Report No. PID7601 PID7601.TXT Project Name Cameroon-Railway Concessioning Project Region Africa Sector Transport Project ID CMPE54786 Borrower Government of Cameroon PID Update January 11, 1999 Project Appraisal Date February 1, 1999 Projected Board Date May 20, 1999 Infrastructure and Equipment Rehabilitation and Informatics Components: Mr. Monpert CAMRAIL 51, rue Louis Blanc 92400 Courbevoie, France Telephone: (33-01) 41 41 5492 Fax: (33-01) 41 41 5038 Management Capacity Development Component: Bassoro Aminou, President of the Privatization Committee Ministry of Transport/ Ministry of Economy and Finance/ Ministry of Public Investment Yaounde, Cameroon Telephone: (237) 239 750 Fax: (237) 255 108 1. Country Background. Throughout the 1970s and until 1985, Cameroon registered an average real growth rate of about 8 percent per year. A major factor of this growth was the production of oil, which accounted for about 45 percent of Government revenues. Three external shocks, starting in 1985-86, demonstrated the fragility of the oil-dependent economy: decline in external terms of trade (coffee, cocoa and oil), depreciation of the dollar and decline in oil production. As a result, the economy and living standards began to decline. Per capita income fell by 55 percent between 1986 and 1993; the population living in poverty increased from 40 percent of households in 1983 to 48 percent in 1993. 2. A first Structural Adjustment Program was launched in 1989, supported by a World Bank Structural Adjustment Loan, but failed to halt the economic decline, largely since it was not accompanied by a real depreciation in the CFA Franc (CFAF). The CFAF devaluation in January 1994 created a pre- condition for resumption of positive real growth and an improvement in the country's external competitiveness. In parallel, the Government implemented the Central Africa Customs and Economic Union tax and tariff reform to simplify the tariff structure and eliminate all remaining quantitative restrictions on merchandise imports. However, adjustment efforts remained weak; as a result, Cameroon's long-term development has been plagued by three main constraints: (a) a fiscal crisis, with inadequate resource mobilization, poor public expenditure orientation and a crippling internal debt; (b) a residual external debt, for which the debt service, including payment arrears, amounted to 111 percent of total government revenues in 1994; and (c) uneven ownership and commitment to the adjustment agenda. 3. Since early 1995, the Government has clearly demonstrated its commitment to reverse past trends. All outstanding activities agreed under the IDA- financed Economic Recovery Credit have been completed. The Government has announced and is following additional adjustment measures, including, among others, acceleration of the privatization program and improvement of the privatization procedure under the auspices of a Presidential committee responsible for ensuring transparency. Another Structural Adjustment Credit was approved and became effective in 1996. 4. Sector Background. [Note: Summarize assessments of key policy, institutional and other issues, and the Government's strategy to address them, referencing the economic and sector work of the Bank and other development agencies.] Cameroon's 1993 Transport Sector Strategy (TSS) identified the following priority issues: (a) lack of adequate road maintenance due to declining Government revenues; and (b) inefficient public transport enterprises (including REGIFERCAM ), which cause a severe drain on Government resources. The TSS recommended the following actions to address these issues: (i) strengthen road maintenance capacity and develop a sustainable road maintenance policy; (ii) improve road transport fiscal policy and cost recovery; (iii) restructure public enterprises; (iv) improve institutional capacity and strengthen transport sector management; and (v) further improve transit transport facilitation and the corridor's competitiveness. The FY 1996 Transport Sector Program (TSP) further identified the following issues: (a) weak sector management and institutions; (b) unsatisfactory regulatory framework; (c) non-performing transport sector public enterprises (of which REGIFERCAM was identified as one of the largest debtors); (d) missed sector investment opportunities; (e) inefficient maintenance of existing infrastructure; and (f) lack of competitiveness. Transport services in isolated rural areas (including rail services) are a national priority to facilitate passenger movement and transport goods to and from isolated rural areas to help cure regional economic imbalances. The TSP focused on addressing these issues by: (i) strengthening sector institutions; (ii) improving road maintenance capacity; and (iii) restructuring or privatizing public transport enterprises. 5. In the railway subsector, as noted above, REGIFERCAM is an inefficient public sector company in charge of the national railways, which has become a drain on the Government budget. Despite a major reduction of its workforce in the last few years, it still suffers from overstaffing, lack of commercial orientation and interference from the government on management and procurement decisions; it generates heavy deficits. Unmaintained track and rolling stock have led to unreliable and unsafe railway service. Due to its lack of commercial behavior and the poor quality of services offered, rail transport has lost freight custom to road transport. The railway is particularly important as a means to facilitate the transit trade with Chad and the Central African Republic (CAR). 6. The proposed operation directly addresses the need to restructure public enterprises in the transport sector by concessioning the national railway to - 2- the private sector. It will also contribute to reducing the burden on Government resources for transport by effecting private operation of REGIFERCAM. Operational efficiencies and improved transport service quality gained through concessioning will preserve rail infrastructure and will improve the competitiveness of domestic freight and transit transport to Chad and CAR. Government institutions (particularly the Ministry of Transport) will be strengthened by focusing on concession monitoring rather than on operating an inefficient public enterprise. The project will further develop a regulatory framework to facilitate private sector development in the transport sector. 7. Project Objectives. The objectives of the proposed project are to: (a) improve the efficiency and sustainability of the transport sector through private operation of the railway sector; and (b) eliminate the burden on public finance for provision of railway services. These objectives support the Government's 1993 Transport Sector Strategy, and 1996 Letter of Sector Policy, which call for, among others, State divestiture of transport operations in favor of greater private sector operation. 8. Project Description. The Cameroonian national railway is to be run as a concession. A concessionaire, CAMRAIL, has been selected through International Competitive Bidding; the concessioning process will be completed prior to project effectiveness. The project, to be financed by a group of donors (see below), comprises 3 main components: (a) railway infrastructure rehabilitation, including tracks, structures, signaling and telecommunications; (b) railway equipment rehabilitation and maintenance (locomotives, wagons, maintenance equipment, spare parts); (c) informatics and office technology for the concessionaire; and (d) management capacity development to strengthen the Ministry of Transport to manage concessions. The IDA credit will contribute to financing railway infrastructure rehabilitation and management capacity development. 9. Project Financing. The project is estimated to cost a total of US$87.15 million. The proposed IDA Credit is US$20.5 million equivalent. Cofinanciers include the Agence Fran6aise de Developpement (AFD), contributing US$10.75 million equivalent; and the European Investment Bank (EIB), financing US$12.9 million equivalent; the International Finance Corporation (IFC), providing US$5.9 million equivalent; PROPARCO contributing US$7.2 million equivalent; and Deutsche Investitions und Entwisklunggesellschaft mbH (DEG), financing US$5 million equivalent. The Concessionaire will provide another US$25 million in local financing. 10. Project Implementation. The concessionaire will be the main implementing agency and will have complete responsibility for the physical project components (rehabilitation of railway infrastructure and equipment) and for the informatics and office technology component (project start-up). The Ministry of Transport will be responsible for implementing the staff restructuring component. A Concession Monitoring Committee, headed by a Government designee and comprising representatives of the Ministry of Economy and Finance, the Ministry of Transport and 3 representatives of the concessionaire, will be created to oversee implementation of the concession agreement, including project implementation. 11. Project Sustainability. The project has been designed to ensure sustainability by instituting a 20 year concession with a strong private -3 - sector operator and initial support from donors for the start-up period. The concessioning process has paid particular attention to selection of a highly qualified Concessionaire. 12. Lessons Learned. Support of the public railway company is neither effective nor sustainable: An earlier transport operation in Cameroon, which focused on institutional strengthening of REGIFERCAM, was successful in cutting the work-force in half, but performance did not improve significantly. This was due to public sector management practices and obligations (i.e. lack of commercial orientation, Government interference in railway management and procurement, nonpayment of services rendered to Government organizations) which proved to be major impediments to cost-effective operation of the railway. The C¶te d'Ivoire-Burkina Railway Concession, supported by multiple donors including IDA, started from a similar situation and dramatically improved the operation of the railway through concessioning. Public enterprise reform must have support of the Government. Earlier attempts to reform or divest public enterprises in Cameroon have failed due to lack of full Government support. In the proposed operation, the GOC has already demonstrated its commitment by finalizing the concessioning process. 13. Poverty Aspects. This project does not directly address poverty, however it should indirectly improve the lot of the poor in Cameroon by making rail transport more efficient, thereby improving quality of service and the economy. The concessionaire will continue to meet the Government's public service obligation to provide rail transport to isolated rural areas until roads can be built to these areas. Implementation of the concession will involve reduction of some 500 jobs over 2 years, will be carried out in consultation with involved unions and will include compensation packages, job counseling and placement, and outsourcing of works to former employees to lessen the impact of redundancies. This social package has been drafted and approved by the involved parties (the Government, the unions and the concessionaire). 14. Environmental Aspects. The project is rated Category B, and is expected to help improve the environment through better functioning railway and workshop equipment and more attention to environmentally sound maintenance activities. A preliminary environmental assessment has noted the following environmental and social issues to be addressed in project preparation and implementation: (i) an adequate system to dispose of equipment and materials discarded during rehabilitation, maintenance or routine operation must be established; (ii) guidelines and procedures must be developed for transport of hazardous materials; (iii) measures should be taken to reduce noise pollution; (iv) enforcement measures must be developed to prevent illegal transport of poached flora and fauna; and (v) continued accessibility of rural areas must be ensured. An environmental annex will be prepared upon receipt of the final environmental assessment. 15. Project Objective Category. The project objective is private sector development. For information, please contact: The InfoShop The World Bank 1818 H Street, N.W. -4- Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending April 30, 1999. - 5 -