Report No. 10667-ZA Zambia Financial Performance of the Government-Owned Transport Sector November 1992 Infrastructure Division MIC P CFICHE COPY Southern Africa Department F N. Type: (f Africa Region r i t i e: F INANCIAL FPF'RFOPMANCTE (F' THF CT FOR OFFICIAL USE ONLY Axt.': 3 B(: or2 IJ11125 Dept. :AFtN Ext. t Docunent of the World Bank This document has a restricted distribution and may be used by recipients -onily in the performance of their official duties. Its contents mnay not otherwise b!etisclosed without World Bank authorization. ZAMBIA CU ECEYOIVALENTS Currency Unit - Zambian Kwacha Exchange Rates YM ~~~~~~~~~~~~~~~K per US Do: lar 1987 8.9 1988 8.2 1989 12.9 1990 29.0 1991 50.0 1992 (assumed average) 120.0 FISCAJ. YEARS Government: January 1 - December 31 Transport Enterprises: April 1 - March 31 ABBREVIATIONS AJAS - African Joint Air Services BAU - Business-As-Usual BP - British Petroleum Ltd. CHL - Contract H-aulage Ltd CSO - Central Statistical Office DC - District Councils DCA - Department of Civil Aviation EEC - European Economic Community ESCO - Engineering Services Corporation Ltd IATA - International Air Transport Association km - Kilometer MC&T - Ministry of Communications and Transport MH - Mpulungu Harbor Corporation Ltd M-Roads - Main Roads MSD - Mechanical Services Department MT - Mulungushi Traveller Ltd NACL - National Airports Corporation Ltd PSO - PuDlic Service Obligation PTA - Preferential Trade Area RD - Roads Department SADCC - South African Development Coordination Conference SATCC - Southern Africa Transport & Communications Commission sq km - Square Kilometer TC - Traffic Comm!ssioners T-Roads - International Trunk Roads TYDP - Ten Year Development Plan UBZ - United Bus Company of Zambia Ltd. UNCTAD - U. N. Commission on Trade and Development ZA - Zambia Airways Corporation Ltd. ZIMCO - Zambia Industrial and Mining Corporation ZIMOIL - Zambian National Oil Company ZNSL - Zambia National Shipping Company Ltd. ZR - Zambia Railways Ltd. FOR OFCML USE ONLY EtNANCILPPEQRFORMANCE F THE GOVBERNMEU-OWNED TRANSPQRTSEC Table of Conents EXECUTIVE SUMMARY ....... .............. i I. INIRODUCTION .............................. 1 II. PUBLIC EXPENDrlrURE REVIEV . ........ .. 3 IH. REVIEW OF AGENCIES WITH MAJOR PROBLEMS...... 4 A. The Roads Sector.... 4 A.1 Current Financing Arrangements . . ............ 5 A.2 Options for Reform . . . 10 A.2.1 Revenue Mobilization ..10 A.2.2 Management Arrangements . . . 13 A.2.3 Maintenance of DC Roads ....14 A.2.4 Road Maintenance Capacity . . . 16 A.2.5 Road Rehabilitation . . . 17 A.3 Conclusions . . .19 B. Zambia Railways ....20 B.1 Current Financial Performance . . .20 B.2 Options for Reform . . .21 B.3 Conclusions . . .23 C. Zambia Airways ....24 C.1 Current Financial Performance . . . 26 C.2 Options for Reform . . .31 C.3 Conclusions ...32 IV. ROAD TRANSPORT INDUSTRIES ......... 34 A. Contract Haulage Ltd . . .34 A.1 Current Financial Performance ..34 A.2 Options for Reform . .35 A.3 Conclusions ..36 This report is based on the findings of a mission consisting of Ian G. Heggie and Ms. A. Fantaye which visited Zambia in November/December 1991 and presented an initial draft of the report to the government in February, 1992. The text was finalized and formatted by Nellie Sew Kwan Kan and Mary Jackson. The mission would like to thank officials from the Ministry of Finance, Ministry of Communications and Transport, Ministry of Works and Supply, and the individual transport enterprises for their generous help during preparation of the report. IThis document has a restricted distribution and may be used by recipients only in the performance |or their official duties. Its contents may not otherwLse be disclosed without World Bank authorization. pagn No B. United Bw Company of Zambia Ltd. ...................... 36 B.1 CurreotFinancial Per; nance ...................... 36 B.2 Options for Reform ...................... ... 37 B.3 Conclusions ......................... i8 C. Urban Bus Services ........................... ; ...... 38 V. AIRPORTS AND OTHER CIVIL AVIATION ..... . ... 40 A. National Airports Corporation Ltd .. 40 A.1 Current Financl Performance .42 A.2 Options for Reform .43 A.3 Conclusions .45 B. Department of Civil Aviation ..46 B.1 Present Financial Perfbrmance .48 B.2 Options for Reform .50 B.3 Conclusons.. 51 VL OTHER TRANSPORT AGENCIES . .52 A. Engineering Services Corporation .52 B. Mpulungu Harbor Corporation Ltd .53 C. Zambia National Shipping Company Ltd. 54 VIM. OVERALL SECTOR PERFORMANCE . .56 A. Overall Fiscal Balance .56 B. External Indebtednes .58 C. Diversifying Ownership and Increasing Private Sector Involvement .... 60 D. Postscript .......... i .... 61 -TABLES 1. Length and Costs of Maintaining Trunk, Main and District Roads 2. Central and Provincial Roads Departments: Revenues and Expenditures 3. Revenues and Selected Expenditures: Kabwe Urban DC 4. Build up of Retail Prices of Fuel in Lusaka S. Prices of Gasoline and Diesel Fuel in selected countries 6. Indicative Finahcing Plan for Trunk, Main and District Roads 7. Overall Development Budget, Ongoing and New Projects 1991-1994 8. Passengers on Intercontinental, Regional and Domestic Services 9. Estimated Operating Results, FY91 First Two Quarters 10. Zambia Airways, Cash Flow From Intemational Sales Office 11. Amount of Traffic Handled at the Four Airports Managed by NACL 12. Charges at Selected Regional Airports in Africa 13. Amount of Traffic Handled at Category H Airports Managed by DCA 14. Civil Aviation Departnent: Revenues and Expenditures 15. Consolidated Public Expenditure Program for Transport 16. Transport Sector Outstanding and Disbursed Govermment and Government Guaranteed Debt ANNEXES 1. Estimated Number of Vehicles and Income from License Fees 2. Accounts: Zambia Railways 3. Accounts: Zambia Airways Corporation 4. Acounts: Contract Haulage S. Accounts: United Bus Company of Zambia 6. Accounts: National Airports Corporation EXECtIIQOVERVIEW 1. The overriding Issue arising from the present Transport Sector Public Expenditure Review is the need to reduce the sector's drain on the government's overall fiscal revenues. In FY91 the drain amounted to almost K 5 billion (nearly $100 million), or 12 percent of the government's total current revenues. The drain took the form of injections of cash and/or equity, overdrafts and short-term loans from government-owned banks, or short-term loans from commercial banks with government guarantees. The financial situation is even worse when the decapitalization of roads, due to shortfalls in regular road maintenance, is included. 2. Since the financial drain is largely attributable to Zambia Airways Corporation Ltd. (ZA), Zambia Railways Ltd. (ZR) and the roads sub-sector, these are the areas targeted by the review for immediate reform. First and foremost, ZA needs to revise its route structure (probably by giving up routes to Bombay and Mauritius), consider terminating its air freight business or continue operating it using cheaper aircraft, and extending pooling arrargements with other airlines with a view to disposing of one or both of its two B-737 aircraft. Second, ZR needs to cancel its Ten Year Development Plan and replace it with a smaller and more realistic commercially-oriented one which focusses on its core business as a freight railway. It also needs to Improve its accounting system to ensure it provides a true picture of the corporation's financial health. Third, priority actions for roads include increasing road user charges over a period of five years to finance road maintenance (higher vehicle license fees and an additional fuel tax), agreeing on cost-sharing arrangements for maintenance of district roads, sub-contracting most road maintenance to the private sector with maximum involvement of local consultaits and contractors, and developing a road rehabilitation program consistent with the availability of government local currency contributions. 3. The report further outlines an agenda for improving the overall financial performance of the aector over the next five years. Although it is difficult to be precise about the impact of the proposed reforms and the speed at which they might be implemented, the program of reforms could reduce the sector's overall cash shortfall to 6 percent of total current revenues by the end of FY92, 4 percent by the end of FY93 and 1 percent by the end of FY94. The program would also ensure that current shortfalls in road maintenance spending were brought into balance within five years. The proposed reforms are listed in a policy matrix attached to this overview. For convenience, the reforms have been given an order of priority and a time-scale. A final column of the matrix also lists actions taken by the government since the mission's first visit to Zambia in November/December 1991. 3 c !ifl E|SE j E s EN E CA 4 eV E E I tI c I t Is c It I & I, 1 ~~ i i .1 | i |t ti Pae, 2 of 3 Polinv MawCotinud Polcy Isuo Pr fiequlrd Actionsm Timing Status IV. Contract Haulage Ltd Set CommOrI ObjcIes I Mak6 it clew tht thOe corpoation Immediate Agreed In principle Is pctbd to operast. on a wholly commemcW basi wihout the need for govnmnt support Set Guidelines for Bilaral Aid I Ensure bilateral aid Is mad. Immediate cavlabls Uas of crdit which do nct discriminate In favor of th publo sedor. Deslfy Owneship 11 Invib a stslf buy-out and. If thd Late FY02 To be studIed Is unsuccessful. consider outright esb. V. Unitd Bus Co. of Zembia Ltd: se CommrciW Objectis I Make i clew that the ccpor n Immediate Agreed In prInciple Is expcted to operate on a wholly ccvnmwroW basis without th need for government support. Set Guidelines for Bilateral id I Ensure biltea aid is mode Immediate waaiab an lines of credit which do not diorikninab In favor of the public sector. Resrucure Loans I Govenment to aist Ms IY92 guarantues) wih converion of short-term loans Into long-term one. Improv Peformance if Increase fleet utlizmtlon, hold FY02 to FY93 down coms, reduce sa, Incr vshbol utilidzlan and reduce aounts payable. Reform Workshops Ill Dispose of workshops and hae FY92 to FY04 maintenanoe done byathird party;, considr leaing. Dergublt Fae Ill Remove all fae regudaons and FY92 to FY04 To be studied concentrate on regublting safety, qualIty and reWiabUity. Diesify Owehip Ill When peformanc has Impronvd. FY03 to FY04 To be studied invit a *s buy-out and. if that does not succeed, consider outright "sb. VI. Urban Bus Onerons: Revis Reguatoy Framework 11 Revise regulaions to emphasiz FY*3to FY34 To be studied safety, regularity and relibiliy of sevic. Inboduce PSO Grant Ill In conjunction with urban didrict FY03 to FY04 counils, introduce grants to cover th costs of publio sevie obilga0ons (e.g.. concslonry fs, network xtensins, tc.). VII Ndional Airnoft Qo oration Ltd: Transfer Fixed Assts I Formalize trarsfe offixed assets FY02 to FY03 and agree on procedures for deaing with rehabilittion of aiport. Diwvrr Revnue Bas I Seek othr source at rewvnue from FY92 to FY93 concssion, property rentls. cr prking. de. Polov M*tix Conthu d POlcy Issue Prority Required Actions liming 8talu Airport Polie Ill Charge te cotd of polko at NACL FY93 o4port agina tth corporation. Meteorological Chrgee III Charge z'p to 10% of the cosb of FY93 the meetoolglal departent aginst NACL to be recoved m wis through alr navigaion Divsfy Ownenhip iII ODrlfloalon of ownership Is only FY03 To be studied fsblb n unways and navald are tr red to DCA; ell 10 % of shaes to staff to strengthen incentv lil. Deoartnent d Civil Aviton: Rabe 'isr Charges I Rse ' ng fee to an averag of R ed FY02 Budget $40 pek awr and exprm K In Ielgn xchange; rase the passenger service departure foe to K200. Comm reize AIrport 11 Turn alrportb Into a separate unit FY03 Decision deferred within MC&T accounting for its activie ag regulr commercial lines. Denlopmt Plan III Continue with present deelopment FY93 to FYU Agreed plan and reviso Itonce the AIDS study is complebt. Diversify Ownrhip Ill Conalder whether some airfields FY93 to FY94 could be traisferred to ditrict councis and whethe some (e.g., Southdowns) should be transfrred to NACL, or prva opwerato. Ot Enelne g Servic Cornoraton Ltd: R esture Operdaons I Re--organize the corporation Into FY92 Agreed In princle sd9ate busInss centers, build up those whkh are proftble and clo thoee which mak losses. Diesfy Ownerhip 11 Invit a st buy-out of FY02 to FY03 To be studied indMdual buslne centrs, or of the busin as whole; failing that, sl th enire busines, or iquldate IL X. Mukunau Harbor Corforation Ltd: 8tralghtsn OLt Accounts 11 Agre on the value of the aees, FY92 pravide for depreciation and reduce accounts receiable. Dirsify Ownersp 11 Opeate the port under a managenent FY92 to FY3 Offer from th privae contrat, under a conceuIon sectr being . agreement, or sell th entire port considered to a private sectr opator. l. Zambia Naional Shloolno Company Ltd: Finali Uquldation I Wind up corporation and only settle FY02 Agreed guaanteed de. EXECUT ,SUMMARY 1. Zambia is land-locked and depends significantly on road and rail transit routes through Tanzania, South Africa, Zaire, Mozambique and Angola. The Ministry of Communications and Transport is responsible for overall transport policy and for supervision of transport enterprises. The road sector suffers from a number of systemic weaknesses which hamper effective performance. It suffers from lack of clear lines of responsibility, weak institutional structures and under-funding. Some transport enterprises are operated as joint ventures with the gcvernments of Tanzania and (in 1La case of air services) Uganda. Joint ownership adds to the complexity of management. The remaining transport enterprises are operated under the jurisdiction of Zambia Industrial and Mining Corporation (Zimco), which acts as a holding company on behalf of the government. Zimco has not provided effective leadership and many of the enterprises under its jurisdiction are in a critical financial condition. Apart from the trucking industry, these enterprises are also affected by an unfriendly regulatory environment and by well-intentioned donor sLpport which has inadvertently weakened competitive pressures. Once existing and proposed studies of the transport sector have been completed, it would be desirable to prepare a transport sec.or strategy document to guide long-term development of the sector. 2. The public expenditure review takes it for granted that government-owned transport agencies should be able to operate commercially without the need for financial support from government, other than to meet a clearly agreed public service obligation (PSO). A quick review of the financial health of the transport sector in Zambia shows this to be far from the case. In FY91 the sector imposed a financial burden of about K 4,875 million (nearly $100 million) on the government in the form of grants and overdrafts and short-term loans at g -,rnment-owned banks or commercial banks with government guarantees. This report examines the reasons for this poor financial performance and suggests ways of improving it. 3. Three agencies account for most of the sector's financial problems: roads, railways and the airline. Road expenditures are well below the levels needed to maintain the road network in a stable long-term condition. Current spending levels on roads under the jurisdiction of the Roads Department (RD) cover 20 to 40 percent of requirements for trunk and main roads (7,087 kn), and a mere 10 to 20 percent for district roads (13,696 km). The condition of roads under the jurisdiction of District Councils (15,980 km) is no better. Inadequate allocations for road maintenance means that routine maintenana has effectively ceased, vehicle operating costs have risen, rural roads become impassable during the rainy season, road rehabilitation has become a substitute for regular road maintenance and low maintenance expenditures have destroyed RD's capacity to undertake road maintenance. One of the main reasons for the shortage of finance, is that road users are paying negligible snms for use of the road network. License fees have not kept up with inflation and fuel only bears a standard excise tax (i.e., no explicit user fee is added to the price of fuel). 4. There is a clear need to put the financing of roads on a sustainable long-term basis. The task is to increase revenue mobilization, put in place management arrangements to ensure the additional funds are used effectively, revise arrangements for financing maintenance of district roads, rebuild the country's road maintenance capacity, and develop an affordable program to rehabilitate high priority roads. Improved revenue mobilization should focus on raising vehicle license fees and adding a supplementary fuel charge to the tax on transport fuels. These charges could be r.ised gradually over a period of five years. By FY96, the proposed increases would have raised average license fees to K 9,000 for cars ($75), K 36,000 for buses ($300) and K 60,000 for trucks ($500), all at FY92 prices. The fuel charge would likewise have raised the - Ii - ii - price of premium gasoline from K 86 per liter to K 99 ($0.83) and that of diesel from K 49 per liter to K 59 ($0.49). 5. Roads are important national assets with an estimated replacement .ost, less the backlog of deferred maintenance, of $1.95 billion. Of this, $1.46 billion are managed by RD, while the remaining $0.49 billion are managed by the 57 urban and niral DCs. Since these assets need to be well-managed to ensure they produce value-for-money, and required road maintenance expenditures are three to five times current levels, there is a need to introduce better management arrangements to ensure the large sums of money which need to be spent on road maintenance are properly accounted for. It is suggested this be done by commercializing RD and turning it into an autonomous Roads Board. The Board's executive committee would include representative of the road transport industry, and the Board would be expected to keep commercial accouvts, introduce program budgeting systems and charge a clear price for roads implemented via international transit fees, vehicle license fees and a specific fuel charge. The road tariff would either be collected by RD or collected by British Petroleum (BP) and Zimoil on an agency basis. These arrangements need to be complemented by revised arrangements for financing maintenance of district roads. District Councils have a narrow tax base and it is suggested that block grants be introduced to support maintenance of district roads. The block grants would be financed from the overall fuel charge and allocated in a way which encouraged local tax effort and compensated for variations in the DCs ability to pay. 6. Road maintenance capacity also needs to be rebuilt and it is suggested this be done by involving the private sector. Local consultants could be used for design and supervision of work, with local contractors undertaking most road maintenance. In rural areas, it is furthermore suggested that maintenance of gravel and earth oads be undertaken using lengthmen sub- contractors to help increase rural employment. AD's role would also change and it would become a more specialized agency with a smaller and better paid staff. They would primarily become planners, facilitators and paymasters. They may also need to retain the capacity to undertake emergency road maintenance and some routine maintenance of paved roads. Finally, a road rehabilitation program needs to be prepared to handle the large bacldog of road maintenance which now needs to be made good. The size of the program should be determined to suit the availability of government local currency contributions. Under the above financing program a rehabilitation program of between K 2,000 million and K 2,500 million per year would be affordable. 7. The financial performance of Zambia Railways Ltd. (ZR) has deteriorated in recent years and reported losses in 1990/91 reached K 440 million ($15 million). The actual bottom line is much worse, since the corporation has not been servicing its debt, assets have not been revalued and depreciation provisions are too small. In spite of creafive accounting, ZR required government grants and equity contributions of K 2,347 mi-'n ($81 million) in 1990/91 to rebuild working capital. To address these problems ZR prepared a Ten Year Development Plan (rYDP), involving expenditures of over $200 million. The plan is unrealistic and does not face up to the difficult issues which need to be overcome if the corporation is to survive. F. The performance of ZR is only likely to improve if it is radically restructured. One of the first tasks should be to straighten out the corporation's accounts to ensure they present a true picture of its overall financial health. ZR also needs to focus on its core business as a freight railway and should stop operating pre-ast concrete factories, attempting to open quarries and should only develop the parcels business in conjunction with private sector interests. Passenger services, which account for a mere 2.5 percent of total income, should also be restructured, terminated (including closure of the Mulobezi lina), or operated with explicit suppoAc from a PSO grant. The operation off workshops is another area in need of reform. The report recommends that ZR get out of the business of operating workshops. Instead, It should arrange to have overhaul and maintenance of locomotives and rolling stock .rried cat by a third party Mased either on privatization of existing workshops or leasing equipment directly Irom a third party). 9. The above reforms need to be complemented by strenuous efforts to improve utilization of equipment. Better utilization of locomotives would avoid the need for costly hires from Spoornet and purchase of Canadian locomotives. The contract for purchase of these loc,..motives should be scaled down, or canceled. Priority sectons of track also need tco be rehabilitated and should concentrate on relieving restrictions on sections of track carnying the highest volumes of traffic. Construction of the new Chipata-Mchinji line to Malawi shou!d be cancelled or postponed. Finally, the TYDP should be dropped and r-^Iaced by a m'ore modest and commercially-oriented development program. It is recommcnded that the government's development budget for FY92 only include a provision of K 300 million for ZR, followed by provisions of K 2,440 million in FY93 and FY94. 10. Zambia Airways Corporation Ltd. (ZA) is in a critical financial condition. It incurred a loss of K 2,112 million ($73 million) in 1990/91 and has only managed to keep afloat by running up overdrafts and short-term debts. Overdrafts and short-term debts reached a total of K 1,384 million ($48 million) in 1990/91. ZA's poor performance furthermore has a direct effect on the country's foreign exchange position, since ZA uses the IATA Clearing House (effectively underwritten by government) as a means of settling payments for miscellaneous services. The payment for miscellaneous services amounted to $45 million in 1990/91, out of a total net payment ef $53.2 million. The main reasons for poor performance are an unsuitable route strucre, lack of a cost-effective sales organization, an unprofitable air freight business and low aircraft utilization (the two B-737s only flying for 2.5 hrs per day). 11. Some attempts have already been made to improve performance and have focussed on liquidating Africa Bound Ltd. (a tour company), terminating flights to New York, reducing the scope of the air freight business, closing foreign sales offices and promoting pooling arrangements with otler regional airlines. To survive, ZA must nevertheless do more. The corporation needs to concentrate on five main cost-cutting measures. First, it needs to take a hard look at the present route structure and may need to cut its inter-continental services to Bombay and Mauritius. Regional services to Gaborone, Windhoek and Entebbe also need to be reviewed. Second, ZA's international sales offices (which absorb about 30 percent of sales revenues) cost far too much and some offices need to be down-sized, or closed. In 1990/91 the London sales office lost over $7 million and it may ba desirable to market ZA s-rvices under an agency agreement with another airline. Third, ZA's air freight services have been affected by structural changes in the international freight market and may have to be terminated, or continued using a cheaper aircraft. 12. Fourth, poolinl arrangements should be promoted but, since all SADCC airlines are suffering from excess capacity, one or both of ZA's two B-737s should be sold. Finally, ZA needs to explore every opportunity for improving crew utUlization, cutting staffing and victualling costs, and generally impro 'ing operational performance. The serious financial state of the airline also raises questions about the timing of the Africa Joint Air Services (AJAS) agreement. Such ventures are normally only attempted by airlines in sound financial health. Implementation of the AJAS agreement should therefore be deferred. In spite of current problems, it should be possible to turn the airline around. In the medium term, the emphasis should be on encouraging - iv - the airline to operate iWx a more commercial way and, once that had been achieved, to conslder privatization, provided a suit&ble buyer can be found. The only qualification is that no corporate investor is likely to be willing to invest in LA for less than 51 percent of the voting shares. 13. Contract Haulage Ltd. (CHL) is in reasonable financial health sknd is the most consistently good performer. ;n 1989/90 it earned net profits of K 72 million ($5.6 million) and earned a rate of return on total assets of 41 percent. As a top performer, CHL is not in need of restructuring. Whatever steps are needed to improve performance are under the control of management and they should be encouraged to address these problems without government involvement. Road haulage does not have to be in the public domain and government should start considering the long-term future of CHL. There is no case for infusions of public iunds and offers of dedicated bilateral aid should be resisted in favor of general support to the road haulage industry (preferably in the form of lines of credit). CHL should be a key target for diversification of ownership. Government should set clear commercial targets and announce its intention to diversify ownership of the corporation. Within six months the government should ;nvite bids from existing management and staff and, if that does not succeed, should explore other wa "s of diversifying ownership through outright sale, or sale of shores. 14. The United Bus Company of Zambia Ltd. (IM.tZ) operates inter-urban and peri-urban bus services. The corporation was restructured in 1988 and performance thereafter improved. However, in 1989/90 performance started to decline and, in spite of substantial fare increases, it incurred a net loss in 1991/92. The corporation is now in an illiquid position and has been financing fixed assets through a combination of accounts payab!e and short-termn oans. UBZ management needs to make strenuous efforts to improve financial performance to ensure it does not repeat the crisis which affected it in 1987. It needs to increase fleet utilization, hold down operating costs, reduce staffing levels from 12 per vehicle in service to less than 10, increase vehicle utilization, reduce accounts payable and should convert its short-term loans into long-term debt (perhaps with government guarantees). These actions need to be supported by provision of clear commercial objectives and womplete deregulation of fares. Offers of bilateral assistance should likewise be made to both public and private bus companies on the same basis. Finally, government needs to give serious consideration to diversifying ownership through a management or staff buy-out, or outright sale. 15. Urban bus services are provided almost entirely by the private sector and government is mindful of the need to ensure they are operated reliably. Most current problems are caused by the rigid and outdated regulatory framework. These need to be relaxed to encourage provision of a wider and more diverse range of urban bus services. It would be unwise for government to become involved in the provision and operation of urban services and it should confine itself to being the regulator and facilitator of such services. The regulatory role should be corfined to ensuring safety and reliability of service, while the facilitating role should be confined to financing (in conjunction with urban District Councils) incremental improvements to existing private bus services. These improvements should be financed through provision of explicit PSO grants provided to support services provided on a contractual basis. 16. In September 1989, the four category I airports (Lusaka, Ndola, Livingstone and Mfuwe) were transferred from the Department of Civil Aviation (DCA) to a newly created National Airports Corporation Ltd. (NACL). Many of the airport facilities taken over were in a deteriorated condition and neither the value of the assets, nor the terms of their transfer, have yet been agreed. NACL keeps good accounts and is reasonably well managed. In 1990/91 it produced net profits of K 21 million ($1 million) and earned 5 percent return on total assets. v - Revenues consisted almost entirely of aircraft and passenger fees. The NACL tariff is relatively high, although they are broadly in line with charges in neighboring countries like Zaire, Angola and Mozambique. 17. NACL is a relatively well run corporation and there is no need for any major structural reforms. However, it may be worth considering some minor restructuring to transfer ownership of runways and air traffic control equipment back to DCA. DCA could then negotiate a contract with NACL for managemen. of these assets. This would make NACL a much smaller corporation operating more like a property development company. In this form, ownership of the corporation could probably be diversified. The corporation would then focus on management and development of airport land and termmals, and would also manage runways anct navigational aids on behalf of DCA. Several other steps could also be taken to improve performance, since a 5 percent return on total assets is too low to generate sufficient revenues to operate on a sustainable basis. There are six issues which need to be addressed. First, the value of the fixed assets need to be agreed and so do their terms of transfer. Second, arrangements need to be agreed for rehabilitating these assets. It would be unreasonable to saddle the corporation with the costs of making good past neglect by DCA and it is suggested that government act as broker in trying to arrange grants and soft loans to finance the required rehabilitation. Third, NACL needs to diversify its revenue base by increasing earnings from concessions, rentals and parking charges. Fourth, the costs of the airport police (currently carried on the Police Department vote) should be charged to NACL. Fifth, operating costs need to be reduced and staff incentives improved (possibly by selling 10 percent of the equity to staff, or issuing it in the form of bonuses). Finally, goverment should consider charging 10 percent of the meteorological department costs against NACL. The corporation could then recover these costs from users by adding them to the air navigation charges. 18. DCA regulates all civil aviation services and is responsible for operating the country's 40 category II and III airports. DCA levies landing charges at category II airports and collects passenger service departure fees. Airfield revenues during FY90 were K 1.7 million, while expenditures were K 46.7 million leaving a shcrtfall of K 45 million. Curren3t landing fees are negligible. During FY90 the average landing fee was K 55 (about $1.90) for a 10 tonne aircraft. These fees need to be raised by a factor of st least 12 to reinstate their 1987 values. The passenger service departure fee is K 80 compared to a domestic departure fee of iC 200 at NACL airports. There is no systematic method of accounting for invoices issued, bills paid and delinquent accounts. A quick check suggests that revenue evasion and leakage are not a problem. 19. To improve financial performance and reduce the burden on the government's recurrent budget, it would be desirable to commercialize all category H airports and account for them as a separate commercial entity within the Ministry of Communications and Transport. Commercialization should be accompanied by an increase in fees. The average landing fee should be raised to $40 (and expressed on foreign exchange) and the passenger service departure fee should be raised to K 200. This would increase revenues to K 19.5 million in FY92. Other refbrms should concentrate on examining the feasibility of transferring management of selected airports (e.g., Southdowns) to District Councils, or transferring them to NACL or private sector operators. With revised charges and improved management, Southdowns airport could probably be managed profitably. Allocations in the development budget appear reasonable, but should be reviewed once the ongoing airport study being finarced by the African Development Bank has been completed. - vI v 20. The remaining transport agencies covered in this report include Engineering Services Corporation Ltd. (ESCO), Mpulungu Harbor Corporation Ltd. (MH) and Zambia National Shipping Company Ltd. (ZNSL). ESCOs fincial position is precarious and there are no signs of things getting better. It is suggested that the corporation be restructured into separate business cent-rs, that management concentrate on those which are profitable (or could be made so) and closes those which continue to make losses, and that government then privatizes the corporation as a whole or as separate business centers. The time-table for privatization should be no longer than two years. MH is a small harbor and there seems to be no case for spending large sums of public money rehabilitating quays and providing more equipment. It is suggested that the government consider partial or complete privatization of the port. Finally, ZNSL is currently being liquidated and it appears that government has made a wise decision. The company is likely to end up with lazge debts and it is recommended that government only meets losses covered by government guarantee. 21. In FY91 the transport sector's cash shortfall amounted to K 4,875 million (nearly $100 million), or 12 percent of the government's total current revenues. When decapitalization of roads due to inadequate maintenance are included (to reflect the sector's long-term expenditure requirements) the overall shortfall amounted to K 6,304 million ($126 million), or 15 percent of the government's total current revenues. The shortfall was mainly attributable to ZA and ZR. These figures emphasize the urgent need to restructure selected transport agencies. The transport sector is now one of the country's main macro-economic problems and the government's stabilization program will only succeed if it includes actions to reduce !he above financial losses. The impact of the reforms proposed in this report suggest that the sector's overall cash shortfall could be reduced to 6 percent of total current revenues in FY92, through 4 percent in FY93 to I percent in FY94. When road maintenance shortfalls are included, the percentages amount to 11, 7 and 3 percent respectively. In other words, within three to five years, the transport sector could again be brought into balance with all road maintenance expenditures fully funded. 22. The government-owned transport sector accounts fbr 9.3 percent of the government's long-term external indebtedness and for 11.1 percent of project-related long-term debt. For a revenue-earning sector this is probably too high and more effort should be made to strengthen internal financing and domestic borrowing. External debts are mainly attnbutable to railways (the Tanzam railway being a large borrower), roads and air transport. The road sector has also benefitted from a large number of donor grants. Since these three agencies account for most of the sector's financial problems, the loans (and the covenants usually attached to them) have not been effective. Roads face a two-fold problem. First, donor-financed rehabilitation has become a substitute for regular road maintenance and, since much of the rehabilitation is being financed on a grant basis, there has been little need to raise road user charges. It might have been better to use the leverage of grant-financing to promote improved performance of railways and air transport, and to require roads to mobilize more of their own revenues by raising road user charges. I. INfRQUDlCQON 1 Zambia is land-locked with a surface area of about 750,000 sq km and a population of just under 8 million. The economy is dominated by the mining industry which is heavily dependent on external trade. The transport network comprises five distinct modes of transport: rail, road, civil aviation, inland water transport and pipeline. Rail and road are the most important modes, while air transport is significant for passenger traffic. The main transit routes rely on shipments through ports in Tanzania, South Africa, Zaire, Mozambique and Angola. Most external traffic is carried by rail, although road transport is becoming increasingly important. The railways concentrate on bulk traffic (coal, minerals and agricultural products), while road transport handles most intermediate and consumer goods. 2 The Ministry of Communications and Transport (MC&T) is responsible for overall transport policy and for supervision of transport enterprises. There is a small Planning Unit within MC&T which helps with this task. Operation and maintenance of main roads is under the jurisdiction of the Roads Department (RD) in the Ministry of Works and Supply (MWS), while other roads are under the jurisdiction of 9 urban and 48 rural District Councils (DCs), presendy under the Ministry of Local Government and Housing. Two transport enterprises are operated as joint ventures between the governments of Zambia and Tanzania. They include the Tanzania Zambia Railways Authority (Tazara) and Tazama Pipelines Ltd. (67 percent of which is owned by Zambia). A third joint venture, Africa Joint Air Services Ltd (AJAS), was also established to operate joint air services on behalf of Zambia, Tanzania and Uganda, although financing for this activity has been drastically reduced. Most other transport enterprises are operated under the jurisdiction of Zambia Industrial and Mining Corporation (Zimco), which acts as a holding company on behalf of the government. Traditionally, Zimco has chaired the Boards of these enterprises, set overall management policies and guided their long-term development. However, Zimco's role will soon diminish, since it is in the process of being restructured into an investment holding company providing a non-executive chairman and financial controls. 3 The road sector suffers from a number of systemic weaknesses which hamper effectivc performance. Uncertain lines of responsibility, weak institutional structures and under-funding are perennial problems. DCs are unsure which roads are their responsibility and !he legislative arrangements for financing maintenance of DC roads (which empower the Transport Minister to make grants and require owners of adjoining property to contribute to maintenance) are not being used. DCs are furthermore imostly too small to support an effective road maintenance organization. It would be better to group DCs into larger units and designate highway authorities responsible for a larger and more viable road network. Under-funding is also pervasive and affects both main and DC roads. There is now a substantial backlog of deferred maintenance. 4 It has proved difficult to operate the joint ventures on a commercial basis (Tazara, Tazama and AJAS). Joint ownership makes co-ordination and management difficult, and turns simple managerial decisions into elaborate exercises in international relations. Tazara is the largestjoint venture. It mainly serves Zambian transit traffic, although it is increasingly carrying local traffic in the southern part of Tanzania. The performance of Tazara, in terms of freight transported, improved significantly in 1987 and 1988 in spite of serious constraints on the availability of its locomotive fleet. However, a serious deterioration was noted in 1989 due to numerous accidents caused by relaxed operational practices. Cost recovery is poor and Tazara has been unable to meet its debt-service obligations and this has led to a restructuring of its capital. The government is currently exploring options for creating a separate management company to deal with Tazara's operations within Zambia. -2- S The enterprises under the jurisdiction of Zimco suffer from a number of problems. Zimco has not provided effective leadership and many of the transport enterprises are in a critical financial condition. Asset utilization is low, financial oversight is weak and. little attempt has been made to instil a sound commercial outlook, or to restructure the enterprises to improve performance. These disadvantages have been exacerbated by an unfriendly regulatory environment and by well-intentioned donor support which has inadvertently weakened competitive pressures. Public transport has been particularly affected. The regulatory framework imposes entry restrictions on urban bus operations, requires standardization of fares (hence preventing any form of service differentiation, including operation of scheduled services) and even requires all private vehicles to be painted green and white. Donor assistance - which has provided privileged access to foreign exchange for purchase of vehicles and spare parts, and has provided generous technical assistance - has helped public transport operators, but has done so at the expense of the private sector which has to survive without such assistance. The trucking industry is one of the few areas which does not suffer serious regulatory constraints. Entry and tariffs are effectively deregulated and there are nearly 1,000 trucks offering domestic haulage services (only 206 being government owned), supplemented by an estimated 1,600 foreign trucks offering intemational services to, from and through Zambia. 6 The unfriendly regulatory framework and the lack of clear policy directions emphasize the need to prepare a consistent sector strategy to guide future development of the sector. The proposed Infrastructure Engineering Credit, being prepared for possible inclusion in the Bank's FY93 operational program, would finance a series of detailed studies covering national transport policies, operation and maintenance of roads, management of government plant and equipment, and the potential for developing the local construction industry. Once these studies have been completed, they could be used as the basis for preparing a clear sector strategy to guide future development of the transport sector. -3 - II. PUBLIC EXPENDITURE REVIEW 7 This review examines the financial performance of the government-owned transport sector in Zambia and was undertaken as part of a national Public Expenditure Review (PER). The objective was to: (i) review the financial performance of each government-owned transport agency; (ii) identify the net impact of the sector on the government's overall fiscal balance; (iii) examine the scope for improving financial performance by increasing private sector involvement; (iv) review methods of financing roads and examine ways of placing such financing on a sound long-term basis; and (v) consider all other ways of strengthening financial performance. 8 The review took. for granted that: (i) government-owned transport agencies should be able to operate commercially without the need for net financial transfers from government; (ii) in principle, these agencies should make a net contribution to overall government revenues in the form of corporate taxes, profits (on government equity) and surpluses of government departments; (iii) government regulation should focus on safety, quality and reliability of service leaving the remaining service characteristics to be determined by the market place; and (iv) when government wishes transport agencies to undertake social service obligations, it should do so under transparent arrangements which compensate transport agencies for the financial costs of meeting these obligations. 9 A quick review reveals a sector in poor financial health. In FY91 it imposed a financial burden of about K 4,875 million ($9S million) on government in the form of direct grant requirements, overdrafts in government-owned banks, or government guaranteed short-term debts held by commercial banks. This is equivalent to 12 percent of the government's total current revenues (excluding grants). When shortfalls of regular road maintenance are included (i.e., when the figures include erosion of capital), the financial burden rises to K 6,565 million ($131 million). This is equivalent to 17 percent of the government's total current revenues. The estimates for FY92 are equally large. The financial burden is K 6,243 million ($52 million) without the maintenance shortfall and K 10,330 million ($86 million) when erosion of capital is included. Far from contributing to government revenues, these transport agencies are imposing a major drain on such revenues. This report examines the reasons for this poor performance and outlines an agenda for improving it. 10 For purposes of analysis, the government-owned transport agencies have been divided into four main groups. The first group includes the agencies accounting for the largest and most important financial problems (the Roads Department, Zambia Railways Ltd. and Zambia Airways Corporation Ltd.). The second group focuses on the road transport industry (Contract Haulage Ltd., United Bus Company of Zambia Ltd. and support for urban bus operations). The third group focuses on airports and other civil aviation activities (National Airports Corporation Ltd. and the Department of Civil Aviation). The final group includes the remaining miscellaneous transport agencies (Engineering Services Corporation Ltd., Mpulungu Harbor Corporation Ltd. and Zambia National Shipping Company Ltd.). Chapter m examines the agencies facing the most serious financial problems, chapter IV examines the road transport industry, chapter V examines airports and other civil aviation while chapter VI deals with miscellaneous transport enterprises. Chapter VII finally discusses the overall financial performance of the government- owned transport sector, emphasizes the need for radical te form and summarizes the implications of adopting the financial reforms recommended in chapters III through VI of this report. m. REVIEW OF AGENCIES WITH MAJOR PROBLEMS 11 Three agencies account for most of the deficits incurred by transport sector agencies and have the largest impact on the government's overall fiscal balance. They include the Roads Department (RD), Zambia Railways Ltd. (ZR) and Zambia Airways Corporation Ltd.(ZA). In FY91 and FY92 their losses amounted to K 4,268 million ($85 million) and K 4,911 million ($41 million) respectively (the losses consist of RD's revenue shortfall, ZR's government equity contributions and ZA's overdrafts and short-term loans) . The following sections examine each of the above agencies, identify th- causes of weak financial performance and outline ways to improve it. A. 'Mpg PRoads Sector 12 Zambia has a fairly extensive road network, although the density is low compared to other African countries. The spatial density is about 4 km per 100 sq. km (which is slightly below the average for Africa as a whole), while the population density is about 4 km per 1,000 population (which is about twice the average for Africa as a whole). The network includes 3,119 km of international trunk roads (T-roads), 4,048 km of main roads (M-roads), 23,882 km of district roads and 5,714 km of rural roads. Of this, about 2,979 km of T-roads, 2,008 km of M- roads and 1,489 km of district roads are paved. About 20,783 km fall under the jurisdiction of the central and provincial Roads Departments, while the zemaining 15,980 km are under the jurisdiction of 9 urban and 48 rural District Councils (see Table 1). It is estimated that the replacement costs of the road network are about $1.95 billion (i.e., the capital value of past investments, valued at current prices, less the backlog of deferred maintenance). Table 1s Lenath and Costs of Maintalnina Trunk. MaLn and District Roads (kas and $, million at FY92 prices) Trunk "T" Roads Main "MW Roads District Roads Rural Roads iwos of Road tab RD .DCQ . RD DC RD DC DC Road Lengtls: Paved 2,916 63 1,991 17 1,489 - Gravel - - 1,211 - 1,049 _ Earth - _ 612 - 5,487 - _ Unclassifled 140 _ 216 - .6.L70 10.186 5.714 Total Length 3.0S6 9 , 4031 13- 8696 10.186 5.1 Maintesance Costs$ lbb Paved 11.66 0.25 7.96 0.07 5.96 0.00 0.00 Gravel 0.00 0.00 1.21 0.00 1.05 0.00 0.00 Earth 0.00 0.00. 2.19 0.00 2.19 0.00 0.00 0.00 Unclassified 0.06 0.0Q 0.09 0Q.0 2.27 4.07 2.29 Total Costs 11.72 Q 9.51 07 11.47 4.07 2.29 Notes: (a) RD - roads under the jurisdiction of the Roads Department; DC Roads under the jurisdiction of District Councils. (b) Maintenance costs have been estimated as follows (average cost p.a.): Paved: routine $1,500; periodic $2,500. Gravel: hand work $150; grading $400; regraveling $450. Earth: hand work $100; grading $150; spot patch $150. Unclassified: same as earth. A. 1 Cufent Fnincn Arrangements 13 Expenditures on RD roads were unbalanced during the entire 1980s (see Table 2). Maintenance expenditures (essentially recurrent expenditures on "Purchase of Goods", together with maintenance by Provincial Roads Departnents) in FY86 were only K 19 million ($2.7 million), compared to project expenditures of K 224 million ($30.7 million). RD was thus spending nearly twelve times as much constructing new roads as it was maiaining tL. existing network. Maintenance expenditures thereafter increased until they reached K 305 million in FY91 ($6.1 million) compared to project expenditures of K 429 million ($8.6 million). Much- of the project expenditures were furthermore for rehabilitation, so that nearly all road spending now concentrates on maintaining and rehabilitatng the existing network. Budgeted allocations for maintenance in FY92 increased to K 587 million, but devaluation has reduced its real value to $4.9 million. Project expenditures for FY92, again almost entirely for rehabilitation, are budgeted at K 791 million ($6.6 million). -6 - Table 2. Central and Provlnda Roads Denartment: Revenues and Exesnditumr (Kwacba, miln) Revised Busins Estmatw Esmat as Usual Revised Item 1986 1987 1988 1989 1990 1991 1992 (a) 1992 Rovenue: Internadonal Trnsit Feo - - * 7.005 47.560 82.000 82.000 216.000 Fuel Charge (b) Gasoline - - - - - - 346.140 Diesel . - - - - - 320.320 M.V. Licensa 3.339 4.821 4.556 2.017 6.000 8.000 10.000 123.600 Road Toil Zaire Pedicle 0.358 0.106 0.027 0.678 0.255 0.300 0.350 0.3S0 Other - 6.495 0.026 0.048 - - Road Taffic Collections 0.845 .7_42 4.412 9.450 15.000 1S.000 .lS000 lS.000 Total Revenue 4.542 12.169 9.021 19.198 68.81S 10S.300 107.3S0 1021,410 Expenditutes: Personal Emoluments 13.685 1S.100 17.213 20.318 S.374 13.482 21.673 21.673 Recurent Expenses Allowances 0.180 0.520 0.640 0.840 1.657 8.000 13.510 13.510 Purchase of Goods 19.442 23.215 30.490 64.675 34.19S 224.001 479.264 479.264 Purchae of Sevices 0.28S 0.470 1.062 1.138 1.513 5.260 18.09S 18.095 Training 0.100 0.090 0.100 0.400 - - - CApita Expenditure Movable Asst - - - - - 2.000 90.000 2.000 Projects 222.543 175.06S 199.093 311.000 498.404 419.500 791.000 791.000 (c) Mechanical Services (30%) 13.046 7.485 ? ?- - - Road & Road Traffic Board 0.241 0.389 0.418 1.732 3.791 8.728 17.774 * 17.774 * Road Trtf Commissioners (d) 1.042 1.047 1.479 2.693 1S.898 23.110 39.983 * 39.983 Provincia Roads Dept. Admin & Overhead - - - - S3.796 171.995 229.298 * 229.298 * Maintenance (e) S4.730 81.293 108.377 * 108.377 * Projects (f) 1S49 1834 2 595 2.944 4.939 9.340 ? 0.0 Sub-Total 272.113 225.215 253.090 40S.740 674.297 966.709 1.808.974 120. Surplust(Deficit) (267.571) (213.046) (244.069) (386.542) (605.482) (861.409) (1,701.624) (699.564) Notes: (a) Busineu as Usual means 1992 Estimate without policy shif. Figures include actual project capital expenditure. (b) Excludes geneal revenue taxes. (c) Excludes capital expenditure on plant and equipment. (d) Includes expenditure of provincial traffic commissioner. (e) Maintnance of Provincl roads funded thrugh the Prime Ministers Office. Includes expenditures on fuel, spae past, maintenance matrials and cycle maintenancoe. (I) Ptoject expenditure on feeder roads and road maintenance camps funded under the Provincial HQ vote. * = Estimate. -7- 14 Mainienance expendicures are well below the levels needed to keep the road network in a stable long-term condition. This Is reflected in recent road condition surveys. In 1984 the proportion of the paved road network in good, fair and poor condition was 40, 30 and 30 percent respectively which was close to the average for East and Southern Africa as a whole. However, by 1990 these proportions had worsened to 20, 40 and 40 percent respectively. A rough calculation suggests that an optimal maintenance regime (i.e., one which minimizes the sum of vehicle operating costs and road maintenance costs) would involve annual expenditures on RD roads of about $33 million ($21 million for T & M roads and $12 million for district roads). Although these figures are not strictly comparable with RD expenditure estimates (which exclude the costs of administration and equipment), the differences between the two sets of figures are starding. Expenditures on T & M roads were K 224 million ($4.5 million) in FY91 and a mere K 479 million ($4.0 million) has been budgeted for FY92. Even if these figures were doubled to allow for the costs of administration and equipment, they would still be less than 40 percent of optimal requirements. The comparable figures for district roads are K 81 million ($1.6 million) and K 108 million ($0.9 million) respectively, which is only 10 #', 20 percent of optimal requirements. 15 The condition of DC roads is no better. Indeed, roads under the jurisdiction of rural DCs are often impassable during the rainy season and this has a serious effect on agricultural output. The urban DCs have a broader tax base and this is reflected in their spending patterns. As an example, selected financial data for Kabwe Urban DC are presented in Table 3. The table shows that urban DCs have a narrow tax base and rely heavily on transfers from central government. The only effective local taxes are rates levied on property and these are notoriously difficult to collect. Furthermore, although the new local government act proposes to give DCs additional taxation powers, they do not go beyond residential and commercial rates, and local sales taxes. Revenue mobilization at the DC level will therefore remain weak. The table also shows that Kabwe Urban DC spends about 13 to 14 percent of its income on maintenance of roads and drainage, but that this only covered about 20 percent of optimal requirements in FY90. Although budgeted allocations for FY91 would cover nearly 50 percent of requirements, the increased spending is almost entirely dependant on estimated increases in the claw-back on local sales taxes and increased profits from shops and liquor undertakings. -8 - Table 3. Revenues and Selected 3 ditur: Kabwe Urban DC (Kwachi, at 1991 prices) FY90 FY91 Approved Estimate Source gf Revenues: Local Taxes Rates 6,000,000 13,283,360 Personal Levy (head tax) 20000 5000 Sub-Total 14.233.360 Transfers From National Taxes Grant in lieu of Rates 389,890 358,400 Share of Local Sales Tax 8,94.760 42.941.450 Sub-Total 926A8.650 43.299.850 Other Net Revenue Interest 70,000 75,000 Low-Cost Housing (1,797,840) (3,596,087) Water & Sanitation Services (184,810) 2,335,789 Shops & Liquor Undertakings 340,430 8,864,346 Factories, Motels, etc. 4,21L,160 6.101.132 Sub-Total 2.645.940, 137280.180 Total District Revenues 18.83Z.U0I 71.313.390 Population 166,619 166,619 Local Taxes/Head 41 85 District Revenue/Head 1 ' 3 428 National Taxes/Head 2,626 4,730 District Revenue/National Taxes (%) 4.I 9.0 Selected Expenditures: Road Maintenance & Drainage Actual and Budgeted 2,395,286 9,765,758 As % of Total District Revenue 12.7 13.7 Desirable Level of Expenditure 11,600,000 20,000,000 Actual and Budgeted/Desirable (%) 20.6 48.8 -9 - 16 Inadequate allocations for maintenance have had three important effects. First, routine maintenance has effectively ceased and, even when funds are available, there is a chronic shortage of vehicles to transport laborers to where they are needed (vehicles are sometimes available, but get commandeered for other purposes). Most of the available funds are being used to carry out periodic maintenance on paved roads. As a result, the road network has deteriorated, vehicle operating costs have risen substantially (by two to three times the shortfall in maintenance allocations) and some rural roads have become impassable, particularly during the rainy season. It is estimated that about $250 million now needs to be spent rehabilitating paved roads and a further $150 million probably needs to be spent rehabilitating unpaved roads. In other words, about $400 million of public capital has been eroded through lack of maintenance (i.e., nearly 20 percent of the total capital invested in roads). These roads either need to be rehabilitated, or abandoned. 17 Second, road rehabilitation has become a substitute for regular road maintenance. Donor willingness to finance rehabilitation of roads (and in some cases even routine maintenance of these roads for a period of five years after rehabilitation) has avoided the need to put road maintenance on a sustainable financial basis. Roads are rehabilitated, receive little or no maintenance and after ten years again require rehabilitation. Third, lack of maintenance has eroded the physical capacity to plan, mobilize and undertake road maintenance. It has also destroyed the financial controls needed to ensure that allocations fcr maintenance are not diverted to other uses. The country's road maintenance capacity has withered away through disuse and now needs to be rebuilt. 18 One of the reasons for the acute shortage of finance, is that road users are paying negligible sums for use of the road network (see Table 2). License fees have not kept up with inflation and, more important, fuel taxes have been confined to a standard excise tax without any additional road user charge (gasoline is taxed at 30 percent and diesel at 28 percent).1/ The only significant source of revenues are the international transit fees introduced in FY89. The fees are payable in foreign exchange and started off at $60 per goods vehicle, but were increased in November 1989 to $120. The fees are collected on behalf of the government by British Petroleum Ltd. (BP) at centers in Lusaka, Kitwe, Livingstone and Chipata and are credited to the Ministry of Finance account at the Bank of Zambia. The arrangements for collecting these fees are vague. The funds are treated as miscellaneous revenue by the Ministry of Finance (instead of as road toll revenue) and there appears to be no arrangement for dealing with interest payments while funds await transfer to the Bank of Zambia (they sometimes wait 9 months before being transferred). 19 The international transit fee was replaced in June 1992 by the new Preferential Trade Area (PTA) harmonized road transit charge. The proposed charge is $8.00 per 100 km for heavy goods vehicles with more than 3 axles and $3.00 per 100 km for rigid goods vehicles without trailers. A typical international transit vehicle in Zambia has 6 axles and travels 800 km across Zambian territory and 900 km in adjoining countries. The new PTA charge for such vehicles would thus be $64, compared to the existing fee of $120. A Zambian vehicle, which has to pay to travel 900 km in the adjoining country, would pay a fee of $72. This represents a significant reduction over the existing fee level of .120 and PTA members are planning to meet in Maputo 1/ Officials at the Ministry of Finance confirmed that tax rates on transport fuels were designed as general taxes and did not include any element to reflect road user charges. - 10- to discuss ways of revising the fees. The current suggestion is that each country should be free to set its own fee level. A.2 Options for Reform 20 There is a clear need to put the financing of roads on a sustainable long-term basis. Routine maintenance has virtually ceased, periodic maintenance is well below the levels needed to keep the road network in a stable long-term condition, the capacity to undertake road maintenance has been seriously damaged and about 20 percent of the capital invested in roads has been eroded through lack of maintenance. These problems apply at both central and district government levels. At the same time, road users are paying next to nothing for use of the road network. User charges cover a mere 6 percent of annual expenditures on roads, with the balance of the revenues, over K 1,700 million ($14 millio)n) in FY92, coming from the government's scarce general revenues. 21 The task for the road sector is thus to: (i) mobilize sufficient revenues to ensure that the road network can be operated ana maintained on a sustainable basis; (ii) devise managemen; arrangements to ensure the funds allocated for maintenance are not confused with the government's general revenues and diverted to other purposes; (iii) revise arrangements for financing maintenance of DC roads; (iv) ensure that the capacity to undertake road maintenance is rebuilt and that effective procedures are put in place to control increased road maintenance expenditures; and (v) after resolving items (i) to (iii), develop a program to rehabilitate a core road network which the country can afford to maintain on a sustainable basis (there is no point rehabilitating roads which can not be maintained). A.2.1 Revenue MobilizatiQn 22 The government is seriously short of fiscal revenues and it is unrealistic to imagine that additional revenues for road maintenance could be allocated from the government's recurrent budget. Of necessity, the road sector needs to become more self-sufficient and will have to generate additional resources by raising road user charges. There are three charging instruments which could be used to mobilize these revenues: (i) international transit fees; (ii) vehicle license fees; and (iii) fuel charges. 23 The original international transit fee was $120 per goods vehicle and the new PTA agreement has lowered this to an average of $64 per vehicle. This is a large reduction and, for purposes of revenue mobilization, it is assumed that the proposed meeting in Maputo, which will discuss the suggestion that each country should set its own fee level, will enable Zambia to reinstate the original $120 fee. In FY90, transit fee revenue amounted to $1.64 million (all paid in foreign exchange) and this is expected to rise to $1.80 million in FY92 and $1.98 million in FY93. Since the fees are collected on an agency basis, BP needs to be paid a commission for collecting these fees. However, any interest earned on fee payments awaitirn transfer to the Bank of Zambia, should be treated as part of the fee income. The Ministry of Finrance should keep accurate records and not treat these fees as miscellaneous revenues. 24 Vehicle license fees have not been consistent'y adjusted for inflation and are low by regional standards. A large part of the vehicle fleet also appears to be unlicensed and uninsured (see Annex 1). It is therefore suggested that these fees be raised over a period of five years to levels similar to those in countries like Kenya and Uganda. This would raise average annual license fees for passenger cars from $21.00 to $75.00, for buses from an average of $37.50 to - 11 - $300.00 and for trucks from an average of $45.80 to $500.00. Provided all non-govrnment vehicles are licensed (i.e., the Administration and enforcoment of the license system i8 substandally improved), this would mobilizo about $1.03 mUUilon duri PY92 and $5.45 million In FY96 when the fllI fees were payable (see Table A.2). 25 In the case of fuel, the suggestion Is to add a supplementary road user charge to the price of gasoline and diesel fuel and agaia to introduce the increases over a period of five years. The charge for gasoline would rse from K 3 per liter in FY92 to K 13 per liter ln FY96 and this would raise the pump price r-r liter of premium gasoline from the present level of K 86 ($0.72) to K 89 ($0.74) in FY92 and to K 99 ($0.83) in FY96. iibe charge for diesel fuel would likewise rLse from K 2 per lter ln FY92 to K 10 per liter in FY96. This would raise the pump price per liter of diesel from the present level of K 49 ($0.41) to K 51 ($0.43) in FY92 and to K 59 ($0.49) in FY96. The build-up of these prices is sbown in Table 4. The new charges would generate K 666 million in FY92 and K 3,628 in FY96 ($S.6 million and $30.2 million respectively). Table 4. Build Up of Retal PUaO Prim of Fuel In LUka (Kwacba nd $ at Jan. 1992 prims) Premium Gasolin Rcguar Gasoline Diesel Kerosene K/cu m S/iter K/ou m S/iter K/lcum S/liter K/cum S/L;tcr Border Pice 37,320 0.31 37,320 0.31 34,668 0.29 34,740 0.29 implcit TaxI(Subuidy) 16,480 0.14 7,780 0.06 (5.36b) (0.04) (5,640) (0.05) Wholuale Prce 53,800 0.45 45,100 0.38 29,300 0.24 29,100 0.24 Excise Duty @30 % 16,140 0.13 13,530 0.11 @28% 8,204 0.07 i1s % - 4,365 0.04 Tenninal oFC 200 0.00 200 0.00 200 0.00 200 0.00 Transpot Coat a K1S.0 per km/cu m 4,665 0.04 4,665 0.04 4,665 0.04 4,665 0.04 Company Margin 0 7.5 % 5,610 0.05 4,762 0.04 3,178 0.03 2,875 0.02 Dealer's Marsin @ 7.5 % 6,031 0.05 5,119 0.04 3,416 0.03 3,090 0.03 Total 86,447 0.72 73,376 0.61 48,963 0.41 44,295 0.37 Pump Ptbc per lItr 86 0.72 73 0.61 49 0.41 44 0.37 PRice incing New Tax FY92 89 0.72 76 0.64 51 0.42 0.37 FYS6 99 0.83 86 0.72 59 0.49 0.37 Note: Exobahge rae used is K120 - $1.00. - 12 - 26 The above price increases would make Zambia a relatively high-price country for gasoline (which, as a land-locked country, it should be), while the price of diesel fuel would still be average by regional standards (see Table 5). In FY96, the price of gasoline would be similar to that in Rwanda and Zaire, while the price of diesel fuel would be lower than Malawi, but higher than Zimbabwe. Fuel prices would remain low in relation to West African countries like Ivory Coast, Chadl, Senegal and Niger. It would also be low compared to industrialized countries (where premium gasoline usually costs between $0.90 and $1.00 per liter, and diesel between $0.60 and $0.90 per liter). The proposed fuel charges would affect relative prices and create a large differential between the price of kerosene and gasoline/diesel. This would encourage vehicle operators to substitute kerosene for diesel fuel (there is always a temptation to do this when the price differential exceeds about $0.08 per liter) and encourage garage owners to mix kerosene with gasoline. Zambia fortunately colors its kerosene with blue dye and this should prevent mixing with gasoline. It is more difficult to discourage substitution of kerosene for diesel fuel and It is recommended that introduction of the new fuel charges be accompanied by increased enforcement (i.e., inspection of fuel tanks for blue coloration) to discourage substitution. Table 5. Prices of Gasoline and Diesel Fuel In Selected Countries (U.S. Cents at end 1991 prices) Fuel Price Fuel Price Country Gasoline Diesel Country Gasoline Diesel Tanzania 42 25 Zambia, FY92 72 41 Namibia 46 41 Zambia, FY96 80 47 Swaziland 46 41 Ghana 53 43 Zaire 81 73 Kenya 53 37 Rwarta 81 79 Burundi 63 61 Niger 94 81 Malawi 64 56 Ivory Coast 124 115 Cameroon 68 58 Zimbabwe 68 37 Germany 93 68 Botswana 68 61 U.K. 94 82 Uganda 69 55 France 99 64 Mozambique 74 26 Italv 124 95 27 The present tax rates applied to gasoline and diesel fuel result in gross tax rates of 19 and 18 percent respectively (the gross tax rate is the amount of tax divided by the final selling price). The above fuel charges would raise these gross tax rates to 30 and 32 percent respectively. The net customs and excise taxes applicable in Zambia are generally 15, 30 and 50 percent, depending on the type of commodity. If these were replaced by a broad-based commodity tax with a minimurm of exemptions (as recommended in the World Bank policy paper, Lessons of Tax Reform), the gross tax rate would probably be in the vicinity of 20 percent. In such a system, tax rate differentiation would be kept to a minimum and applied only to those items which justified higher rates on grounds of equity, or efficiency (i.e., where the item was known to have a low price elasticity of demand and Ramsey pricing suggested a higher rate in the interests of - 13 - minimizing overall welfare losses). Gasoline and diesel fuel fall Into this category and tax rates of 2 and even 3 times the standard rate are usually justified (because of the low price elasticity of demand for gasoline and diesel fuel). An optimal fuel tax would thus be in the vicinity of 40 to 50 percent, suggesting two things: (i) the proposed fuel charges would result in overall fuel taxes which were economically efficient; and (ii) the overall welfare losses due to taxation would be reduced if the taxes on gasoline and diesel fuel were raised even fiuther (from 30 and 32 percent to nearer 40 percent) and other tax rates were lowered accordingly. 28 Timely implementation of the above arrangements would have a significant impact on the road sector's financial balance. It would reduce she sector's overall FY92 Business As Usual (BAU) deficit from K 1,700 million ($14 million) to about K 700 million ($5.8 million), although there would still be a shortfall of regular road maintenance of about K 3,300 million ($28 million). However, the shortfall could be completely eliminated by FY96 (see Tables 2 and 6). Indeed, by FY96, the road account (excluding the Roads and Road Traffic Board and the Traffic Commissioners, but including expenditures on traffic police) could cover all maintenance requirements and run a current account surplus of nearly K 400 million ($3.2 million). This surplus represents the internal financing available to support rehabilitation of roads and would provide most of the local currency required to support a realistic road rehabilitation program. A.2.2 Management Arranyements 29 Roads are important national assets. Their replacement value (assuming about 25 percent of their value has already been eroded through lack of maintenance) is about $1.95 billion, of which $1.46 billion is managed by RD and $0.49 billion by the various DCs. Few other enterprises in Zambia manage assets of comparable size. The net asset value of the National Airports Corporation is $50 million, while the estimated replacement costs of Zambia Airways and Zambia Railways are $120 million and $400 million respectively. Roads are clearly big business in Zambia. RD is nevertheless still managed as a government department. It offers terms and conditions of employment which are unattractive to managers and technical staff, keeps accounts on a cash basis, has no balance sheet and simply writes off new investments as soon as they are made.. Expenditures are firthermore financed from general revenues allocated as part of the annual budgetary process. In other words, RD's financial accounts lack transparency. There is limited managerial accountability and no market discipline. Revenues and expenditures are de-linked, road user charges are not separated from other taxes and the government does not know how much road users are paying for use of the national road network. Such arrangements may be suitable for agencies managing few assets and handling small sums of money (e.g., like minor regional airports), but are not suitable for an agency with assets worth billions and managing (with road maintenance fully funded) an annual recurrent budget of $33 million and a capital budget of $15 million. Roads need to be managed in a more business-like way. 30 The suggestion is that RD should be commercialized and required to account for its activities along regular commercial lines subject to a hard budget constraint. Under such arrangements, RD might eventually become an autonomous Roads Board, owned by the government but managed by a Board made up of er offlio representatives of government (e.g., ministries of Works & Supply, Communications & Transport, Agriculture, Industry, etc.) and representatives of the road transport industry. The Roads Board would be expected to collect its own revenues through the international transit fees, license fees and fuel charges outlined in section A.2.1 above, or to cause them to be collected by others under a clear agency arrngement. International transit fees could continue to be collected by BP and fuel charges could be collected by Zinoil and credited to the Roads Board. Current arrangements for - 14 - collecting license fees also require revision. There is a great deal of evasion and the existing procedures administered by the Road Traffic Commission either need to be substantially Improved, or fees need to be collected by the proposed new Roads Board, which would have an incentive to minimize evasion. 31 The RoaAs Board would also be expected to prepare an income statement, a sources and application of ' jnds statement and to keep a balance sheet. The balance sheet should furthermore show the capital value of the national road network, the accumulated shortfalls of regular road maintenance (i.e., aggregate erosion of capital) and should write off road rehabilitation against this erosion. Cost accounting, in the form of performance budgeting, should be introduced to complement the commercial accounting systems to improve planning, execution and monitoring of road maintenance. An effective financial control system, supported by independent external auditing, should also be introduced to ensure that the substantial increase in funding envisaged under the above proposals are adequately accounted for. Finally, to further strengthen market discipline and promote more public involvement, fuel charges should be prominently displayed on all fuel pumps. The public needs to know what they are paying for roads to ensure they demand value for money and hold the Roads Board accountable for the efficiency of road spending. A.2.3 Maintenance of DC Roads 32 The above user charges would all be collected by (or on behalf of) the Roads Board. Some of the revenue would therefore represent charges for use of urban and rural DC roads and some mechanism would be needed to ensure these revenues reached the district level agencies responsible for maintaining DC roads. That does not mean all DC road expenditures should be financed from user charges. DC roads are mainly access roads (i.e., they include a lot of municipal streets and rural access roads), carrying low volumes of traffic and these roads are usually financed through a combination of central government grants, user charges and local property taxes. Part of the revenues collected at the national level nevertheless need to be remitted to DCs in the form of a block grant to support district road expenditures. 33 The example of Kabwe Urban DC showed that DCs have a narrow and relatively weak tax base (see Table 3). The urban DCs rely on property taxes and head taxes and, under the new local government act, may also start collecting local sales taxes. Rural DCs generally have a weaker property tax base (e.g., fewer commercial undertakings and less formal housing) and tax instruments which are more difficult to administer (e.g., taxes on movement of fish and agricultural produce). Kabwe Urban DC is allocating reasonable sums of district revenue to support spending on maintenance of roads and drainage. In spite of that, it is only meeting about 25 to 50 percent of requirements (the figure of 50 percent being an estimate which may not be realized in practice). Their tax base makes it unrealistic to imagine they could mobilize sufficient local revenues to meet all requirements or, if they did, that the funds would eventually be spent on maintenance of roads and drainage (rather than on other local expenditure programs). The local tax effbrt - at least in relation to DC roads - appears to be close to its limit. 34 The block grants made to support DC roads, may therefore bave to cover up to 50 percent of local maintenance requirements. This issue nevertheless needs to be examined in more detail, since some DCs are more solvent than others and introduction of a block grant system offers an ideal opportunity to encourage greater local tax effort. Table 6 has therefore assumed, for illustrative purposes, that the average grant amounts to about 30 percent of aggregate DC road maintenance requirements. Administrative arrangements for making such block grants would also have to cover: (i) preparation of a credible road maintenance program; (ii) assurances that funds would be spent on road maintenance (supported by appropriate technical and financial auditing procedures); and (iii) an agreed formula for estimating block grant entitlements (based on length and type of road, population and income levels). - 15 - Table, . Indicative Fnanuina Plan for Trunk. Main and Disrit Roads (a) (Kwacha, million, at FY92 prices) PY 92 FY93 FY94 FY95 FY96 Revenues: Internationa Tansit Fos (b) 216.00 237.60 261.36 287.50 316.25 Annual Licpnse Fees (c) 123.60 266.45 420.53 586.50 765.09 Fuel Carges (d) GasoHne 346.14 659.97 998.36 1,362.76 1,754.72 Diesel 320.32 666.27 1,039.37 1,441.27 1,873.65 Other 15.35 15.96 16.60 17.27 1.96 Total Revenues 1,021.41 1.846.25 2,736.22 3.695.29 4.727.65 Admnitradion (f) 55.28 57.49 59.79 62.18 64.67 Maintenance of T & M Roads Paved (g) ) 517.97 988.85 1,600.99 2,354.40 Gravel ) 479.26 58.08 87.12 116.16 145.20 Eabth ) 11.52 17.28 23.04 28.80 Unclasified ) 7.20 10.80 14.40 18.00 Maintenance of District Roads Paved ) 286.08 429.12 572.16 715.20 Gravel ) 108.38 50.40 75.60 100.80 126.00 Earth ) 105.12 157.68 210.24 262.80 Unclassified ) 108.96 163.44 217.92 272.40 Contib to Distict Roads (h) 96.19 144.29 192.38 240.48 Traffic Police (i) - 10037 104.39 108.56 112.91 Total Expenditures 642.92 1399.38 2.238.35 3.218.84 4.340.85 Profit/(LOss) 378.49 446.87 497.87 476.4S 386.80 Percntgo of Maintenance - 0.40 0.60 0.80 1.00 Financed Notes: (a) Tmffic is assumed to grow at 4 percent p.a. Maintenance requibments are assumed to remain constant. (b) Based on cuurent toi revenue increasing at 10 pect p.a. (c) Fes rise from $1.7 to $S for motorcycles, from $21 to $75 for cam, from an average of $37.5 to $300 for buses, fiom $16.7 to $125 for vans and from $45.8 to $500 for tucks over the five year period. (d) The gasolin charge rises from to K 2 to K 13 per liter and diesel from K 2 to K 10 over the period. The revenue estimates are based on 1989 fuel sales. (e) Ie maintenance requiments based on $4,000 per hn for paved roads, $1,000 for gravel roads and $400 for earth and unclassified roads. (f) Based on esdmated 1991 budgeted expenditures an Personal Emoluments. Allowances, Purcas of Servicoes and Moveable Assets. (g) Length of road under maintenance increases from 3,500 to 6,396 km during the period; the romainder of the paved rads are being rebabilitated. (h) This asumes that centl goverment meets 30 percent of the ideal mainteance costs of District Council roads by FY96. (i) Based on 15 percent of Police HQ budgeted costs. - 16- A.2.4 RoaVMaintenance Capacity 35 The technical capacity to undertake road maintenance also needs to be rebuilt. The process nevertheless needs to bear in mind the following factors. First, RD has had difficulty managing and maintaining road maintenance equipment. Maintenance arrangements with the former Mechanical Services Department (MSD) were not satisfactory and RD does not employ ESCO to maintain its mechanical equipment. As a result, repair and maintenance of equipment is problematic and RD also has difficulty recruiting and retaining qualified heavy equipment operators. The difficulties experienced with the Bank's previous highway project were largely due to problems with mechanical equipment. The equipment and spare parts were procured, but the re-equipped resealing and re-graveling units remained idle for much of the time, due to inadequate budget allocations, and little road maintenance was undertaken. Second, RD finds it almost impossible to recruit and retain qualified engineering and technical staff and has to rely on technical staff financed by foreign donors (about half the authorized technical staff positions are vacant and many are under-filled). Third, world-wide experience has demonstrated that most road maintenance activities can be sub-contracted, that this improves quality and can reduce costs by as much as 10 to 20 percent (when force account work is fully costed). Fourth, Zambia appears to have a number of competent local consulting engineers (who are continually losing qualified local engineers to firms in Botswana) and there are a number of local civil works contractors capable of undertaking road maintenance work. 36 One way to rebuild road maintenance capacity is thus by involving the private sector. Local consultants (strengthened, as necessary, through existing associations with foreigT. partners) could be used to prepare bid documents, issue and evaluate tenders and supervise the ensuing maintenance work. Local contractors are likewise capable of undertaking most types of maintenance, provided it is appropriately packaged to suit their physical and financial capacity. It is therefore suggested that sub-contracting work to the private sector should become the main instrument for rebuilding road maintenance capacity. 37 In rural areas, it is suggested that maintenance of gravel and earth roads under the jurisdiction of RD be undertaken by way of individual labor sub-contracts (i.e., through the lengthman system). These are labor contracts under which rural residents are given short sections of road (usually about 5 km) to maintain by hand with a minimum of hand toels. The work includes vegetation control, clearing drains and filling potholes and can usually be planned to avoid conflict with the demands for agricultural labor. The role of RD would be confined to supervision, providing hand tools (usually leased to laborers) and paying for work completed. The lengthman system has many advantages. The main ones are that it provides a welcome form of income support to rural areas (particularly for female household heads), the labor does not have to rely on motorized transport to site (the lengthmen either live near the road, or can get there by bicycle) and, since the lengthmen are maintaining roads they themselves use, they have a strong incentive to keep them in good condition. 38 Sub-ontracting would also change the role of RD. Under this scenario, RD would become a more specialized agency, with a smaller and better paid staff. They would primarily be planners, facilitators and paymasters. They would plan all road expenditures, recruit private sector consultants, select contractors based on the consultants' bid evaluations and disburse fimds after work had been satisfactorily completed. They may also need to undertake emergency maintenance and some routine maintenance on paved roads. RD would need to retain the capacity to undertake such work. Any labor made redundant through the proposed reorganization of RD would furthermore have to be voluntarily transferred to private contractors undertaking - 17 - road maintenance, or otherwise compensated through introduction of a formal labor redundancy scheme. A.2.5 Roaneabltd 39 There is currently a large backiog of road maintenance which needs to be made good. Total requirements are in the vicinity of $500 million, of which $243 million relates to rehabilitadon of 3,054 km of paved :3ads. RD has prepared a program for rehabilitating these roads (and constructing some new ones). It envisages development expenditures rising from K 1,432 million in FY91 ($29 million with a 73 percent foreign exchange content), through K 6,727 million in FY92 ($56 million) and K 7,576 million in FY93 ($63 million), to K 5,700 million in FY94 ($48 million with a 90 percent foreign exchange content). These proposals are unrealistic and the revised FY91 and FY92 estimates instead budget for K 420 million and K 1,098 million respectively, excluding projects financed through provincial roads departments (see Table 7). The final program, as amended by the FY91 and FY92 budget discussions, furfther reduced the FY93 approved budget allocation to K 791 million. Fm-~~~~~~~-8 __AL AL 2h2. L _& _& 221 Q1 ML A L DcAiaa 8so-Wyatc ow .0 0.0 8.0 40.0 0.0 40.0 40.0 0.0 40.0 40.0 0.0 40.0 Soiwa.CdMWWBMua 83.0 0.3 100.0 80.0 0.8 176.0 220.0 0.0 220.0 250.0 0.0 250.0 4UWMadw Didge 3.0 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Lusaka-Kaomas (CHI) 20.0 1.2 80.0 350.0 0.0 350.0 300.0 0.0 300.0 300.0 0.0 300.0 Mm- *wo ea kuomp(ITA) 10.0 0.0 10.0 50.0 0.0 50.0 0.0 0.0 0.0 0.0 0.0 0.0 KCaUe4MisUmdiU (ULAID) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 tdeZobc (KM) 2 T.0 2.7 157.5 54.0 0.6 130.8 60.0 1.5 240.0 60.0 1.0 180.0 BtidgoWogka 9.0 0.0 9.0 10.0 0.0 10.0 0.0 5.0 600.0 0.0 5.0 600.0 Qu"(ROM110) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Cbo.a.Naawaa 10.0 0.0 10.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 XafOeMOaa (Pb. 1) o(ORAD) 0.0 0.0 0.0 10.0 0.4 56.0 20.0 6.0 740.0 20.0 6.0 740.0 Eapiri..aiol(DANJDA) 0.0 0.0 0.0 10.0 0.4 53.2 15.0 10.0 1,215.0 20.0 6.0 740.0 Luaak.Ktw 0.0 0.0 0.0 10.0 0.4 53.2 66.0 10.0 1,26.0 66.0 10.0 1,26.0 PI"e. & Eis 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 LuaasKbwo (u C 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1 eaiwLuuks (UMAD) 0.0 0.0 0.0 40.0 0.2 68. 20.0 12.0 1Q460.0 20.0 6.0 740.0 LCw BMa. (JAPAN) 0.0 0.0 0.0 10.0 0.2 38.8 20.0 4.0 500.0 20.0 0.5 80.0 Livinguow.smboeb 30.0 0.2 40.0 40.0 0.0 40.0 50.0 0.0 50.0 60.0 0.0 60.0 LuRkd(Up S 0.0 0.0 0.0 10.0 0.2 29.2 20.0 8.5 1,040.0 20.0 8.0 980.0 (DANIDA+ADD) Road-Mainnance audy(ADD) 0.0 0.0 0.0 0.0 0.0 0.0 6 0 7 7 I O cbd Awio (ADD) .0 0.0 . 0.0 0.0 0.0 QO 7 --I --o s SubTtda Roash 00 00 Q 0 0 .0 0L. 07.0 70671.0 06.0 EL S.0.0 aCtchtgaao Mirs 0.0 0.0 0.0 3.0 0.4 45.0 3.Q 0.4 45.5 3.5 0.4 40.5 X . Railway 4l D) 0.0 ~ 0.0* g. 1. 0.4 88.0 20,0 60 320.0 20.0 LO 170 0 Sub-Total Od0 E.0 0, 0.0. 10. 0.4 2 66.0 10.0 1,. 66L 10.0 1,26. TOTAL ONGOING ML .. g~ ZtL 52 59.7- MI 929.5 43.9 6.91. B.Railways Railway P. Radio 0.0 0.0 0.0 0.0 0.0 0.0 2.5 0.5 62. 0.0 0.0 0.0 Loo Rebabiittio 0.0 0.0 0.0 0.0 0.0 0.0 18.8 49.0 5,898.8 0.0 0.0 0.0 Track2.pair& Uppadla 0.0 0.0 0.0 0.0 0.0 0.0 140.6 3.7 584.6 140.6 3.7 584.6 siwan-VLuhTck Ro( waS 0.0 0.0 0.0 0.0 0.0 0.0 532.5 12.3 2,008.5 0.0 0.0 0.0 Raiway Wodahop oqoipmooa 0.0 0.0 0.0 0.0 0.0 0.0 1.3 1.0 121.3 2.5 2.0 242.5 allat Qiuavia 0.0 0.0 0.0 0.0 0.0 0.0 3.0 3.9 49.0 30.0 3.9 40.0 jaLe Railway ipdM 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0. 60.0 37.S 5.4 680. 1iisdMd &GCutTt1aD 0.0 0.0 0.0 0.0 0.0 0.0 0.5 0.2 24.5 2.0 1.1 134.0 rtck Maint po 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.4 42.0 7.5 1.6 19.5 UaiRiflo 1ML gL L 40 i 8S.0 8. 24. 320.0 a 10 -1.0 TOR gL OMA 2Al 1.. 31. ZL nL 4.21-7 1233L. 95.7 2439 19 NAi.m AiPsa 10.0 1.0 60.0 48.0 2.4 336.0 48.0 2.4 336.0 48.0 2.4 336.0 Dept of Civil Aviation 3L AL AL 22&. AL lL 22& AL ILL- 1290 ELo .1 Sub-ToialAvistion Ia& LA. .. fZ± 14. M&A flL 14. lLe& IlL 14. Mg TOTAL k.W PROMCTO 0. 0L L a0.0 QO Q 14. 74.7 5S74.6 14.6 37 S. GRAND TOTAL 282.0 6.2 0.5 80.5 .0 1QO 1,759.6 134.3 17,879.2 126.6 64.0 8,90. - 19- 40 The main constraints on the size of the rehabilitation program are: (i) RDs implementation capacity; and (ii) the availability of government local currency contributions. A pragmatic rule- of-thumb for local currency contributions is that they should be able to finance about 20 percent of project costs, leaving the remaining 80 percent to be financed through donor-financed foreign exchange. In other words, if local currency contributions are limited to between K 400 million and K 500 million (see Profit/(Loss) figures in Table 6), the overall development program should be limited to between K 2,000 million and K 2,500 million ($16.7 million and $20.8 million). Applying this criterion to the ongoing and new projects proposed in the FY91-94 development budget, shows that the proposed FY93 and FY94 programs are still too large. They are at least twice the size of the program affordable under the financing plan outlined in Table 6. On the other hand, the program for FY92 could be marginally increased if the proposed financial reforms (higher license fees and a supplementary fuel charge) are quickly introduced. 41 In the long term the intention should be to make main roads self-financing. Once the existing maintenance backlog has been cleared, RD should attempt to be financially self- sufficient. New investment should then be financed through retained earnings and borrowing (probably from the government) and user charges should be set to generate sufficient net revenues to cover operation and maintenance expenditures, part of the investment program and sufficient revenues to service the long-term loans required to finance the balance of the investment program. A.3 Conclusions 42 It is suggested that the government consider taking the following steps to put the road sector on a sound financial basis: (i) Attempt to persuade the PTA to allow each country to set its own transit fees and, when that has been agreed, reinstate the original $120 fee for heavy vehicles with more than 3 axles. (ii) The revenue from international transit fees should be recorded in the Ministry of Finance accounts as toll revenue and there should be a clear agency agreement with BP covering agency fees i a:rrangements for dealing with interest earned while fee revenue is awaiting transfer to the Bank of Zambia. (iii) The government should raise vehicle license fees over the next five years to K 9,000 for a car, K 36,000 for a bus and K 60,000 for a truck (all at 1992 prices) and introduce a supplementary fuel charge to support spending on roads (eventually adding K 13 per liter to the price of gasoline and K 10 per liter to the price of diesel fuel). The increases should be introduced as part of a five-year package intended to improve the financing of roads. (iv) The government should seriously consider commnercializing RD and requiring it to account for its activities along regular commercial lines. Among other things, this would involve creation of an autonomous Roads Board, explicit linking of revenues and expenditures and introduction of a hard budget constraint. (v) The government should start a dialogue with DCs with a view to agreeing on ways to revise the financing of district roads. The dialogue would have to cover arrangements for making block grants, their size and the nature of the allocation formula to be applied to each DC, the scope for encouraging greater local tax effort, and arrangements for technical and financial auditing of the ensuing road maintenance programs. (vi) The government should take steps to rebuild the country's road maintenance capacity. It is suggested that this be done through maximum involvement of the private sector. Local - 20 - consultants should be used for preparation and supervision of works, and local contractors could be used to implement the civil works. In rural areas, lengthman sub-contractors should also be considered. RD could then evolve into a more specialized agency concentrating on the planning and financing of roads. (vii) Finally, a road rehabilitation program needs to be developed to make up for past shortfalls in regular road maintenance. The size of the program will be constrained by the availability of government local currency contributions. The financing plan presented in section A.2.2 would support a development program of between K 2,000 million and K 2,500 million and it is suggested that the proposed development program for FY93-94 be adjusted in line with this constraint. (viii) In the long-term, RD should aim to be financially self-sufficient and, once the existing backlog of road maintenance has been made gooa, should aim to finance all investments through internally generated funds and long-term loans. B. Zambia Railways 43 Zambia Railways Ltd. (ZR) employs 8,500 staff, operates 1,888 km of track and carries about 4 million tonnes of freight and 100,000 passengers per year. About a quarter of the freight traffic is domestic, another quarter is transit traffic and the remainder is international traffic. Traffic has fallen steadily in recent years. Freight traffic hovered around 4.4 to 4.8 million tonnes p.a. from 1980/81 until 1987/88, rose briefly to 4.9 million tonnes in 1988/89, fell to 4.2 million tonnes in 1989/90 and fell again in 1990/91 to 3.4 million tonnes. Traffic during 1991/92 is expected to fall even further to 3.1 million tonnes. Although loss of traffic is partly attributable to economic factors, it is also due to deteriorating service quality (see next paragraph). Passenger traffic has also fallen sharply in recent years. In 1988/89 ZR carried 2.2 million passengers, but this fell to 1.2 million in 1989/90 and to 0.8 million in 1990/91. The decline in passenger traffic is likely to continue, sir_; i. now faces stiff competition from high quality inter-city bus services on virtually all routes. 44 ZR's operational performance is poor and getting worse (see Annex 2, page 1). The target for locomotive availability is 75 percent, but actual availability has declined consistently from 63 percent in 1986 to 43 percent in 1991. As a result, ZA has had to hire locomotives from South African Transport Services (SATS) now known as Spoornet (25 in 1989, 22 in 1990 and 13 in 1991). Wagon turnaround times have also deteriorated. Between 1988 and 1991 turnaround times increased from 14 to 17 days (domestic freight), from 4 to 12 days (mineral traffic) and from 4 to 6 days (transit traffic). These poor turnaround times have a direct impact on rolling stock requirements; a turnaround time of 12 days requires three times as many wagons as one of 4 days. Most other productivity indicators were either stagnant or got worse. The figures are furthermore well below the company's own modest targets. B. 1 Current Financial Performance 45 The company's financial performance has deteriorated in recent years (see Annex 2). Net profits were positive in 1987/88, but have been negative ever since. Losses in 1990/91 reached K 440 million ($15 million). However, the real bottom line is much worse. There are four main factors which distort the bottom line. First, the corporation stopped servicing its debt in 1986/87 and only made a token interest payment of K 225 million ($8 million) in 1990/91 (at 10/31/91 total interest due for the year was K 491 million and principal due would have required an additional cash payment of K 237 million). Second, depreciation provisions between 1986/87 and - 21 - 1989/90 fell from nearly 7 percent of total fixed assets to less than 2.5 percent. Third, the assets have not been re-valued and the value appearing in the accounts in 1990/91, K 2,724 million ($94 miliion), is well below the estimated replacement costs of these assets (over $400 million). Finally, ZR is living off its assets (i.e., it is not spending enough to keep its assets in a stable long-term condition). As a consequence of that, ZR will need to make substantial expenditures in future years to restore these assets, or acquire new ones as the deteriorated assets reach a premature end. 46 In spite of the above, internal sources of funds were negative in 1989/90 and ZA had to cover the shortfall (and finance its other requirements) through government grants and equity infusions of K 169 million ($13 million) and increase its accounts payable by K 939 million ($73 million). In 1990/91, accounts payable dropped by K 809 million ($28 million), but this required government grants and equity contributions of K 2,347 million ($81 million). ZR's Corporate Plan expects these shortfalls to continue requiring further infusions of equity and long-term loans. On a tentative basis, it is estimated that ZR will continue to require government equity contributions of about K 1,500 million ($30 million) in 1990/91 and K 2,000 million ($17 million) in 1991/92. 47 To address the above problems ZR has prepared a Ten Year Development Plan (TYDP) to enable the corporation"to execute its duties in a cost-effective manner". The TYDP and ZR's Corporate Plan (1991/92-1995/96) and Business Plan (1991/92) show little recognition of the company's serious financial position and do not face up to the difficult issues which have to be overcome if the corporation is to survive. Instead, they deal in generalities and focus on peripheral issues like establishment of quarries, manufacturing concrete sleepers and developing parcels traffic. The traffic forecasts and operational targets are unrealistic. Even though ZR is currently incurring losses, the TYDP projects internal financing of $123 million over the ten year period. With unpaid debts in 1990/91 of K 677 million ($23 million) and a required government equity contribution of K 2,347 million ($81 million), the projections are not realistic. 48 The TYDP likewise places too much emphasis on procuring new items of equipment without clear arrangements for overhauling and maintaining them ox, in the case of passenger coaches, any idea of their value to the rail business. For example, the TYDP recommends adding 26 new locomotives to the existing fleet of 71 when: (i) a recent study has shown that, with efficient operation and reasonable utilization levels, the corporation requires no more than 35 locomotives; and (ii) the corporation does not have the capacity to overhaul and maintain its existing fleet, let alone maintain any additions to the fleet. The TYDP also proposes to spend $31 million purchasing 52 new passenger coaches (with priority I-El out of IV) for a business sectQr with a turnover in 1990/91 of K 83 million ($2.9 million) which is rapidly declining. Such investments would not be cost-effective. B.2 QOtions for Reform 49 ZR currently imposes a major drain, both directly and indirectly, on the government's overall fiscal revenues. Given the poor financial performance of the corporation - and the plans embodied in the TYDP and other documents - the situation is unlikely to improve. The corporation's performance will only improve if it is radically restructured and low priority projects like the new Chipata-Mchinji rail line to Malawi are canceled, or postponed. There are at least five issues requiring immediate attention. ZR needs to: (i) improve its accounts to ensure they present an accurate and unbiased picture of the corporation's financial health; (ii) focus on its core business as a freight railway; (iii) reform current arrangements for overhauling and - 22 - maintaining locomotives and rolling stock; (iv) improve operational efficiency and reduce surplus labor; and (v) rehabilitate high priority sections of track in a cost-effective manner. 50 One of the first tasks should be to improve the corporation's accounts. Among other things, this means accounting properly for debts, revaluing assets, making adequate provisions for depreciation and ensuring that maintenance expenditures are high enough to prevent erosion of capital. Simply stated, to maintain the value of the equity invested in ZR (i.e., to avoid de- capitalization of assets), the corporation needs to generate sufficient gross cash flow (working profit plus depreciation) to service debts and replace assets. A rough calculation suggests it needs to generate about $23 million per year, rather than its present negative cash flow, to achieve this target. Furthermore, to earn 10 percent return on equity investment, ZR would have to earn an additional $30 million per year. 51 The second need is for the corporation to focus on its core business. Some of the activities in which it is presently involved (operation of a pre-cast concrete factory), or actively attempting to become involved (operation of stone quarries and the parcels business), are not commercially sound. The pre-cast concrete factory is operating well below capacity, has concentrated unduly on manufacture of railway sleepers and will be wholly redundant if it is eventually decided to switch from concrete to steel sleepers. ZR likewise has no comparative advantage in operating quarries and should leave such activities to the private sector. The same applies, though to a lesser extent, to the parcels business. Most railways are trying to get out of the parcels business and ZR should only develop this business (if at all) in conjunction with private sector interests. Finally, there is the issue of ZR's passenger services. Traffic is declining, passenger revenue accounts for a mere 2.5 percent of total income and passenger operations appear to require large cross-subsidies from the freight business. Current passenger services therefore need to be restructured to make them profitable (if that is feasible), terminated when existing equipment is worn out (as should be done with the Mulobezi line instead of spending $5.3 million rehabilitating it), or continued as loss-making services operated under an explicit Passenger Service Obligation (PSO) grant paid by the government. 52 Arrangements for overhauling and maintaining locomotives and rolling stock also need to be reformed. Low locomotive availability is partly related to poor performance of ZR's workshops. In 1989 locomotives overhauled by the workshops were still only achieving an average of just over 6,000 km between failures. The poor performance of ZR's workshops is furthermore not attributable to inadequate workshop facilities. The workshops are well-endowed with buildings and equipment financed under Canadian bilateral aid and the Bank's first two railway projects. They nevertheless appear to be poorly managed, cannot recruit sufficient qualified mechanics and their equipment is consequently under-used, or used to carry out work for third parties. The problems they face are deep-seated and are unlikely to be solved through provision of technical assistance or, as suggested in the TYDP, provision of additional expensive equipment. Instead, ZR should consider getting out of overhaul and maintenance of locomotives and rolling stock and concentrate on operation of running sheds only. Overhaul and maintenance could then be done on a contractual basis by a third party (based either on privatization of the existing workshops, or railway workshops in Zimbabwe or South Africa), or locomotives could be leased from a third party leaving the third party with responsibility for their overhaul and maintenance. 53 The above reforms need to be complemented by strenuous efforts to improve utilization of rolling stock to avoid the need for costly hiring from Spoornet and purchase of new Canadian locomotives. A recent review of ZR's operations shows that, with feasible improvements in - 23 - locomotive availability and utilization (even under current track conditions), no locomotive hires are necessary. The same applies to wagons. With improved performance, no hires are necessary and there may even be a large surplus of wagons. Other cost-saving measures are also feasible. Costs could be reduced through tighter operations (saving fuel and crew costs by running full trains and improving rostering), improved planning and monitoring of operations and introduction of a formal labor redundancy scheme to reduce surplus staff. Finally, there is a need to rehabilitate priority segments of track. This should concentrate on relieving restrictions on sections of track carrying the highest volumes of freight traffic and generally facilitating the expeditious movement of freight. As far as possible, the work should be done by sub-contractors to ensure it is cost-effective and carried out according to specification. 54 The government's original development budget for FY92 included K 3,751 million ($31.3 million) to support ZR's TYDP. Subsequent revisions reduced this allocation to zero (see Table 7). The above review questions the need for much of the investment included in the TYDP and supports this action. Instead, it is recommended that the development plan include a provision of K 300 million ($2.5 million) during FY92 to cover the expected costs of technical assistance to support the restructuring program, together with further provisions of K 2,440 million ($12.0 million) in FY93 and FY94 to support later stages of the program once the key elements of the restructuring program have been agreed. B.3 Conclusions 55 ZR's financial performance is poor and getting worse. It imposes a large and unwelcome drain on the government's overall fiscal revenues. Without major restruct.ring the present situation is likely to get worse. The main elements of a restructuring program should include the following: (i) Reform of the corporation's accounts to ensure they present an accurate picture of ZR's overall financial health. ZR currently has a negative cash flow. This needs to increase to an estimated $23 million per year to ensure ZR can service its debts and replace assets. To earn a reasonable return on equity, the figure would have to increase by a further $30 million per year. (ii) ZR needs to concentrate on its core business as a freight railway. Among other things, this means staying away from operation of pre-cast concrete factories, quarries and the parcels business (unless the latter is done in conjunction with a private sector partner). It also means reviewing the future of ZR's passenger business and either reducing services, or operating them at a loss under a specific PSO grant financed by the government. (iii) ZR's workshops, though well equipped, are not functioning satisfactorily. It is suggested that ZR get out of operating workshops and sub-contract overhaul and maintenance of rolling stock to a third party. Alternatively, it may simply wish to lease locomotives and rolling stock from a third party, leaving the third party with responsibility for ownership and maintenance. (iv) Every effort should be made to improve operational performance to avoid having to hire locomotives and rolling stock. Costs could also be reduced through tighter operations, improved planning and monitoring and reducing surplus labor. (v) There is a need to rehabilitate priority sections of track to reduce speed restrictions and facilitate provision of improved freight services. (vi) There is no justificatioin for the government's development plan to support ZR's TYDP. It is recommended that a provision of K 300 million be made during FY92 to cover the costs of technical assistance to support preparation of a restructuring program, followed by -24 - provisions of K 1,440 in FY93 and FY94 to support initial implementation of the restructuring program. C. Zambig Airwavs 56 Zambia Airways Corporation Ltd. (ZA) is the national carrier of Zambia. It operates six passenger aircraft (one leased DC-10, one leased and one owned B-737, one Presidential DC-8 also used for scheduled services, and two owned ATR-42 commuter aircraft used for domestic services) and one leased B-757 cargo aircraft operated through a wholly-owned subsidiary, National Air Charters Ltd. ZA also owns a small tour business, Africa Bound Ltd, which is registered in the U.K. The airline operates inter-continental, regional and domestic air services and is the largest (in terms of traffic carried) of the five airlines which operate inter-continental services and belong to the South Africa Development Coordination Conference (SADCC). It earns about 10 percent of its revenue from freight and mail, down from nearly 20 percent in the mid-1980s. Since Africa Bound was not considered effective (selling too many heavily discounted tickets), it was decided to liquidate the company as of 31 December 1991. 57 ZA carries about 360,000 passengers per year (see Table 8). Tourists are the major passenger group and account for about 70 percent of traffic. There are about 100,000 inter- continental passengers (nearly 80 percent on the London, Rome and Frankfurt sectors, most of the remainder being on the Bombay sector and a few on the Jeddah sector), 110,000 regional passengers (about 50 percent on the Johannesburg and Harare sectors, a reasonable number on the Nairobi sector and a few on the remaining sectors) and 150,000 domestic passengers (mainly on sectors to Livingstone, Mfuwe, Ndola and Chipata). Inter-continental services to New York and Cyprus have recently been withdrawn, and so have some regional routes serving Zaire, Gaborone and Blantyre. - 25 - Table 8. Passengers on Intercontinental. kg lonal and Domestic Services (Number) Sector 1988/89 1989/90 1990/91 Status Inter-Continental Lusaka-London 37,589 44,428 42,875 Lusaka-Rome 14,646 13,102 9,804 Lusaka-Frankfurt 5,532 3,760 9,271 Lusaka-New York 8,206 11,450 14,632 (Discontinued) Monrovia-New York 2,882 6,054 - (Discontinued) Lusaka-Bombay 13,419 13,788 16,243 Lusaka-Larnaca 4,801 2,611 2,125 (Discontinued) Larnaca-Rome 1,684 - - (Discontinued) Lusaka-Jeddah 261 1,098 1,123 Sub-Total 89,020 96,291 96,073 Regional Lusaka-Monrovia 1,326 2,796 1,228 (Discontinued) Lusaka-Johannesburg 26,735 29,979 34,187 Lusaka-Harare 25,140 24,141 24,521 Lusaka-Nairobi 13,876 14,034 17,386 Lusaka-Mauritius 8,159 8,233 6,913 Lusaka-Dar-Es-Salaam 3,221 2,774 3,104 Lusaka-Lilongwe 4,748 6,137 6,557 Lusaka-Manzin 3,134 3,593 5,984 Lusaka-Gaborone 5,387 6,958 6,415 Lusaka-Lubumbashi 768 2,578 2,418 Ndala-Lubumbashi 164 - - (Discontinued) Manzini-Gaborone 147 - - (Discontinued) Lusaka-Blantyre 220 - - (Discontinued) Lusaka-Windhoek - 3,874 7,005 Lusaka-Entebbe - 178 2,211 Sub-Total 95,025 105,275 117,929 Pomestic Lusaka-Ndola 104,116 101,200 98,855 Lusaka-Kitwe 2,226 1,047 650 Lusaka-Livingstone 19,727 19,920 23,098 Lusaka-Chipata 4;907 7,606 6,247 Lusaka-Mfuwe 13,773 13,045 12,721 Other 14,422 19,023 10,544 Sub-Total 159,171 161,841 152,115 Grand Total 343,216 363,407 366,117 -26- 58 The airline employs about 2,300 staff (including staff in the a'rline, air freight business and tour business) and is over-staffed. Airlines generally employ about 150 to 200 staff per aircraft and, with seven aircraft in service, this means ZA should not employ more than 1,000 to 1,500 staff. With 2,300 staff, it is therefore clearly over-staffed and, although remuneration is ')w relative to other expenses, over-staffing reduces productivity and causes management to spend too much time on personnel matters. Until recently, ZA operated sales offices in eighteen major cities, including unlikely places like Tokyo and New Delhi. It has recently attempted to rationalize its network of sales offices and New York is due to be closed, Tokyo, New Delhi, Bulawayo, Jeddah and Manzini have been closed, others such as Gaborone may also be closed, and the London office will be reduced in size. 59 The corporation has recently attempted to rationalize its air freight business. The operation was originally set up with two leased aircraft, a DC-8 freighter and a B-757 freighter, to import hieu.:y rated cargo for the mining industry from Eutope to Zambia. Return cargoes consisted almost entirely of agricultural products concentrated during four months of the year. However, political changes in South Africa and other factors have resulted in major structural changes in the underlying trading pattern for the high rated goods from Europe, with the mining industry now purchasing most of its imports from India and South Africa. Demand for southbound cargo from Europe has dropped and the secondary cargo - low rated agricultural produce from Africa to Europe - has become the main business. Faced with a sharp fall in cargo receipts, ZA therefore terminated the lease on the DC-8 and continues to operate a scaled back service using the B-757. 60 Fleet utilization, other than for inter-continental services, is low. The inter-continental DC- 10 is currently utilized for an average of 7.2 hrs per day. This is reasonably close to the world average of 10.5 hrs per day. Utilization of the two B-737s (mainly used to provide regional services) is much lower. They are utilized for a mere 2.5 hrs per day, which is not only lower than the 3.9 hrs achieved in 1989, but is well below the 7 to 8 hrs achieved on short-haul services in Europe. The ATR-42s, on the other hand, are being used for an average of 4 to 6 hrs per day, which is close to the world average of 5.5 hrs, even though some services are confined to daylight hours through lack of airfield landing lights. 61 In April 1991, the government of Zambia became a signatory to the African Joint Aircraft Services (AJAS) agreement. the other signatories are the governments of Uganda and Tanzania. The agreement provides for joint ownership of one or more aircraft to serve the operations of all three airlines on routes to Europe, the Middle East and India. Current intentions are to lease a wide-bodied DC-10, Airbus, or B-767 and to lease a second stand-by aircraft to cover an expected peak during six weeks of the year. The aircraft will be operated by the individual member airlines using their own staff, or will be operated on a pooled basis to India and the Middle East. The three member airlines have already agreed on the basic route structure and sharing arrangements. It is not clear, particularly on European routes, whether AJAS will secure additional traffic rights, or will have to rely on the existing rights of their member airlines. C.1 Current Financial Performan 62 ZA is in a critical financial condition (see Annex 3). In 1989/90 it incurred a loss of K 287 million ($22.3 million) on a turnover of K 2,110 million and this increased to K 2,112 million ($72.8 million) on a turnover of K 4,97,6 million in 1990/91. Estimates for 1991/92 suggest that losses for the year may fall to K 1,700 million ($34 million). The expected improvement between 1990/91 and 1991/92 is encouraging, although ZA's financial projections may not be - 27 - reliable. Since 1988/89, operating costs have been increasing almost twice as fast as revenues and this has had a devastating effect on cash flows. Accounts payable mcreased by K 1,530 between 1988/89 and 199C/91 until, at the end of 1990/91, ZA owed over K 1,813 million ($62.5 million). Working capital likewise decreased from K 14 million ($1.7 million) in 1988/89 to a negative K 1,971 million ($68.0 million) at the end of 1990/91. ZA is technically bankrupt and has only managed to keep afloat by running up overdrafts and short-term debts to government-owned banks (mainly Bank of Zambia), or to commercial banks with government guarantee. Short-term indebtedness and overdrafts amounted to K 1,384 million ($48 million) in 1990/91 and were K 2,326 million ($47 million) for the twelve months ended 31 December 1991. 63 ZA's poor financial performance has a direct effect on the country's foreign exchange position. Hard currency expenses are charged through the IATA Clearing House and this ensures (by implicit government agreement) that they become payable in hard currency by the Bank of Zambia. Since any inter-airline transactions can be settled through the IATA Clearing House, ZA uses this method to pay other airlines for services rendered and goods supplied. The settlement process is used to pay for maintenance performed by Alitalia, aircraft leased from other airlnes, fuel purchases in Bombay billed by Air India, and technical services rendered by other airlines. In 1988/89, the Bank of Zambia paid IATA $43.7 million net, of which $29.6 million (nearly 68 percent) represented payments for miscellaneous services. By 1990/91, payment for miscellaneous services had increased to $45.4 million out of a total net payment of $53.2 million (i.e., to 85 percent of the total). However, without this arrangement, suppliers would not be willing to provide services on credit to ZA and this will remain the case until ZA's financial performance has improved. These payments show up as loans to ZA from the Bank of Zambia. 64 There are several reasons for ZA's poor financial performance: (i) an unsuitable route structure; (ii) lack of cost-effective sales offices; (iii) a high-cost air freight business; and (iv) low utilization of aircraft. The financial results for the first two quarters of 1991/92 are summarized in Table 9. They present a reasonable picture of the profitability of the existing route structure. On average, they show that inter-continental routes lose money, regional routes are mixed, and domestic routes generally make small profits. The inter-continental services using ZA's DC-10 generally make some contribution towards standing charges and fixed costs, although the size of the contribution on the Bombay sector is too small. It aiso shows that the leased L-101 1 is not profitable on inter-continental routes. The regional routes are reasonably satisfactory, although both the Gaborone and Mauritius services are unprofitable. Finally, domestic services nearly all make some contribution to standing charges and fixed costs, although the B-737s make a lower contribution than the ATR-42s. - 28 - Firt Qaner Sod Quater Route Aircraft (ross Standu2g 8urius/ arom Studiag Surplus/ Type Revenues Charges plus (Deficit) Revenue Charges plus (Deficit) low Fixed Cos les Fixed Coat Variable Variable Costs cost In,mcontinental: Lusaka-London DC-10 196,752 184,S94 48,494 292,613 276,764 34,594 Lusaka-London L-1011 16,582 16,582 (19,783) Lusaka-Bombay DC-10 61,385 55,171 (2,979) 45,3S6 39,452 (63,307) Lusaka-Bombay L-1011 (4,424) (4,424) (17,300) I ALak-Rome-Franldkirt Dc-10 60,174 54,161 (10,32) 134,480 126,891 1,796 Lusaka-Larneca- DC-10 61741 (8L174) .00) -- Rome-Fnkfurt Sub-Total 32.295 2297,10 L2Q2 472.449 44S.107 (28,215) kogional: Lusaka-Iohannesburg DC-10 27,624 25,742 261 82,233 79,493 21,976 Lusaka-lohannesbug L-1011 4,222 4,222 (312) - - Lusaka-Johannesburg B-737 3,013 2,641 933 - - Lusaka-Harare 1-237 4,533 2,936 (2,131) 12,432 10,430 3,131 Lusaka-Gaborous 3-737 (1,183) (2,248) - - - - Luaka-Vjndhook 3-737 3,326 2,009 (4,016) 7,903 6,303 (3,15) Lusaka-Nairobi- B-737 6,766 7,909 (1,433) 16,616 14, 1,351 Dar-eos-Salam-Luaka Lusaka-Nairobi- B-737 10,7S7 8,634 (191) 12,794 10,265 (2,082) Entebb-Lusala Lusaka-Mauritius B-737 (2,576) (5,371) (18,388) 1,232 (1,S29) 542 Lr *bk-Lilongwe B-737 - - - (43) (94) (370) Lusaka-Ndola-FBM B737 - - 351 260 (297) Lusaka-Lubumbardi ATR42 1,732 1,001 (196) 2,046 1,29 542 Lusaka-Lilongwe ATR42 2.S38 1.7l (313) A0 3.70S 37 Sub-Total 62.7S6 4LZ273 2D25S 140206 124. 122 Ilomestic: Lusaka-Ndola B-737 19,576 16,331 (1,04S) 27,622 23,742 (1,461) Lusaka-Livintono B-737 11 (369) (1,504) 636 296 (1,598) Lusaka-M&w 3-737 21 (4) (105) 7,699 6,521 (1,182) Lusaka-Ndola ATR-42 18,243 14,738 3,966 22,02S 18,469 4,604 Lusaka-Livitoe ATR-42 11,964 9,733 1,319 20,445 17,641 4,644 Lusalca-Mfi ATR-42 7,110 5,63S 533 S,201 4,S83 1,8I8 Luska-Chipla ATR-42 4,523 3,392 (561) 2,16S 1,445 (1,794) Lusaea-Mfaw- ATR-42 2,148 1,876 822 3,543 2,994 545 Chipa-Luska Luswka-Ndola-Mun ATR-42 3,165 2,707 1,153 3,669 2,814 (622) Losl-Ndols- ATR-42 7.761 6.0S 664 7.662 6.04 (634) Kuaams-KasabaB3y Sub-Total 74542 A1 5.242 MM 8J4 S Grand-Totul 459,593 406,379 (59,915) 713,522 654,303 (17,433) -29 - 65 The current costs of sales services, advertising and publicity are about 30 percent of sales revenues (up from about 20 percent in 1989/90). The major part of these costs are incurred outside Zambia paying sales commissions and operating cosdy international sales offices (see Table 10). The costs of internaional sales is almost exactly equal to revenues earned. In 1988/89 net earnings were a mere $87,000 (on a turnover of $39 million) and this only increased to $223,525 in 1990/91. In 1990/91 the main loss-makers were London ($7.4 million) and New York ($1.3 million). Windhoek and Dar-es-Salaam also lost money and New Delhi, Bombay and Manzini produced litde net income. Table 10. Zambia Ailms: Cash Flow Fom Intemational Sales Ofe ($'000) 1988/89 1990/91 Sales Office Receipts Expenses Net Revenue Receipts Expenses Net Revenue Curint Stats Lubumibashi 114 156 (42) 627 158. 469 Dar-Es-Sabam 188 158 30 142 158 (16) Bombay 110 137 (27) 1,614 1,464 150 Gaborone 657 772 (115) 1,273 530 743 Downsized or closed Rome 9,495 9,536 (41) 4,308 2,847 1,461 London 17,243 15,850 1,393 13,132 20,509 (7,377) Downsized Hanue 1,093 3,520 (2,427) 1,506 701 805 Monrovia 1,946 1,538 408 - - - Manzini 820 142 678 515 307 208 Closed c Johannesburg 2,844 2,903 (59) 5,965 2,175 3,790 1 New York 2,851 2,878 (27) 4,929 6,238 (1,309) Downsized; To be cosed Blatyre 536 547 (11) 1,232 795 437 Nahrobi 811 483 328 1,147 532 615 New Delhi - - - 347 313 34 Closed Franckfut - - - 478 212 266 lWiendhoek - 668 720( Tots 38,708 38,620 88 37,883 37,659 224 Nots: (a) Other Sales Offices in Tokyo, Bulawayo and Jeddah have P1mady been dosed - 31 - C.2 Opto for Rerm 66 Recent attempts to cut losses have focussed on liquidating Africa Bound Ltd, terminating flights to New York (and canceling the lease on the second DC-10 which was costing $0.5 million per month), reducing the scope of the corporation's air cargo operations (by terminating the lease on the DC-8 freighter), closing international sales offices and reducing sales staff, and attempting to improve utilization of the two B-737s by pooling with other airlines on regional routes (with Air Botswana and Royal Swazi Airlines). Current plans are focussing on extending pooling arrangements and refinancing the remaining DC-10. To survive, ZA must nevertheless do more. A major restructuring is unavoidable if the airline is to avoid liquidation. Restructuring needs to focus on: (i) cutting unprofitable routes; (ii) reducing sales costs to no more than 20 percent of revenues; (iii) over-hauling the air freight business; (iv) improving utilization of aircraft; and (v) exploring all other opportunities to cut costs. 67 Now that the New York and Larnaca services have been terminated and ZA has stopped using a L-1011 on some routes, the inter-continental services are in better financial health. However, there are still question marks over the Bombay service and, unless steps can be taken to increase load factors or reduce costs, ZA should consider terminating this service. On regional routes, the service to Mauritius should be dropped and the future of services to Gaborone, Windhoek and Entebbe need to be carefully reviewed. Little needs to be done immediately about domestic routes, other than to review the Ndola-Chipata route and make sure that B-737s are only used on sectors where they are profitable. ZA's network of international sales offices also need to be over-hauled. A number of offices have already been closed or down-sized, but questions remain about Bombay, Windhoek and London. In 1990/91 the London office lost over $7 million and this cannot continue. If net sales revenues can not be substantially increased, ZA should consider marketing most of its services in other countries under an agency agreement with another airline. 68 ZA's air freight operations have suffered unexpected setbacks in recent years. Recent political changes in southern Africa - which have caused major structural changes in the air freight market - appear to be irreversible and the future of ZA's air cargo business needs to be re-evaluated. The major question is whether it still makes sense to continue serving the corporation's much reduced air freight business by operating a dedicated air freighter (rather than carrying freight as a joint product on passenger aircraft) and, if so, whether the present B-757 is the best aircraft to use. B-757s are expensive when used as long-distance freighters and it may make more sense to terminate the lease on the B-757 and use a second-hand hush-kitted B-707 instead. 69 Pooling arrangements with other regional airlines are a suitable way of increasing utilization of aircraft. However, since all SADCC airlines suffer from excess capacity and low aircraft utilization (mostly of B-737 type aircraft), pooling will only succeed if some airlines dispose of under-utilized planes. ZA must therefore seriously consider getting rid of one or both of its two B-737s. Other efforts to cut costs are likely to be relatively less important. ZA should nevertheless explore every opportunity for improving crew utilization, cutting victualling costs and generally streamlining the organization and staffing of the corporation. It should also cut down on the miscellaneous expenditures which it currently charges through the IATA Clearing House. - 32 - 70 The serious financial state of the airline also raises quesdons about AJAS. Joint ownership of an inter-continental wide-bodied aircraft is a risky business. Both other partners (Uganda and Tanzania) suffet from acute shortages of foreign exchange and may have 4ifficulty meeting their foreign exchange obligations in a timely manner, securing traffic rights in Europe is likely to be more difficult than expected and, based on experience with Air Afrique, joint airline agreements usually experience numerous teething problems. On the other hand, a shared aircraft could generate more business to the Indian sub-continent and provide the attraction of a wide-bodied jet on other inter-continental routes. However, AJAS only makes commercial sense, if the new wide-bodied aircraft substitutes for ZA's existing capacity. Otherwise it will merely increase costs without generating any additional revenues. AJAS is the sort of venture only attempted by airlines in sound filancial health and able to cover their losses during an initial start-up period. 71 The recent SADCC regional airline study recommended that airlines be allowed to operate as commercial entities and that their restructured boards should put pressure on management to deliver an adequate rate of return on capital. To improve perfbrmance, it stressed that the key lay in reductions in excess capacity (to improve utilization), but stressed that, given the lumpy nature of capacity, the only way to achieve lower aggregate capacity was through joint use/sharing/pooling arrangements. The report also stressed that, while a joint airline might give the lowest long run costs, 80 percent of the benefits could be achieved with commercially-based joint use arrangements negotiated by the airlines. The best medium-term strategy would thus be to change the regulatory environment of the airline to encourage it to operate in a more commercial way and to put pressure on management to improve commercial performance. The long-term solution should be to privatize the airline, provided there was a willing buyer. However, ZA could not be privatized until it had been restructured and turned into a profitable enterprise. This might take two to three years. In the meantime it may nevertheless be desirable to widen ownership by selling up to 10 percent of the equity to employees to strengthen incentives (or issue them in the form of bonuses). The balance of the equity could then be sold to the public, or bids could be invited from international airlines or other potential buyers. The only qualification is that no international airline (or other corporate investor) is likely to invest in ZA for less than 51 percent of the voting shares. C.3 ConclusioM 72 In spite of ZA's current financial problems, it should be possible to turn the airline around. To do that it needs to be restructred, to concentrate on its core business and to explore every opportunity for reducing costs. The immediate need is to rescue the corporation from insolvency and to do so quickly. The need is for action, not for further studies. The main elements of the restructuring plan should include: (i) Rationalizing ZA's route structure to build on profitable routes and terminate those that are losing money and are unlikely to ever cover their fully allocated costs. The future of the inter-continental route to Bombay needs to be reviewed, the regional route to Mauritius needs to be discontinued and those to Gaborone and Windhoek need to be reviewed. Domestic routes merely need fine tuning. (ii) Sales costs need to be drastically reduced to no more than 20 percent of revenues. Costs at Bombay, Windhoek and London need to be pruned and ZA should explore the option of marketing its services through an agency agreement with another airline. (iii) The air freight business needs to be overhauled. The main questions are whether existing traffic justifies operation of a dedicated air freighter and, if so, whether tht present B-757 is the best aircraft to use. - 33 . (iv) Utilizationof aircraft needs to be increased. With the growing use of pooling arrangements with other regional airlines, ZA has to seriously consider disposing of one, or both of its two B-737s. (v) Efforts should also be made to reduce surplus staff, improve utilization of crews, cut victualling costs and to generally improve operational performance. (vi) AIAS appears to be premature. It is a high risk operation being done, in conjunction with countries which are seriously short of foreign exchange. The proposed leasing of a wide- bodied jet should be delayed. (vii) In the medium-term, the government needs to change the regulatory environment to allow ZA to operate more commercially and to put pressure on management to produce better commercial performance. (viii) In the long-term, the plan sbould be to privatize ZA, provided a suitable partner can be found. Ten percent of the equity might initially be sold to staff to strengthen incentives (or be issued to them in the form of bonuses), while the remainder could be disposed of after the corporation has been restructured and its financial prospectus has improved. Corporate investors are unlikely to settle for less than 51 percent of the voting shares. - 34 - IV. ROAD TRANSPORT INDUSTRIES 73 There are three government-owned road transport enterprises: (i) Contract Haulage Ltd. (CHL) which provides roaa haulage services; (ii) United Bus Corporation of Zambia Ltd. (UBZ) which provides inter-city bus services; and (iii) Mulungushi Traveller Ltd. (MT) which also provides inter-city bus services. The two main corporations are CHL and UBZ. MT was established in 1988 when the government split up the operation of UBZ as part of a restructuring program and handed over the operation of bus services in the Copperbelt to MT. MT has a fleet of 50 buses and uses about 30 to provide regular bus services and the remainder for contract hire. By all indications it is a relatively efficient operator but, since it is small and raises no issues for the government's public expenditure program, it will not be examined in this report. Instead, this chapter focuses on CHL, UBZ, and arrangements for supporting private urban bus services. A. Contract Haulage Ltd. 74 At the end of 1991, CHL had 206 trucks with an average payload capacity of 30 tonnes (see Annex 4, page 1). Many vehicles are ola and only 155 are operational (i.e., fleet utilization is 75 percent). The corporation provides general haulage services in both domestic and international markets (Namibia, South Africa, Botswana, Tanzania and Malawi). About one third of their business is done on behalf of other public corporations (i.e., other Zimco group companies), while the other two thirds is for other clients. Vehicle utilization is about 50,000 km per vehicle p.a., which is about average for heavy trucks elsewhere in Africa (50,000 to 60,000 kn p.a.). The tonnage per vehicle in 1989/90 was 2,154 tonnes (down from 2,389 tonnes in 1988/89), which also appears reasonable. On the other hand, the number of staff per vehicle was 5.8 in 1988/89 and this rose to 6.4 in 1989/90. This is far too high and the corporation has already set itself a target to reduce this figure to 3.5 staff per vehicle. 75 CHL operates in a reasonably competitive market. Freight rates are effectively deregulated and set by the market place. Even the rates for haulage of maize have recently been deregulated. Most rates are now in the range $0.06 to $0.07 per tonne km and are determined through negotiation with customers. There is wide-spread competition in both domestic and international markets. There are an estimated 600 to 800 trucks providing domestic road haulage services and, although these vehicles tend to be smaller and older than the CHL fleet, utilization appears to be better with higher annual veh kms and load factors. A large number of enterprises (both public and private) and co-operatives also operate own-account fleets. International road transport has also grown rapidly in recent years and there are now an estimated 1,600 heavy trucks providing international trucking services to, from and through Zambia. Indeed, fierce inter national competition effectively caps the rates which domestic hauliers can charge. A. 1 Current Financial Performance 76 CHL is in reasonable financial health and, during the past five years, has been a consistently good performer (see Annex 4). Profit before tax increased from K 9 million in 1986/87 ($1.3 million) on a turnover of K 52 million to K 72 million ($5.6) in 1989/90 on a turnover of K 241 million ($18.7 million). Rate of return on total assets likewise increased from 19 percent in 1987/88 to 41 percent in 1989/90. Fixed assets are revalued on a cyclical basis and are revalued at least every three years. Total fixed assets increased from K 70 million ($9.6 million) in 1986/87 to K 206 million ($16.0 million) in 1989/90. Most new investment was - 35 - financed from internally generated funds, with internal financing increasing from 45 percent in 1986/87 to 80 percent in 1989/90. Depreciation provisions appear adequate (the ratio of depreciation to fixed assets is about 10 percent), although they have fallen slightly in recent years. Depreciation provisions are sufficient to finance 10 to 20 new vehicles per year and, since the corporation's debt to equity ratio is still quite low, there is scope for financing additional vehicles through borrowing. 77 In spite of the overall good performance, there are danger signals on the horizon. Ac.:-ats receivable increased by K 47 million ($3.6 million) during 1989/90 to reach a total of K '3 million and this reduced the current ratio from 2.2 to 1.3. Most of these debts were run up by the Zambian Co-Operative Federation and some of them may eventually have to be written off as bad debts. The corporation is also over-staffed and fleet utilization could be improved. Finally, the corporation has enjoyed a number of hidden subsidies which have either already been withdrwn, or should be in the near future. The most important subsidies included preferential access to foreign exchange at the official rate, retention of foreign exchange earnings and access to concessional loans. A.2 Options for Reform 78 CHL is the transport sector's top performer and requires tio major restructuring. Whatever steps are needed are under the control of management and they should be encouraged to address these problems without government involvement. Management is fully aware of the areas in need of attention and: (i) has already set a target for reduction of surplus staff; (ii) is installing radios in existing vehicles and tachographs in new vehicles to help improve vehicle utilization; (iii) is introducing a driver incentive scheme to reduce accidents, increase volume of cargo carried and improve cleanliness; and (iv) is setting norms to control usage of fuel and other stores. This is commendable and should be complemented by efforts to reduce accounts receivable and dispose of over-aged vehicles (to improve overall fleet utilization). 79 It is rare nowadays for governments to own trucking companies. Road haulage does not have to be in the public domain and it is time to start considering the long-term future of CHL. There is no justification for providing public funds, or soft loans to one of several competing road hauliers. Indeed such actions simply damage other domestic road transport operators. There is thus no case for making any provisions in the government's development budget to support CHL. Offers of bilateral assistance (in the form of dedicated vehicles and/or spare parts) should be firmly resisted in favor of general support to the road haulage industry - preferably in the form of a line of credit - available to all road hauliers on an equal basis. CHL should be encouraged to operate on a wholly commercial basis and should finance new investments through retained earnings and medium to long-term commercial borrowing (possibly through the Development Bank of Zambia). 80 CHL should be a key target for diversification of ownership and the government may wish to set out a timetable for implementing it. Diversification of ownership can nevertheless not be accomplished overnight. Studies have shown that, even after it has been firmly decided to diversify ownership, it usually takes 2 to 3 years to complete the process. Rushed changes of ownership invite low sale prices and asset stripping. The government should therefore consider a sequential approach involving the following steps: (i) announce that CHL is expected to operate on a filly commercial basis without the need for any financial support or other perks from government; (ii) at the same time announce the intention to diversify ownership of the corporation; (iii) about six months later invite bids from existing management and staff; (iv) if - 36 - they express no interest, explore other ways of diversifying ownership through outright sale, or sale of shares. A.3 Conclusions 81 CHL is a well run corporation and requires little government attention. Most of the required reforms are under the control of management and they should be encouraged to implement them without government involvement. Options for improving performance include: (i) Encouraging management to go ahead with plans to reduce surplus staff, reduce accounts receivable and introduce measures to improve vehicle utilization. (ii) Government should announce that CHL is expected to operate commercially without the need for financial support from government. No provisions should be made in the government's development budget to support CHL. (iii) Offers of dedicated bilateral assistance for vehicles and spare parts should be firmly resisted in favor of a line of credit available to all road hauliers on an equal basis. (iv) Government should set a firm 2 to 3 year time-table for diversification of ownership through a management and/or staff buy-out, outright sale, or sale of shares. B. United Bus Company of Zambia Ltd. 82 The United Bus Company of Zambia Ltd. (UBZ) operates inter-city and peri-urban bus services. It currepi'y has about 440 vehicles, of which 250 are operational and 165 in service (see Annex 5, page 1). About 80 vehicles operate inter-city services with route lengths of up to 800 km, while the remainder operate peri-urban services with route lengths of between 300 and 400 km. Although the corporation also used to operate urban bus services, these have effectively ceased and all urban bus services are now provided by the private sector. 83 Fleet utilization is about 66 percent which is significantly lower than the figure of 80 to 90 percent usually associated with public bus companies. The low utilization appears to be related to lack of standardization (UBZ operates a large number of vehicle types and is only now standardizing them) and poor maintenance. The corporation is also over-staffed, although less so than in the recent past. In 1987/88 it employed 26 staff per vehicle in service and this has now been reduced to 12 per vehicle. Similar bus companies elsewhere in the world usually employ between 5 and 10 staff per vehicle. Vehicle utilization has also fallen. The number of vehicle km per vehicle per day fell from 440 in 1987/88 to 393 in 1990/91, while the number of passengers per vehicle per day fell more sharply from 571 in 1988/89 to 272 in 1990/91. B.1 Cfent Financial Performanc 84 UBZ, like most other transport enterprises in Zambia, has competent financial staff and produces good financial accounts (see Annex 5). Fares were regulated and kept low during the early 1980s and this resulted in heavy losses and a chronic shortage of working capital and liquid funds. By 1987 the corporation was technically bankrupt and in 1988 the government had to provide K 317 million ($39 million) to rescue it. The government took over loans of K 191 million, accounts payable of K 40 million, exempted the corporation from K 28 million of overdue taxes and provided a cash injection of K 60 million to enable the corporation to rehabilitate some of its buses. In addition, the government exempted the corporation from payment of import duties and sales taxes on vehicles and spare parts, provided a new Japanese - 37 - loan of $1.0 million and a US Aid grant of K 1.4 million, allocated foli exchange to finance purchase of spare parts and agreed to a fare increase of 40 percent. 85 The above financial restructuring had a dramatic effect on performance and in 1989/90 (after further fare increases of 140 percent) the corporation turned in a net profit of K 72 million ($5.2 million) on a turnover of K 378 million ($27 million). The corporation also earned 30 percent rate of return on total assets. Thereafter, performance began to decline with net profits falling to K 41 million ($1.4 million) in 1990/91, turning into a net loss of K 78 million ($1.6 million) in 1991/92. The decline in financial performance occurred in spite of further fare increases in January 1990 (50 percent), September 1990 (100 percent) and November 1990 (55 percent). Indeed, fares are now so high that further increases are generating little extra revenue. The rate of return on assets likewise fell from 30 percent in 1989/90 through 19 percent in 1990/91 and was negative in 1991/92. It is now well below the target rate of 12 to 15 percent needed to generate sufficient revenues to finance replacements. 86 Other indications of the corporation's worsening financial condition include an increase in creditors and increased reliance on short-term loans. Accounts payable increased by K 68 million ($2.3 million) between 1989/90 and 1990/91 to reach a total of K 106 million ($3.7 million). Short-term loans also increased from almost zero in 1988/89 to K 104 million ($3.6 million) in 1990/91. This pushed the corporation into an illiquid position with a current ratio to 0.7. Since fixed assets increased by K 247 million between 1988/89 and 1990/91, it seems fairly clear that these assets were being financed through a combination of accounts payable (i.e., forced supplier credit) and short-term loans. That is not a satisfactory way of financing fixed assets. B.2 Options for Reform 87 UBZ needs to make strenuous efforts to improve financial performance to avoid repeating the crisis which affected the corporation in 1988. Major issues requiring attention include: (i) fleet utilization needs to be increased from 66 percent to over 80 percent; (ii) operating costs must be reduced to hold down the need for further fare increases; (iii) staffing needs to be reduced to an average of less than 10 per vehicle in service; (iv) vehicle utilization needs to be increased to achieve about 450 km per vehicle per day with a load factor of between 500 and 600 passengers per vehicle per day; (v) accounts payable need to be reduced; and (vi) short-term loans need to be converted into long-term loans or equity. 88 Most of the above reforms require action by UBZ management. Only some require action by government. The main issues requiring management attention include the future of the corporation's workshops and arrangements to eliminate surplus labor. Low fleet utilization is usually a sign of poor maintenance. The corporation should therefore explore ways of improving vehicle maintenance by operating the workshops under a management contract, privatizing them and sub-contracting maintenance (to either the privatized entity or other private sector workshops), or leasing vehicles through a third party which would remain responsible for all overhaul and maintenance. In the case of surplus labor, all ghost workers (or one-day per month workers) should first be removed from the payroll and a formal labor redundancy scheme introduced to handle additional redundancies. 89 The above actions by management need to be complemented by four supportive actions by government. First, government must make it clear they have no intention of bailing out the corporation a second time. The corporation must henceforth operate on a wholly commercial basis. Second, remaining fare regulations should be removed to ensure the corporation has - 38 - sufficient freedom to operate commercially. Third, UBZ may need some help converting its short-term loans into long-term debt. As far as possible, the government should confine assistance to provision of guarantees. UBZ should be left to negotiate appropriate re-financing arrangements with the commercial banking sector, or the Development Bank of Zambia. Finally, government should give serious consideration to diversifying ownership of UBZ. Long distance bus companies do not have to remain in public ownership. Government may therefore want to consider a management or staff buy-out of the corporation or, if that fails, outright sale to a third party. This could probably be accomplished over a period of 2 to 3 years. 90 There is no case for making any allocations in the development budget to support UBZ. The corporation should stand on its own feet and finance all new investments from retained earnings and medium and long-term commercial borrowing (possibly from the Development Bank of Zambia). As noted in the previous para., government assistance should be confined to provision of guarantees to enable them to borrow on a long rather than short-term basis. A corollary of this strategy is that offers of vehicles and spare parts from bilateral donors should be resisted in favor of dedicated lines of credit available on the same basis to both UBZ, other public bus companies and private sector operators. B.3 Conclusions 91 The performance of UBZ is in many ways better than expected, but is still well short of the sort of performance needed to enstire long-term survival. The corporation was bailed out in 1988 and, although performance improved significantly immediately thereafter, it has again started to decline. The corporation nevertheless does not require any major restructuring and reforms should focus on the following issues: (i) Separating the operation of buses from their overhaul and maintenance. (ii) Getting rid of ghost workers (or one-day per month workers) and introducing a formal labor redundancy scheme to deal with additional surplus labor. (iii) Government should establish transparent financial objectives for UBZ and make it clear that the corporation is expected to operate commercially. (iv) Government should abolish all fare regulations and leave them to be determined by the market place. (v) Government may have to provide some assistance to help UBZ convert its short-term loans into long-term debt. As far as possible, such assistance should be confined to provision of guarantees. (vi) Finally, government should consider diversifying ownership of UBZ by inviting a management or staff buy-out or, if that faDls, outright sale to a third party. C. Urban Bus Services 92 Urban bus services are characterized by shortage of bus capacity (52 percent of journeys in Lusaka are made on foot) and inflexible and unreliable services (e.g., average waiting times for buses are 60 mins). Their poor performance is mainly attributable to the restrictive regulatory environment administered by the Traffic Commissioners. The basic regulations were clearly designed to protect the United Bus Company monopoly at the time of independence. Licenses are only issued to private operators for operation along specific routes (no matter how many vehicles the company might own) and permission to operate on more than one route is only granted by special dispensation (to prevent the development of a competitive network of services). - 39 - Although the overall level of fares is no longer directly controlled (bus companies as a group merely notify the Minister of their proposed fare levels), individual operators are not permitted to offer different quality services at different fares. This means no one is %Atling to: (i) offer regular scheduled services (a scheduled service has a lower occupancy rate and must compensate by charging a higher fare); (ii) provide services on poor paved roads and on gravel roads (operating costs on theme roads are higher, but fares cannot be raised to offset the higher costs); and (iii) offer greater comfort at a higher fare (by limiting seating to four instead of five across). 93 Government is mindful of the need to improve urban bus services and, in particular, to ensure they are operated more reliably. The best w'ay of doing this is by relaxing the present regulatory environment and confining the regulations to matters of safety and quality of service. Financial support for urban bus services should furthermore be confined to financing (in conjunction with Urban District Councils) incremental additions to the existing commercial bus services. The additional services should furthermore be financed as explicit public service obligations. This ensures that fares on a commercially vWable network continue to be determined by market forces. The additional services might consist of higher service frequencies, scheduled services, extended services (into new areas or earlier/later in the day), lower fares for all passengers, or lower fares for designated target groups (e.g., students, the elderly and handicapped, etc.). 94 Payment for the above public service obligations has implications for the government's recurrent budget. On a tentative basis, it is suggested that about K 120 million ($1.0 million) might be set aside from FY92 onwards to support the above urban transport strategy. It is furthermore suggested that: (i) support be provided on a cost-sharing basis in conjunction with the concerned urban District Councils; and (ii) the additional services be provided on a contractual basis. Contractual arrangements have been shown to be an effective way of controlling costs to ensure the government gets maximum value for money and the traveling public is the main beneficiary (contractual arrangements prevent the subsidy from lowering productivity and artificially inflating bus industrv costs). - 40 - V. AIRPORTS AND OTHER CIVL AVIATION 95 All airports were originally operated by the Department of Civil Aviation (DCA). In 1989 the Aviation (Amendment) Act was passed which permitted the transport minister to transfer any of these airports to a separate holding company, which could either be publicly or privately owned. As a result, the minister decided to transfer four international airports - Lusaka, Ndola, Livingstone and Mfuwe - to a newly created National Airports Corporation Ltd. (NACL), under the jurisdiction of Zimco. Responsibility for national air traffic control was also transferred to NACL. The remaining airports remained under the jurisdiction of the DCA. The legislation envisaged that further airports might be transferred to NACL, or other potential operators, when conditions were right (the legislation actually includes a presumption in favor of transferring airports "unless there are economically compelling reasons not to do so"). A. Nain- Ai=MQMrdnLd 96 In September 1989, the four category I airports - Lusaka international airport, Ndola, Livingstone and Mfuwe - were transferred from DCA to NACL. These four airports handle over 30,000 aircraft movements per year (about two thirds being commercial flights), over 800,000 passengers and nearly 15,000 tonnes of freight (see Table 11). These airports handle over 90 piacent of all aircraft movements in Zambia. About 70 percent are handled at Lusaka, 25 percent at Ndola and the remaining S percent at Livingstone and Mfuwe. The remaining 10 percent of all aircraft movements are handled at the category HI and ImI airports operated by DCA. Table 11. Amount of Traffic Handled at the Four Airvorts Managed by NACL (Number of Aircraft and Passengers, '000 kgs of Freight and Mail) Lusaka Int Ndola Livingstone Mfuwe Total TYpe of Traffic 1989 1990 1989 1990 1989 1990 1989 1990 1989 1990 Aircraft Movements: Commercial 13,520 14,120 4,226 4,114 742 1,279 855 744 19,343 20,257 Private 1,908 1,997 1,887 1,626 74 56 59 34 3,928 3,713 Civil 9,716 6,607 2 f56 1,824 2 128 24 6 12 328 8,565 Total 25.144 22. 724 8,699 7.564 8 1,463 938 784 35.599 32.535 Passenoers Disembarked 332,173 296,106 74,399 74,209 11,186 16,108 7,681 9,656 425,439 396,079 Embarked 293,766 299,851 75,483 74,832 10,944 15,465 7,658 9,622 387,851 399,770 Transit 20.541 18.864 _ - - - - - 20r541 18.864 Total 646.480 614.821 149.882 149.041 22130 31.573 15.339 19.278 833.831 814,713 Freight: Loaded 4,892 4,988 326 290 38 42 3 2 5,259 5,323 Unleaded 10.976 9.020 391 437 35 45 35 47 11.437 9.550 Total 15.868 14.008 717 727 73 88 38 50 16.696 14.873 Mails Loaded 122 131 7 9 0.1 0.2 0.8 0.8 130 141 Unloaded 258 254 17 28 0. 1 0.5 1 .j5 2S 5 2_ 27 285 Total 380 384 24 37 0.*2 0.7 2 2 3.3 407 426 - 42 - A. 1 Current Financial Performance 97 Many of the airport facilities taken over from the DCA were in a deteriorated condition. The assets were valued at roughly K 1,417 million at 1990 prices (roughly $49 million), although their replacement costs are thought to be over $100 million. Buildings and civil works were valued at K 1,146 million, navigational aids and telecommunication facilities at K 120 million and motor vehicles and other equipment at K 150 million. It is estimated that it will take nearly $16 million (including $14 million in foreign exchange) to rehabilitate these assets and raise them to a maintainable standaid. There is also a need to spend a further $11 million on modernization and extension of facilities, particularly to improve telecommunications and navigational aids. 98 The transfer of the country's four main airports to NACL represented a major improvement over previous arrangements. The corporation keeps good accounts and has a reasonably commercial outlook (see Annex 6). Total revenues increased from K 79 million ($6.1 million) in 1989/90 to K 243 million ($8.4 million) in 1990/91 and produced net profits of K 21 million and K 51 million respectively. The rate of return on total assets in 1990/91 was 5 percent, up from an estimated 2 percent in 1989/90. The revenues consisted almost entirely of aircraft and passenger fees Oanding, take-off, parking, navigation and passenger service departure fees). In 1990/91, a mere 16 percent came from other sources (mainly car parking fees). Furthermore, although revenues grew by a factor of three between 1989/90 and 1990/91, operating expenditures increased by a factor of five and administrative expenditures by a factor of four. Costs are rapidly escalating. 99 NACL's revenue figures must be interpreted with caution. There are at least three qualifications. First, although the corporation took over fixed assets valued at K 1,174, the value of these assets have not been agreed with the government and nor have the terms of their transfer. The corporation is currently treating these assets as equity (i.e., they are not servicing any loans), which reduces potential debt service charges. Second, the airport police (K 21 million in FY91) are being paid for under the government's police department budget allocation, rather than being charged to NACL. Third, accounts receivable (debtors) are uncomfortably high. The corporation took over debtors of K 55 million ($4.3 million) from the DCA in 1989/90 (none outstanding over 90 days) and these increased by a further K 32 million to K 87 million ($3.0 million) in 1990/91 (with 77 percent outstanding over 90 days). During the same period the corporation also increased accounts payable by K 25 million from K 7.6 million ($0.6 million, or 13 percent of total expenditures) to K 32 million ($1.1 million, or 18 percent of total expenditures). These trends have caused the current ratio to fall from seven to two. 100 The profitability of the airport is also dependant on its tariff. NACL tariffs are relatively high and the airports they manage are classified as high-cost airports (Table 12 summarizes landing & take-off charges for three typical aircraft types and passenger service departure fees at selected regional airports). However, although NACL airports are considered high-cost, they are broadly in line with charges in neighboring countries like Zaire, Angola and Alozambique. Airports in Kenya, Malawi and Zimbabwe charge fees which are so low they are unlikely to cover their costs. NACL furthermore does not charge for meteorological services. - 43 - Table 12. Charges at Selcte Reonal Airrt in frica (U.S.$) Daytime Landing and Passenger Take-off Charges Service Departure DC-9 B707 B747 Fees High Cost Airports: Zambia (NACL) 200.00 775.00 1,975.00 20.00 Angola 160.00 766.00 1,707.00 6.75 Ghana 173.00 737.00 1,781.00 10.00 Mozambique 248.00 820.00 1,777.00 10.00 South Africa 274.00 874.00 1,897.00 0.00 Zaire 200.00 1,002.00 2,434.00 15.60 Medium Cost Airports: Burundi 138.00 601.00 1,384.00 15.00 Botswana 171.00 572.00 1,053.00 0.00 Rwanda 145.00 479.00 1,039.00 15.00 Uganda 210.00 840.00 1,155.00 20.00 Low Cost Airports: Kenya 54.00 214.00 495.00 20.00 Malawi 69.00 248.00 553.00 10.00 Zimbabwe 74.00 243.00 526.00 10.00 Source: Manual of Airport and Air Navigation Facility Tariffs, ICAO, 1990. A.2 Options for Reform 101 NACL is a reasonably well-run corporation and there is no need to consider major structural reforms. However, it might be worth considering some restructuring to turn the corporation into a smaller, more focussed and hence more commercially oriented organization. In its present form, NACL manages large assets and the runways and traffic control system are - 44 - strategically important. The ownership of these strategic assets could, however, be handed back to DCA and a new contract could be negotiated between DCA and NACL to cover management of these assets. This would turn NACL into a smaller and more manageable property development corporation (owning airport land and terminals, and having a vested interest in a contract for management of runways and air traffic control equipment). In this form, ownership of NACL could probably be diversified. 102 Regardless of whether NACL is restructured, it may be desirable to widen ownership of the corporation to strengthen staff incentives. Shares could either be sold to staff, or issued as part of a bonus scheme. This would strengthen incentives, motivate staff to cut costs and should help improve financial performance. It is suggested that government consider selling about 10 percent of the equity to existing staff. Apart from widening ownership, there are also several other issues which need to be addressed to improve financial performance. A rate of return on assets of 5 percent is too low and needs to be raised to at least 8 to l0 percent to ensure the corporation generates sufficient revenues to operate on a sustainable basis. 103 The other issues which need to be addressed include: (i) the value of fixed assets need to be agreed and so do their terms of transfer (including a decision on whether runways and air traffic control equipment are to be handed back to DCA); (ii) arrangements need to be agreed for rehabilitating these assets; (iii) efforts are needed to diversify NACL's revenue base; (iv) the government needs to consider what to do about the costs of airport police; (v) steps need to be taken to control costs and deal with arrears; and (vi) there may be a case for charging some meteorological services to NACL. 104 The first two issues concern the transfer of fixed assets and the need to rehabilitate them. NACL should seek to agree on the value of the assets to be taken over from DCA. To ensure the corporation does not end up with a large debt burden, most (if not all) these assets should be transferred to NACL in the form of government equity. Some of the assets require rehabilitation and it seems unreasonable to saddle the corporation with the costs of financing this. The transfer should therefore be accompanied by an agreement on how to finance the estimated $16 million required for rehabilitation. The best solution would be to finance it through grants and concessional loans, with the government playing a facilitating role in brokering such arrangements. After that, NACL should be left to operate on a wholly commercial basis, financing new investments from internally generated funds and borrowing. They should ideally borrow from the commercial banking sector and, only when that is not feasible, through or lending from government. 105 The third issue concerns the corporation's current revenue base which is too narrow. Most commercial airports, particularly international ones, earn up to half C revenues from concessions (duty-free shops, restaurants, tourist shops, etc.), car parking and property rentals (for commercial activities linked to civil aviation). NACL has made a good start by introducing car parking charges, but it needs to make more effort to diversify its revenue base. The fourth issue concerns the costs of the airport police. Police services provided at NACL airports should be charged to NACL and they should recover these costs from users thtough regular airport charges. 106 The fiftih issue concerns the rapid escalation of operating expenditures and NACL's arrears position. The corporation has 1,062 employees and is thought to be over-staffed. Operating expenditures have furthermore risen much faster than inflation. NACL therefore needs to make strenuous efforts to cut surplus staff and get costs under control. The possible widening of -45 - ownership suggestd above may help by strenghening staff incentives, but this should be complemented by other effbrts to cut costs. With regard to NACL's current ratio, it is still satisfactory, but the corporation needs to reduce accounts receivable (and write off bad debts) and keep accounts payable at a manageable level to ensure it fails no further. 107 The final issue relates to meteorological charges. Aircraft currendy pay no fees for meteorological services, even though they are some of the main users of such services. The practice in many countries is for the Meteorological Service to charge part of its costs against the country's civil aviation department (or authority) and for the department to then recover these costs through the charge for air navigation services. For example, in the U.K., 25 to 30 percent of the costs of the Meteorological Office are charged to the Civil Aviation Authority which recovers this by adding it to the Eurocontrol air navigation charge. It may therefore be worth charging at least 10 percent of meteorological services to NACL and requiring them to add this amount to air navigation charges. In 1990/91 the charge would have been K 3.7 million which would have increased air navigation charges by about 50 percent (increasing it from the current 15 percent of the landing fee to about 26 percent). A.3 Conclusions 108 The overall conclusion is thus that NACL is not in need of any radical restructuring. Several issues nevertheless require attendon: (i) Ownership of NACL oould probably be diversified if the ownership of runways and air traffic control equipment were transferred back to DCA and operated by NACL under a management contract. Regardless of whether NACL is restructured, the government may wish to consider selling 10 percent of the equity to existing employees, or issuing them in the form of bonuses, to strengthen staff incentives. (il) The value of the fixed assets to be transferred from DCA to NACL needs to be agreed and so do their transfer arrangements. The recommendation of this report is that they be transferred in the form of equity. (di) Some airport assets need to be rehabilitated and it is recommended that this be done using grants and concessional loans to avoid burdening the corporation with debt. The goverment will have to help secure this finance and should consequently provile in the development budget for a rehabilitation program of about $15 million spread over five years (FY92 to FY96). (iv) NACL needs to diversify its revenue base to help generate more revenues. (v) The costs of the airyrt police, at least those police employed at NACL airports, should be charged to NACL and recovered from users through airport charges. This will effectively increase government revenues. (vi) NACL needs to make greater efforts to reduce surplus labor and cut costs. It also needs to improve its arrears position before this reduces the current ratio any further. (vii) It is suggested that 10 percent of the costs of the meteorological department be charged ainst NACL and that they recover these costs through air navigation charges. This would have the effect of Increasing government revenues. - 46- B. Degartment of Civil AviSion 109 DCA regulates all civil aviation services and is responsible for operating and maintaining 40 regional airports. Nine are classified as category 1 airports and all but one (Zambezi) handles scheduled commercial traffic. The remaining category m airports handle light traffic and are effectively grass (or bush) landing strips. The traffic handled by these airports is summarized in Table 13. It shows that aircraft movements increased from just over 2,000 in FY89 to over 3,000 in FY90, while total passengers disembarked and embarked increased from 34,358 to 38,725. Kasama, Kasaba Bay and Mansa also handle a fair amount of freight. About 80 percent of the aircraft movements represent commercial traffic, the remainder being mainly private. Southdowns is the busiest airfield. In FY90 it handled 68 percent of the aircraft movements and 37 percent of the passengers. It handles more aircraft than either Livingstone or Mfuwe (NACL airports). At the other extreme, Zambezi handled 42 aircraft during FY90 (ess than one per day) while Kalabo only handled 5. The six main airports handled 95 percent of the aircraft during FY90. Tabl 13. Annmm of Tufflh Handed at CaIoxmv 8 Aboa Mboa d by DCA (nlbar of Absaft and Pmnauon. '000 bps of fibht ond Me0l Southdbwns Chiwna K sra Ubnow Knuob EJV mm" - Sohyed Zerbad Kg"b TOMS Two* gt Tndli 19B9 1990 1989 1990 l989 1990 1989 1900 1889 1o9 10n 1990 1989 1990 1989 1990 1989 1990 1989 190 Aker*f &Iowmwfta Commwrcd 842 1.77a 311 340 208 213 200 130 121 262 142 168 44 18 * 6 1.627 2,401 Pdnva 179 292 103 139 98 97 38 42 16 23 3 22 80 100 56 42 - 418 570 ChA *u __ _ . _ n 38 20 a ... i __- -_ . _ _ _ 3a __n Totd 2t 02t 270 414 4n .ME 310 28M 192 197 291 146 190 1S8 118 . SO 42 .f 6 2.fl 3AS1 Obenabyd 3.014 7.155 4,199 0,245 8.929 6.075 3.47 1i204 963 2,876 3.243 2,392 261 202 77 so 14 17599 190.78 Embmldd 2.998 7.276 3.922 5.8 8.546 4,831 3,293 1,054 977 2,337 3.146 2,47 218 221 83 60 - 18 16.759 18.09O Trarwl . -- -* Told 19~j fJ Z213 13A21 L.908 8.7SQ ZI 1. 1 .231 EM! 4LI9I 4 4 423 .lie -A - MA MMZ! Loaded 1.1 3.6 2.7 4.1 27.7 26.0 2.5 1.7 3.5 7.8 4A 3.0 1.1 Q 4 1 l 34 30 Ukioaded _. 6.3 2. 4 30.0 32.1 2.6_ 1.3 I J3.6 2.44 3.0 1.1 - - - -3- 4 3 01 UhkwSd 1.3 0.3 _7 9.3 57Q 7 3. 7.0 3B 10. 18. OA. OA iL4 _ _97__ 4S 0 Totij 24f s.e 8.7 _13.6 67.7 S7 10.1 16.3 13,9 26B3 28.9 2S.7 3.5 j 0.0 CQD CDO CuO 39j 97 M: Loaded OA 1.2 0.1 0.1 0.6 0.1 O. - - - OA IA Uhtoade ..Q _ .. 0.0 0 1 0.1 0.2 0.1 _ 0.0 0.1 _._._._-_- 0.1 13 Totd O 0.0 OA 2.3 0.0 0.2 0.1 0.3 0.7 0.0 0.1 0.1 0.0 0. 0.0 0.0 0. 0.0 0.5 2.7 -48 - B.1 esent Financial Position 110 The financial status of the above airports i8 summarized in Table 14 (expenditures include the costs of DCA's regulatory functions). lhe table also summarizes expenditures on meteorological services and the Air Service Training Insdtute (financed under the Ministry of Communicadons and Transport vote) and on airport police (financed under the Police Deparment vote). The table shows that airfield revenues are negligible. The revised FY90 esdmate for aviation and landing fees was a mere K 0.2 million (the actual was K 170,000 which is less than $6,000). The estimate for paswenger service departure charges was somewhat greater at K 1.5 million, while the actual increased to K 3.3 million (ust over $113,000). Expenditures, on the other hand, amounted to K 46.7 million in FY90 ($1.61 million), leaving a deficit of over K 45 million. TabIe 14. avil Aiatinn lwvbed lBUMr and Em k&bM (Kwadba, niEc) Rovined Busin= EiimMe Eatima as Usa Revsd 1985 1986 1987 1988 1989 1990 1991 1992 1992 AIFOR7S: Navitgdon Chore 0.782 1I566 2.351 7.213 11.518 - Avieton Landing Fie 1.157 3.216 8.242 13.234 11.468 0.2C0 0.700 0.700 14.700 Pax SavlcemCuges 2.357 2.173 7.896 9.598 9.811 1.500 .I500 I.500 4.800 cxs" 0- o.m o.m2 1508 0.706 0.030 0.300 - - Total 4.296 7.228 18.711 31.553 33.503 1.730 2.500 2.200 19.500 Pesonad Emoinumta 4.402 5.065 6.079 7.296 16.448 18.889 34.945 5 34.945 Reca Fpdiu Allowances 0.136 0.346 0.546 0.806 1.877 2.610 Purchseof Goods 1.335 1.465 3.722 3.915 3.679 7.135 47.140 47.140 Purseu of Services (a) 1.711 1.764 4.834 3.916 5.830 9.402 Trining Epess - - 0.250 0.200 0.200 0.130 Grats & Other Pymet 0.086 0.400 0.700 0.707 0.897 1.200 4.797 -4.797 MoveableAssets 0.150 0.530 0.100 0.039 3.130 3300 Project hieeienta 32.680 31.362 51.750 52.000 10.680 28.000 68.355 68355 c Prov. CMAi Av. EVpen. O) - - - - 4.000 21.071 28.218 ' 28.218 Toul 40.500 40.932 67.981 68.879 46.741 91.737 183.455 183.455 Surplusl(Deficit) (33.272) (22.221) (36.428) (35.376) (45.011) (89.237) (181.255) (163.955) = = = = == =Z= = = === = = = = = =3C = = === = == == OTHER CIVIL AVIATION XFMENDITURES: Meeological Dept. (c) 2.400 5.650 4.993 26.235 37.002 73.375 120.845 * 120.845 (d) L Met. Cbargs (d) - - - - - - (24.169) Aiport Police (e) - - - - 10.052 21.445 34.312 Air Services Trag Int - - - 19.721 22.367 30.859 49.374 ' 49.374 Total Odier Ependitures 2.400 5.650 4.993 45.956 69.421 125.679 2D4.532 146.051 = = == ==== = == = = = == = =S= = = = === = == == == == = Surplusl(Deficit) (35.672) (27.871) (41.421) (81.332) (114.432) (214.916) (385.787) (310.006) Notes: (a) Inludes costs of maintenance carried out by Roads Dprtment. (b) Includes aiport maintenac carried out by Prvincial Roads Department. (c) Includes povincial meteorological epnd after 1991. (d) Assmes 20% of total costs are recovead through landing fees at NACL airports. (e) Ahpot Police charged to NACL from 1992 onwards. ' = Estimated. -50- 111 The DCA levies landing and parking fees at all their airports (there are separate schedules for category II and category m airports), although in practice they are only collected at category II airports. The DCA also collects passenger service departure charges on behalf of the Ministry of Finance. In the case of landing and parking fees, DCA staff issue invoices at the airfield and the airline is expected to remit payment to DCA headquarters in Lusaka. The proceeds are then credited to the government's general revenues. The accounting system does not record accounts receivable. There is no follow-up when an invoice is issued to ensure it is paid and to follow up delinquent accounts. Staff from DCA's accounting unit collect the airport departure fees and these are remitted directly to the Ministry of Finance. Again, there appears to be no systematic monitoring to discourage evasion and leakage. 112 Current landing fees are negligible. The average fee during FY90 was K 55 (about $1.90). Fees were last revised in March 1987 (when the exchange rate was K 10 = $1.00) and have not been raised since. The landing fee for a 2-tonne Cessna 206 is K 11.20 (ess than $0.10), while that for a 6-tonne ATR 42 is K 89.60 (less than $0.75). Tnese fees need to be raised by a factor of at least 12 to reinstate their FY87 values. The passenger service departure charge is currently K 80, which is lower than the K 200 domestic departure charge applied at NACL airports. A quick check on the relationship between landing fees and revenue collected suggests that arrears are not a problem. However, once fees are raised, arrears could increase and DCA would need to introduce a more systematic method of accounting for invoices issued, bills paid and delinquent accounts. A quick check of the passenger service departure charge likewise suggests that evasion and leakage are not a problem, but this could change if the fee was raised, or expressed in foreign exchange. B.2 Options for Reform 113 To improve financial performance and minimize the burden on the government's recurrent budget, it might be desirable to commercialize all category II airports and require DCA to account for them as a separate commercial entity within MC&T. Commercialization would enable operation and management of the main regional airports to be separated from that of the minor (bush) airports and also from DCA's regulatory and policy making functions. The commercial accounting systems would provide a transparent record of income and expenditures, account for capital assets (in the form of a balance sheet) and show sources and application of funds (and identify reliance on government budgetary transfers). When supplemented by cost accounts, the accounting framework would also identify options for cutting costs and show the profitability of individual airports. The accounts would also record accounts payable and help to identify delinquent accounts and bad debts. Fees and charges could then be raised without fear of increasing evasion and leakage. 114 Apart from commercializing category II airports, the reforms should concentrate on raising fees dnd charges. If the average landing fee was raised from the present figure of K 55 (corresponding to the fee paid by a 10 tonne aircraft) to $40 and the passenger service departure charge was raised to K 200 (to equal the NACL domestic departure charge), annual revenues would increase to nearlv K 18 million at FY92 prices and exchange rates. To ensure the fees and charges retain their value, they should be expressed in dollars. Although the higher fees and charges would only marginally reduce the overall FY92 deficit (from K 116 million to K 99 million, excluding development expenditures), it would at least move the deficit in the right direction. - 51 - 115 Other reforms worth considering include: (i) should Kalabo (and even Zambezi), which handle very little traffic, be re-classified as category m airports; (ii) should responsibility for selected airports (e.g., Southdowns) be transferred to district councils (who would become responsible for managing the airport and financing any deficits); (iii) should such airports be transferred to NACL; or (iv) should bids for operation of such airports be invited from private operators (either to manage the airport, or to operate it under a lease arrangement). Southdowns already deserves such consideration. With revised charges it would earn about K 11.4 million p.a. (nearly $100,000) and with improved management could probably be financially self- sufficient. 116 Finally, there is the question of development expenditures. DCA has estimated that it needs to spend about K 133 million ($2.7 million) rehabilitating and modernizing airports (at FY91 prices and exchange rates). Most of these expenditures relate to works at Southdowns, Chipata, Kasama and Kasaba Bay (K 120 million of the K 133 million). The remainder is relatively minor work. Development budget allocations for FY91 were K 32 million and the estimate for FY92 is K 65 million (both equivalent to about $0.5 million). These allocations appear reasonable. DCA is nevertheless reviewing the above rehabilitation and modernization plan with the assistance of technical assistance provided by the African Development Bank (AfDB) and, once the review has been completed, the development budget allocations should be revised. B.3 Conclusions 117 The main recommendation of this section is that operation and management of all category H airports be commercialized to improve performance and reduce demands on the government's recurrent budget. The main steps would involve: (i) Separating operation and management of category II airports from DCA's other responsibilities and accounting for them as a separate commercial entity within MC&T. (ii) Raising fees and user charges and expressing them in dollars to ensure they maintain their value. The average landing fee needs to be raised to about $40 from the present level of K 55, while the passenger service departure charge needs to be raised from K 80 to K 200 in line with domestic departure charges at NACL airports. (iii) The government should consider whether Kalabo (and Zambezi), which carry very little traffic, should be re-classified as category Im airports. For other airports, particularly Southdowns, the government should consider requesting district councils to take over their operation and maintenance, transfer them to NACL, or transfer them to private operators. (iv) Present provisions in the development budget appear reasonable. Once DCA has completed its review of the development plan under technical assistance provided by AfDB, the development budget allocations should be revised. - 52 - VI. ER, TRNSPRT AENrCIES 118 The review of the remaining government-owned transport agencies was confined to Engineering Services Corporation Ltd. (ESCO), Mpulungu Harbor Corporation Ltd. (MH) and Zambia National Shipping Company Ltd. (ZNSL). Although ESCO and ZNSL are relatively important agencies, little is known about their financial performance and they have consequently been grouped under Other Agencies. A. Eneineering Services Cooratioil 119 ESCO was established in December 1989 to take over the responsibilities of the former Mechanical Services Department (MSD) which had until then been part of the Ministry of Works and Supply. The responsibilities taken over from MSD included procurement of government vehicles, maintenance of government plant and equipment, and repair and maintenance of vehicles. ESCO inherited 2,500 staff (now reduced to 900) and assets, valued at the end of 1988, of K 205 million (probably worth about $20 million). The assets consisted of vehicles, plant and equipment, workshops and a large stock of spare parts. ESCO did not take over any road construction and maintenance equipment. RD kept all its heavy plant and equipment, but most of its large workshops were taken over by ESCO. There are nine main regional workshops and each has several district workshops under its control. Most work is concentrated in Lusaka, Livingstone and Kitwe. 120 The new organization continues to procure government plant and equipment and provides four main types of service to government departments, public enterprises and private sector clients. They include: (i) repair and maintenance of plant and equipment; (ii) hire of plant and equipment (cranes, fork-lift trucks, compressors, etc.); (iii) operation of machine shops and metal fabrication facilities; and (iv) installation, maintenance and rehabilitation of air-conditioning equipment. Although the intention when creating ESCO was to diversify its customers, 60 to 70 percent of the corporation's revenues still come from government departments. Their current customers include the Army, Airforce, Central Statistical Office, Ministry of Health and Ministry of Education. 121 ESCO's financial position is precarious and government had to provide grants of K 60 million in FY91 ($1.2 million) and has budgeted a further grant of K 120 million ($1.0 million) to keep the corporation solvent during FY92. The extent of the corporation's financial problems are still unclear. Although it has been in business for over two years, it has not produced any accounts and is still in the process of getting auditors to produce a Statement of Affairs covering the first 15 months of operation (December 1989 - March 1991). Indications are that turnover for this period was about K 90 million. However, this includes a large element of arrears (mainly attributable to insolvent government departments) and many of these commitments are likely to become bad debts. The corporation is also seriously short of cash. There are frequent reports of the corporation being unable to meet its salary bill and spare parts have been sold to private customers to finance current operations. The corporation has also run up an overdraft of K 80 million on which it is paying 46 percent interest. The financial position seems to be improving (unverified estimates are that losses were down to K 60 million during the first quarter of 1991/92 and down to K 7 million during the second quarter). -53 - 122 ESCO has still not managed to develop much private sector business and several government departments (the Roads Department being one), either prefer to maintain their own mechanical plant and equipment or use other agencies instead. The corporation inherited a bad image from MSD and is having considerable difficulty overcoming it. Current plans for restructuring seem to be confined to tinkering with existing arrangements by reducing manpower (by an estimated 250 out of 900) and concentrating workshop operations on the three main regional centers (probably Lusaka, Livingstone and Kitwe). The other regional workshops would then either be leased to the private sector, or sold. No serious consideration seems to have been given to other forms of reorganization. 123 A serious restructuring of the organization should probably start off by dividing it into clearly defined business centers focussing on: (i) procurement of government vehicles and equipment; (ii) hire of plant and equipment; (iii) overhaul and maintenance of vehicles and heavy equipment; (iv) metal fabrication and light engineering; and (v) installation and maintenance of air-conditioning and other equipment. The second step would be to concentrate on those business centers which were profitable (or could be made so) and to down-size or close those which were problematic (ike maintenance and repair of vehicles which faces stiff competition from the private sector and appears to account for much of the corporation's bad image). The restructured corporation might then be privatized as a whole, or as individual business centers, through mflanagement and staff buy-outs, or by outright sale. This procedure was successfully used when the New Zealand Ministry of Works was corporatized in 1988 (the commercial activities of the ministry were divided into four main business centers - civil works, consulting services, computing, and building services - and the latter two were quickly privatized under management buy-outs). The time-table for privatization should be no longer than two years. 124 There appears to be no case for further infusions of public capital to keep ESCO going (other than to reduce the corporation's overdraft as part of a restructuring exercise) and the corporation should be encouraged to sort out its own affairs and to do so in an expeditious and energetic way. The tragedy of ESCO's present predicament is that it has not put the overhaul and repair of road maintenance equipment on a sound basis, so that RD cannot rely on ESCO to provide its workshop services. B. Mlulungu Harbor Corporation Ltd. 125 MH came into being at the end of 1989 when it took over responsibility for operation of the harbor from MC&T. MH is a relatively small port. It has 72 employees and handles about 60,000 tonnes of cargo p.a. (about 40,000 tonnes of exports and 20,000 tonnes of transit traffic). This is equivalent to about 260 tonnes of cargo per day (i.e., about 10 truck loads per day). Burundi is the main destination for cargo shipped through the port and other destinations include Tanzania, Rwanda, Malawi and Zaire. The main commodities handled are cement and sugar. The PTA secretariat has estimated that traffic at MH could grow to 120,000 tonnes by the end of the decade, but this forecast appears optimistic. 126 Port facilities consist of one rehabilitated quay - financed by the European Economic Community (EEC) in 1984 - and another in a run-down condition. The port also owns a fair amount of equipment which includes cranes, fork-lift trucks and tractors. Storage facilities include four warehouses (two are in a poor state of repair and are not being used) and cargo must often be stored in the open awaiting shipment. This causes problems during the rainy season when sugar and cement have to be stored in the open. -54 - 127 MH produces annual accounts which are subject to an external audit. The auditors qualified the 1990/91 accounts, because they considered the systems of stock control inadequate. The annual accounts show a loss of K 95,677 on a turnover of K 7.3 million during the first 15 months of operation and a profit of K 745,492 (roughly $15,000) on a turno;r of K 13.0 million during 1990/91. Accounts receivable are substantial and account for more than half recorded turnover (i.e., the port is owed over $100,000). MH has furthermore not yet agreed on the value of the assets taken over from MC&T and the accounts consequently do not include depreciation. It seems likely that the assets will be valued at about K 15 million (only about $125,000 at the average 1992 exchange rate) and, since much of this consists of plant and equipment, the inclusion of a realistic item for depreciation would turn the 1990/91 profit into a loss. 128 There seems to be no case for spending large sums of public money on rehabilitating the second quay, providing workshops, or procuring more port equipment. The future of the port is in any case being reviewed under a study financed by the EEC. The port is small, handles a limited range of cargo (mainly cement and sugar) and could quite easily function outside the public sector. It may therefore be desirable to consider greater private sector involvement. The port could either be operated under a private management agreement, selected port services could be sub-contracted to the private sector (e.g., provision, operation and maintenance of port equipment, cargo handling ser.ices, etc.), it could be operated under a concession arrangement, or the entire port could be sold to a private sector operator. It is suggested that these options be explored before any further public funds are provided. C. Zambia National Shipping Company Ltd. 129 ZNSL was established at the beginning of 1989 and set up its headquarters in Colchester, U.K. It was primarily a liner shipping service and started business by chartering three vessels of about 12,000 Dwt each. S ,rvices were initially operated between selected European ports (Hamburg, Antwerp and Feli;stowe) and four African ports (Walvis Bay, Beira, Dar-es-Salaam and Mombasa). The Beira service was soon terminated because of long turnaround times and two additional ports of call were added in South Africa (Durban and Port Elizabeth). The service relied on carrying cargo from Africa to Europe and had great difficulty finding any return cargoes. The main export cargo was copper, supplemented by smaller amounts of tobacco, coffee and groundnuts shipped from Zimbabwe via Beira. 130 The company had great ambitions. It was not satisfied with operation of services between Africa and Europe and wished to expand its services to include routes to India and to Far Eastern and MAediterranean ports. It also wanted to estabiish joint ventures with other shipping lines to further diversify its business. The company operated under the jurisdiction of Zimco which was also a major shareholder. However, after three years, the company had still not produced any accounts, or was unwilling to share them with either the Bank or Zimco (in spite of being responsible to, and part owned by, Zimco). Press reports suggest that losses during 1991 amounted to about K 69 million ($1.4 million). The future of the company was reviewed during 1991 and a decision was taken to liquidate it by allowing its boat charters to lapse when they became due for renewal. The company will therefore cease to exist at the end of March 1992. 131 International shipping is a highly competitive business and small national shipping lines can only survive in a competitive market if they are protected, or heavily subsidized. ZNSL clearly hoped to receive such protection and the government's Committee on Transport Policy did suggest that Zambia adopt the UNCTAD shipping code to ensure cargo was diverted to ZNSL. - 55 - Tbe UNCTAD code is a cargo reservation system, which asserts the right of national shipping lines to carry up to 40 percent of their own foreign trade. Another 40 percent can be carried by nationals from the other countries involved in this trade, while the remaining 20 percent can be shipped through the open market. The cargo is allocated to one of these categories by a National Shipping Council which receives a large commission for providing this service. This appears to be a painless way of protecting local carriers. However, it does so by forcing shippers to use local carriers, regardless of cost and quality of service. The cargo allocation system likewise encourages gratification payments (to the Shippers Council) to avoid being classified into the 40 percent reserved for local carriers. 132 Most countries in Africa operate cargo reservation systems to force shippers to use the national shipping lines. The costs of these arrangements are substantial. For example, the rates from Northern Europe to Angola are $170 per tonne for reserved national flag carriers and $80 per tonne for international carriers. This difference costs Angola an additional $26 million a year in extra freight charges. The costs of shipping freight via local carriers in Africa typically costs 30-40 percent more than open market fixings. This is a high cost to pay for the benefit of having a national shipping line. Other parts of the world recognize these costs and have been moving away from the UNCTAD shipping code, particularly in Asia and Latin America. Estimates prepared for the Uruguay Round negotiations likewise show that the annual costs of cargo reservation systems vary from $400 million in Malaysia, through $250 million in India to $80 million in Chile. 133 Under the circumstances, the government appears to have made a wise decision in deciding to liquidate ZNSL. No provision has been made in the following Public Expenditure Program for any costs which might be incurred during FY92 in winding up ZNSL. However, the company is quite likely to end up with large debts. If these are guaranteed by the Zambian government, the 1992 budget may have to absorb these costs. On the other hand, if these losses are not covered by government guarantees, the company should simply be allowed to go bankrupt in the normal way. - 56 - VII. QEIRQL SER ERFOMANCE 134 This chapter examines the impact of the government-owned transport sector on the overall economy. It examines it from three points t f view. First, by looking at the sector's financial impact on the government's overall fiscal balance; second, by looking at the sector's contribution to external indebtedness; and third, by examining the scope for diversifying ownership and increasing private sector involvement. A final section adds a postscript outlining actions taken by the government since the substance of this report was first discussed with the government in December 1991. A. OQerl Fiscal Balance 135 The overall financial performance of the sector is summarized in Table 15. The table shows the net flows between the government and the transport sector. Positive items are deficits and represent flows of funds Jrom the Ministry of Finance (injections of cash and/or equity), overdrafts and short-term loans provided by government-owned banks (mainly Bank of Zambia), or short-term loans from commercial banks carryir3 government guarantees. Negative items are payments to the government and consist of surpluses of government departments, corporate taxes and charge-back items (e.g., Airport Police, meteorological charges and Road Traffic Police). The table shows flows for each transport agency and the totals for all agencies. It includes FY91 actuals, the FY92 estimates under the Business-As-Usual (BAU) scenario and the likely impact of proposed reforms on the estimated deficits for FY92-94. Table 15. Consolidated Pueb Emoendit N rs, for Trananort (a) (Kwacha, mliii.) Rwcurrat Budget Devleopment Budget FY92 FY93 FY94 FY91 FY92 FY92 FY93 FY94 FY91 FY92 Eat BAU Est BAU Loca FX Local FX LoAK2 FX MinistlrofC &TH.Q.(b) 360 m 892 m 892 24 170 25 55 25 SS 25 55 Roads: Roads Deputment 442 911 (194) - - 420 791 295 496 538 4,531 434 5,148 Shortfal of Rd Maint 1,429 3,575 3,575 2,767 1.916 Zambia Pbfic- - (100) (i'4) - - - - - - Road Transport ConrctrHaulage 0 0 0 0 0 0 0 0 0 0 0 0 0 UnieD Bus 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Tunsort (c) 0 0 120 120 120 - - - - - - - - Civil Aviation: Nafinal Airports 0 0 0 0 0 60 384 48 336 48 336 48 336 Mctorological Charge (d) - - (24) (24) (24) - - - - - - - - Airport Police Costs - - (34) (34) (34) - - - - - - - - DeptL Crv Aviation 187 321 269 269 269 28 65 IS 50 15 SO 25 240 Zambia Arwys (C) 2,326 3,000 2,000 1,500 0 0 0 0 0 0 0 0 0 _ Rs;WEys: (1, 1500 2,000 1,500 1,000 0 110 3,751 60 240 240 I,20 240 1,200 Other Transport E!DPB. SerVieesCor. '0 120 120 0 0 10 ? ? 0 0 0 0 MupFUungu Habo q 0 0 0 0 0 0 0 0 0 0 0 0 Nationd Shipig ? ? ? 0 0 0 0 0 0 0 0 0 0 Tota RequihrentMs: Inc Mint Shorall 6,304 10,818 8,224 6,390 3,035 652 5,161 443 1,177 866 6,172 7m2 6,979 S of Gov Cunret Rav. 15.2 14.0 10.7 6.6 2.7 - - - Eal mInt Shotfafl 4,875 7,243 4,649 3,623 1,119 652 5,161 443 1,177 866 6,172 712 6,979 * of Gov CUrn51 R 11.7 9.4 6.0 3.7 1.0 - - - - Not: (a) Figure e not ricty compuable. Some rlte to caledar yeas ad othr to Apr1 I to March 31. FY91 figunrs at curnt prices and excha rates; remader at FY92 pries and exchange rate ($1.00 = K 120). (b) Eclud ping on Chpat-Mcrinji ra inc. (e) Uran rnspor enue sot fo Cpra Councils. (dD as20X of meoogicl depa n cost charged against intirport uses from FY92. This ww1ld incease eisting landing and deatr fees by about 8 percet. (e) Shoitenr indebednes and overat to govnment owned banks. Actual. for FY91, remainder arc mission estimates. (0) Mision esimat with tagt reductions for FY93 nd FY94. Dvelopment e ditures substantially reduced. - 58 - 136 The introduction to this report suggested that transport agencies should be able to operate commercially without the need for net financial transfers from government, other than to cover specific PSO grants. Instead, however, the transport sector is imposing a severe drain on the government's overall fiscal revenues. In PY91 the sector's cash shortfall amounted to K 4,875 million (nearly $100 million), or 12 percent of the government's total current revenues (revenues, less grants). When shortfalls of regular road maintenance are included (to reflect the sector's requirements, rather than what it actually received), the shortfall amounted to K 6,304 million ($126 million), or 15 percent of the government's total current revenues. The shortfall was mainly attributable to ZA and ZR. Estimates for FY92 (BAU), show an increase in Kwacha terms, but a reduction in $s. This reduces the shortfall to 9 percent of total current revenues without the maintenance shortfall and 14 percent with the shortfall. However, it is important to note that this improvement is dependant on both ZA and ZR cutting their dollar losses during FY92. 137 Table 15 emphasizes the urgent need to restructure selected transport agencies. The transport sector is now one of the country's main macro-economic problems and the government's macro-economic stabilization program will only succeed if it includes actions to reduce the severe financial losses b =urred by selecteri transport agencies. The main culprits are clearly ZA and ZR, followed by kD, DCA and E CO. The restructuring program therefore needs to focus on: (i) addressing ZA's short-term financial problems and setting out a firm agenda for medium and long-term development (disposing of surplus aircraft, closing for- -n sales offices, reviewing the route structure and reviewing current air freight services); and (ii) tackling ZR's financial problems and defining a clear role for the railways in the Zambian economy (concentrating on the core rail business, getting out of operation of workshops, reducing locomotive and rolling stock requirements and abandoning the TYDP). Equally important, is the need to put road maintenance on a sound financial basis by raising user charges, commercializing RD and rebuilding road maintenance capacity. DCA and ESCO are smaller problems, but should nevertheless still be addressed as part of the sectoral restructuring program. 138 The potential impact of the above reforms are also spelled out in Table 15. Although it is difficult to be precise about the impact of the reforms and the speed with which they can be implemented, the table suggests that the sector's overall cash shortfall could be reduced to 6 percent of total current revenues in FY92, through 4 percent in FY93 to 1 percent in FY94. When road maintenance shortflls are included, the percentages amount to 11, 7 and 3 percent resrsctively. In other words, within three to five years, the transport sector could in principle again be brought into balance with all road maintenance expenditures fully funded. B. External Indebtedness 139 Government and govermment guaranteed debt outstanding and disbursed (DOD) attributable to the transport sector is summarized in Table 16. It shows that the sector as a whole accounted for about 9.3 percent of all DOD as of October 1991 (excluding short-term debt and IMF loans) and about 11.1 percent of project loans (i.e., excluding debt rescheduling, import credit and structural adjustment loans). For a revenue earning sector capable of financing many of its requirements from internally generated funds, this percentage is probably too high. Most of the debt is accounted for by railways (mainly Tazara), roads and air transport. The road sector has also benefitted from a large number of grants. Since these three agencies are also responsible for the largest financial problems in the transport sector, the loans - together with the covenants which usually accompany them - have not been effective. It may also have been unwise for donors to fimance road expenditures through grants. Road rehabilitation has already hecome a substitute for regular road maintenance and, by financing it on a grant basis, donors have further weakened the need to raise road user charges (gasoline and diesel prices in Africa are amongst the lowest in the world). It might make more sense to borrow for roads (and to service the loans by raising road user charges) and to use grants as leverage to improve the financial performance of railways and air transport. -59 - oble 16. Trmort Sector gA _bgn _wtadGvtCumnedDb Outstanding & Disbursed Total Committment Agement Units $8 Lender Currency ('000) Date I. RAILWAYS: African De relopment Bank U/A 8,000 02/1980 6,230 8,207 Austria A. Sh 26,664 08/1979 7,499 561 China Yuan 15,000 08/1983 15,305 7,730 China Yuan 494,000 07/1970 494,000 200,813 China Yuan 5,000 08/1986 5,000 1,449 European Economic Community $ S,000 06/1980 2,658 2,658 European Development Fund EUAF 8,000 02/1980 6,640 8,696 World Bank (BRD) S 25,000 06/1980 32,366 32,366 World Bank (IDA) $ 15,000 06/1980 15,000 15,000 World Dank (IDA) SDR 20,500 04/1985 1,544 1,575 OPEC Special Fund $ 4,S00 08/1979 1,332 1,332 U.K. U.K. Pds 1,000 04/1987 250 411 Sub-Total 264,300 Ii HIGHWAY TRANSPORT: Arab Bank for Dov. of Africa $ 10,000 04/1978 9,410 9,410 Arab Bank for Dev. of Africa $ 15,000 07/1985 15,000 15,000 China U.K. Pds 7,000 05/1967 20,470 56,293 World Bank (IBRD) $ 10,700 10/1968 3,510 3,510 World Bank (IBRD) $ 11,250 06/1978 9,842 9,842 Italy $ 22,922 08/1985 18,779 18,779 Italy $ 11,750 06/1986 3,200 3,200 Saudi Fund for Development SRLS 65,000 04/1982 11,761 3,429 U.S. AID $ 10,510 09/1981 8,2S0 8,250 Sub-Total 127,712 m. LAND TRANSPORT: Denmark D. Kr 4,245 09/1981 2,478 348 Germany $ S44 12/1980 367 367 Netherlands NLG 2,363 12/1980 1,327 667 Sub-Totd 1,382 IV. BUS TRANSPORT: India Re 22,518 08/1983 22,518 2,230 India Re 11,020 12/1979 6,612 813 India Rs 17,544 07/1980 11,753 1,495 ECESA (Liberia) $ 575 03/1981 460 460 SDESA (iberia) NLW 1,100 12/1986 1,100 553 Sub-Total 5,551 V. AIR TRANSPORT: OPEC Special Fund $ 5,000 01/1988 998 998 U.S. Export Credit $ 32,000 07/1984 44,600 44,600 U.S.S.R. Supoliers Credit U.K. Pds 2,969 01/1980 1,484 637 Sub-Total 46,235 Grand Totad 445,180 As % of All Debt Outstd & Disbursed 9.3 As % of All uectsDA 11.1 -60- C. Dv g ersh n c gi ecr Invmn 140 The final issue which government needs to address as part of any transport restructuring program relates to ownership. It is not thought, at least at this stage, that RD (even if reconstituted as a Roads Board), or ZR are suitable candidates for diversification of ownership. On the other hand, more of their activities could be sub-contracted to the private sector and some parts of both RD and ZR (e.g., quarries, workshops and the pre-cast concrete factory) would benefit from greater private sector involvement. It is likewise unlikely that ownership of NACL could be diversified in its present form. However, if runways and air traffic control equipment were owned by DCA and NACL merely managed them under a management contract, ownership of the restructured airports corporation could probably be diversified, either through a management-staff buy-out, or sale to local financial interests. Ownership of CHL and UBZ could also be diversified through a management-staff buy-out, or sale to local financial interests. MH could be dealt with in the same way, although there may be some advantage in allowing foreign financial interests to take over the corporation. Arrangements for CHL and UBZ could be completed within 1 to 2 years; those for MH could be completed within 2 to 3 years. ZA needs to be restructured before attempting to widen its ownership. Ownership would benefit from integration into a wider regional or international network of services and this would involve sale to a major regional, or international airline. Tbe remaining agency to be dealt with is ESCO. Although it is a relatively small corporation, it is in serious financial difficulty and it would be desirable to resolve this as soon as possible. It is therefore suggested that ESCO be quickly restructured and either sold off as separate business centers (Preferably under a management or staff buy-out), or liquidated. Ihis could be done within 2 years. -61 - D. The substance of the above review was presented to the govenment in the mission's Aide Memoir. dated December 12, 1991. An informal draft of the present report was discussed with the Government during February 1992 and the Grew Cover report was discussed during September 1992. lhe government's response to the report was swift and decisive. Immediate steps were taken to reduce ZA's losses and a consultant was recruited to prepare an emergency restrucuring plan. The consultaots reported in September 1992 and the restructring plan is now under implementation. In the case of ZR, a new Managing Director was appointed and a major restructuring program is curendy under preparation as part of the restructurg of the Bank's Fourth Railway Project. To address questions raised about the roads sector the government volunteered to be included in the Road Maitenance Initiative administered by the Bank and is proposing to explore a wide range of reforms under the Bank's Infrastructre Engineering Credit which is currently under preparation. CHL and UBZ are both due to be privatized under the government's wide-ranging privatization initiative and MC&T is exploring ways to restructure NACL so that part, at least, might also be privatized. In the case of DCA, the government decided not to go ahead with commercialization as recommended in this report. With so many other initiatives going on this was probably a wise decision, although commercialization should still remain a long-term goal. Finally, a restructuring plan has been prepared for ESCO and the government is currently reviewing it before deciding whether to implement the plan. The above initiatives represent a bold response to the bleak financial picture presented in the report. In that connection, the report has served a usefil purpose in pin-pointing areas of concern, quanifying the consequences of current policies, suggesting options for reform and outining potential areas of Bank assistance to support the reforms (e.g., providing help to explore options for restructring the airline, helping to restructure the railways and oudining ways to reform management and maintenance of roads). The key to success is nevertheless government commiitment. It was the government's willingness to adopt the report and broadly accept its prescriptions which made the difference. The report played a catalydc role by outlining the mantude of the problem, suggesting solutions and (of particular importance) helping to develop a shared vision with the Ministry of Finance. I Annaex Esimated Number of Viles anid Income From License Fees 1. It is unclear how many vehicles are currently operating in Zambia. Annual licenses are issued at the District level and the numbers are not consolidated to give the total size of the active vehicle fleet. The only consolidated statistics relate to: (i) the number of insured vehicles (some basic insurance is c.npulWory); (ii) the number of road service licenses issued (to operate commercial vehicles for hire and reward); and (iii) the number of new vehicles registered with the Traffic Commissioners (TCs). 2. The total number of compulsorily insured vehicles at the end of May 1991 was 38,951. The costs of basic insurance varies from K50 ($0.60) p.a. for a private car to K150 ($1.82) p.a. for buses, and trucks. The basic policy only pays out when there are serious injuries, or a fatality. The average payment is under K40,000 ($500) and, given the small size of the premiums, is rarely paid out. The general consensus is that most vehicles are uninsured. The figure of 38,951 is thus substantially less than the actual number of vehicles operating in Zambia. 3. Road service licenses only cover vehicles operating for hire and reward. They do, however, indicate how many foreign vehicles are providing transit services to and from Zambia. During 1990 the TCs issued s}.ort-term licenses to 2,531 foreign trucks and 2,200 foreigp tractor-trailers. It is estimated that these licenses cover operation of an average fleet of about 1,500 vehicles making about 12 trips p.a. 4. Statistics on new registrations are unreliable. TLn. -gures compiled by the Central Statistical Office (CSO) differ from those compiled by the TCs. The TC figures furthermore appear to relate to all vehicles up to 1980 and only to annual registrations thereafter. The CSO nevertheless prepared a special estimate of the total vehicle fleet in 1975 and a SATCC study produced estimates for the vehicle fleet in 1984. The TC figures for 1980 likewise appear to relate to the total vehicle fleet in that year. Finally, as a further check on the size of the vehicle fleet, the U.K. Transport and Road Research Laboratory vehicle wastage model was used to estimate the overall size of the vehicle fleet from annual new vehicle registations. These estimates are summarized in Table A. 1. 5. The final column in Table A. 1 represents the mission's best estimate of the current size of the vehicle fleet in Zambia. Most figures are reasonably consistent with previous estmae. The main discrepancy relates to the number of cars. The various estimates vary from 94,000 to 27,000. However, since anmnal sales of gasoline suggest there are about 70,00 to 100,000 cars and light commercial vehicles operating in Zambia, the number of cars is probably close to 70,000. The annual consumption of diesel fuel is reasonably consistent with the estimated number of buses and trucks. 6. Table A.2 uses the above vehicle fleet estimates to calculate current revenues from license fees (asuming all fees are collected) and the implications of increasing these fees. Ihe figures suggest current revenues should be about $585,000 and this would rise to $11.4 million if fees were raised to the levels set out in the third column of the table. Annex I Page ; Table A&1. Estimatec_Number of Domestic Vehicles Estimated Vehicle Type 1976 (a) 1980 (b) 1984 (c) 1988 (d) Fleet Motorcycles 10,208 5,164 4,819 5,238 5,000 Passenger Cas 94,259 69,003 68,032 26,702 70,000 Buses & Minibuss 855 957 1,064 2,545 2,500 Vans, Vanettes & Ambulances 29,438 17,821 18,545 18,911 19,000 Tnucks 17,293 12,447 16,971 5,597 6,000 Total 152,053 105,392 109,431 58,993 102,500 Notes: (a) Estimate prepared by Central Statistical Office, 1977. (b) Total motor vehicde registrations, Road Traffic Commision, Lusaka. (e) Estimates prepared for the 1986 SATCC study on road user charges. (d) Estimates prepared from annual new vehicle registrations and natural wastage rates. Vehicles brought In from other countries have been troated as cars. Annex 1 Page 3 Table A.2. Estimated Revenue from Ucense Fees (a) (U.S. $) ------------------------------------------------------------ Ucense Fees Total Revenue ________________________ Current Proposed ($,'000) Estimated -------------------------------------- Fleet Kwacha $s Kwacha $s Current Proposed ___________________________________-_______________________________ Motor cycles 6,000 200 1.67 600 5.00 8 25 Passenger Cars Private 30,000 2,500 20.83 9,000 75.00 625 2,250 Govemment 40,000 - - - - Buses Private 1,000 4,500 37.50 36,000 300.00 38 300 Govemment 1,500 - - - - Vans, Vanettes & Ambulances 19,000 2,000 16.67 15,000 125.00 317 2,375 Trucks Private 1,000 5,500 45.83 60,000 500.00 46 500 Govemment 5,000 - - - - Total 102,500 1,033 5,450 Notes: (a) Exchange rate: $1.00 = K 20 ANNEX 2 Page 1 OPURATKNAML PEWCRMANCE 1666 1967 10U6 16 1690 1901 1196 Ab t A f A_hW AM Pu T4M ('00( 4,068 4.53 4,620 4,902 4,087 3.43 T-bn (mi 1,65 1.837 1.3"5 - 1.404 776 Pamngw TwAU Nwm*e (000) 1.271 1,571 1,684 2,182 1,187 788 P-1n (Ml) - - - - 208 170 NumbLr dLo _ometvu own 71 71 71 Hked 25 22 13 SW 8,489 ? 8.500 Apg*LooomdveAvlybOE) so so s0 54 43 AvwagK Per L LooomoI Per Day h 224 231 244 1og 200 208 245 Abmg. tg AMaY () e1 88 88 88 90 91 89 AHango'Akgn Terwramd Ths (days) Dometc 13 1 14 10 20 17 10 Mhwsb 4 4 4 5 12 12 10 EVortAnwt NA NA NA 30 31 31 30 Tra_wk 4 4 4 a 7 6 Average Apgon Loan (Tremo) Geinr Fredt 25 27 37 s6 Mhwab 40 44 44 40 PrQoducIry Per Avalble Wagon Per Year (000 vo ) 260 ? 260 260 SWlProduty (000 .Ir ULh per ERhy.) 207 213 207 192 200 210 ANNEX 2 Page 2 z RA.WAYS PfOFrr AC LOS 5rATEMWdT -- - FY 196/ 11U1711 100 198W8l 1090/- 1 INCOME Pasngo 171,Z6 25,719 44,415 S98 83,053 Gnrwal GoodsMirnb 386,412 448,6"1 U2,004 I6208 2,94,880 Sterage. Dwuara. Ote 10,456 24,457 20,044 50,80 138,"0 Uvntok 3.312 m 2,400 11,120 22,050 SWI Ren,t 2,865 2.731 5,943 46 8.477 MIscmllaneous CaterIng 0.Ot4 110.51 17.4N 6,S809 107,085 Tol Ironcme 4006992 514Wo6 643,331 1.4490248 3,304,015 EXPENDnlUR Operating Expendib Adminbtrave 01C 9g 128,833 225.886 351,442 495.873 937,460 Opwating and Running 90,604 127,317 1029S1 423,45 1,258,482 M&LtsMnanWs/Trmks 84,077 07.725 101.09 1860,779 531,771 Go& passenger HandInh 31,28 34,964 12,29 308519 84.335 Caterlngtr.nnha 426 0 2822 0 0 uin.. inuininmin Uin=022mm~ mtmum , Toa COperating Expido 348.168 485.882 830.423 1,122,624 2812,048 OpratIngncome 61.824 28,414 12,00 326,624 491,967 Non wOaing Expendite Fbunnc Clwgo 0 0 0 0 224,703 Decreese In Provisbn for DhInutlon InVaaudeolntbest 2,177 0 0 0 0 Exchange Loes 49.873 O9l00 50,372 716,017 704A,9 Prlbnnfor Bad Debt 0 0 14,023 29,780 0 TAX 206 to96 2,6 2tO9 2,9t6 Total Non Operfing Eipmdbe 55,016 12,486 68,26 748,733 032268 Not lneome A808 15,948 (55.5) (422,100) (440,301) Rattn on Total Asst % 2 -4 -24 -6 Rate of Reiwn on Not Fbld Aseet % 3 -8 -44 -10 ANNEX 2 Page 3 ZAMBIA RPALWAYS BALANCE SHEEr Ohoaad kWaahe FY 18oa 19117/88 lo8w 198/9 1990/911 Aeb PAua A I AIW Aduh FIXED ASSETS 861,728 828,740 9048,87 1.481.474 2.020,408 INTEREST IN SUBSIDIARY 5,814 9679 16,006 10,202 S8.104 UNITARY SYSTEM ACCOUNTS 41,183 43,105 45,088 45,443 46,108 Toal Fixed Aes 608.725 681.524 1,000,026 1,520.119 2,729,800 CURRENTASSETS Sboks 08806 112,800 258.418 814,118 410,618 Cabtors 169,300 155,960 180,278 501.400 1,078,877 Snk and Cah 72,339 90,96 194.048 252,400 107,M =w==s=J s== ===Wu= cmmin I =M=i=====c ===n==c S==O TotalCuentAssats 310.451 448,509 588.732 1,08,0683 1.597272 Unralsed Exchange Losses/GaIn 64,115 44,616 127865 792727 241.782 Tol As"et 978,201 1,174,708 1,726,513 3,380,009 4,562,854 LLABDTlES CURRENTLIABIUTIES Creditrs 260,295 372.300 540,769 1,485,580 670,886 Taxation 2,906 2,960 2.960 2.96 5,932 BankOverdraft 9,472 1,403 5,801 S,365 114,609 ======, ======== ==== === ======= ======a== Toal Cwrent LaliIe 278,733 370.875 6S5,530 1,493,881 797,427 LONG-TERM LLADLMES Long-Term Loan 453.437 460.147 820,353 1,584,899 1,470,029 Tot Liabte 732,170 880,822 1,175,889 3,078,780 2,274,066 EQUtTY Auhoried hare Capilta 197,758 197,750 197,756 197,758 197.766 Pending Alloent of Shar 20,938 89.241 331,274 4660542 2,317,048 Grant 9,420 21,934 47,992 90,338 686,401 Dlstribube Reserves 13,007 26*85 (20,388) (446,507) (813,007) ==Gg=Sm,=S *SS=====.s = _ = ==Mum i==== Total Equlty 241.121 337,886 580,624 308,129 2,288,798 Tota LiabiUe and Equity 973,291 1,174,708 1,720,513 3,3806,909 4,602,854 CurrentRaftlo tes) 1.11 1.19 1.06 0.71 2.00 Dbt Equity Ratio 27:75 71:29 68:32 90:10 J0:50 ANNEX 2 Page 4 ZAMBIA RAILWAYS SOURCES AND APPUCATION OF FUNDS (thousand kwacha) 1986187 1987/88 1988/89 1989/90 Actual Actual Actual Actual SOURCES OF FUNDS Internal Sources Profit Before Tax 14.128 18,914 (52.387) (417.143) Add: Unralsed Exchange Losses/Gain 49,873 9.500 28.165 55.395 Deprs,Istlon 40,202 40,304 73,536 67,874 Proision for Diminullon In Value otIntevevtIn8ubsidluy (2,177) 0 0 0 Deferred Expenditure & Write Off 0 0 4,383 0 LosIGaJn on Dispoul of FA 458 446 0 (1.084) Total lntemal Sources 102,484 69.164 53,697 (294,958) Funds Rom Other Sources Government Grant 25,333 88,303 242,033 135,268 Received for Rehab-Mulobozl Branch 9,453 12,290 24,339 33,880 Long-Term Debt 52,568 6,710 85,853 337,320 Interest In SubsIdiary 1,870 0 SalesProceedsofFA 70 459 0 1,536 "===== =._==. . __=..=. =.==.=_=. ===.. ==========. Total Other Soures 89,294 87,762 352,225 508,004 otlal Sources 191.778 158,926 405,922 213,046 APPUCATION OF FUNDS AddliIon to FA 152,950 107,997 386,400 334,602 Intent In Subsidiary 0 3,865 5,204 (3,974) Unitary System Accounts 150 1,922 1,978 360 Tax 2,881 2.966 2,968 2,966 Loan Repald 0 36 33 70,999 Increa/Decrease In Working Capitd 35,817 40,176 9,338 (190,907) Tota Apa==oRd9 n==e==== , *-========2 ==========. Total Appcstlon ot Rinds 191,778 156,962 405,919 214,048 ANNEX 3 Page 1 ZAMBIA AIRWAYS CORPORATIOP &l.MITE PROFIT AND LOSS ACCOUNT (thousnd kwacha) 116/117 1187/64 10056/8 1161/90 1090101 OPERATING REVENUE Pasngr a Baggage 436,347 500,9 745.013 1.800.53 3.9089.403 Freight & MSa 80.023 80.616 127.781 213.305 480,064 Chares 24.610 45,705 32.108 890.13 134,457 MIcelaneous U2.710 54.426 122.245 (3.197) 371.377 sC__x _omz = a tnsE M=C=ww= =w sst as==: Total OpatIng Revenue 004,745 6094.248 1.028.027 2,100.474 4.976,20i OPERATING EXPENDITURE A/C Deprecation 0,845 0.024 17.115 33.317 72,547 A/C Insurance 31.781 28,528 23.374 204.170 557,241 Flying Operations 102W501 203,061 277.057 331.720 1.327,130 Technical Sele 61,061 10.,830 07.060 280.918 550.307 Ground Options 41.000 53.3u 7 63,449 90,807 330.075 P angor S8ewlca 37,300 44,731 54,832 471.313 1t53.030 Sal"Advert.Pubicity 1306.30 144,88 203.801 290.212 1.470.521 G*n.& Administration 37.159 u3.001 122.307 205o,20 770.04 Hire of Aircraft 0 0 0 307.04 302,849 Aircrat Charte 0 0 0 2t1,533 325.478 Total Operating Expenditure 534.31 042.740 us,.024 2,531.720 7.322,048 Opwating ProltfLos 609,014 81.,50 168.103 (422.248) (2.345.757) Other Income 0 0 0 141,714 30o,525 Profit on Sale of Fkied Aset 0 0 0 1.007 3,074 Subtotal 0 0 0 142,721 312,509 ProfitAftwr Othr Income 09,914 51,508 108,103 (270,526) (2,033.158) NON-OPERATING EXPENDITURE Finance Chargs 20.457 25.280 33.561 11,052 73.077 Exchangos/aln= (1.7a0) 11,041 00,078 307,004 382,649 Dlminuion Value ofA*Ica Bound 0 0 40,445 187,126 StafiTTring a Doevelp. 1.670 1,044 3.846 0 0 Uini .8 ..... m.u .i . Total Non-Opoating Exp. 29.220 38.251 07.285 366.001 022,8652 ProltLoos SBefore Tax 40.60 13,257 70.818 (287.366 (2.111.352) TAx 486 oo0 488 488 488 Net Profit 40.190 12,957 70.330 (287.874) (2.111.840) ANNEX 3 Page 2 ZAMBIA AIRWAYS CORPORATION LIMrrED BALANCE SHEET (thousand kwacha) 1986/87 1087/88 108/80 1980/90 1090/01 FiXED ASSETS Net Fixed Asse 184.341 127.852 312,607 370.341 4.853.213 Investments 36.204 41.529 23,305 4.328 0,220 CURRENT ASSETS Gonral Stores 5.977 8,067 10.454 63,059 222,319 Debtors 138,231 202,771 288,050 554,029 818,710 Funds on Deposit 72,444 55.65 136,250 251,890 235,001 Bank Baane and Cash 29,024 31,2S8 84.411 218.743 340.651 Tax recoverable 0 0 2,351 0 0 Due from Subsidiary 0 0 25,950 0 0 ====--===D e==========U =-e=..a==a- ======stas= =======s=== Tota Current Asseht 245,676 2908,81 5t3.481 1,087,721 1.,16.5U7 Differed Expenditure 5,332 7,977 9,288 3,410 1,537 Total Asets 421,843 476,219 881,681 2,181,161 8,286,304 CURRENT LIABiLTIES Creditors 157,000 143,329 282,738 869,038 1,813,270 Sales In advance 61,600 95,450 131,825 289,701 463.675 Short term loan 12,283 10,447 33,484 144,130 095,347 Bank overdmts 1,240 24.031 30,380 142,616 910,003 Tax 864 661 0 7,907 8,670 Dividends payablb 2,000 2,894 8,000 8.000 0 Difrred Exchange Lous 0 0 0 700,363 1,805,741 ========-=s I-=~=====sc m=8ss=s==a. ===== ==s= Total curren Liabiities 234,993 277.412 402,216 2.170,765 5,966,802 LONG TERM LOAN 15,356 14,264 13.260 9,524 25,548 Loot. obiUgations 226,264 197,129 38S.687 869,612 2,329,295 Urarealbed Exchange Losses (169,662) (143,674) (220,118) (709,363) (1.805,741) Dierrod LiabUlty 98,658 202,674 ,==== .... n=......... ........... =====asc= === s w========s 8==_a*= Toal Long Trm Liabilities 71,968 67,710 178,825 268,431 781,776 'otal Libitieb 300,091 345,131 671,041 2.430,226 6,718,578 EOL;iTY Share Captal 32,532 32,532 32,532 32,U32 32,532 Received Pending Aiotmt of Share 67,000 63,309 63,300 63,209 63,309 RevenuaReevo 23,870 33,976 114,799 (S53,906) 1,471,885 Non-Dldributable Reseve 1,271 1,271 0 0 0 === 8 _ =- ~~~~~===a =a== _*9zC=f xxv es===_ Total Equity 114,682 131,088 210,040 (268.06 1,567,720 Total Liabilities A Equity 421,643 476.219 881,661 2,181,161 8,280,304 Dobt Ratio (96) 0.73 0.72 0.76 1.12 0.81 Equity Ratio() 0.27 0.28 0.24 -0.12 0.10 ANNEX 3 Page 3 ZAMBIA AIRWAYS CORPORATION LIMITED SOURCES AND APPLICATION OF FUNDS (thousand wacha) 1980/87 1987/88 1988/89 1989/90 1990191 INTERNAL SOURCE Loss hefore Tax 40,080 13.257 70,818 (465,732) (2,111,840) Add: ProltlLoss on Sale of PA (8.250) (181) (55,649) (1.148) (3,030) PtovionnAgalnstSubaldia 0 0 1,010 0 0 Asse Writtn nOf 0 0 0 1,259 1,428 Deprcation 9.013 9,527 25.480 34,730 74,940 Amortlton of Defwrrd Expenditure 1,570 2,744 3,840 5.878 1.873 Deferred Liabiliy 98.68 104,010 ExchangeLo.e. 10,780 5,442 17,831 83,512 210,372 m==c====S u c==S==a===== ==e====c===3 ===S==ni ======= Thai Internal Sources 59.700 30,780 63,122 (242,843) (1,722,235) OTHER SOURCE Lease Finance 0 0 158,758 28,402 491.651 Proceeds fromr Sal oftFA 8,046 246 04,509 1.536 4,381 Increase In Long Trm Loan 509 17,377 Tax Recovered 0 224 DecrIsaeInlnvstmente 17 22 19 Recelvd Pending Alomet of Shares 67,000 6,309 0 0 0 NotDecreaselnAircratSparws 0 17,011 0 0 0 -=-=== 8.== ..cccw=a=.. ==-==-=a==s =s==D==ttt==== s==========D Total Othe Sources 65,663 23,658 223,288 30,507 513,633 ToW Source of Fund 125,453 54,377 288,408 (212,336) (1,208,602) APPLICATION OF FUNDS Purchate of Fixed Asstsh 10,030 20,114 219.075 118,343 500,602 Increase In Aircraft Spares 10,284 0 Deferred Exponditure 3,200 5,380 4,957 0 0 lno.in interest Subsidiaris 12,074 5,257 0 3,276 4,900 Tax Paid 0 8a3 3,500 4,000 0 Dividends Paid 0 1,606 1,994 0 8,000 Decrase In Long Trm Loan 2,288 2,920 1,008 1,030 776 Leas Finance Repid 22,858 8,001 41,438 41,520 151.059 *==1=w==5s =X ==S=S= S- ======-====c =a====55tt===D =====n==== Total Application of Funds 70,64 44,750 271,072 108,181 702,327 increase/Decrease In WC 54,810 0,621 14,430 (380,517) (1,070,029) =.Aps=p= atn12ea =4 53=====w=S =====3288=82 t e========28 Total Appilcallon 125,458 u.,377 288,408 (212,336) (1,208,602) ANNEX 4 Page 1 ZAMBIA CONTRACT HAULAGE UiMITED PUBUC EXPENDITURE REVIEW STATISTICS 1988/89 1989/90 Operational Statistics Number of vehicles 149 130 i