Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10015 PROJECT PERFORMANCE AUDIT REPORT PAKISTAN TENTH RAILWAY PROJECT (CREDIT 684-PAK AND LOAN 1372-PAK) AND ELEVENTH RAILWAY PROJECT (CREDIT 1278-PAK) OCTOBER 18, 1991 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. COUNTRY EXCHANGE RATES Currency Unit = Rupee (Rs) 1976-1981 US$1 = Rs 9.90 1982 US$1 - Rs 12.84 1983 US$1 = Rs 13.50 1984 US$1 - Rs 15.36 1985 US$1 - Rs 15.98 1986 US$1 = Rs 17.25 1987 US$1 = Rs 17.45 1988 US$1 = Re 18.65 ABBREVIATIONS AND ACRONYMS ERR - Economic Rate of Return GOP - Government of Pakistan MIS - Management Information System OED - Operations Evaluation Department PCR - Project Completion Report PPAR - Project Performance Audit Report PR - Pakistan Railways PSO - Public Service Obligation SAR - Staff Appraisal Report FISCAL YEAR OF BORROWER July 1 to June 30 THE woRLD eANK FOR OFFICIAL USE ONLY W&thingion. C) C 20433 U.5 A Office of Director-General Operations Evaluation October 18, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Projeci- 'erformance Audit Report on Pakistan Tenth Railway Project (Credit 684-PAK and Loan 1372-PAK) and Eleventh Railwav Proiect (Credit 1278-PAK) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Pakistan - Tenth Railway Project (Credit 684-PAK and Loan 1372-PAK) and Eleventh Railway Project (Credit 1278-PAK)" prepared by the Operations Evaluation Department. Attachment This document tias a funcg distribution 4nd may be used by rMi:pwnts only in the Perfonnmce *of their Offilcial duttm. Its contents MAY not otherwise be disclosWd without World Elankc *utho=~t1gfl FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PARISTAN TENTH RAILWAY PROJECT (CREDIT 684-PAR, LOAN 1372-PAK) AND ELEVENTH RAILWAY PROJECT (CREDIT 1278-PAK) TABLE OF CONTENTS Paze No, Preface................... . . . . ..i Basic Data . . . . . . . . . . . . . . . . . . . . . . . . ..iii Evaluation Summary . . . . . . . . . . . . . . . . . . . . . . vii I. BACKGROUND................ ... . . . . .1 Transportation . . . . . . . . . . . . . . . . . . . . . 1 Bank Assistance to Transport Sector . . . . . . . . . . 1 Pakistan Railways . . . . . . . . . . . . . . . . . . . 1 Bank's Railway Strategy.......... ... . . . .1 Audit Railway IX.. ............ . . . . 2 II. RAILWAY X - PREPARATION AND IMPLEMENTATION. ..... . . . 3 A. Preparation................... . . 3 Traffic Forecast.. .......... . . . . 3 Plan of Action.. ............ . 3 Other Covenants and Undertakings ... . . . 3 The Project........... . . ..... . . 4 Concern About Effectiveness of Assistance to PR 4 Negotiations............ ... . . . . 4 Board Presentation......... ... . . . . 4 B. Implementation...................5 The Project....................5 Plan of Action................... 5 Other Covenants and Undertakings . . . ......6 Traffic Developmert . . . ............6 Financial Results . . . ............7 Economic Results . .o... ......... . . . . 7 III. RAILWAY XI - PREPARATION AND IMPLEMENTATION...... . . .8 A. Pr.paration .......... ...... . .8 Traffic Forecast.....................8 Plan of Action .............. . . . .8 Other Covenants and Undertakings........ . .8 TheProject . . . . . .. . . . . . . . . . .8 Board Presentation . . . . . . . . . . . . . . . . 8 This document has a restricted distribution and may be used by recipients only in the performance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (Cont.) B. Implementation . 9 The Project . . . . . . . . . . . . . . . . . . 9 The Plan of Action . . . . . ............ 10 Other Covenants and Undertakings *. ....10 Traffic Development........................ . .11 Financial Results ....,.., . . . . . . . . 11 Economic Results............... . . 11 Bank's Supervision Effort..... ... . . . . .11 Closing of the Credit...... ... . . . . . .11 IV. FINDINGS, LESSONS AND RECOMMENDATIONS ...... . ..12 A. Findings . . . . . . . . . . . . . . . . . . . . . . 12 B. Lessons . . . . . . . . . . . . . . . . . . . . . . 13 C. Recommendations . . . . . . . . . . . . . . . . . 14 TABLES 1. Pakistan, Domestic Traffic, by Mode, FY70-FY89 . . . 17 2. PR Passenger and Freight Traffic, FY70-FY89 . . . . . 18 3. PR Financial Results, FY70-FY97...... . . . . . .19 4. PR Passenger Fares, in Constant Prices, FY70-FY89 . . 20 5. PR Freight Rates, in Constant Prices, FY70-FY89 . . . 21 6. PR Availability and Utilization of Locomotives and Rolling Stock, FY71-FY89 . .... . . . . . 22 ANNEX I - Railway XI - Increasing Passenger Fares: A Chronology 23 ANNEX 2 - Comments from the Borrower......... . . . . . . .26 MAP - IBRD 16248R1 PROJECT PERFORMANCE AUDIT REPORT PAKISTAN TENTH RAILWAY PROJECT (CREDIT 684-PAK, LOAN 1372-PAR) AND ELEVENTH RAILWAY PROJECT (CREDIT 1278-PAK) PREFACE 1. This is the Project Performance Audit Report (PPAR) of the Tenth Railway Project, involving an IDA Credit of US$25.0 million and a Bank Loan of US$35.0 million, and of the Eleventh Railway Project, involving an IDA Credit of US$50.0 million.1/ Objectives of both projects were the same: improve the operational efficiency and capacity, economic viability and financial results of Pakistan Railways (PR). The Credit and Loan for Railway X were approved February 22, 1977, and became effective on May 9, 1977. The Closing Date of June 30, 1982 was extended by six months. Final disbursement was made on June 10, 1983, and the balance of US$ .5 million was canceled. The Credit for Railway XI was approved July 1, 1982, and became effective September 13, 1982. The Closing Date, as scheduled, was December 31, 1985, final disbursement was on July 25, 1986, and US$23.3 million was canceled. 2. The PPAR is based on the Project Completion Reports (PCRs) of the two projects prepared by the Europe, Middle East and North Africa Regional Office and issued in 1985 and 1989,2/ the President's Reports, the credit and loan documents, the transcripts of the Executive Director's meetings at which the projects were considered, a study of the Bank's files, and discussions with Bank staff. An OED mission visited Pakistan in July 1990 and discussed the effectiveness of the Bank's assistance with Pakistan Railways (Lahore), Karachi Port Trust (Karachi), Ministry of Railway, Planning Commission, Cabinet Secretariat, and several private transport organizations (Islamabad). The cooperation and assistance of Pakistani authorities in the preparation of this report is gratefully acknowledged. 3. The PCRs of the two projects provide an adequate account and assessment of the project experience and discusses the performance of the Bank and PR. This audit report supplements the PCRs and highlights aspects such as implementation of covenants, passenger fare adjustments and financial results. Based on a review of the experience with these two projects and with Railway IX, 1/ Of these 11 railway projects eight were in what is now Pakistan and three in what is now Bangladesh. 2/ Project Completion Report, Pakistan, Tenth Railway Project (Credit 684-PAR and Loan 1372-PAK), Report No. 5767, June 28, 1985, and Project Completion Report, Pakistan, Eleventh Railway Project (Credit 1278-PAR), Report No. 7781, May 16, 1989. - *11 - the audit offers recommendations for consideration by the Government of Pakistan (GOP), PF and the Bank. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government and PR for comment. The comments received are attached (Annex 2). PROJECT PERFORMANCE AUDIT REPORT PAKISTAN TENTH RAILWAY PROJECT JEDIT 6C4-PAK. LOAN 1372-PAK) BASIC DATA KEY PROJECT DATA Appraisal Actual Exgpectation Estimate Total Project Costa (US$ million) 247.0 300.7 Overrun (M) 21.7 Credit and Loan Amount (US$ million) 60.0 60.0 Disbursed 59.5 Caheeled (6/10/83) .5 Repaid 21.1 Outstanding as of November 30, 1990 47.1 Date Physical Components Completed 6/30/81 12/30/83 Economic Rate of Return (2) 24 negative Operating Performance unsatisfactory Financial Performance unsatisfactory Institutional Performance weak CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS 19Z7L78 1978L79 1979/80 198081 .L8.182 1982183 Appraisal Estimate (US$ million) 13.3 43.5 58.1 60.0 - - Actual (US$ million) - 16.4 24.7 36.1 46.7 59.5 Actual as % of Appraisal (2) 0 38 43 60 Date of Final Disbursement: June 10, 1983 PROJECT DATES Original Plan Actual Government Application 12/74 Negotiations Completed 12/23/76 Board Approval 2/22/77 Credit/Loan Agreement Date 3/ 8/77 Effectiveness 5/ 9/77 5/ 9/77 Closing Date 6/30/82 12/31/82 STAFF INPUTS (staff weeks) FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 TOTAL Preappraisal 2.4 2.3 47.5 .5 52.6 Appraisal 20.4 24.3 44.7 Negotiations 5.6 5.6 Supervision 6.7 34.4 42.3 37.4 10.4 9.4 18.1 12.8 - .7 .6 172.9 Other 10.4 10.4 Subtotal 2.4 2.3 67.9 47.6 34.4 42.3 37.4 10.4 9.4 18.1 12.8 - .7 .6 286.2 - iv - MISSION DATA Aonth No. of Man- Date of Year Persons Weeks Repart Preappraisal 2/75 5 5.0 11/13/75 Appraisal 4/76 5 15.0 2/10/77 Supervision 1 4/78 3 6.0 5/23/78 Supelvision 11 9/78 2 4.0 2/1C178 Supervision 1II 2/79 4 9.6 3i W/79 Supervision IV 8/79 3 11.1 10/ 1/79 Supervision V 4/80 2 2.4 12/ 6/80 Supervision VI 8/80 4 8.0 10/31/80 Supervision VII 2/81 2 0.4 10/ 3/81 Supervision VIII 4/61 4 5.2 7/31/81 Supervision iX 11/81 5 14.0 1/12/82 Supervision X 2/82 5 8.5 4/9/82 Supervision XI 11/82 1 --3/ Supervision XII 12/83 1 0.6 OTHER PROJECT DATA Borrower: Government of Pakistan Executing Agency: Pakistan Railways Follow.-On kg2ject: Name: Eleventh Railway Credit Number: 1278-PAR Amount (US$ million): US$50.0 Date of Agreement: July 13, 1982 3/ Limited to the supervision of the Telecommunication Sub-Project, undertaken by IPD Telecommunication Engineer in conjunction with other operations. PROJECT PERFORMANCE AUDIT REPORT PAKISTAN ELEVENTI LAILWAY PROJECT (jREDIT 1278-PAK) BASIC DATA KEY PROJECT DATA Appraisal Actual Eipectation Estimate Total Project Costs (US$ million) 132.7 42.2 Cost Underrun (2) 31.8 Credit and Loan Amount (US$ million) 48.0 50.04/ Disbursed 25.7 Canceled (7126/86) 23.3 Repaid 0 Outstanding as of November 30, 1990 34.3 Date Physical Components Completed 6/30/85 5/ Proportion completed by that date (%) 100 15 Economic Rate of Return 2 18 Negative Operating Performance unsatisfactory Financial Performance unsatisfactory Institutional Performance weak CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY83 PY84 FY85 FY86 PY87 Appraisal Estimate (US$ million) 4.5 27.0 46.5 50.0 Actual (US$ million) 0.1 0.2 7.8 24.9 25.7 Actual as % of Appraisal (%) 2 1 17 50 Date of Final Disbursement: July 25, 1986 PROJECT DATES Original Plan Actual First Mention in Files 8/20/80 8/20/80 Negotiations Completed 4/12/82 5/12/82 Board Approval 7/ 1/82 Credit Agreement Date 7/13/82 Effectiveness 10/ 1/82 9/13/82 Closing Date 12/31/85 12/31/85 _/ Credit amount SDR 44.3 million. Because nf changing SDR/US$ exchange rate, the US$ equivalent for disbursed, cancelee and outstanding balance do not add up. 5/ Not completed as of May 15, 1987; at that time, Pakistan Railweys expected to complete the project in mid-1988, but the necessary financing was not forthcoming. STAFF INPUTS (staff weeks) FY80 FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88 TOTAL Identification/Preparation 4.5 39.5 20.1 64.0 Appraisal 1.4 55.2 56.6 Negotiations 15.9 15.9 Supervision 14.8 27.5 37.4 30.0 10.5 .2 120.4 Other .3 4.4 .4 .2 .1 6.6 Total 4.5 41.2 95.6 15.2 27.7 37.5 30.0 10.5 .2 262.5 MISSTON DATA No. of Man Date of MonthLYear Persons weeks h2plort Identification 9/80 2 12 11/80 Preparation 1/81 1 1 - Pre-appraisal 4/81 3 12 - Pre-appraisal 7/81 3 10 7/30/81 Appraisal 11/81 5 24 2/11/82 Supervision 1 6/83 5 10 7/21/83 Supervision II 4/84 1 3 4/30/84 Supervision III 7/84 3 5 8/28/84 Supervision IV 2/85 2 5 4/ 9/85 Supervision V 6/85 2 4 6/20/85 Supervision VI 9/85 7 11 11/ 7/85 OTHER PROJECT DATA Borrower: Government of Pakistan Executing Agency: Pakistan Railways Yollow-On Roqject: Name: Transport Sector Credit Number: 3241,-PAK Amount (US$ million): US$184.0 Date of Agreement: July 27, 1990 -Vii- PROJECT PERFORMANCE AUDIT REPORT PAKISTAN TENTH RAILWAY PROJECT (CREDIT 684-PAK, LOAN 1372-PAK) AND ELEVENTH RAILWAY PROJECT (CRDIT 128-PAR EVALUATION SUMMARY 1. Introduction Since 1952, the Bank has turned into substantial losses (Table assisted the transport sector with 3), reaching US$400,000 a day (FY89), eight railway, four highway, and four and accounting for 6% of GOP's port projects and, most recently overall budget deficit (para. 1.3). (1990), a tranapGrt sector (rail and road) proirct. In addition, 2. Obiectives considerable transport sector work was done (parq. 1.2). The general objectives of the two - as well as other - railway The two projects, Railway X and projects were to improve PRIs XI, subject of this Audit, cover the period 1977-1985. Its predecessor, - operational efficiency and Railway IX (1969-1978), was the capacity, subject of a previous Audit (para. - economic viability, and 1.4). The results of that project - financial results (nara. 1.5). were unsatisfying (paras. 1.7 - 1.13) and the Audit concluded that GOP/PR's 3. Implementation Expe.ience and policies resulted in the railway Results Railway X (1977-1983) providing most passenger services at charges well below costs and that The project was approved by the freight services were hampered by Board February 22, 1977. In its priority given to passenger trains discussion of the proposed project (para. 1.14). the Board clearly indicated its skepticism about the project based on Pakistan Railways (PR) has a GOP/PR's track record with previous network of 8800 km. About 75% of its projects, in particular Railway IX, traffic is on the 1200 km Karachi- then still ongoing (paras. 2.8-2.11). Lahore-Peshawar route. As a result, Bank staff, six months earlier, half of the system carries only 6% of during preparation of the project, the total traffic and less than 40% obviously had had similar qualms of the system is economically viable about the project and had exp--essed (para. 1.3). concern about PR's achievement under past loans and credits and about Over the last two decades PR expected results from continued has seen its share in total domestic assistance to PR (para. 2.6). traffic decline considerably (Table 1) and small financial surpluses have The project was based on a two- - too low tariffs year time slice of PR's Investment continued provision of Plan. It consisted of track uneconomic services rehabilitation, telecommunications - continued provision of and signalling, passenger coaches, capacity (locomotive and miscellaneous other works (para. plus line capacity) at 2.5). the expense of freight traffic The project's closing date was extended by two and a half years and PR's freight traffic continued to one of the main components, stagnate and PR saw its market share telecommunications an-! signalling, further decline (para. 2.19). had to be completed -nder the next project (para. 2.12). 4* ImRlementation Experience and Results Railway XI (1982-1985) The project also included a Plan of Action as well as other The project was approved by the covenants and undertakings by GOP/PR. Board July 1, 1982. Again, as in its They provided specific agreed targets discussion of the previous project, and obligations with respect to Railway X, "ive years earlier, the operational and financial performance Board clearly expressed its as well as staff reduction (paras. skepticism about the proposed 2.3 and 2.4). Most of these project. This time around, it had, covenants were not implemented moreover, the benefit of the Audit of (paras. 2.13 and 2.14). Railway IX, which had just been issued, plus the additional PR's financial performance experience of the ongoing Railway X, further deteriorated because of: then in its fifth year of implementation and about to be - continued priority being given closed. The Board expressed concern to passenger over freight traffic "that many of the problems we see to- - provision of most passenger day are long standing and that services at a considerable loss successive Bank projects have somehow coupled with unwillingness to adjust failed to bring about any significant fares as agreed improvement in key areas" (paras. - inability to increase 3.6-3.11). operational performance as agreed (paras. 2.17 and 2.18). The project was to focus on a limited number of high priority items The economic results of the rather than providing general support project, in terms of the economic to PR's Medium Term Plan. rate of return (ERR), were negative. Essentially it covered four items: At appraisal, the investment program support to diesel locomotive was expected to (i) reduce rail maintenance, implementation of a operating costs and (ii) increase Managemunt Information System (MIS), capacity to expand rail freight expansion of Lahore Dry Port and operations. implementation of a Karachi-Lahore However, because international container service, and training of middle management (para. - productivity did not increase 3.5). - rail passenger traffic was continued to be favored through - ix - Implementation was very slow to 6. Findings, Lessons and take off primarily because of GOP/PR Recommendations bureaucratic wrangliag. About two years were lost (para. 3.12). The The experience of Railway IX, X locomotive maintenance component was and XI plus the development of PR partly implementedt the MIS was not since completion of Railway XI, in implemented because of further delays 1986, cover a period of about two of the telecommunications component; decades (para. 4.1). the Lahore Dry Port was partly implemented but no container service This Audit's principal findings established (in FY86 PR handled less are: than 1% of the available containers); Developments since the early and the training, to have started in seventies have been disappointing 1982, took place in 1986 (para. (para. 4.2): 3.13). - PR's freight traffic has been Railway XI, as its predecessor, stagnating at around 8 billion ton included a Plan of Action plus other km/year (Table 2) and lost covenants and undertakings by GOP/PR. considerable ground to road transport Again, compliance with the covenants (Table 1). was disillusioning (paras. 3.14 and - PR's passenger traffic doubled 3.15) (Table 2) but generated considerable and growing losses (Table 3) and PR's financial performance limited PR's capacity to expand its under the project further freight traffic. deteriorated (para. 3.17) and - GOP/PR's reluctance to continued the downward trend of regularly adjust passenger fares previous projects (Table 3). resulted in a considerable erosion in real terms. Just to correct this The economic results of the erosion over the last two decades project were similar to those of its would have required increasing fares predecessor: the ERR was negative in the second half of the eighties by (para. 3.18). over 50% (Table 3). - Similarly, because of GOP/PR's The Bank's supervision of the reluctance, no significant progress project was flawed. Continuity, was made in: focus, and reporting left to be desired and valuable time was lost r e d u c i n g P R s (para. 3.19 and Annex 1, para. 4). overstaffing = terminating uneconomic After repeated unsuccessful passenger and freight prodding, by the Bank, in 1984 and services 1985, requesting GOP/PR to comply = closing down uneconomic with key covenants and undertakings, lines and stations. the Bank declined to extend the closing date and half the credit was - PR's operational performance cancelled (para. 3.20). did not improve (Table 5): 5. Sustainabilitv availability of locomotives and rolling With a negative economic rate of stock deteriorated and return Railway X and XI were both their utilization unsustainable. remained about the same. -x - - PR's financial performance Timing and focus left to be desired steadily deteriorated (Table 3). By and valuable time was lost (para. the end of the eighties it generated 4.5). a loss of US$400,000 per day and was responsible for 6% of GOP's budget Flowing from the project deficit. experience of Railway XI, X and XI this Audit offers three - The three projects, Railway IX, recommendations. X and XI, were not successful. The economic rate of return (ERR) for a Recommendation 1: On Future Bank large part of Railway IX was Lending to PR (para. 4.7). unsatisfactory while the ERRs of Railway X and XI were negative. To exclude any allocation to PR from the Bank's Lending Program and make The two principal reasons for future Bank lending to PR contingent this disappointing outcome, the Audit upon prior and full implementation by believes, are, in order of importance GOP/PR of a list of specific and (para. 4.3): detailed actions to be prepared and agreed to by GOP/PR and the Bank (see GOP's persistent reluctance - also paras. 4.8 and 4.9). well illustrated by the project ex- perience over the last two decades - Recommendation 2: On Supervision of to take a number of essential but Railway Component of Ongoing unpopular decisions and see them Transport Sector Project (para. through. 4.10). - The fact that PR is "...steeped in 100 year traditions, constrained (a) To increase the frequency of by bureaucratic procedures...", and supervision missions to three a year operates in a politically seriously and ensure preparation of detailed constrained environment. This Terms of Reference and Back to Office background and environment, the Audit Reports of these missions as well as feels, contribute to complacency and continuity of mission staff; inertia and does not augur well for the introduction of change and the (b) To broaden and prioritize the development of new initiatives and supervision effort and focus, in approaches as, for example, the order of priority, on: introduction of rail container traffic. (i) a regular and detailed review of and reporting on Principal lessons are: implementation of all covenants and undertakings agreed under the The project experience shows Project; that covenants and undertakings have frequently not been honored and (ii) a dialogue with GOP/PR expectations not met. One solution to prepare and agree on a list of is to require implementation of specific and detailed actions which essential conditions up front, i.e. must have been implemented by GOP/PR before the Bank commits itself (para. before the Bank could consider future 4.4; see also Annex 1). lending to PR; the implementation of the agreed actions to be monitored A second lesson concerns closely and reported on regularly; project supervision by the Bank. The experience of Railway XI has shown (iii) procurement of items that supervision was not a smooth financed under the Project; extension of project preparation. - xi - (c) To arrange an annual Recommendation 3: On Privatizing Departmental review focussing on the Rail Container Transport Karachi- three items listed under (b) above Lahore (para. 4.12). (see also para. 4.11). For GOP/PR to consider privatizing Implementation of this the rail transport of containers recommendation will probably require between Karachi and Lahore, including a substantial increase in staff and the operation of the Lab -re Dry Port other resources beyond those now (see also para. 4.13). allocate, to the supervision of the Transport Sector Project (para. 4.11). PROJECT PERFORMANCE AUDIT REPORT PAKISTAN TENTH AND ELEVENTH RAILWAY PROJECTS (CREDIT 684-PAR/LOAN 1372-PAK AND CREDIT 1278-PAR) I. BACKGROUND Transportation 1.1 Pakistan's land transport system consists of road and railway networks. The most important traffic flows are north-south, connecting the agricultural and admirtatrative centers in the Sind and Punjab provinces with the port and industrial activities in and around Karachi. Some two thirds of land transport takes place in the corridor Karachi-Lahore-Islamabad-Peshawar. Bank Assistance to Transport Sector 1.2 Since 1952, the Bank has assisted the trrasport sector with eight railway, four highway and four port projects totalling US$561 million and, most recently (1990), a transport sector (rail and road) project. In addition, considerable transport sector workwas done including, Transport Project Conditionality Review (1986), Issues and Options in the Transport Sector (1987), and Transport Strategy Paper (1988). Pakistan Railways (PR) 1.3 PR has a network of 8800 km. Rail traffic is concentrated on a limited number of long distance routes: about 75% of all railway passenger and freight traffic is on the Karachi-Lahore-Peshawar route. As a result, half of the system carries only 6% of total traffic and only 3300 km is commercially viable. PR has lost shorter distance traffic to road transport, has seen its share in inter-city traffic decline (Table 1) and small financial surpluses have turned into substantial losses (Table 3), reaching US$400,000 per day (FY89), accounting for 6% of GOP's budget deficit. 1.4 Since the late sixties three Bank-financed railway projects were implemented: Railway IX (1969-1978), Railway X (1977-1982), and Railway XI (1982-1985). OED issued an audit report on Railway IX in 1982 6/ and Railway X and XI are the subject of this audit report. Bank's Railwav Strategy 1.5 The Bank's strategy vis-a-vis PR has frcussed on improving PR's - operational efficiency and capacity, - economic viability, and - financial results. 6/ Project Performance Audit Report, Pakistan, Ninth Railway Project (Loan 621-PAR), Report No. 3964, June 10, 1982. -2- In pursuit of this strategy the Bank-financed railway projects have included investments in fixed assets (yards, track, workshops), in locomotives and rolling stock, equipment, Management Information System, spare parts, studies, and in human resources (training). 1.6 In addition, this strategy was pursued by a dialogue among the Bank, PR and the Government of Pakistan (GOP) on issues such as the role of the railway, desirable organizational/institutional changes, staff retrenchment, phasing out of uneconomic services and lines, and introduction of cost-based pricing.- This dialogue - carried on through preparation and implementation of projects, the Bank's economic and sector work and subsequent discussions, and through studies and reports prepared by GOP, PR, and various consultants - has frequently led to agreements between the Bank, GOP and PR on what was to be done, how it was to be done, by whom, and when. These agreements, in turn, were reflected in covenants in, and side letters to, loan and credit agreements, as well as in other, more informal, ways (in aide memoires and letters). Audit of Railway IX 1.7 The Audit of Railway IX was issued in 1982 (see para. 1.4 above). The purpose of the project was to i) reduce railway transport costs through renewal of track and bridges increasing line capacity, improvement of work shops and ii) achieve institutional strengthening with the help of technical assistance. During project preparation the Bank concluded that major improvements in operations and in management were required. Because PR and the Bank could not reach agreement on a program and timetable for changes, as a compromise, studies on these two topics were included in the project. 1.8 Railway IX became effective in 1969 and was, with six years delay, completed by mid-1978. The delay was partially caused by political disturbances in the early seventies, serious floods, inadequate project preparation, and major project redefinitions. 1.9 Economic Performance. The Audit estimated the economic return for a large part of the project to be unsatisfactory. The anticipated increase in locomotive utilization, reducing the need for additional locomotives, did not take place while the expected reduction in wagon turn around time from 11.2 to 8.5 days did not happen. Instead it increased to 15 days, 75% above target. 1.10 Financial Performance. This was rated unsatisfactory and seriously deteriorated during the project period. Before project appraisal the operating ratio was 84 and, according to the loan agreement, was to be reduced to 80 by FY73. However, by FY80 it had reached 107. The main reason was an insufficient increase in passenger fares, with most passengers being transported at less than variable cost and, while representing 70% of PR's cost, accounting for only 30% of total revenue. 1.11 Institutional Performance. This was also rated unsatisfactory by the Audit. The agreed upon study on urgently needed management improvements was never carried out. - 3 1.12 Implementation of Covenants. PR was not to provide services at an avoidable financial loss unless it received from the Borrower a specific request to provide such services at such loss. Such avoidable financial lose, specifying each individual service concerned, was to be incorporated in PR's annual financial statements. This covenant was not implemented and the project does not seem to have had a significant impact on the reduction of uneconomic services. 1.13 The covenant on the operating ratio was not implemented (see para. 1.10 above). Finally, the loan agreement provided that depreciation was to be not less than 12% of gross operating revenues. This condition was met but because of the shortfall in revenues its intended aim was not achieved. 1.14 In conclusion, the Audit expressed concern about the Borrower's and PR's policies as they affected railway tariffs and transport priorities. "These have resulted in the railway providing most passenger services at charges which are well below the cost to the economy and freight services hampered by priority given to passenger trains" The PCR is more succinct and concluded that"... the real basic cause of PR's difficulties is the marked preference given to passenger traffic at the expense of freight." II. RAILWAY X - PREPARATION AND IMPLEMENTATION A. PREPARATION 2.1 While Railway IX was being implemented (1969-1978) preparation of Railway X got underway in 1974. Traffic Forecast 2.2 To judge the appropriate size of PR's investment program the Bank focussed on traffic forecasts. The freight traffic forecast (for 1976-1981) became a sticking point. PR insisted on an annual growth of 11% (ton km) while the Bank thought this highly unrealistic in light of past performance and suggested 6% as more reasonable. The Bank's position, in the end, prevailed. Plan of Action 2.3 Under the previous project (Railway IX) PR had not been willing to adopt a Plan of Action and the Bank had settled for inclusion of some studies (see para. 1.7 above). This time a Plan of Action was prepared, became part of the project and provided specific operational targets to be achieved. In a covenant in the loan agreement GOP/PR agreed to carry out the Plan. Other Covenants and Undertakings 2.4 These focussed mainly on financial aspects of PR's cperations and defined rate adjustments to be made and financial targets to be reached. In addition there was a covenant dealing with a reduction in railway staff. -4 The Proiect 2.5 This was essentially based on a two-year time slice of PR's Investment Plan. The total cost was estimated at US$247 million and the principal items were: - Track rehabilitation plus bridges (34% of total cost) - Telecommunications and signalling (19%) - Passenger coaches (17%) - Miscellaneous other works, including technical assibtance and training (30%) Concern about Effectiveness of Assistance to PR 2.6 During project preparation, in mid-1976, Bank staff expressed concern "about i) PR's achievements under past loans and credits and ii) expected results from continued assistance to PR". This stimulated internal Bank discussion of previous projects and current problems. Nezotiations 2.7 Negotiations took place in December 1976. Pakistani negotiators on various occasione indicated that certain operational and financial covenants would be difficult to achieve "...in view of the political and social implications ..." or " ...in view of the prevailing economic and political climate...". Board Presentation 2.8 On February 22, 1977, Bank staff presented the project to the Board. The Board expressed skepticism about the proposed Railway X project: "...what good reason do we have to believe that PR is able to implement this project? The previous project (Railway IX) was approved in June 1969 and would not be completed until June 1977. Obviously, it did not go according to schedule. Of 15 recommendations made in 1971 by the consultant hired under that loan, only four have been implemented to date.7/ The remaining recommendations have been incorporated in the current project ...". 2.9 "While ... the SAR noted some signs of operational improvement in PR, these improvements have been accompanied by, quote, adverse effects. I think one could argue that these effects, combined with PR's steadily deteriorating financial position, tend to negate the effect of any minor improvements". 7/ See SAR, Railway X, Annex 3. One of the more important of these four implemented recommendations was to restructure the mail and express service by grouping trains in "batteries" and freeing wide time spaces for the freight service. This accomplishment was shortlived. Five years later (1982), the SAR, Railway XI, para. 2.10, reported: "This battery system, however, has now been abandoned by the railways as a result of political pressures to add more passenger stops". -5' 2.10 "Lastly, the inadequacy of PR's accounting system was recognized by the consultants in the early 1960's, and yet they are still in the process of implementing the steps required to improve and modernize their accounting methods. In short, what has happened that will give us more confidence in the future than the rather unimpressive record would lead us to conclude?" 2.11 Bank staff responded that control over PR in the last years had shifted from a Federal body to a Provincial body, and back again, and that as a result of this unstable situation required investments did not take place. Moreover, natural disasters (floods) had taken place in the last few years. "However, PR in November 1975 introduced a new system of running express trains, reducing the number of passenger trains on the main Karachi - Rawalpindi line. These are very drastic measures and we consider this as a serious commitment on the part of the Pakistan Government." B. IMPLEMENTATION The Prjo.ect 2.12 The PCR describes the various problems which contributed to the delays encountered during implementation of the various components of the project. The Project's closing date was extended by two and a half years and one of the main components, telecommunications and signalling, had to be completed under the next project (Railway XI). The PCR observes that ". . .most of the physical implementation schedules set in the project appeared optimistic in regards to PR's slow decision making process in procurement matters and the experience drawn from the six previous railway projects" (PCR, para. 3.12). Plan of Action 2.13 Most of the agreed targets in the Plan of Action, covering the period FY77-FY81, were not achieved. - Productivity of Diesel Locomotives, Freight (km/day per locomotive). From a base of 187 km in FY76 it had been expected to increase by 63%. Instead, it remained essentially the same. - Productivity of Diesel Locomotives, Passengers. From a base of 480 km/day it was to increase by 23% but instead declined by 3%. - Productivity of Freight Wagons. Wagon turn around time was expected to drop from 16.1 days to 11.0 days or by 32%; instead it dropped by only 9% which, moreover, was not sustained (three years later it reached 18.6 days, up 16% from the base). - Productivity of Passenger Coaches (km/day per coach). From a base of 327 km it was expected to increase by 13%; instead it increased by only 5% which, moreover, was not sustained. - Freight Train Productivity (tons/train). This was to increase by 14% from 613 tons; instead it declined by 5%, which was sustained. - 6 - - As to the availability of diesel locomotives, wagons, and coaches during FY75-FY81, not part of the Plan of Action, this remained about the same. Other Covenants and Undertakings 2.14 These included: - Financial losses incurred on uneconomic services to be recorded (the same covenant was included and not implemented under the previous loan, Railway IX). This was not done. - Fares and rates to cover at least variable costs by 1980. This was not done. - Revenues to cover operating expenses (incl. depreciation), debt service, plus dividends, by 1982. This was not done. - Staff to be reduced through attrition. Some reduction in staff seems to have taken place but it was not sustained: staff numbers went up again later. Traffic Development 2.15 Freight. The forecast (see para. 2.2 above) was far from realized: Tons. Ton km. (million) (billion) Actual FY75 (base) 10.7 8.54 Forecast FY81 17.1 10.95 Actual FY81 8.3 7.92 Overestimation of Forecast FY81 106% 38% 2.16 Passengers. In summary: Passengers Pass. km Trip_Length (million) (billion) (km) Actual FY75 (base) 143 12.4 86 Forecast FY81 178 14.6 82 Actual FY81 123 16.4 133 Over(Under) Estimation of Forecast FY81 45% (11%) (38%) The actual number of passengers declined during the period but passenger kilometers and trip length increased considerably. - 7 - 2.17 The traffic picture is beat understood through the following table. Passenzer Trains Freight_Trains Number Train Km Number Train Km (000) (million) (000) (million) Actual FY75 156 33.4 75 14.3 Actual FY81 164 36.0 62 13.0 FY81 vs FY75 +5% +8% -9% -9% This reflects the priority given to passenger trrffic over freight traffic. This policy in combination with: - provision of most passenger services at a considerable loss coupled with the unwillingness to adjust fares as agreed (see para. 2.14 above) and - the inability to increase operational performance (productivity) as agreed (see para. 2.13 above) laid the foundation for the financial results discussed next. Financial Results 2.18 As under the previous project (Railway IX), the financial results had been expected to improve but instead considerably worsened. Table 3 provides details. Net operating revenue and net income, instead of increasing, decreased and turned negative while the operating ratio, instead of improving, deteriorated. Economic Results 2.19 The economic rate of return of the project, estimated to be 24% at appraisal, turned out to be negative (PCR, para. 7.01ff). At appraisal the investment program was expected to (i) reduce rail operating costs and (ii) increase capacity to expand rail freight operations. Because - productivity (see para. 2.13 above) did not increase and - rail passenger traffic was continued to be favored through - too low tariffs - continued provision of uneconomic passenger services and W continued provision of capacity (locomotive and line capacity) at the expense of freight traffic, PR's freight traffic continued to stagnate (Table 2) and PR saw its market share further decline. - 8 - III. RAILWAY XI - PREPARATION AND IMPLEMENTATION A. PREPARATION 3.1 While Railway X was still being implemented (1977 - 1983) preparation of Railway XI was started in 1980. Traffic Forecast 3.2 After the recent experience under Railway X (see para. 2.15 above) freight traffic (ton km) was estimated to increase by only 4% in total from FY81 to FY86. Passenger traffic (pass. km) was expected to increase by some 15% over the same period. Plan of Action 3.3 As under the previous project, a Plan of Action was prepared providing specific operational targets (incl. staff reductior) to be achieved. In a covenant in the loan agreement GOP/PR agreed to carry out the Plan. Other Covenants and Undertakings 3.4 These focussed on PR's financial performance. The _Proec t 3.5 The project was to focus on a limited number of high priority items instead of providing general support to PR's Medium Term Development Plan. Essentially it covered four items: - support to diesel locomotive maintenance (70% of total project costs); - implementation of a Management Information System (14%); - Expansion of Lahore Dry Port and implementation of a Karachi-Lahore international container service (10%); and - training of PR middle management (2%). Board Presentation 3.6 As during the Board presentation of the previous project, Railway X, five years earlier (see para. 2.8ff above), the Board, in July 1982, expressed its skepticism about the proposed project. "... this is the Bank's eleventh railway project in Pakistan, yet there seem to 1,e a number of fundamental problems which continue to adversely affect railrcad operations". 3.7 "What concerns us, however, is that in looking back over the Ninth Railway Project - recently audited by OED - and the Tenth Railway Project, approved in 1977, it appears that many of the problems we see today are long standing and that successive Bank projects have somehow failed to bring about any significant improvement in key areas". - 9 - 3.8 "Perhaps the most obvious example of this is the priority given to passenger service over freight service". And reference ia made to OED's Audit of Railway IX. "In recognition of this problem, the Tenth Railway Project included a covenant intended to help reduce the degree of cross subsidization between passenger and freight service. It required that revenue from each service covered the variable cost of that service by 1979/80. Again in the eleventh loan, the same covenant appears, this time with the timeframe extended to 1983/84." 3.9 A second example given referred to the disappointing institutional progress registered during the decade of implementation of Railway IX. Skepticism was expressed about future results in this area. 3.10 Bank staff pointed out that Railway IX and X were both rather small compared with PR's development program of US$100 million a year. Also Railway X was proceeding almost on schedule. In addition, GOP had recently abandoned the policy that passenger services had to have absolite priority. "If a locomotive breaks down which is due to go on a passenger train, PR cannot take a locomotive from a freight train anymore." "Also, PR has started to cancel unpopular, partly used passenger services, something which is literally unheard of in the country. In these two areas decisions have been made and actions taken". 3.11 "We had hoped to get the Government to make a commitment to increase passenger fares in particular by this time. They feel that because they are making such fundamental changes in the structure of the railway management at the top and the middle, and they have taken this other decision on the policy of priorities of passenger services, and a host of other detailed operational changes, they want tc see how these will work out before they put up the passenger fares. Nonetheless we have a commitment from the Government that they will make a substantial fare increase in the coming twelve months, and this will be discussed at a joint IDA/Government meeting in November/December of this year" .8/ B. IMPLEMENTATION The Prolect 3.12 Implementation was very slow to take off. This primarily because of bureaucratic wrangling to get the so-called PC-1 proformas9/ for each of the project components ready and approved. About two years were lost. g/ This meeting did not take place and is not further referred to in the Bank's files. As to the fare increase, this did take place a year later, in July 1983, but it wta not "substantial" (15%). For more details, see Annex 1 to this Audit. 9/ GOP's internal procedure for techno-economic analysis of development projects involves the preparation of PC-1 proformas which are project appraisal documents used as the basis for project selection (SAR, Railway XI, para. 2.19). - 10 3.13 The locomotive maintenance component was partly implemented. The management information system was not implemented because of further delays in completing the telecommunications component of Railway X on which it depended (see para. 2.12 above). The Lahore Dry Port was partly implemented but no container service was established. In FY86 PR handled less than 1% of the containers available. The training, which was to have begun in 1982, took place in the first half of 1986. About 120 man-months of overseas training was involved, about three tmes the 42 man-months planned. While the program was originally intended for middle level management staff, a considerable number of the participants were high level staff, some approaching retirement age. PR management staff considered the training to have been beneficial and expressed interest in having more opportunities of this type. Plan of Action 3.14 Most of the agreed targets in the Plan of Action, covering the period FY82-FY85, were not achieved. - Availability of Diesel Locomotives. It had been expected to increase from 85% to 88% but instead declined to 83.5%. - Diesel Locomotives in Use, km/day. Expected to increase from 310 to 385 but increased to 342. - Net Tons per Freight Train. Was to increase from 578 to 725 but increased by 11 to 589. - Daily Number of Wagons to be Dispatched for Karachi. Was to increase from 750 to 910, instead declined to 607. - Minimum Weekly Frequency of Container Trains Karachi-Lahore (in each d!.rection). Was to reach four but did not reach one. - Elimination of Uneconomic Passenger Trains. Beginning in FY82 two to three trains had to be eliminated every month but few actually were. - Reduction in Staffing through Attrition. Actual staffing in FY82 was 130,000; by FY87 it reached 131,000. A minor reduction in the intervening years was not sustained. Other Covenants and Undertakings 3.15 These included: - On passenger fares. GOP/PR was to carry out a comprehensive review, in consultation with the Bank, in December 1982, and at that time firm decisions would be made on the extent and timing of increases in passenger fares. This review did not take place. In July 1983 passenger fares were increased 15%, far short of what was required. For more background on this whole issue, see Annex 1 to this Audit: Railway XI - Increasing Passenger Fares: A Chronology. - 11 - - Revenues to cover operating expenses and debt service requirements in FY< . and dividend on capital-at-charge by FY86. This was not done. A similar covenant under the previous project had not been implemented either; see para. 2.14 above. - Revenue from passenger services to cover at least the variable costs in FY84 and thereafter. This was not done. A similar covenant under the previous project had not been implemented either; see para. 2.14 above. Traffic Development 3.16 Freight traffic, in ton km, increased sl-wly between FY81 and FY86 in line with the modest forecast (para. 3.2 above). Passenger kilometers in FY86 was about the same as in FY81, about 107 short of the forecast (para. 3.2 above). Financial Results 3.17 As under the previous project, Railway X, the financial results, expected to improve, deteriorated further. Table 3 provides details on the financial results under Railways IX, X, and XI. Whether measured in terms of net operating revenue, operating ratio, or net income, the financial position worsened progressively under each of the projects. Economic Results 3.18 The economic rate of return of the project, estimated at 18% at appraisal, turned out to be negative (PCR, para. 7.06). The availability of locomotives decreased instead of increased, and PR transported only a small number of containers. Hence, the expected benefits were not there. Bank'AsSupervision Effort 3.19 The Bank's supervision was flawed. It neglected to follow through on the planned "joint IDA/Government meeting" referred to in the Board Meeting (see para. 3.11 above). The first supervision mission took place more than a year after negotiations. That mission, and its successor, exclusively focussed on procurement. The next supervision mission, almost two years after negotiations, was the first to undertake a comprehensive review of all project aspects, including covenants and undertakings. Also, supervision reporting left to be desired. For more details, sae Annex 1 to this Audit, paras. 4 and 16ff). Closing of the Credit 3.20 After repeated unsuccessful prodding (ultimatums), by the Bank in 1984 and 1985, requesting GOP/PR to comply with key covenants and undertakings, the Bank declined to extend the credit's closing date of December 31, 1985, and canceled 50% of the credit. - 12 - IV. FINDINGS, LESSONS AND RECOMMENDATIONS 4.1 The experience of Railway IX, X and XI plus the development of PR since completion of Railway XI, in 1986, cover a period of about two decades. A. FINDINGS 4.2 Developments since the early seventies have been disappointing: - PR's freight traffic has been stagnating at around 8 billion ton km/year (Table 2) and PR loot considerable ground to road transport (Table 1). - PR's passenger traffic doubled (Tables 1 and 2) but generated considerable losses (Table 3)10/ and constrained PR's capacity to expand its freight traffic. - GOP/PR's reluctance to regularly adjust passenger fares resulted in a considerable fare erosion in real terms. Just to correct this erosion over the last two decades would have required increasing fares in the second half of the eighties by over 50% (Table 4). - Similarly, because of GOP/PR's reluctance, no significant progress was made in: a reducing PR's overstaffing = terminating uneconomic passenger and freight services closing down uneconomic lines and stations. - PR's operational performance did not improve (Table 6): availability of locomotives and rolling stock deteriorated and their utilization remained about the same. 10/ The Region observes, and the Audit concurs, that the financial losses on passenger traffic are generated primarily by short di3tance and branch line traffic with economic costs five to six times bus costs but no corresponding fares. Obviously, those rail services, the Audit feels, should be prime candidates for termination. - 13 - - PR's financial performance steadily deteriorated (Table 3). By the end of the eighties it generated a loss of US$400,000 per day and was responsible for 6% of GOP's budget deficit.11/ - The three Bank-financed projects, Railway IX, X and XI, were not successful. The economic rate of return (ERR) for a large part of Railway IX was unsatisfactory while the ERRs of Railway X and XI were negative. 4.3 The two principal reasons for this disappointing outcome, the Audit believes, are, in order of importance: - GOP's persistent reluctance - well illustrated by the project experience over the last two decades - to take a number of essential but unpopular decisions and see them through. - The fact that PR is "...steeped in 100 year traditions, constrained by bureaucratic procedures.. ."I2/, and operates in a politically seriously constrained environment. This background and environment, the Audit feels, contribute to complacency and inertia and do not augur well for the introduction of change and the development of new initiatives and approaches as, for example, the introduction of container traffic. B. LESSONS 4.4 The project experience shows that covenants and undertakings have frequently not been honored and expectations not met. One solution - as, for example, recommended by the appraisal team of Railway XI and accepted but not implemented by the Bank (for details, see Annex 1 to this Audit) - is to require implementation of essential conditions up front, i.e. before the Bank commits itself. 4.5 A second lesson concerns project supervision by the Bank. The experience of Railway XI shows that project supervision was not a smooth extension of j1/ The following quotes from a recent article on Pakistan's fiscal deficit put in some perspective the size of this deficit as well as its cost to the economy. Pakistan's fiscal deficits, expressed as a fraction of GNP, "are very high by international standards" and "average nearly twice that of Asian countries as a group". "Pakistan's deficit remains high because of the political and administrative inability of the Government to mobilize additional resources or to cut expenditures". "Moreover... the structure of expenditures is not amenable to large cuts. The burden of expenditure cuts, therefore, falls on development expenditure at the cost of much needed infrastructure". (from Macroeconomics of the Public Sector Deficit: The Case of Pakistan, Nadeem Ul Haque and Peter Montiel, International Monetary Fund, June 1991). 12/ As mentioned in statement by Bank staff during the Board presentation of the Transport Sector Project in 1990. - 14 project preparation. Continuity, timing, focus, and reporting left to be desired and valuable time was lost (see para. 3.19 aboe). C. RECOMMENDATIONS 4.6 Flowing from the project experience of Railway IX, X and XI this Audit offers three recommendations. 4.7 Recommendation 1: On Future Bank Lending to PR To exclude any allocation to PR from the Bank's Lending Program and make consideration of future Bank lending to PR contingent upon prior and full implementation by GOP/PR of a list of specific and detailed actions to be prepared and agreed to by GOP/PR and the Bank. 4.8 This list of actions could be prepared, agreed to and implemented while the ongoing Transport Sector Project is being implemented. This list could focus on: - closing down and physical removal of an appreciable number of uneconomic lines, say, 75% of the total number of those lines in terms of kilometers (i.e. some 3000 kilometers)13/ - closing down nearly all uneconomic stations generating minimal traffic, say, 90% of those stations (i.e. some 600 stations) - terminating nearly all uneconomic passenger trains, i.e., trains carrying a very low number of passengers, say, 90% of the total of those trains in terms of train kilometers (i.e. some 20 million train kilometers) - reducing the number of railway staff to eliminate (i) present overstaffing and (ii) additional overstaffing which will result from other rationalization measures to be taken (line closures, station closures, elimination of trains, etc.) - increasing tariffs of all passenger and freight services which do not now recover variable costs to a level that they will recover those costs. - establishing a system for automatic and regular (semi-annual or annual) adjustment of passenger fares (incl. PSO services) and those freight rates which are below cost to offset erosion caused by inflation; this could best be done on the basis of a simple formula reflecting changes in the consumer price index and/or the wholesale price index. 13/ The Region reports (July 1991) that GOP recently approved the closure of some 1,000 km of branch lines. The Audit feels that this is a step in the right direction. - 15 - In addition, the ongoing Transport Sector Project addresses a number of oth'er important issues such as commercialization and full autonomy of PR. Here too indicators could usefully be identified to measure progress towards realization of the objectives involved and acceptable levels of achievement be specified and agreed. An example here would be that, say, 75% of rail freight is to be handled under contract indicating that an appreciable level of commercialization of freight has, in fact, been attained. 4.9 This list of actions would identify all uneconomic lines and stations and indicate which of them are to be closed and by what date. Similar information would refer to uneconomic passenger trains carrying few passengers and to present as well as anticipated overstaffing. As to the elimination of the overstaffing, it would also indicate how this is to be achieved (attrition, early retirement, transfer). 4.10 Recommendation 2: On Supervision of Railway Component of Ongoing Transport Sector Project (a) To increase the frequency of supervision missions to three a year14/ and ensure preparation of detailed Terms of Reference and Back to Office Reports of these missions as well as continuity of mission staff; (b) To broaden and prioritize the supervision effort and focus, in order of priority, on: (i) a regular and detailed review of and reporting on implementation of all covenants and undertakings agreed under the Project; (ii) a dialogue with GOP/PR to prepare and agree on a list of specific and detailed actions which must have been undertaken by GOP/PR before the Bank could consider future lending to PR; the implementation of the agreed actions should be monitored closely and reported on regularly; (iii) procurement of items financed under the Project; (c) To arrange an annual Departmental review focussing on the three items listed under (b) above.15/ 14/ The Region suggests that two supervision missions a year plus follow-up by the Resident Representative may be sufficient. The Audit, however, feels that three missions would be more appropriate to help ensure the development and maintenance of a truly effective dialogue with GOP and PR. 15/ The Region suggests that EMTIN and INUTD also be asked to participate in this review. The Audit concurs with this suggestion. - 16 - 4.11 Implementation of this recommendation will require a substantial increase in staff and other resources beyond those now allocated to supervision of the Transport Sector Project. 4.12 Recommendation 3: On Privatizing Rail Container Transport Karachi-Lahore For GOP/PR to consider privatizing the rail transport of containers between Karachi and Lahore, including the operation of the Lahore Dry Port. 4.13 This could best be approached by first preparing a paper outlining the various alternatives of a possible interaction of PR and a private company to be formed, and then entering into discussion with potentially interested private parties (shipping lines, banks, transport companies).,L/ 16/ The Region reports (July 1991) that PR has recently decided to obtain private assistance for the marketing and management of the container traffic between Karachi and Lahore and operation of the terminal in Lahore, together with private funding of the additional equipment needed for expanding the service. The Audit feels that these are useful steps in the right direction. Table 1 - 17 - Pakistan, Domestic Traffic, by Mode, FY70-FY89 Mode FY70 FY89 Growth FY70-FY89 Ton Km Pass. Km Ton Km Pass, Km EgiZht Easengers ---------------------billion-------------------) (-annual % growth-) Rail 7.7 (51%) 9.9 (23%) 8.4 (20%) 19.7 (14%) .5% 3.7% Road 7.3 (49%) 32.8 (77%) 32.8 (76%) 115.2 (84%) 8.0% 6.8% Air --- .2 (0%) --- 2.5 (2%) --- 29.0% Pipeline --- --- 1.7 (4%) --- Total 15.0(100%) 42.9(100%) 42.9 (100%) 137.4(100%) 5.7% 6.3% Sources: GOP and various Bank reports. Taible 2 - 18 - PR Passenzer and Freight Traffic. Ey70-FY89 Fiscal Pasenzers Freighl Year Number Pass. Av. Revenue Total Ton Length km Trip Tons Tons km of LengZ&h. -____ __Haul (million) (billion) (km) (million) (mil.) (bil) (km) 1970 132 9.85 75 10.9 12.6 7.68 610 1971 126 9.33 74 10.8 12.5 7.49 601 1972 124 9.52 77 11.3 12.9 7.76 606 1973 136 11.07 81 11.3 12.5 8.36 672 1974 141 11.69 83 10.3 11.5 7.38 645 1975 143 12.35 86 10.7 14.1 8.54 608 1976 147 12.96 88 10.1 15.3 9.10 603 1977 143 13.20 93 9.5 14.4 7.86 553 1978 149 15.18 103 9.4 13.3 8.56 647 1979 145 16.51 114 9.1 12.0 9.37 792 1980 144 17.30 121 8.8 11.9 8.60 733 1981 123 16.39 133 8.3 11.4 7.92 705 1982 120 16.50 138 8.1 11.4 7.07 624 1983 123 18.03 147 8.2 11.8 7.32 622 1984 107 18.29 171 8.1 10.8 7.39 691 1985 95 17.81 187 7.8 10.5 7.20 690 1986 83 16.85 203 9.1 11.8 8.27 705 1987 78 16.92 217 9.3 11.6 7.82 675 1988 81 18.54 229 9.8 11.6 8.03 694 1989 85 19.73 232 9.1 10.4 8.36 805 Sources: Pakistan Railways, various Yearbooks of Information. Table 3 - 19 PR Financial-Results. FY70-FY97 Fiscal Year Net Operating Operating Net Income Revenue Ratio Fore- Actual Fore- Actual Fore- Actual cast cast cast (Rs million) (------%------) (Rs million) A. Railway IX 1970 131 53 81 93 99 23 1971 134 137 81 82 101 103 1972 143 138 81 83 107 93 1973 144 175 81 81 112 107 1974 - 24 - 98 - (41) 1975 - (42) - 103 - (118) 1976 - (104) - 94 - (204) B. Railway X 1977 (113) (15) 94 101 (254) (159) 1978 192 186 90 92 21 31 1979 161 72 92 97 (39) (104) 1980 254 (175) 89 107 29 (481) 1981 328 (266) 87 109 80 (402) C. Railway XI 1982 (485) (224) 116 107 (615) (354) 1983 232 (398) 94 112 86 (544) 1984 434 (554) 91 115 214 (774) 1985 506 (1285) 91 135 246 (1524) 1986 711 (1001) 89 123 431 (1260) 1987 - (1030) - 122 - (1525) 1988 - (758) - 114 - (1198) 1989 - (1715) - 132 - (2655) 1990 - (1544) - 127 - (2097) D. Transport Sector Projectl/ 1991 (1250) 121 (1784) 1992 (1128) 116 (1689) 1993 (833) 110 (1491) 1994 (448) 105 (1232) 1995 22 100 (876) 1996 606 95 (400) 1997 1327 90 211 1/ To make the Transport Sector Project data comparable to those related to the previous three projects (Railvays II, X,X1), they izclude the Public Service Obligations (PSO) retabursement from GOP as revenue item. Notees 1. Wet operating revenue - total operating revenue minus total operating *zpeses (incl. depreciation) 2. Operating ratio - total operating expensea (incl. depreciation) as percentage of total operating revoue. 3. Net income * net operating revenue minus interet on loans. 4. Figures in parenthesis 0 indicate negative values. Sources, SAls and PCIs Railway 12. 1. 1 plus SAR Transport Sector Project. - 20 - Table 4 PR Passenger Fares, in Constant Prices. FY70-FY89 Fiscal Pass. Pass. Revenue Price Revenue Year Revenue km per Pass. Deflator per Pass. in current km prices in 1989 prices (Re million) (billion) (Paisa) (1989-100) (Paisa) 1970 282 9.8 2.9 15.3 19.0 1971 265 9.3 2.8 16.1 17.4 Average 1972 272 9.5 2.9 17.8 16.3 16.3 1973 314 11.1 2.8 22.6 12.4 1974 334 11.7 2.9 27.7 10.5 1975 426 12.4 3.4 34.0 10.0 1976 457 13.0 3.5 36.7 9.5 1977 473 13.2 3.6 40.1 9.0 1978 641 15.4 4.2 42.5 9.9 1979 698 16.7 4.2 46.7 9.0 1980 998 17.3 5.8 52.9 11.0 1981 1091 16.9 6.7 58.7 11.4 1982 1114 16.5 6.8 61.2 11.1 1983 1231 18.0 6.8 65.6 10.4 1984 1428 18.3 7.8 71.8 10.9 1985 1426 17.8 8.0 73.9 10.8 1986 1562 16.8 9.3 77.5 12.0 1987 1586 16.9 9.4 84.0 11.2 Average 1988 1746 18.5 9.4 92.2 10.2 10.7 1989 1861 19.7 9.4 100.0 9.4 Note: Passenger fares in the early seventies (FY70-FY73) on average, and in real terms (1989 prices), were 16.3 Paisa per passenger kilometer or some 50% higher than the corresponding figure of 10.7 Paisa for the period FYB6-FY89. In other words, if GOPIPR's policy had been to maintain an even fare level in real terms, a fare increase of some 50% would have been required in the second half of the eighties. Sources; Pakistan Railways, various Yearbooks of Information SARs and PCRs Railway IX, X, X1 plus SAR Transport Sector Project IV, International Financial Statistics, various issues for Price Deflator(wholesale price index which is about the same as retail price index). - 21 - Table 5 PRFitRt in Constant Prices. _U70-FeY9 Fiscal Freight Ton Revenue Price Revenue Year Revenue km per ton km Deflator per ton k in current in 1989 Prices Prices (Rs million) (billion) (Paisa) (1989-100) (Paisa) 1970 389 7.6 5.1 15.3 33.3 1971 450 7.5 6.0 16.1 37.3 Average 1972 507 7.8 6.5 17.8 36.5 1973 572 8.4 6.8 22.6 30.1 34.3 1974 610 7.4 8.2 27.7 29.6 1975 829 8.5 9.8 34.0 28.8 1976 1074 9.1 11.8 36.7 32.2 1977 1174 7.9 14.9 40.1 37.2 1978 1463 8.6 17.0 42.5 40.0 1979 1461 9.4 15.5 46.7 33.2 1980 1589 8.6 18.5 52.9 35.0 1981 1713 7.9 21.7 58.7 37.0 1982 1727 7.1 24.3 61.2 39.7 1983 1929 7.3 26.7 65.6 40.2 1984 1980 7.4 26.9 71.8 37.5 1985 1973 7.2 27.4 73.9 37.1 1986 2494 8.3 30.0 77.5 38.7 1987 2794 7.8 35.8 84.0 42.6 Average = 40.9 1988 3351 8.0 41.9 92.2 45.4 1989 3109 8.4 37.0 100.0 37.0 Note: Freight rates in the second half of the eighties(FY86-FY89), on average, and in real terms(1989 prices), were 40.9 Paioa per ton kilometer or some 20% higher than the corresponding figure of 34.3 Paisa for the early seventies(FY70-FY73). Sources: Pakistan Railways, various Yearbooks of Information SARa, and PCRs Railway IX, X, XI plus SAR Transport Sector Project IMF, International Financial Statistics, various issues, for Price Deflator(wholesale price index which is about the same as retail price index). Table 6 22 - PR Availability and Utilization of Locomotives and Rolling Stock. FY71-FY89 Availability (%) FY71 FY89 1. Diesel Locomotives 85.8 83.4 2. Passenger Coaches 85.7 76.8 3. Freight Wagons 96.0 91.5 Utilization 1. Diesel Locomotives - km/day 254 262 2. Passenger Coaches - km/day 291 323 3. Freight Wagons - km/day 49 58 - turn around time(days) 12.1 16.5 - wagons/train 50.6 56.9 - net load/train(ton) 565 614 - net load/wagon(ton) 11.2 10.8 Sources: Pakistan Railways, various Yearbooks of Information Annox 1 23 RAILWAY XI - INCREASING PASSENGER FARES: A CHRONOLOGY SummarV 1. This chronology is based on the Bank's files. It reports, in some detail, on the process of increasing the passenger fares under Railway XI. 2. It shows how the Bank, during project preparation, makes a sound assessment and formulates an appropriate recommendation (appraisal mission), discusses and approves the recommendation (through the issues paper and decision meeting process), and then gradually, step by step, whittles away at and retreats from the decision which has been reached. 3. Subsequently, during project implementation, for nearly two years, the Bank does not follow through on what has been agreed with GOP/PR. 4. The cironology also shows (see para. 16ff) that the Bank's supervision effort was flawed (late start-up, no follow through on planned December 1982 dialogue with GOP/PR, no comprehensive focus, poor reporting). DurinR Prolect PreDaration 5. Issues Paper (12/8/81). The appraisal mission "recommends (inter alia] that prior to negotiations passenger fares should be increased by at least 30%. The mission believes that GOP is likely to accept these recommendations and to honor the agreements. We also feel that heavier pressure on the sensitive issue of passenger fares may be counter productive". 6. The Decision Meeting (12/18/81) concurred with the above recommendation:" ...to demonstrate its commitment to these policiesl17/, prior to negotiations, GOP should have permitted PR to increase passenger fares by at least 30% as an interim measure." 7. On February 5, 1982, the Bank conveyed to GOP/PR that the Aide Memoire of the November 1981 appraisal mission had been accepted in the Bank including, inter alia, the recommendation that "an interim increase in passenger fares by at least 30 per cent should have been introduced before negotiations as a demonstration of commitment to the policies embodied in the covenants". 8. On April 5, 1982, the Bank was informed by its Islamabad Office that "GOP not yet in position to indicate position on increase of fares. Following established procedures and for reasons of political expediency, decision could only be announced as part of budget end of June". 17/ These were: revenues from passenger services should be at least sufficient to meet their variable costs, and total revenues from passengers and freight should cover the cost of operation (incl. depreciation), debt service and appropriation to the Development Fund. 24 9. On April 6 the Bank informed its Islamabad Office that with the concurrence of top management the Bank would like to start negotiations subject, inter alia, to prior decision by GOP" to increase passenger fares by about 20 percent". In addition, the Bank noted that "we are seeking only GOP decision on above matters at this stage not repeat not public announcement (which could come in budget...). Timing of actual implementation could be discussed during negotiations". The Islamabad office was requested to convey this to GOP/PR. 10. On April 13, 1982, GOP/PR communicated to the Bank that "regarding the proposal to increase passenger fares... by al least 30 per cent (reduced now to 20 percent), keeping in view the present overall situation in the country, the Government will review this requirement in the near future. While GOP does not consider it opportune to increase fares immediately, it nevertheless agrees, in principle, that to remove the deficit in the railway budget, fares would ultimately have to be increased". GOP/PR concluded that "it hoped that it would be possible to start formal negotiations on May 3, 1982." 11. On April 13, 1982, Bank staff asked top management "to agree to GOP proposal to start negotiations with the intention of reaching agreement on the specific amount and timing of passenger fare increase.... A Government decision on an early fare increase would be a condition of Board presentation (scheduled for June 15, 1982)". Top management agreed. 12. The Loan Committee's review of the loan documents took place April 2 to 7, 1982. Top management, inter alia, commented that "at negotiations there should be fixed dates for future tariff increases." 13. On April 20, 1982 the Bank formally proposed to GOP/PR to start negotiations on May 3 and that the Bank "would wish to reach formal understanding on specific amount and timing of passenger fare increase.. ." And that "proposed project would be submitted to the Bank's Executive Board after GOP decision repeat decision on appropriate early fare increase". 14. On April 25 the Bank received GOP/PR's reaction. "It is hoped that the Bank would understand the constraints in not being able during negotiations to give formal undertakings of specific amounts and timing of passenger fare increases. However, you may rest assured that GOP has every intention of increasing passenger fares at appropriate juncture..." GOP expressed the hope "that a reasonable consensus could be reached during negotiations and that it is agreed that negotiations may commence in Washington on May 3, 1982". The Bank's files do not contain the Bank's answer to the foregoing but negotiations started on May 4. 15. During negotiations GOP expressed its willingness "to undertake to make substantial increases in passenger fares by no later than June 1983" (i.e. more than a year later) but that for political reasons it was not possible to do it earlier. That in the meantime it would pursue a strategy of "cost savings and increased productivity". "A comprehensive review would be carried out in consultation with the Bank in December 1982 and at that time firm decisions would be made on the extent and timing of increases in passenger fares." The memo reporting on the negotiations concludes: "We believe that the course of action proposed by GOP promises to have a significant lasting impact on PR's efficiency 25 and financia) position, we therefore recommend that we accept COP's short-term strategy including its commitment to make substantial increases in passenger fares by no later than June 1983 as necessary to satisfy the financial covenant by FY84". Bank management concurred. The Board approved The Credit on July 1, 1982; the Credit Agreement was signed two weeks later, and the Credit became effective September 13, 1982. Pt!rip& Plo_ect Implementation 16. In the Bank's files there is no further reference to the "comprehensive review" which was to be carried out by GOP/PR in consultation with the Bank, in December 1982, and the "firm decisions on the extent and timing of increases in passenger fares that were to be made at that time". The Audit concludes that the Bank did not follow up on this point and that GOP/PR were not pushing it. 17. The first supervision mission took place in June 1983, more than a year after negotiations. It focussed exclusively on procurement matters. 18. This was followed by a "limited supervision mission", in October 1983, which had the same narrow focus. The mission produced a one-page Aide Memoire and no Back-to-Office Report- 19. The next supervision mission, almost two years after negotiations, in April 1984. was the first to review all project aspects, including covenants and undertakings, and to report, inter alia, that nine months earlier, in July 1983, passenger fares had been increased by 15%. 20. It was only after this mission that the Bank began to request GOP/PR repeatedly to comply with key covenants and undertakings. But without success. The next year, the Bank declined to extend the credit's closing date and canceled 50% of the credit. 26 Annex 2 COMMENTS FROM THE BORROWER From: Arbab Abdul Sattar, Director Planning. Ph: 823514. No. AL-81-VT/1, Dated.9th Sept, 1991. Sub:- Railway X (Credit 684 and Loan 1372) Railway )a (Credit 1279) Project Ferformance Audit Reocrt. Dear Mr. Albou;y, Thanks for your letter of 23rd July, 1991 on the above subject. The re-port prepared by the Infrastructure and Energy Division, Operation Evaluations Department eliciting the reasons for the failure of X and XI pro,ect are very comprehen- sive. !inistry of Railways is making all efforts that the causes which led to the failure of X and XI projects donot recur and transport sector loan meets a success. As regards the i=lementation of the recommendations about the privatisation of container:i! traffic, the matter would be reported shortly. Sinc -Y Difector ; t7r. Yves Albouy, nr:::truc ture TInerCy Divi son, W,orl 7ank, IBRD 16248R1 64- 7'8 b . S S R CH NA PAK ISTAN ( NATIONAL CAPTAL 0 CITIES AND TOWNS - NATIONAL ROADS PR!MARY AND SECONDARY ROADS RAILWAYS 4 AIRPORTS \ o,, tio c -PROVINCE BOUNDARIES N -oýlsoeo ---INTERNATIONAL, BOUNDAR!ES ,~ Q L AA RIVE RS Rooåoo. JAMMU and KASH odo 3 32°- Dl Khon A F GHAN S-AN 28* Jocobobod 2 S AMIC REPUBL i C OF - I D Kh .' RAN . K 100 0 300 400 .-- s N '01EER 0 50 '0 '0 200 250 Bel. Nosbp 9 Hydobod b-saoi