of reduced tariffs or improved quality of service. It is expected that the concessionaire, in order to increase his profits, would need to increase his share of the traffic by offering better quality of service and attractive tariffs. One can assume, however, that the concessionaires would resort to the minimum possible tariff reductions and/or quality enhancements, just enough to wean away traffic from road. If the road tariffs remain high, the transport cost reductions for the existing rail customers may remain limited. In order not to depend solely on the rail-road competition and concessionaire's strategy, the Project would facilitate introduction of intra-rail competition a few years after the commencement of the concession. The concession agreement would require the concessionaire to allow access to other operators after an agreed initial period of, say, five years. Even the prospects of intra-rail competition should result in better service to the customers. Fiscal Impact. One of the expectations from the concessioning of the infrastructure, maintenance facilities and leasing/sale of locomotives, rolling stock, and other operating assets is that GRZ's revenues, net of restructuring and other railway-related costs, would increase as a result of: (i) increased corporate income tax payable by the concessionaires; and (ii) income from concession fees, leasing fees, and licenses. Three major risks to realizing this expectation are: (a) lower than expected concession and leasing fees offered by the bidders; (b) a major part of the income from the concessions is spent on the residual ZRL and the regulatory body that is proposed to be established; and (c) the income is spent on promoting other uneconomic public service obligations by the Govemment. To maximize GRZ's income from the concessioning process, the concessioning proposals include: (i) using the intemational competitive bidding process for selecting the concessionaires; (ii) inviting the potential bidders to bid for the passenger, inter-mine freight, and inter-city freight concessions in any preferred combination, viz., one, two or all the three, thus enhancing the scope of bidding and, with at, the opportunity for enhancement of the concession value; and (iii) including the possibility of renegotiating concession fees as part of the discussion to extend the closing date of the concession. To minimize the expenditure of additional revenues for railway related activities in the post-concessioning period, it has been proposed that: (i) the residual ZRL be restructured or wound up in the shortest time possible, and that (ii) all such decisions are taken in consultation with the Bank. Stripping ofAssets. There has been widespread concern that the concessionaires, motivated by short-term gains, may allow the infrastructure to deteriorate, thus inflicting a huge cost on the economy at a later date. To mitigate against asset stripping, the concessionaire will be expected to capitalize, and all concession contracts would be required to provide for an independent periodic (yearly or two-yearly) audit of the infrastructure assets along with a system of penalty or reward. Public Service Obligations. The potential concessionaires' proposals will certainly be based on the assumption that they would be free to decide as to which freight traffic to accept and which to ignore, and which line or part of line to operate. For operations that are loss-making, but, in GRZ's view socially or - 17 - economically relevant and undertaken at the behest of the government, the concessionaires would expect to be adequately compensated. It has been agreed with GRZ that the public service obligations to be transferred to the concessionaires would be identified on the basis of proposals ftom the bidders. Public Financing of Infrastructure Rehabilitation. The concessionaires in general would prefer to have the inftastructure of the railways handed over to them in a reasonably good condition. They might insist on Government sharing responsibility for whatever rehabilitation is required. Necessary or desirable as such investments by GRZ might be, such financing increases Government's risk and forces it to delay or abandon other important investrnents. GRZ would like to avoid making investment commitments and taking responsibility for the implementation of the necessary rehabilitation projects. 2. Financial (see Annex 4 and Annex 5): NPV=US$ 65.6 million; FRR = 38.6 % (see Annex 4) Pension Liability. ZRL has for many years defaulted on transferring pension contributions from staff under the Zambia Railways Pension Rules to the Pension Fund. Consequently, the staff, who are entitled to pension benefits under the Zambia Railways Pension Rules (either a refund of contributions or a deferred pension on reaching the retirement age), cannot be paid their dues by the Pension Fund. The responsibility for this accumulated liability lies with ZRL, and it has agreed to pay the arrears by December 31, 2000. Investments prior to concessioning. As can be seen from the project description, an allocation of US$7.0 million has been allocated to enable ZRL to meet its pressing requirements for maintenance and liquidating accumulated environment-related liabilities. This has been done after making sure that: (i) the investments would make a substantial difference in reducing derailments and enhancing operating efficiency and capacity and, consequently, the level of traffic; and (ii) the funds can be spent speedily and certainly prior to the take over by the concessionaire. The expected increase in traffic as a result of this investment is about 0.15 million tons, equivalent to revenue of about US$3.0 million. Excluding the benefits that would accrue as a result of reduction in derailments, the payback period of the proposed investment (IDA - US$5.0 million and GRZ - US$2.0 million) is estimated to be no more than two years. The investment would also ensure that the concessionaires would not have to take time to do the same thing and would be in a position to receive enhanced level of revenue right from the date of commencement. This would result in an enhancement in the value of the concession. Retrenchment package. The retrenchment package used in 1998 and 1999 comprised 4 months of salary for every year of service. Subsequently, the salary structure was revised and a lot of allowances were amalgarnated with the basic salary. Coincidentally, the term of the 1998 ZRL-Union agreement on retrenchment also lapsed and, therefore, a fresh agreement was negotiated by ZRL with the unions in August 2000. According to this agreement, the retrenchment package now comprises 3.2 months of salary for every year of service. This package was arrived at by taking into account the increase in the basic salary resulting from the amalgamation of allowances in the basic salary, the extent of inflation vis-a-vis pay increases during the last two years, the extent of unemployment in the country, and the difficulty faced by the retrenched staff in getting reemployed (only 5% of the 1998 retrenchees were able to get reemployed in the formal sector). The real value of the package and hence the allocation of funds for retrenchment, however, remained unchanged. Fiscal Impact: See above. 3. Technical: - 18 - Infrastructure Standards. The setting of standards has a direct impact on the operating cost since higher standards will often mean increased cost of maintenance, expensive track maintenance equipment, and high cost of depreciation. The use of standards that are appropriate for the service proposed could lead to considerable cost savings. When finalizing concession contracts, some govemments insist on maintaining high standards at high cost, without realizing that this could lead to a considerable reduction in the concession fees revenues. This is true for sub-Saharan African railways. The technical standards are proposed to be defined in general terms, requiring the concessionaires to ensure safety and maintain assets in such a condition as to avoid accidents. In particular, the standards for the safe running of the passenger services would be defined in more specific terms. Beyond that, the concessionaire would be left free to adopt standards of maintenance as appropriate for the traffic levels and business requirements. Compliance with Standards. Provisions in the contract would be made for periodic independent inspections using computerized track recording cars or independent auditors to assess the degree to which the standards are being maintained and linking the quality of maintenance to penalties/rewards. Accident Investigations. Provisions would be made in various concession contracts for independent investigation of accidents, at least for those accidents where public property or human lives are involved. 4. Institutional: Regulatory Framework. The setting up of a supportive regulatory framework is essential to ensure that the concession contracts are implemented properly and rigorously. To avoid excessive, subjective, or undefined regulation, the concession contracts will be developed in an exhaustive manner, leaving very little for subjective interpretation. The task of the regulatory body would then be to enforce what has already been agreed upon in terms of maintaining technical and safety and environment-related standards. Instead of setting up a separate regulatory body, GRZ proposes to establish a special unit within MCT to monitor compliance with concession agreements. Additionally, in compliance with the requirements under the Railways Act, the Railway Inspectorate Unit under MCT would be adequately strengthened. Since the concessionaires would be free to adopt a freight tariff policy and the passenger tariffs would be specified in the bidding documents, no substantive issues of economic regulation are involved. For broader economic regulation involving adherence to competition policy and fair trade practices, the Project's preference is for the issues pertaining to rail transport to be also addressed by a multi-lateral regulatory body with appropriate mandate and skills such as the Competition Commission. Environment-related regulations are proposed to be enforced by the Environment Council of Zambia. ZRL's Role after Concessioning. Eventually, ZRL would need to be wound up unless there are activities that need to be performed and the concessionaires are not prepared to undertake that responsibility. In any case, immediately after the take over by the concessionaires, ZRL will need to continue operating as a downsized state-owned company with the responsibility of spinning-off the remaining commercial and non-commercial activities (i.e., not taken over by the concessionaires such as guest-houses, clinics, football teams and police), discharging all its liabilities, and selling off the remaining assets. When all these tasks are completed, ZRL would also have the responsibility of winding itself up. To ensure that the process is not unnecessarily prolonged and the task of winding up ZRL is executed efficiently, an independent administrator would be appointed for a specific period of time. The monitoring of the concession agreements would be handled by MCT or some other institution identified by GRZ. Role of SATCC. SATCC, the specialized body under Southern Africa Development Council (SADC) dealing with transport issues, has recently advised the different railways in the region regarding -19- implementation programns aimed at private sector participation in the management and operation of railways. These discussions are aimed at improving the performance of the transport sector in the region. ZPA has kept that advice in view while finalizing the concession design, and the concessioning proposals are consistent with the directions/intentions of SATCC. Linkages to Neighboring Countries. To achieve optimal results, the railway systems in neighboring countries that are linked to the railway network in Zambia must also improve their perfonnance. Conversely, the continuing non-performance of the neighboring countries' railway systems could seriously undermine the performance of the railways in Zambia. Malawi, and Mozambique are currently in the process of privatizing their railway systems. Privatization of the South African and Zimbabwe railways is under serious consideration. The newly incorporated companies/concessionaires in Zambia would need to reach an agreement with the neighboring countries on: (i) accessing each other's markets as well as on haulage and track usage charges; (ii) sharing each other's facilities, particularly the expensive ones; and (iii) developing a common marketing and pricing strategy. The Project would include provisions for technical assistance to enable development of such mutually-beneficial agreements. Tanzania-Zambia Railway (Tazara). The route over Tazara to the port of Dar es Salaam is the shortest and the least expensive for international overseas freight traffic of Zambia and DRC, provided Tazara and the port of Dar es Salaam operate efficiently and provide acceptable levels of service. Though of tremendous benefit to customers and the Zambian economy, the route offers much less revenue to ZRL than would be available to ZRL if the freight were routed through the port of Durban (the average haul for the Dar es Salaam route is about 100 km, whereas the one to Durban is more than eight times). Given this differential, the concessionaire could have a tendency to try to manipulate the traffic to move through the port of Durban. In order to prevent that and enable the traffic to flow unhindered in accordance with customers' preferences, the concession agreement would stipulate that Tazara would be provided with trackage rights over the sections between Kapiri-Mposhi and Kitwe in the north and Lusaka in the south, these two being the key origin/destination points for the bulk of Zambia's overseas traffic. For DRC traffic, the same would be handled by ZRL after Ndola. User charges and any reciprocal trackage rights on Tazara would be left to be negotiated between the concessionaire and Tazara. 4.1 Executing agencies: Executing Agencies: (i) for Concessioning of Railways Component: ZPA; (ii) for Staff Rationalization, Assets Rehabilitation, Environmental Mitigation, and ZRL Restructuring/Winding up Components: ZRL/ZRL Board; (iii) for Regulatory Framework and MCT Strengthening Components: MCT; and. (iv) for Social Mitigation Component: NSSN. MCT will be the overall Project Coordinator including coordinating compilation of the quarterly reports from the different implementing agencies. 4.2 Project management: ZRL is currently managed by an expatriate group being financed by SIDA. The group has already reversed the declining trend of ZRL's performance and has put in place effective management and operational systems. SIDA has agreed to extend the term of the contract of this group until the conclusion of the concessioning process. Additionally, ZRL recently retrenched about 1,500 staff on their own and have already acquired considerable experience in dealing with staff rationalization issues. A tentative timetable for the implementation of the various components has already been agreed to with ZR and there is no reason to believe that the timetable will not be adhered to. There is no doubt that the Project components assigned to ZR would be effectively managed. ZPA has successfully privatized many public enterprises in Zambia and has considerable cumulative experience and skills in this area. Assisted by consultants, ZPA will be able to effectively manage the - 20 - concessioning component of the Project. The timetable for the concessioning process has been agreed to and work is progressing according to schedule. Discussions with MCT have indicated that the Ministry is engaged in a serious exercise within the Ministry to develop sub-sectoral strategies and a more dynamic transport policy. The initiative for the regulatory and the Ministry strengthening components has come from the Ministry itself and the implementation of the two components is expected to proceed well. NSSN has considerable experience in implementing a variety of measures aimed at assisting the retrenched staff in getting re-employed or self-employed. NSSN has adequate capacity to deal with the staff that are proposed to be retrenched under the Project. 4.3 Procurement issues: The main features of the procurement arrangements are as follows (values within parentheses indicate the approximate value of goods and services proposed to be obtained through the specified procurement method and are inclusive of physical and price contingencies): Goods would be procured through: (i) Intemational Competitive Bidding (US$4.3 million); (ii) National Competitive Bidding (US$1.0 million); and (iii) Limited International Bidding, limiting the intemational bidding to original equipment suppliers (US$0.8 million). (iv) Shopping (US$0.2 million). Consultants' services would be procured through: (i) Quality and Cost Based Selection (US$2.0 million); and (ii) Selection Based on Quality of Consultants (US$0.3 million). Training and retraining of retrenched staff would be procured through mutual consultation (US$1.1 million). 4.4 Financial management issues: ZRL will be the implementing agency for the Asset Rehabilitation and Environment Mitigation, Staff Retrenchment, and the Restructuring of ZRL/Winding Up Components. An Implementation Committee, headed by a Project Manager, has been established to undertake the day to day implementation of the project. The Accounts Section will be managed by the Head of Management Accounting on a full time basis. Support to the Management Accountant will be made by three Senior Accountants (Treasury, Infrastructure and Workshops) from the existing ZRL establishment. The Management Accountant will be responsible for ensuring that financial management and reporting procedures for the ZRL component of the Project will be acceptable to the World Bank, GRZ and ZRL's Board of Directors. Existing disbursement procedures, as outlined in the World Bank's Disbursement Handbook, will be followed, i.e., Direct Payment, Reimbursement and Special Commitment (if appropriate). - 21 - ZRL's financial management systems will support management in their deployment of resources with the purpose of ensuring economy, efficiency and effectiveness in the delivery of outputs required to achieve desired outcomes. ZRL's financial management system will be expected to produce timely, understandable, relevant and reliable financial information that will enable management to plan, implement, monitor, and appraise the project's progress towards achievement of the stated goals. ZRL's current financial management arrangements meet the minimum requirements to comply with the Bank's OP/BP 10.02. ZPA will be responsible for implementing the Railway Concessioning component of the project. They will also handle the funds for the Staff Counseling, Re-deployment and Social Mitigation component that will be implemented by the National Social Safety Net (NSSN). ZPA is familiar with handling donor funds and has been responsible for privatization of numerous public enterprises. A core team headed by a Project Manager and including a professionally qualified accountant has been formed to spearhead the project. The financial management system successfully used in accounting for more than two hundred privatized enterprises will be used to manage the IDA resources for the project. This system meets the Bank's minimum requirements to comply with OP/BP 10.02. MCT is currently assembling staff to implement the Regulatory Framework and MCT Strengthening components. For MCT to deliver on the aforementioned objectives, its financial management system will be based on the Financial Management Action Plan. The Project accounts, SOEs and the Special Account will be audited each year by an independent auditing firm under terms and conditions satisfactory to IDA. In addition to the annual financial statements conforming to Intemational Standards on Auditing (IFAC Standards), the audit report will include comments on the accuracy and propriety of expenditures withdrawn under SOE procedures and the extent to which these can be relied upon as a basis for credit disbursements. Audit reports will be submitted to IDA no later than six months following the end of the Borrower's fiscal year. In addition, ZRL would be required to submit annual entity audit reports also within six months following the end of the Borrower's fiscal year. 5. Environmental: Environmental Category: B (Partial Assessment) 3.1 Sumnmarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. ZR already has a fairly elaborate company policy with associated rules and procedures for safety and health at work. However, an environment audit identified the following key issues pertaining to environmental compliance: (a) ZR has no environmental policy or an environment management system, though there is a growing interest to formulate one; (b) ZR has no site-specific safety and occupational health plans; (c) Appropriate protective equipment, clothing and accessories are in short supply; (d) Environmental knowledge and skills are inadequate; (e) Handling of hazardous wastes generated by the railways does not conform to cleaner production practices. These wastes include fuel, lubricants, furnace heavy metal slag, and waste waters contaminated with caustic soda; (f) Arrangements for collection and disposal of solid wastes - scrap metal, furnace slag, machine shop swarf, saw dust, and waste coke - are haphazard; (g) There is no formal self-inspection program for facilities for storage of petroleum fuel and lubricating oils located within ZR premises; (h) Small quantities of acids and caustic soda sometimes find their way into drains; oily discharges are - 22 - freely discharged into open spaces; (i) Potential health hazards - paint fumes, final metal dust, and noise - need more attention; (j) The environmental impact of ZRL's track weed control program has not been assessed; (k) There is no environmental emergency preparedness and response plan; and (I) The capacity of the Environmental Council of Zambia (ECZ) to enforce environmental regulation is limited and a lot of environmental violation goes by default. The major liability issues include: (a) operations without environmental permits or licenses on water, wastes; (b) lack of monitoring of pollutants; (c) disposal of wastes into unauthorized areas; (d) lack of environmental preparedness and response plans; and (e) environmental, occupational health, and safety liabilities arising out of copper concentrate droppings on the copper-belt. The summary of the environmental audit report would be attached to the concession agreement and the concessionaires would be required to fully meet the environmental standards. The environmental regulation would be the responsibility of the railway regulator to be appointed as a part of the Project. The appointed regulator would work in consultation with and with guidance from ECZ. 5.2 What are the main features of the EMP and are they adequate? An Environmental Management Plan (EMP) is not required at this stage. Developing and handling the EMP would be the responsibility of the concessionaires that are selected and with whom concession agreements are signed. The concession agreements would hold the concessionaires responsible for EMP and would be subject to regulation. 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: June 16, 2000. 5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? The consultants who were appointed to undertake the EA have consulted the stakeholders during the study stage. 5.5 What mechanisms have been established to monitor and evaluate the impact of the project on the environment? Do the indicators reflect the objectives and results of the EMP? The concessionaire would be required to submit a timetable to complete the actions that would be specified in the bidding documents. Once the timetable is agreed, the same will form the basis of monitoring compliance. The regulatory body, proposed to be established under the Project, and the ECZ would also be setting up mechanisms to monitor the impact on the environment. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and speciA.y the project's social development outcomes. StaffReduction. As the retrenchment package has already been agreed between ZRL's management and the staff unions, problems of administration are not likely to arise. However, to address the social, economic and psychological problems of retrenchment, a social mitigation component has been added to the Project. - 23 - Assistance to Retrenched Staff. Based on a series of interviews, questionnaires and experience elsewhere, mitigation measures are proposed as follows: First, the computation of retrenchment packages would be reviewed by outside independent audits for accuracy. Previous experience has shown the staff having serious complaints with regard to the accuracy of these computations. Second, retrenchment packages will be paid on time, to avoid entirely the problems encountered by retrenchees in the past with having to borrow from money lenders to cover the gap between loss of work and receipt of the package. Third, provision has been made under the Project for staff counseling (both money management and psychological), retraining, and re-deployment. Fourth, a special cell would be established within ZRL to address the grievances of staff that have been retrenched. Problems ofpast retrenchment/issues of staff re-deployment. The experience so far with the 1,500 staff already retrenched has not been encouraging. Only about 5 percent of the retrenched staff reportedly have found employment in the formal sector, another 20 percent have opened small businesses, and another 5 percent have migrated to the villages. The rest are still contemplating their options, which appear to be few. Informal discussions suggest that staff have negative feelings about retraining. Staff that are older, uneducated, or work in offices were particularly skeptical of the usefulness of training. Part of the reason for this poor experience is that the counseling and retraining effort was launched much after the retrenched staff had already left. Under the Project, the counselors would be appointed in advance of the retrenchment commencement date. Expert staff would be engaged to develop more options to get staff re-deployed. Poverty focus. The main focus of the Project is on reducing transport costs and making the Zambian economy globally more competitive, reducing GRZ's budgetary deficit, and reducing the allocation for road maintenance. These outcomes by themselves are expected to lead to lower costs of agricultural products and also to make more funds available with the Government for other priority sectors. However, the Project would also seek to include a few poverty-related actions in the agenda for negotiations with the concessionaires. The intention would be to reach an agreement with the concessionaires to include the following in the list of items to be monitored: * Reducing isolation: The indicator for this would be the number of small wayside stations that are kept operational and those that are closed to any passenger or freight operations. The extent to which the small stations are kept open would facilitate personal mobility as well as open the way for rural inhabitants to enter into some trading of agricultural commodities. * Contracts for weed control: The indicator would be the number of small contracts for weed control on tracks awarded to the local inhabitants of villages located along the railway line. Awarding such contracts can be cost effective for the concessionaire as well enable avoidance of the use of chemicals, thus reducing environmental degradation. * Passenger ridership: In spite of the considerable deterioration in the quality of passenger services in recent times, the excessive time it takes from point to point compared to the corresponding bus trips, and the odd times at which the train reaches certain stations, there are a number of people who still travel by train because the train fares are cheaper and all they can afford. With a little better service, these numbers can increase as has been experienced in many countries. So, passenger ridership would be an important indicator of improvement in the passenger services. The increased ridership would also make the passenger services financially more viable. AIDS Control. The concessionaire would also be persuaded to allocate a certain budget for controlling HIV/AIDS in consultation with specialized agencies and institutions within Zambia. This budget could be - 24 - used for: (a) AIDS-related awareness training to staff and famnily; (b) supply of condoms to staff who appear more vulnerable; (c) one to one staff counseling; and (d) for implementing other measures as may be advised by the specialized agencies. 6.2 Participatory Approach: How are key stakeholders participating in the project? The primary beneficiaries of the proposed Project would be GRZ and the rail users, both freight and passenger. The proposed Project has been designed with GRZ, MCT and ZPA, leading the process of designing and implementing the restructuring and privatizing of ZR. Also, GRZ signed a bilateral agreement in September 1997 with SIDA for the purpose of allowing an intemational consultant to manage ZR and formulate and implement a Restructuring Program to establish an efficient and sustainable railway system in Zambia. The Program, including the Retrenchment Plan, was approved by the ZR Board in May 1998, and extensively discussed and agreed with staff unions. Regarding the rail users, they have been intensively and formally consulted and interactions of the marketing department and the top management with the key rail users. The Bank teams have also been frequently speaking to the main rail users. The primaxy affected group has been the ZR staff. Formal negotiations with RWUZ have been held and agreements have been reached on all aspects of staff retrenchment. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Extensive discussions were held with the staff unions of Zambia Railways with regard to the issues pertaining to staff retrenchment and mitigation of adverse social impacts of retrenchment. 6.4 What institutional arrangements have been provided to ensure the prcject achieves its social development outcomes? Even though the main railway operation would be concessioned, the residual ZR would continue to discharge its responsibility towards the staff who have been retrenched. 6.5 How will the project monitor perfornance in terms of social development outcomes? 7. Safeguard Policies: 7.1 Do any of the following safeguard policies apply to the project? Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) O Yes 0 No Natural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 No Forestry (OP 4.36, GP 4.36) O Yes No Pest Management (OP 4.09) O Yes No Cultural Propert (OPN 11.03) O Yes * No Indigenous Peoples (OD 4.20) O Yes * No Involuntary Resettlement (OD 4.30) 0 Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0 Yes 0 No Projects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 No Projects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. - 25 - F. Sustainability and Risks 1. Sustainability: The long-term sustainability of the rail system in Zambia would be considerably enhanced under the Project, which aims at: (a) long-term private concessioning of ZR; (b) reorienting ZRL's remaining operations to their most competitive and productive advantage; (c) transparent selection 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. 2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1): fi~ ~ ~ Rs Ris Rat-n Risk Miiato 'Me.a Xiigv'-urOi t A From Outputs to Objective The concessionaires' perfonnance may tum out to be inadequate due to: (i) The concessions not being well M Improve concession design through: Legal and designed leaving much for subjective financial advisory support, consultation with interpretation. major stakeholders, and incorporating lessons from similar concessions awarded in the region. (ii) The regulatory framework not being M Consultancy support and technical assistance effective in enforcing the terms of the incorporating steps for resolving disputes in the contract. concession agreements. (iii) The appropriate institutional M Formation of consultative group with arrangements not being in place for quick representation from key stakeholders resolution of disputes. (iv) The performance of the neighboring M Encouraging the neighboring railways to railways continuing to be below restructure and privatize. expectation. (v) GRZ does not completely honor the M Encouraging the concessionaires to sign terms of the Concession Agreement. operations agreements with neighboring railways early and setting up of a multi-sectoral regulatory body. From Components to Outputs GRZ does not remain completely M Formal cabinet approval obtained before committed to concessioning of the rail starting the concessioning process. system in a transparent manner. Intemational interest in concession is not M Careful attention to the bidding design. More as expected. publicity. - 26 - GRZ does not take adequate steps to M A letter of transport policy to be obtained from creating a competitive and a level playing the Government. field for all transport modes. The level of redeployment of retrenched S Staff counseling to be a part of the Project. staff is lower than expected. Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: G. Main Credit Conditions 1. Effectiveness Conditions (a) each of the Subsidiawy Financing Agreements has been executed on behalf of the Borrower, ZPA and ZR respectively; and (b) the Borrower has adopted the Project Implementation Plan in form and substance satisfactory to the Association. 2. Other [classify according to covenant types used in the Legal Agreements.] Other dated covenants include: (a) ZR shall, no later than December 31, 2001, pay not less than US$1 million equivalent into the Pension Fund, and no later than 6 months after Credit effectiveness, pay in full all remaining arrears of payments due and payable to the Pension Fund; and (b) the Borrower shall, no later than December 31, 2001: (i) furnish to the Association drafts, in form and substance satisfactory to the Association, of the legislation under which (A) concessions are to be granted under the Project, and (B) the regulatory mechanism is to be set up; and (ii) establish an Escrow Fund in forrn and substance satisfactory to the Association. H. Readiness for Implementation C 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 1 1. b) Not applicable. [A 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 21 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 1] 4. The following items are lacking and are discussed under loan conditions (Section G): - 27 - 1. Compliance with Bank Policies 1 1. This project complies with all applicable Bank policies. ] 2. The fbllowing exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Yash Pal Kedia Maxyvonne Plessis-Fraissard Yaw An3q Team Leader Sector Manager Country anager - 28 - Annex 1: Project Design Summary ZAMBIA: RAILWAYS RESTRUCTURING PROJECT Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) Three strategic areas 1. The date of take over of the 1. ZPA database Concessionaires will perform identified under the CAS are: railways by private according to expectations and removing constraints to concessionaires the concession agreements sustainable, diversified 2. Freight traffic carried by the 2. Statistics of MCT and the growth; improving railways, which would be a Railways governance; and increasing proxy indicator for the access to basic services and efficiency of operations and direct poverty interventions, quality of service Inadequate infrastructure has been identified as a major bottleneck for private investment and growth. Private concessioning of ZR has been specifically identified as a priority area. Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: The Project development The Development Objectives objective is to enable ZR, are closely linked to the CAS through restructuring and objectives 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 efficient ZR to increase its share of freight traffic are expected to result in: (a) Heightening of rail-road (a) Freight traffic on rail and (a) Records of the competition and, the percentage of total traffic concessionaires, MCT, and consequently, overall for all modes of transport the regulatory body reduction in transport costs leading to the Zambian economy becoming progressively more competitive and growth-oriented. - 29 - (b) Balancing of the (b) Same as (a) (b) Same as (a) respective share of freight traffic between rail and road modes and a significant reduction of traffic on road, particularly 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. (c) The ZR-linked (c) Transit traffic on rail and (c) Records of the international rail corridors total concessionaires, MCT, and becoming more efficient and Ministry of Commerce, Trade cost effective leading to more and Industry trade between countries along these corridors, viz., South Africa, Mozambique, Zimbabwe, Zambia, Zaire, Botswana, Uganda (after the setting up of inter-gauge transshipment facilities in Tanzania), and Angola (after the reopening of the Lobito rail link); (d) ZR becoming financially (d) Income tax paid by the (d) Records of the Ministry of self-sustaining and being in a concessionaires Finance and Economic position to reward its capital Development providers; (e) GRZ being able to reduce (e) Total cash flow from the (e) Records of the its budgetary deficit through concessionaires to GRZ Concessionaires and MFED receipt of concession fees, taxes, and hire and lease charges; and (f) Zambia generating more (f) Same as (c) (f) Same as (c) foreign exchange through shift of considerable transit and international traffic from mostly foreign road hauliers to ZR. - 30 - Output from each Output Indicators: Project reports: (from Outputs to Objective) Component: A. Concessioning of ZPA/GRZ records and Satisfactory proposals from railways concession contracts the potential concessionaires 1. Concession negotiations By June 2001 commenced 2. Concessions By September 2001 operationalized B. Staff Rationalization ZR/GRZ records 1. Retrenchment of surplus staff completed By September 2001 2. Staff retraining and re-deployment completed By June 2002 3. Social mitigation measures completed By June 2002 C. Assets Rebabilitation By June 2001 ZR/GRZ records D. Institutional Refonn ZPA/ZR/GRZ records 1. The regulatory framework By June 2001 agreed and the inspectorate established 2. Strengthening of MCT completed By December 2003 E. Restructuring of ZR ZR/GRZ records 1. Spin-off remaining By December 2002 activities and assets 2. Winding up By June 2003 Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) Railway Concessioning US$1.0 million Staff Rationalization US$17.9 million Assets Rehabilitation US$6.7 million Environmental Mitigation US$0.3 million ZRL RestructuringfWinding US$0.5 million Up Regulatory and Legal US$0.8 million Framework MCT Strengthening US$0.5 million Contingencies US$3.3 million - 31 - Annex 2: Detailed Project Description ZAMBIA: RAILWAYS RESTRUCTURING PROJECT The project would consist of the following components: (A) Railway Concessioning (B) Staff Rationalization * Staff Retrenchment * Pension Obligations (C) Assets Rehabilitation (D) Environment Mitigation (E) ZRL Restructuring/Winding Up (F) Regulatory Framework (G) MCT Strengthening (H) Social Mitigation By Component: Project Component 1 - US$1.00 million (A) Railway Concessioninif Background. ZR's performance has been declining since 1975, more sharply since 1989. Freight traffic, 6.2 million tons in 1975, declined to 4.5 million tons in 1989 and to 1.4 million tons in 1997. The condition of the infrastructure and operating assets is among the worst in sub-Saharan Africa. GRZ, as the sole shareholder of ZRL, did not intervene effectively to halt the declining trend except to change the chief executives of the railways from time to time. It was no surprise that this strategy actually tumed out be completely counter productive. All this time, powerful suggestions were made to the government by donors as well as key customers to seriously consider involvement of the private sector in the operation and management of the railways. In response, GRZ did take a decision to privatize ZRL in principle, but the implementation of the decision was deferred to later date due to commitment of GRZ's priorities in other sectors of the economy. However, in March 1998, GRZ signed a bilateral agreement with the Swedish Intemational Development Co-operation Agency (SIDA), under which an intemational consultancy firm commenced a contract to manage ZRL. The objective of the contract was to formulate and implement a Restructuring Program to establish an efficient and sustainable railway system in Zambia. Since the commencement of the ZRL management contract: (i) the continuous decline in the level of freight traffic carried by ZR has been reversed with the traffic in 1999 being 1.61 million tons (1.43 million tons in 1997) and is projected to be 1.65 million tons for the current year (2000). In ZRL's view, the traffic for the year 2000 could be as much as 1.8 million tons if ZRL were to succeed in mobilizing US$5 million for undertaking urgent targeted repairs to track, wagons, and locomotives; (ii) staff has been reduced from about 5,500 to a little less than 3,300; (iii) significant historic debts and obligations have been paid off, (iv) new systems and financial controls have been put in place, and (v) output from the railway works has substantially increased. Significant though the reversal of the declining performance since the commencement of the management contract has been, it is not enough to transform Zambia Railways into a competitive, efficient, financially viable railway transport system with sufficient capacity to meet the transport needs of the country and its neighbors. In their inception report, the team managing ZR under the management contract has underscored the urgency of privatizing the railways to ensure its long-term viability. - 32 - The continuing poor performance of the railways, combined with evidence of successful turnaround of many railways in Latin America and sub-Saharan Africa after private concessioning and the continuing demand from customers for better service, finally made GRZ agree seriously to consider private sector participation in the operation and management of the railways. GRZ in 1998 asked the Zambia Privatization Agency (ZPA) to explore the various privatization options and to recommend the most appropriate one for GRZ's approval. That set in motion the initial preparatory work pertaining to the possible privatization of the railways. Using a PHRD grant approved in 1994 to facilitate preparation of a possible railway restructuring project including privatization of railways, ZPA launched a Private Sector Participation Study, immediately after getting the mandate from the Cabinet. The study was completed in March 1999. The recommended privatization option, i.e., the private concessioning of the railways, was intensively discussed in a series of meetings involving ZRL, ZRL's Board, the Ministry of Finance and Economic Development, the Ministry of Communications and Transport (MCT), the Ministry of Commerce, Trade and Industry (MCTI), the main consultants who had prepared the report, and ZPA. Agreement was reached on an option discussed in detail in the next paragraph. The recommended option was then formally reviewed by the concerned Ministries, i.e., MCT and MCTI, and a memo recommending the consensus option was then sent to the Cabinet for approval. Cabinet at its meeting held on March 7, 2000 considered and approved the concessioning of ZR as recommended. Concurrently, the following studies have been completed to facilitate private concessioning of the railways: (i) environmental impact assessment and audit study; (ii) asset valuation study; (iii) an in-house social impact assessment study of the staff retrenched so far by ZRL; and (iv) a social impact assessment study by extemal consultants. Main features of the concessionin2 proposal. The concessioning proposal finalized by ZPA envisages three separate concessions as follows: a geographically separated but vertically integrated short-haul, inter-mine freight service concession comprising Ndola-Chingola section plus branches; 3 a geographically separated but vertically integrated long-haul freight service concession comprising the main line (Sakania-Livingstone); and 3 an operating concession for a specified set of passenger services, being operated as public service obligations. The bidders would be given the option to bidfor one, two, or all three of the concessions. The award of the concessions would be based on the net present value of the concession fees offered by the bidders. The discount rate and the evaluation procedure would be specified in the bidding documents. When bidding for the passenger service concession, the bidders for the freight concession would still need to separately indicate the concession fees (positive or negative) for the passenger services concession. The bidders for the passenger services concession would be allowed to offer a negative fee structure, if necessary. To avoid the possibility of no proposal being received for the passenger services concession, the main line freight bidders will be required to ensure that there is a related bidder for passenger services who will offer a price for providing passenger services either in conjunction with or separate from the freight bidder. These bids would be evaluated along with independent bids for the passenger services. The scope of the two freight concessions would include infrastructure as well as a clearly identified set of core operating assets comprising locomotives, wagons, and maintenance equipment. These assets will be specified in the bidding documents. The infrastructure (fixed assets) including the signaling system and - 33 - real estate would continue to be owned by a Government department or a 100% government owned asset holding company to be identified by GRZ, but would be maintained and rehabilitated by the concessionaire(s) during the period of the concession. The main workshop would be included under the inter-city freight concession and the inter-mine freight concessionaire would be free to enter into an agreement with the inter-city concessionaire for the overhaul of its locomotives and rolling stock or with any of the neighboring railways or private workshops in Zimbabwe. The scope of the passenger services concession would comprise sale/lease of an identified number of core operating assets such as locomotives, passenger coaches and maintenance facilities. Passenger services specified in the bidding documents, deemed as public service obligations, would be provided access over the infrastructure of the two freight concessions on concessionary terms, which would be specified in the bidding documents. The freight concessionaires would be required to maintain the infrastructure to standards adequate for the running of passenger services that would be specified in the bidding documents. The passenger services concessionaire would be free to enter into an agreement with the inter-city concessionaire for the overhaul of the locomotives and passenger coaches or with other public or private workshops in the region. Existing passenger rail services are considered to be essential public services. However, these are not seen to be financially viable (at least in the foreseeable future) and therefore may not attract bidders for the concession without the Government offering to provide a subsidy. Bidders for the concession will also be concemed about Government's ability to pay the subsidy when it falls due. It will only be feasible to have an independent passenger operator if there is assurance that the operator will be paid fully and on time, which supports the creation of an escrow fund to receive freight payments and ensure that the passenger operator is paid before the govemment uses the funds for general purposes. First call on funds in the concession escrow account would be a way to provide a guarantee of payment (and at no cost to Government). Establishing such an account would be included as a covenant in the Development Credit Agreement. Trackage rights to Tanzania-Zambia Railway (Tazara). The route over Tazara to the port of Dar Es Salaam is the shortest and the least expensive for the intemational overseas freight traffic of Zambia and DRC, provided Tazara and the port of Dar Es Salaam operate efficiently and provide an acceptable level of service. Though of tremendous benefit to custotners and the Zambian economy, the route offers much less revenue to ZRL than would be available to ZRL if the freight were to be routed through the port of Durban (the average haul on ZR network for the traffic routed through the port of Dar Es Salaam is about 100 kms whereas the one through the port of Durban is more than 800 kms). Given this differential, the concessionaire could have a tendency to try to manipulate the traffic to move through the port of Durban. In order to prevent that and to enable the traffic to flow unhindered in accordance with the customers' preference, the freight concession agreements would stipulate that the concessionaires would be required to reach an agreement with Tazara with regard to trackage rights over the sections between Kapiri-Mposhi and Kitwe in the north and Lusaka in the south, these two being the key origin/destination points for the bulk of Zambia's overseas traffic. Component description. This component would finance advisory services to implement the agreed concessioning proposal. More specifically, the component would cover: (i) the costs of advisory services, which ZPA may require to design, negotiate, implement and monitor the concession agreements; (ii) legal assistance for preparation and negotiation of concessions, articles of incorporation and shareholder agreements, as well as for contract interpretation and dispute resolution; (iii) assistance in addressing questions of finance, accounting, asset valuation, and resource mobilization; (iv) assistance in specialized technical matters, including those pertaining to the environment; and (v) assistance in market intelligence and assessment. - 34 - Component inputs. Inputs for this component would comprise consultant services and technical assistance. Base cost (without contingencies) of the component is estimated at US$ 1.0 million to be financed by IDA (3.0% of the total Project cost). Project Component 2 - US$16.90 million (B) Staff Rationalization Background. In the early 1980s, ZRL had a staff strength of about 9,000. Over the years, the staff strength has been brought down by controlling new recruitment and encouraging voluntary separations. At the time of the take over by the management contract group, the staff strength was 5,500 including 800 casual staff. One of the main components of the Restructuring Program developed by the contract management was to reduce the staff to about 3,300. To determine the right size of staffing within the company, each department was asked to review its objectives and human resource requirements. A methodology for selecting personnel for retrenchment was agreed with the Railway Workers Union of Zambia (RWUZ). Since funding for implementing the retrenchmnent plan was not readily available, the surplus staff was sent on transitional leave. Employees sent on transitional leave continued to receive their full pay until they were paid their termnination packages in full. The agreed retrenchment packages comprised 4 months of salary for each completed year of service plus long service gratuity pay, and resettlement allowances. This is the same package as is offered to staff who retires normally after either reaching the normal retirement age or having completed a minimum qualifying years of service. ZRL also offered to pay part of the retrenchment benefits in the form of houses. The houses were valued in terns of the market prices as per the Government's policy on sale of houses. If applicable, the price of the house was deducted from the total package to arrive at the total cash payable. For an average employee who has served 16 years and has a monthly salary of K 0.2 million, the package would be K 16.2 million. As the average price for a house is K 5.5 million, the net cash outlay for ZRL would thus be K 10.7 million for those retrenchees who agreed to the purchase of houses. These retrenchment packages, though visibly high, were considered comparable with those of other parastatals scheduled for privatization such as the Zambia Consolidated Copper Mlines Limited (ZCCM), as can be seen from the table below. ZRL has already achieved the staff retrenchment target that it set for itself. The staff sent on transition leave have all been retrenched and the current staff strength is a little less than 3,300. Part of the financing requirement was met from the payments received from the final settlement of the unitary system and, for the rest, ZRL has taken a commercial loan of about US$3.5 million. Component description. This component would have two sub-components: (i) Staff Retrenchment; and (ii) Pension Obligations. StaffRetrenchment. Based on the concessioning experience so far and confirmed by the estimates produced by ZRL as well as the consultant who undertook the Private Sector Participation Study, the concessionaires are likely to engage only between 800 to 1800 staff out of the current 3,300. To be on the safe side and to avoid a situation of shortfall of funds to finance retrenchment, the funds allocated for this component is based on an estimated staff employment of 900 by the concessionaire and a corresponding staff retrenchment of about 2,400 staff. Additionally, a price and physical contingency of 15% has been provided to ensure adequate availability of funds for retrenchment in case the concessionaires decide to select less than 900 staff. - 35 - ZRL has negotiated with RWUZ a different salary structure for the staff under which a number of allowances have been integrated into the base salary. The retrenchment package has also been renegotiated by ZRL with RWUZ. According to this agreement, the retrenchment package would comprise 3.2 months of pay for every year of completed service. The total cost of retrenchment would still remain the same as for the package that was used by ZRL to retrench its staff in 1998 and 1999. Using the recently negotiated package and the staff age and service profile, and assuming that all staff would be retrenched, ZRL had estimated the cost of retrenchment to be about US$21.0 million. On the same basis, the proportionate cost of retrenchment of 2,400 staff would come to about US$15.2 million. A contingency of 15% has been provided in addition to cope with any variations in the package or the number of staff to be retrenched. The sequence of retrenchment, as developed in agreement with ZPA/ZRL/GRZ, is as follows: (a) 700 staff would be retrenched immediately after the Credit becomes effective, the criteria to be used for identifying the surplus staff having already been agreed with the unions; (b) the remaining staff would be retrenched after the concessionaires have selected the staff according to their requirement. The sequential steps in case of (b) would be as follows: 3 the concessionaires would identify the staff to be engaged through their own due diligence; e the concessionaires would, in consultation with the trade unions, define the terms of employment of staff, which would in general be as good as or better than the emoluments and current conditions of service; - the selected staff would be offered the letters of employment, and the remaining staff would be retrenched using the agreed terns of retrenchment; - notwithstanding the agreement with the trade unions, the selected staff would be within their rights under the Employment Act of Zambia to refuse the offer, under the Employment Act, "rights arising under any written contract of service shall not be transferred from one employer to another unless the employee bound by such contract consents to the transfer and particulars thereof are endorsed upon the contract by a proper officer." In case the staff refuse to be transferred, they have a right to be retrenched and paid the severance payments; and 3 the staff, who refuses the concessionaires' offer, will not be eligible to get the offer again before three years. It is understood that a major concern of the staffjoining the concessionaires pertains to the consideration of the service with ZRL in computing the package when they eventually retire or are retrenched by the concessionaire. Obviously, staff getting transferred to the concessionaires would be eligible for pension at some point of time. The concessionaires would in all probability, depending the new conditions of service, be prepared to pay the retirement benefits, but limited to the number of years the staff has been employed with them. For the years of service with ZRL, the payment responsibility would lie with GRZ/ZRL or a successor company of ZRL. Unless this money is guaranteed to the staff, the staff would be reluctant to take a risk. To address this concern, the Development Credit Agreement (DCA) has a condition requiring that the Government guarantee such payment when it is due and that the balance in the proposed Escrow account would be used by the Government for general purposes only after the balance in the Escrow account is sufficient to meet retirement/retrenchment liabilities pertaining to the period of service with ZRL. Further, the proceeds of the IDA Credit could be used for severance payments (only in case of retrenchment and not retirement) during the period of the Project, which should be enough for the stabilization of staffs employment with the concessionaires. - 36 - Pension Obligations. In the past, ZRL has defaulted on transferring pension contributions from staff to the Pension Fund. Consequently the staff, who are entitled to pension benefits under the Zambia Railways Pension Rules (either a refund of contributions or a deferred pension on reaching the retirement age), cannot be paid their dues by the Pension Fund. The responsibility for this accumulated liability lies with ZRL. It is quite certain that the retrenchment efforts will get stalled unless ZRL is enabled to meet this liability. ZRL has indicated that a substantial portion of the arrears has already been paid off by ZRL and that US$1.0 million equivalent would be paid into the Pension Fund by December 2000 and the remaining arrears within six months of Credit effectiveness, i.e., roughly by April 2001. This is also reflected as a dated covenant in the DCA. Component inputs. This component would finance the severance payments of pennanent staff to be retrenched. The component would be implemented by ZRL. The total Base cost of the component without any physical and price contingencies is estimated at US$16.9 million (about 56% of the total Project cost) to be financed by IDA (US$15.2 million for retrenchment packages) and GRZ (US$1.7 million for pension scheme obligations). Project Component 3 - USS 6.70 million (C) Assets Rehabilitation Backaround. The infrastructure and operating assets that the contract management group (the Group) took over were in very poor condition. Frequent locomotive failures and derailments have made the operations very inefficient and unsafe. The resulting decline in traffic and revenues, huge staff-related costs, and the Govemment's inability to provide any financial support have so far been making it difficult to provide for adequate maintenance. This in turn is making it difficult for the railways to increase its share of the freight market. One of the first actions of the Group was to identify the staff really required for operations and send the remaining surplus staff on transition leave. The latter staff have since been retrenched (see details under component 2) partly by the ZRL having taken a commercial loan of about US$3.5 million. The Group also pursued accounts payable. These steps have made more funds available for maintenance and the condition of the assets has shown some improvement. However, a lot more needs to be done and urgently. The concessioning process could take quite some time, definitely not less than about 15 months. In the absence of specific targeted interventions, the gains of the past two years could be lost. The proposed investments are expected to pay for themselves manifold in a short period of time by reducing the incidence of derailments and making more capacity available for traffic on offer. Additionally, these investments will enable the concessionaire to take less time to get organized for serious marketing and, therefore, will make the concession more attractive to the potential bidders. The package to be supported under the Project in advance of the concession has been arrived at after ensuring three key considerations: (i) the investments would unequivocally add value to the quality of the railway system which the concessionaires would also acknowledge, and would not become redundant by any future decision of the concessionaires; (ii) the identified tasks were capable of being completed within a year, i.e., before the expected date of commence of the concession; and (iii) the investments address weaknesses identified as the most critical in the railway system. Component description. The component would finance three key sub-components simultaneously to address three major operating constraints, viz., inadequate availability of locomotives, poor condition of track, and excessive sidelining of wagons on account of non-availability of wheels. The items to be financed comprise: (a) materials and equipment for the overhaul of five main line locomotives; (b) - 37 - strengthening of track by replacing a certain percentage of sleepers for the 377 kms of track that is fitted with wooden sleepers and replacing wooden sleepers in poor condition with concrete sleepers to compete the rehabilitation of the Chisamba-Lusaka section; and (c) procurement of about 2,000 wagon wheels. The component would also finance procurement of environmental mitigation equipment to assist ZRL in liquidating the accumulated environmental liability. Locomotives. Five mainline locomotives are overdue overhaul and the longer the overhaul is postponed the more expensive this would become. The costs for rehabilitation at US$240,000 per locomotive are considered reasonable. Allocation for materials and equipment: US$1.2 million by IDA. Track sleepers. Sleepers needed for the replacement of one in every four sleepers is the most economical way of improving the track condition in the short-term. Even though use of wooden sleepers is to be discouraged on environmental grounds, in this case it would be agreed to because of there being no alternative short of shutting down the railway. Nearly half of the main line network is fitted with wooden sleepers and almost all of the sleepers are far older than their permissible age and need to be replaced. Taking into account environmental concems, the final solution would lie in replacing these with concrete sleepers. While wooden sleepers can be replaced one at a time and in any order, say one in every 4 sleepers, which is the proposal here, it is not possible to do so using concrete sleepers. Use of concrete sleepers would mean that all sleepers would have to be changed in one go in any particular section. This could take a long time, about five to six years, and also considerable resources, in the order of US$20 to 30 million. The track cannot hold together for such a long time. In the short-term, some thing else would need to be done. The optimal strategy to meet both the short - and long-term objectives - within a very serious financial constraint, would be to: (i) replace one in 4 sleepers with wooden sleeper (cost less than US$2 million); (ii) start replacing all the wooden sleepers with concrete ones at a time and pace dictated by the availability of funds; (iii) transfer good wooden sleepers from the concretized section to one selected section fitted with wooden sleepers; and (iv) take up this selected section for fitment of concrete sleepers the last of all. This strategy would mean short-term improvement of the track and a strategy to phase the fitment of concrete sleepers as convenient and affordable. Moreover, the life-expired wooden sleepers released from the track will definitely be available for alternative use, leading to reduced deforestation. Allocation: US$0.9 million for 60,000 sleepers by IDA and about 2.0 million by GRZ for fastenings, ballast, rails, and crossings. Also, 35,000 concrete sleepers at a total cost of US$1.5 million by IDA to compete the rehabilitation of the Chisamba-Lusaka section, which has accounted for a large percentage of derailments in the recent past. The section already has concrete sleepers and use of wooden sleepers is not compatible. Wagon wheels. Many wagons are running on wheels, which have reached their technical limit of wear and need to be replaced. Only 500 wagons out of a fleet of 2,600 are fit to cross the border. All other wagons are getting rejected at the border. The interchange loss on account of defective wagons amounted to about US$1.0. million during 1999. About 2,000 wheels are proposed to be procured at a cost of US$1.1 million. Component inputs. The base cost of the component without any physical and price contingencies would be US$6.7 million (21% of the total project cost) to be financed by IDA (US$4.7 million) and GRZ (US$2.0 million). Project Component 4 - US$0.30 million (D) Environmental Mitigation Component description. This component would comprise procurement of pollution-control equipment such as oil separators and fume extractors with the objective of bringing the railways to comply with national and international standards in pollution control. These items have been identified and costed in a Environment - 38 - Study Report. Component inputs. The base cost of the component without any physical and price contingencies would be US$0.3 million (1% of the total project cost) to be financed by IDA US$0.2 million and GRZ (US$0.1 million). Project Component 5 - US$0.50 million (E) ZRL Restructuring/Windins up Background. Eventually ZRL will hand over the freight and passenger business to concessionaires. The future role of ZRL as an entity has still to be defined. ZRL may have need to continue operating as a downsized state owned company with the responsibility of spinning-off the remaining commercial and non-commercial activities (i.e., those not taken over by the concessionaires such as guest-houses, clinics, and police), discharging all of its liabilities, selling off the remaining assets, and finally winding itself up. ZRL may also have to be retained if: (i) no proposals are received for the passenger concession and ZRL is required to continue operating these services; and (ii) ZRL is required to serve as a holding company holding the infrastructure assets on behalf of the government. The future structure of ZRL would depend upon the outcome of the concessioning process. Component description. The internal studies have identified the staff required for the carrying out of ZRL' s residual activities as follows: 1. Dealing with the pending and future court cases: 10 staff; 2. Dealing with the maintenance, disposal, and account of residual assets not taken over by the concessionaires: 17; 3. Operating the passenger services on Mulobezi line: 27; 4. Operation of the passenger services: 261; and 5. Security services: 500. In all probability, with the condition that the freight bidders would need to ensure a bid for the passenger services as well, the concession for passenger services will be awarded. It is also very likely that the concessionaires would make their own arrangements for security either by engaging the necessary police or by subcontracting. The surplus police would be retrenched like all other staff. In such a case, the residual ZRL would be managed by a total staff of 54 until it is wound up. Component inputs. Inputs for this component would comprise consultancy services and technical assistance in orderly winding up of ZRL. Base cost of the component without any physical and price contingencies is estimated at US$0.5 million (2% of the Project cost) to be financed by IDA. Project Component 6 - US$0.80 million (F) Reulatorv Framework - 39- Component description. This component would include assistance to: (i) assess/identify the effectiveness of the existing scope, functions, and instruments for the economic regulatory framework; (ii) recommend the sectoral coverage and accountability relationships for the regulatory institution(s) (iii) define the staffing, internal organization, operating costs and financing mechanisms for a new safety and environment-related regulatory agency; and (iv) prepare the required draft legislation. The component would also include provision for equipment and technical assistance services to enable the launching of the identified agency (ies) and the preparation of its staff. Additional finance provided under this component would cover the technical aspects of the regulatory framnework. Consultant services for a study and for technical assistance would be targeted at the development of the required capabilities within MCT or any other institution identified for this purpose, to enable it to effectively discharge its role as a supervisor of the concession contracts. The component would also include provision of technical assistance services to restructure ZRL, establish an holding company or a unit within MCT to be responsible for: (i) keeping an account of the assets, concessioned or leased under the Project; (ii) taking inventories of said assets and reconciling the inventories with records; (iii) monitoring compliance with the concession agreements; and (iv) undertaking physical inspections of assets and ensuring compliance with the standards prescribed for the assets in the concession agreements. The component would also include provision of technical assistance for the setting up by the Borrower of an escrow fund to be used for the payment of: (i) any subvention for passenger services operated as public service obligations in case the passenger services concession is awarded as a stand-alone concession; (ii) the retirement and /or retrenchment benefits pertaining to the service of eligible employees of Zambia Railways; (iii) operating expenditures of the Holding Company, the Regulatory Body; and any residual part of Zamnbia Railways in the event of winding up, reorganization or privatization; and (iv) the costs of any mitigation measures required under Part H of the Project. Component inputs. Base cost of the component without any physical and price contingencies is estimated at US$0.8 million (about 2% of the Project cost) to be financed by IDA. Project Component 7 - US$0.50 million (G) MCT Strengthenin2 Component description. This component would include a study to (i) review and refine the framework for developing and overseeing transport policy; (ii) define the new functions of MCT to discharge its role; (iii) assess MCT's organizational structure in the framework of this evolving role; and (iv) determine staffing requirements, taking into account GRZ's civil service reform program. The component would also include the provision of consultant services for technical assistance to enable the implementation of the recommendations of the study. Inputs for this component would comprise consultancy services and office equipment. Component inputs. Base cost of the component without any physical and price contingencies is estimated at US$0.5 million (about 2% of the Project cost) to be financed by IDA. Project Component 8 - US$1.00 million - 40 - (H) Social Mitil!ation It is estimated that only about one-third of the current staff, about 1,100 workers, will be required by the concessionaire. ZRL already plans to retrench 700 workers, as soon as funds are available. While the retrenchment payments will help, the loss of employment will have a seriously adverse impact on workers unless the process is carefully planned and implemented. Previous experience of retrenchment in ZRL has not been very encouraging: about 5% of the retrenched workers have found formal employment, another 20% have opened small enterprises, and another 5% have moved to the villages and presumably smallholder agriculture. The project has been designed to provide a more comprehensive professionally organized approach to mitigating the social impact of retrenchment: (i) the component will be implemented by the National Social Safety Net (NSSN) which has substantial previous experience in mitigation and training activities; (ii) the component is being developed using the results and recommendations of a major social mitigation assessment study; (iii) counseling will be undertaken well in advance of actual retrenchment in order to prepare workers for the initial period, especially with regard to the use of retrenchment compensation; (iv) counseling will be undertaken by experienced professional organizations; (v) retraining and re-orienting workers to alternative employment will utilize approved public and private training institutes; and (vi) assistance in resettlement will be considered. It has also be agreed that additional mitigation measures will, if necessary, be funded through the concession escrow account. Component inputs. The total Base cost of the component without any physical and price contingencies is estimated at US$1.0 million (about 3% of the total Project cost) to be financed by IDA. TOTAL PROJECT COST As indicated in the table below, the total Base Cost of the Project has been estimated at about US$27.7 million. Physical and price contingencies, estimated at US$3.3 million, have been calculated as follows: (a) 15% for the staff retrenchment component in view of the uncertainty of the staff numbers that the concessionaires would eventually accept; (b) 10% for all other components. Total Project cost is estimated at US$3 1.0 million. - 41 - PROJECT COSTS (USS million) Categories Implem % of Consult Staff Component enting Costs Total &Tech Train Redun Equip Financin Agency Local Foreign Total Cost Assist ing dancy ment IDA ZRL A. Railway Concessioning ZPA 0.20 0.80 1.00 3 1.00 1.00 B. Staff Rationalization ZRL 16.90 0.00 16.90 55 0.00 0.00 16.90 15.20 1.70 Staff Retrenchment 15.20 0.00 15.20 49 15.20 15.20 Pension Obligations 1.70 0.00 1.70 5 1.70 1.70 C. Asset Rehabilitation ZRL 2.00 4.70 6.70 22 6.70 4.70 2.00 D. Environment Mitigation ZRL 0.10 0.20 0.30 1 0.30 0.30 0.00 E. ZRL Restructuring/Winding up ZRL 0.10 0.40 0.50 2 0.50 0.50 F. Regulatory Framework MCT 0.10 0.70 0.80 3 0.80 0.80 G. MCT Strengthening MCT 0.10 0.40 0.50 2 0.20 0.10 0.20 0.50 H. Social Mitigation NSSN 1.00 0.00 1.00 3 0.10 0.90 1.00 Total Baseline Cost 20.50 7.20 27.70 89 2.10 1.00 16.90 7.70 24.00 3.70 Price and physical contingency (*) 2.70 0.60 3.30 11 0.20 0.10 2.30 0.70 3.00 0.30 Total Project Cost 23.20 7.80 31.00 100 2.30 1.10 19.20 8.40 27.00 4.00 (1) 15% on staff retrenchment and 10% on the rest rounded to nearest figure - 42 - Annex 3: Estimated Project Costs ZAMBIA: RAILWAYS RESTRUCTURING PROJECT Railway Concessioning 0.20 0.80 1.00 Staff Rationalization 17.90 0.00 17.90 Asset Rehabilitation 2.00 4.70 6.70 Environment Mitigation 0.10 0.20 0.30 ZR Restructuring/Winding up 0.10 0.40 0.50 Regulatoiy Framework 0.10 0.70 0.80 MCT Strengthening 0.10 0.40 0.50 Total Baseline Cost 20.50 7.20 27.70 Physical Contingencies 1.35 0.30 1.65 Price Contingencies 1.35 0.30 1.65 Total Project Costs 23.20 7.80 31.00 Total Financing Required 23.20 7.80 31.00 Goods 2.40 6.00 8.40 Works 0.00 0.00 0.00 Services 0.45 1.85 2.30 Training 1.10 0.00 1.10 Staff Redundancy 19.20 0.00 19.20 Total Project Costs 23.15 7.85_ 31,00 Total Financing Required 23.15 7.85 31.00 - 43 - Annex 4: Cost Benefit Analysis Summary ZAMBIA: RAILWAYS RESTRUCTURING PROJECT Background ZR Systemn. The geographical setting of Zambia makes ZR a critical link in the logistic chain for intemational 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, Zambia, 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 Zambia, Tanzania-Zambia Railways at Kapiri Mposhi and onwards to the port of Dar-es-Salaam, and the DRC at Sakania. Past Performance. 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, 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 a decline in Zambia's economy, 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 wom out system. Derailments are an almost daily occurrence and ZR has a poor record of accidents. Vandalism of signals has badly affected traffic control. As a result, the railways are failing to canry all the traffic on offer. Details of actual freight and passenger traffic from 1975 until 1999 are indicated in the table below. Future Prospects. In spite of the deterioration of the ZR system in recent years, quick revitalization of ZR is possible. The expatriate management group that commenced its work in March 1998 has already taken some steps in this direction. Within two years, the 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 trffic on offer. However, for sustainability, more investments, particularly in infrastructure, would be required in future. - 44 - ZRL's Past and Current Performance Actual Projected 1980/ 198&5 1990/ 1991/ 1992/ 1993/ 19941 1995/ 1996/ 1997/ 1975 1981 1986 1991 1992 1993 1994 1995 1996 1997 1998 1998 1999 2000 2001 2002 2003 2004 2005 Freight (000 Tons) Transit 381 640 569 440 323 160 89 47 48 161 93 171 204 224 224 Import 270 880 430 395 401 982 371 193 250 234 270 212 249 249 316 Export 50 470 593 436 398 471 384 309 345 332 235 296 260 235 235 Domestic 5500 2380 2960 2161 2108 1840 1672 1333 1225 955 817 953 897 942 1025 Total 6201 4370 4552 3432 3230 3453 2516 1882 1868 1682 1415 1632 1610 1650 1800 1980 2178 2396 2468 Freight (MiUlion NTKM) Transit 115 53 33 28 85 67 122 131 137 Import 416 167 104 140 161 182 148 150 186 Export 177 141 110 1I1 128 90 139 104 78 Domestic 364 290 195 181 161 133 145 155 166 Total 1072 651 442 467 535 472 554 540 544.5 572 629 692 710 727 _________ Passengers (000) _ 1 1 1 793 906 1156 1509 950 1265 1246 1095 800 8191 868 572 629 692 761 784 Staff Strength Penmanent 9850 8257 8054 7867 7965 7929 5285 5181 5027 3386 3297 1100 1000 900 800 800 Casual 1839 1124 999 819 335 334 576 800 20 20 8 0 0 0 0 0 Total 11689 9381 9053 8686 8300 8263 5861 5981 5047 3406 3305 1100 1000 900 800 800 Summary of Benefits and Costs: The economic rate of return (ERR) for the project has been calculated on the basis of costs and benefits to the Zambian economy in the "With" and "Without" scenarios over a 20 year period. In calculating the costs to the economy, it has been reasonably assumed that the concessionaire will be largely or entirely foreign owned, that concessionaire investmnent in ZR will be financed from overseas resources, and that all profits from the concessioned railway, net of taxes, will be repatriated overseas. The Zambian economy will be affected by: (i) the change in the level of employment and employment income; (ii) the level of concession fees paid to GRZ; and (iii) more efficient rail services and the consequent diversion of freight traffic from road to rail. In the analysis of the costs and benefits, all transfer payments made within the economy have been effectively excluded and no distributional weights have been attached to factor incomes/consumption. The underlying basis for the analysis is outlined below. The "Without" Scenario Following the completion of the present management contract, ZR is operated very much in the same manner, as previously. There would be no fwuther staff retrenchment, due to lack of financial resources, but the level of employment would fall by about 100 workers/year, through natural attrition. Employment would stabilize at a level of 1800, the level considered necessary for operations under parastatal ownership and management. The present average wage rate for ZR workers would remain constant, in real termns. ZR will not have the resources to make major investments, but to avoid a dramatic decline in - 45 - operating capacity, US$5 million will be invested over the next five years. ZR's freight traffic will decline by 2% annually as a result of declining operating efficiency, brought about by inadequate maintenance and investment. This is probably rather optimistic and the rate of decline could be much faster. * Fixed costs and the variable cost/ton-km remain constant in real terms. * Average ZR revenue of US$ 0.0519 ton-km remains constant, although this is again optimistic given the probable decline in operational efficiency and service levels. The 'With" Scenario The impact of private management on formerly parastatal railway operations in developing countries has generally been dramatic with substantial reductions in cost levels and significant increases in traffic levels. Experience elsewhere cannot necessarily be applied in every situation and thus very conservative assumptions have been adopted in the analysis of the 'With" scenario. Project Commencement: It is assumed that the concession would commence operations during the latter part of 2001. The year 2002 has been taken as the first year for the economic analysis. Implementation ofphysical investment: The Project funds allocated for asset rehabilitation would be utilized before the start of the concession, i.e., before the latter part of 2001. With the resulting improvement in the condition of the track, availability of wagons, reliability of locomotives, it is assumed that the level of freight traffic would be increased by 5%, i.e., from 1.65 million tonnes to 1.73 million tonnes and 572 million ton-kms. .Staffreirenchment: The Project funds for staff rationalization would be available as soon as the proposed Credit becomes effective, well before the takeover of the ZR by the concessionaire. It is assumed that approximately 50% of the present ZR labor force would be retrenched prior to concessioning, and that the concessionaire would take over an initial labor force of 1100 workers. With the introduction of revised working practices and improved equipment, the concession would then reduce the workforce, over the next three years, to approximately 800 workers. Thereafter, there will be a gradual increase in the labor force as the level of operations staff are recruited to handle increased levels of freight traffic. Traffic Projections: Over-optimistic traffic forecasts in donor-funded railway projects have been more the rule than the exception (though this has usually been within the context of state owned and operated railways). Despite the very positive impact of concessioning on rail traffic elsewhere, the analysis has assumed very modest traffic growth. It is assumed that in the first year of concessioning, ZR traffic will attract 5% additional traffic and in each of the next two years an additional 10%, reflecting diversion of some road freight traffic back to rail. Thereafter, traffic is assumed to grow at about 2.5% per annum, significantly below the expected growth of the Zambian economy. The growth rates used in the analysis are very modest compared to the average 14% estimated by the consultants working for ZR. Staff costs: As soon as the Credit becomes effective, the current management of ZR will commence retrenching staff, with the intention of retaining only about 2,600. The concessionaire is expected initially to employ 1,100 but will further reduce the level to about 800 as increased efficiency and labor productivity is achieved, From year 5, it is assumed that staff will begin to retire, at about 5% per annum. The concessionaire will pay the retirement benefit for the years during which the staff were employed under the concession, and GRZ will be responsible for the retirement benefits for the period of employment prior to concessioning. It is assumed that the concessionaire will raise wage rates by an average of 25% as part of the plan to increase productivity. Variable costs: While substantial efficiencies could be achieved with regard to both fuel and spare parts consumption, a relatively small reduction in variable cost has been assumed in the analysis; a - 46 - reduction in cost from US$ 0.0156/ton-km to US$ 0.0147/ton-km (approximately, 6% over the first two years of the concession). Much more substantial cost savings are thought possible from better management and control of fuel and spare parts. Fixed costs: The fixed costs of ZR are assumed to remain unchanged, though savings in real estate as well as in the motive power and rolling stock fleets should be achievable. Concession management costs: The concessionaire is expected to need only a very small expatriate senior management team, but the individual costs of the personnel will be relatively high. A cost of US$ I million has been assumed in the analysis to approximate the additional costs of expatriate managers; possibly, four managers at an average cost of US$250,000. Investment by the concessionaire: While the concessionaire's investment strategy cannot be fully anticipated, it might be expected that it will be the minimum level consistent with the need to cater fully for potential traffic demand, at a commercially acceptable service level. The present management has estimated the investment requirement as some US$60 million, but it is quite clear that ZR's revenues cannot support such a level of up-front investment. The Asset Valuation Study indicated that about US$ 12 million would be sufficient to allow ZR to operate reasonably efficiently and safely for the foreseeable future. For the purposes of the analysis, concessionaire investment of US$ 15 million has been assumed, spread over the first six years of the concession period. Distribution of ZR surplus: The concessionaire is expected to require a 20% post tax rate of return on the investments made in ZR and to pay back investments over a five year period. The overall return on investment would be about 35%, reflecting the perceived risks of investing in ZR Any residual surplus is assumed to go to GRZ in the form of concession fees, royalty payments or corporate taxes Retrenched workers and use of retrenchment payments: Overall, some 2,500 workers are expected to be retrenched and will receive approximately US$16 million in retrenchment benefits, On the basis of past retrenchment, it is expected that about 10% of the retrenched workers will obtain altemative formal employment, at about the same wage salary scale. Other retrenched workers are expected to take up smallholder agriculture, and it is assumed that about 25% of retrenchment payments will be invested in informal economic activities, and that such investment will generate rates of return of about 15%. Road freight costs: These costs, US$0.08/ton-km, are based on the tariffs charged by road hauliers as reported in the "Private Sector Participation Study". While these are financial costs, they are broadly indicative of economic costs to the Zambian economy: (i) much of the international freight traffic is hauled by foreign owned trucking companies; and (ii) the taxes paid by truckers on fuel, vehicles and other inputs partly offset the cost of attributable road maintenance costs. The trucking sector is already very competitive and a more competitive railway service is unlikely to result in a significant impact on trucking tariffs. Economic benefits of diverted roadfreight traffic: Without the concessioning of ZR, there would be significantly higher levels of road freight traffic. While rail tariffs are well below road freight tariffs, rail service levels are usually inferior to those provided by the trucking sector. Estimating the economic benefits on the basis in the difference in the tariff levels would thus be an overestimation. Based on the assumption of a straight line demand curve, economic benefits have been estimated at 50% of the difference in the tariff levels. Economic benefits to residual "without" rail traffic: The concessioning of ZR is expected to result in both an expansion in capacity and a substantial improvement in the level of rail service. Existing rail traffic will benefit from the improved level of rail service. The level of economic benefit to these residual rail service is unlikely to be very substantial, however, as such users are clearly relatively insensitive to the level of service (otherwise they would not be using ZR). These benefits have not been estimated. - 47 - There may be other economic benefits from the concessioning of ZR, but have not been included in the analysis because of the uncertainty regarding their level. These might include: (a) an increase in passenger traffic and revenues; (b) an improvement in the level of service to passengers; (c) some reduction in road maintenance costs; (d) more productive use of ZR's non-core assets; and (e) reduced environmental degradation, railways being considered less polluting than road transport. Results of the Economic Analysis The results of the economic analysis for the base case assumptions for the project are as follows: (i) ERR 28.1% (ii) NPV (12%) US$47.9 million The overall ERR is well above the level considered acceptable (10% - 15%) for transport sector investment. The 20% post tax return on capital obtained by the concessionaire is not included in this ERR. Benefits: 68.4 95.8 103.9 Costs: 20.5 30.2 19.7 Net Benefits: 47.9 65.6 84.2 IRR: 28.1 38.1 The opportunity cost of many of the workers retrenched from Zambian Railways is very low. Financial retums to the railway will thus be significantly higher than economic returns to the economy. 2Net public sector surplus with and without project. Main Assumptions: See above. Sensitivity analysis / Switching values of critical items: The economic analysis is based on a large number of assumptions, and it is important to test whether plausible changes in these assumptions would result in unacceptably low ERR. An extensive sensitivity analysis has been performed. Given the very positive ERR in the base case, it is particularly important to deternine what factors, or combination of factors, could result in a marginal or negative ERR: - 48 - Sensitivity Analysis: Pessimistic Scenarios NPV ERR (US$m) (%) 1. Base case 47.9 28.1 2. Retrenched workers: no alternative employment and no investment 40.3 24.9 3. Concessionaire takes 30% return and makes $30 million investment 20.2 18.6 4. Traffic in "without" scenario remains constant at 545 million ton-km 27.8 22.7 5. Annual traffic growth in "with" situation only 2% per annum 10.5 16.1 6. No increase in rail traffic "with" concessioning -14.2 3.6 7. No increase in rail traffic "with" scenario, concessionaire invests only $5 million -0.3 11.8 8. Traffic in "without" scenario constant, growth in "with" scenario 3% per annum 4.6 13.8 The crucial factor for the economic viability of the project is the increase in rail traffic, resulting from the more efficient rail services provided by the concessionaire. It is implausible that the concessionaire would invest substantially without additional rail traffic, and it can be reasonably assumed that Scenario 6 is quite unrealistic. The very worst case scenario (Scenario 7) still generates a marginally acceptable ERR. It is highly unlikely that ZR could be concessioned unless potential concessionaires expect that they will be able to increase the level of freight traffic substantially, nor is it likely that GRZ would accept the very low concession fees implicit in the low traffic scenarios. A faster rate of traffic growth after concessioning, or a more rapid decline in traffic without concessioning would obviously increase the level of economic benefits above the base case level. Both such scenarios are very plausible, as are significant reductions in railway operating costs under concessioned management. A rather different scenario would be very rapid decline in the performance of ZR and its outright closure after, for example, five years. Sensitivity Analysis: Optimistic Scenarios NPV ERR (US$m) (%) 1. Base case 47.9 28.1 2. Annual traffic growth in "with" scenario 10% for 3 years and then 3% 64.4 32.5 3. "With" Fixed and unit variable costs reduced 10% annually for first two years 62.3 32.9 4. Traffic in "without" scenario declines 3% annually 56.7 30.2 5. Scenarios2+3+4 88.2 39.0 6. ZR closed after 5 years "without" concessioning 119.6 38.6 Overall, the economic analysis indicates that the project is robust, in tenns of benefits to the Zambian economy. It is possible that the potential concessionaire will discount the potential of ZR when making the initial offer for concession fees, but once the potential is realized will be prepared to increase the level of fees in order to extend the period of the concession. - 49 - Annex 5: Financial Summary ZAMBIA: RAILWAYS RESTRUCTURING PROJECT Years Ending 2001 - 2003 |Year 1 |Year 2 |Year 3 |Year 4 | Year 5 | Year 6 1 Year 7 Total Financing Required Project Costs Investrnent Costs 18.0 8.0 5.0 Recurrent Costs Total Project Costs 18.0 8.0 5.0 0.0 0.0 0.0 0.0 Total Financing 18.0 8.0 5.0 0.0 0.0 0.0 0.0 Financing IBRD/IDA 16.0 7.0 4.0 Government 2.0 1.0 1.0 Central 2.0 1.0 1.0 Provincial Co-financiers User Fees/Beneficiaries Others Others Others Others Others Total Project Financing 18.0 8.0 5.0 0.0 0.0 0.0 0.0 Main assumptions: Financial Analysis Summary For computing the FRR: (a) the costs constitute the combined investments by GRZ (for staff rationalization and initial targeted investments estimated at US$24 million etc.) and those by the concessionaires (estimated at US$15 million); (b) the traffic has been assumed to increase as in indicated in the section on economic analysis with revenues increasing proportional to ntkms; and (c) unit costs have been assumed as in the ERR computation and expenditure assessed accordingly. The financial rate of return on the combined investments made in Zarnbia Railways by GRZ and the concessions has been estimated at 38.6%. It is clear that the financial rate of return is sufficient to permit the concessionaire to make an acceptable return on his investments while also providing substantial concession fees and corporate taxes to be paid to GRZ. - 50 - Sensitivity analysis. With traffic and cost scenario of the ERR traffic sensitivity case, i.e., zero percent growth of traffic in the first three years and 3 % annual growth thereafter, the FRR comes to 21%. If the cost reductions are also zero, then the FRR would be 5 %. It is obvious that, if after a huge investment of over US$50 million, there is neither a growth in traffic nor a reduction in the operating cost, then the return on investments will be dismal. - 51 - Annex 6: Procurement and Disbursement Arrangements ZAMBIA: RAILWAYS RESTRUCTURING PROJECT Procurement For procurement arrangements see Table A andfor Prior review thresholds see Table B. The main features of the procurement arrangements are as follows (values within parentheses indicate the approximate value of goods/works/services proposed to be obtained through the specified procurement method and are inclusive of physical and price contingencies): Goods would be procured through: (i) International Competitive Bidding (US$4.3 million); (ii) National Competitive Bidding (US$1.0 million); and (iii) Limited intemational bidding, limiting the intemational bidding to original equipment suppliers (US$0.8 million). (iv) Shopping (US$0.2 million) Consultants' services would be procured through: (i) Quality and Cost Based Selection (US$2.0 million); and (ii) Selection Based on Quality of Consultants (US$0.3 million). Training and retraining of retrenched staff would be procured through mutual consultation (US$1.1 million). US$17.3 million will be disbursed towards severance payments and US$1.9 million towards pension payments. Note: Figures in () are inclusive of contingencies. - 52 - Procurement methods (Table A) Table A: Project Costs by Procurement Arrangements (US$ million equivalent) 1. Works 0.00 .____________________ o 0 0 0 (0.00) 2. Goods 6.40 1.00 1.00 8.40 (4.30) (1.00) (1.00) 0 (6.30) 3. Services 2.30 2.30 o) () (2.30) 0 (2.30) 4. Training 1.10 1.10 o OO0 (1.10) 0 (1.10) 5. Severance Payments 17.30 17.30 o 0 (17.30) 0 (17.30) 6. Pension Payments 1.90 1.90 ..___________________ _ o) () 0 0 O (0.00) Total 6.40 1.00 23.60 0.00 31.00 (4.30) (1.00) (21.70) (0.00) (27.00) "Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies v Includes civil works and goods to be procured througlh ntionlu shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local governuent units. - 53 - Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) A. Firms 2.00 0.30 0.00 0.00 0.00 0.00 0.00 2.30 (2.00) (0.30) (0.00) (0.00) (0.00) (0.00) (0.00) (2.30) B. Individuals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) Total 2.00 0.30 0.00 0.00 0.00 0.00 0.00 2.30 (2.00) (0.30) (0.00) (0.00) (0.00) (0.00) (0.00) (2.30) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank Credit. - 54 - Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review' 1. Works 2. Goods >US$100,000 ICB All >US$ 100,000 LIB All >US$30,000 NCB All USS100,000 QCBS (Firm) All >US$50,000 CQ (Firm) All >US$50,000 Individual* \'/'-'-'{OF CONGO ' h ; A N GAL A S1, ( : <-<>>a f /L) tASTERN 0 N~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~N \ { ) W 10 > ablus_ipiN $akaniDOA K.b.. MALAWI h oir olr Koftot. 0kdz j / Lukulu ! --XC ds<-< v t / / 32oMOZAMBIQUE 340 i tONGU 4 ~ gONGO DEMD REP. BURUNET / -, OPFCONGO | T; E R N N.. ANGOLA j~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~uoo,~s 2 R SOUTHE oow..6 ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~AAIIAIeowto4 BOTSWANA 26 eou~~~~M. ,nu. dM B B W 22 In Victoria Foils I BuIowoyo 280 ~% 0 0 10 1502W O 20KLMTR SWANA 2.6' T. Vid.~~~~~~~~~~~~~~~i. F.11, 80-y. ~~~~~~~~~~~OCTOBER 20600