Document of

The World Bank

Report No: 21073-ZM

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 21 MILLION(US$27 MILLION EQUIVALENT)

TO THE

REPUBLIC OF ZAMBIA

FOR A

RAILWAYS RESTRUCTURING PROJECT

OCTOBER 18, 2000

TransportAfrica Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective September 20, 2000)

Currency Unit = Zambia Kwacha (ZMK)

= Us$US$1 = ZMK 3330.00

FISCAL YEARJanuary I - December 31

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance StrategyCDF Comprehensive Development FrameworkDRC Democratic Republic of CongoECZ Environmental Council of ZambiaEMP Environment Management PlanERR Economic Rate of ReturnFRR Financial Rate of ReturnGRZ Govenument of the Republic of ZambiaICB International Competitive BiddingIDA International Development AssociationIFAC International Federation of AccountantsMCT Ministry of Communications and TransportMCTI Ministry of Commerce, Trade and IndustryMFED Ministry of Finance and Economic DevelopmentMLSS Ministry of Labour and Social SecurityNCB National Competitive BiddingNTKM Net Ton KilometerNPV Net Present ValueNSSN National Social Safety NetPAS Project Accounting SystemPIP Project Implementation PlanPMR Project Management ReportPHRD Policy and Human Resource Development FundPSO Public Service ObligationROADSIP Road Sector Investmnent ProgramRWUZ Railway Workers Union of ZambiaSA Special AccountSADC Southern Africa Development CommunitySATCC Southern Africa Transport and Communications CommissionSDR Special Drawving RightSIDA Swedish International Development and Cooperation AgencySOE Statement of ExpenditureZCCM Zambia Consolidated Copper Mines LimitedZPA Zambia Privatization AgencyZR Zambia RailwaysZRL Zambia Railways LimitedZRRP Zambia Railways Restructuring Project

Vice President: Callisto MadavoCountry Manager/Director: Yaw Ansu

Sector Manager/Director: Maryvonne Plessis-FraissardTask Team Leader/Task Manager: Yash Pal Kedia

ZAMBIARAILWAYS RESTRUCTURING PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 32. Key performance indicators 3

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 32. Main sector issues and Government strategy 4

3. Sector issues to be addressed by the project and strategic choices 6

C. Project Description Sumnmary

1. Project components 72. Key policy and institutional reforms supported by the project 123. Benefits and target population 124. Institutional and implementation arrangements 12

D. Project Rationale

1. Project alternatives considered and reasons for rejection 122. Major related projects financed by the Bank and other development agencies 143. Lessons learned and reflected in proposed project design 154. Indications of borrower commitment and ownership 165. Value added of Bank support in this project 16

E. Summary Project Analysis

1. Economic 172. Financial 173. Technical 184. Institutional 195. Environmental 226. Social 237. Safeguard Policies 25

F. Sustainability and Risks

1. Sustainability 262. Critical risks 263. Possible controversial aspects 27

G. Main Credit Conditions

1. Effectiveness Condition 272. Other 27

H. Readiness for Implementation 27

I. Compliance with Bank Policies 28

Annexes

Annex 1: Project Design Summary 29Annex 2: Detailed Project Description 32Annex 3: Estimated Project Costs 43Annex 4: Cost Benefit Analysis Summary 44Annex 5: Financial Summary 50Annex 6: Procurement and Disbursement Arrangements 52Annex 7: Project Processing Schedule 59Annex 8: Documents in the Project File 60Annex 9: Statement of Loans and Credits 63Annex 10: Country at a Glance 64Annex 11: Social Impact Analysis 635

MAP(S)IBRD 31135

ZAMBIA

RAILWAYS RESTRUCTURING PROJECT

Project Appraisal Document

Afiica Regional OfficeAFTTR

Date: October 18, 2000 Team Leader: Yash Pal Kedia

Country Manager/Director: Yaw Ansu Sector Manager/Director: Maryvonne Plessis-Fraissard

Project ID: P003227 Sector(s): TW - RailwaysLending Instrument: Specific Investment Loan (SIL) Theme(s): Private Sector; Transport

Poverty Targeted Intervention: N

Project Financing Data[ Loan 3 Credit O Grant El Guarantee OI Other (Specify)For Loans/Credits/Others:Amount (US$m): 27

Proposed Terms: Standard CreditGrace period (years): 10 Years to maturity: 40Commitment fee: not exceeding 0.5% Service charge: 0.75%

GOVERNMENT 4.00 0.00 4.00

IDA 19.20 7.80 27.00

Total: 23.20 7.80 31.00

Borrower: GRZResponsible agency: ZRL, ZPA, MCT, NSSNZambia Railways LimitedAddress: P.O. Box 80935, Kabwe, ZambiaContact Person: L. Janesson, Acting Managing DirectorTel: 260-5-221197 Fax: 260-5-224411 Email:

Other Agency(ies):Zambia Privatisation Agency

Address: Nasser Road, P.O. Box 30819, Lusaka, ZambiaContact Person: S.A. Cruickshank, Chief ExecutiveTel: 260-1-22-3859 Fax: 260-1-225270 Email: zpa@zpa.org.zmMinistry of Communications and TransportAddress: P.O. Box 50066, Lusaka, ZambiaContact Person: B. Nonde, Permanent SecretaryTel: 260-1-254158 Fax: 260-1-253260 Email:

National Social Safety NetAddress: Fourth Floor Lusaka HouseP.O. Box 32186, Lusaka, ZambiaContact Person: Ngosa Chisupa, DirectorTel: 260-1-237981 Fax: 260-1-237983

Estimated disbursements ( Bank FY/US$M):

Annual 16.0 .4.0

Cumulative 16.0 23.0 27.0

Project implementation period: January 2001 - December 2003Expected effectiveness date: 01/15/2001 Expected closing date: 06/30/2004

OCS PAD F- R. UP, 200

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A. Project Development Objective

1. Project development objective: (see Annex 1)

The Project development objective is to enable Zambia Railways (ZR), through restructuring andprivatization, to substantially increase its operating efficiency, reduce its cost of operations, and configureits freight services and tariffs to meet customers' requirements and expectations, and consequently, toincrease its share of the local, international, and transit freight traffic. Additionally efforts of a privatizedand efficient ZR to increase its share of freight traffic are expected to result in:

1. Heightening of rail-road competition and, consequently, overall reduction in transport costs, leading tothe Zamnbian economy becoming globally more competitive and growth-oriented;

2. Balancing of the respective shares of freight traffic between rail and road modes; this would result in asignificant reduction of traffic on road, particularly the long-haul and bulk traffic, and therefore asignificant reduction in the ideal budgetary allocation of funds for the maintenance, rehabilitation andexpansion of the road network in Zambia. (Note: Due to funding constraints, the budgetaly allocationsfor road maintenance and rehabilitation in the recent years have been grossly inadequate. As costrecovery improves as a result of mechanisms being put in place under the on-going Road SectorInvestment Program (ROADSIP), the budgetary allocations for road maintenance are expected toincrease, but the levels to which these need to increase would be lower.)

3. The ZR-linked international rail corridors becoming more efficient and cost effective, leading to moretrade between countries along these corridors, viz., South Africa, Mozambique, Zimbabwe, Zambia,Democratic Republic of Congo (DRC), Botswana, Uganda (after the setting up of inter-gaugetransshipment facilities in Tanzania), and Angola (after the reopening of the Lobito rail link);

4. ZR becoming financially self-sustaining and being in a position to reward its capital providers;5. The Government of the Republic of Zambia (GRZ) being able to reduce its budgetary deficit through

receipt of concession fees, taxes, and hire and lease charges; and6. Zambia generating more foreign exchange through a shift of considerable transit and international

traffic from mostly foreign road hauliers to ZR.

2. Key performance indicators: (see Annex 1)

Key indicators of success would be:

1. The speed with which concessions negotiations are commenced and concessions operationalized, thetarget dates being June 30, 2001, and three months after signing of the concession agreements,respectively;

2. Freight traffic on rail, the targets for the years 2000 to 2003 being 1.65, 1.8, 2.00, and 2.4 million tons,respectively;

3. Transit traffic on rail, the targets for the years 2000 to 2003 being 200,000; 220,000; 240,000; and260,000 tons, respectively;

4. Progressively increasing arnount of income tax paid by the concessionaires; and5. Progressively increasing total cash flow from the concessionaires to GRZ.

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 19889 Date of latest CAS discussion: 11/17/99

The Country Assistance Strategy (CAS) addresses three strategic priority areas, based on consultationswith GRZ: (i) the removal of constraints to sustainable, diversified growth; (ii) improved govemance; and

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(iii) better access to basic services and direct poverty interventions. These strategic areas provide the basicbuilding blocks for the current working version of the Comprehensive Development Framework (CDF)matrix. The challenge articulated in the CAS is to help Zambia move to a sustainable growth path thatdirectly leads to more rapid growth and poverty reduction in the future. Underscoring the importance ofdiversified growth, two thirds of new operations and 75% of IDA lending under the CAS periodconcentrate on removing constraints to diversified growth.

Inadequate infrastructure has been identified as a major bottleneck for private investment and diversifiedgrowth. The CAS states that, "reducing transport costs will help increase competitiveness and underpingrowth in agriculture, tourism, manufacturing, and mining." The CAS states that IDA will support aproject to facilitate private participation in the operation and management of ZR, to enable the railways toincrease operating efficiency and, consequently, its share of the freight market. By creating the conditionsnecessary for the efficient and sustained operation of the railway system, the proposed project would enablethe rail operators to increase their gross and net revenue. In particular, project funds will facilitate privateconcessioning of ZR and retrenchment of surplus railway staff.

In addition, the Project can be seen as a critical element in the overall framework of economic andstructural reforms being undertaken by the Zambian Government. An efficient rail transportation networkis key given the landlocked situation of the country, the need to leverage past investment, and the challengeof high costs of road transportation. An efficiently managed and financially viable railway network is alsofundamental to the future success of the recently privatized copper mines. Finally, given the recent trendsin restructuring of railway enterprises in Sub-Saharan Africa, the Bank's strategy to support railwayconcessioning in Zambia is not only timely but also essential. Indeed, there is a market opportunity forrailways at this time, and ZRRP has the elements to assist GRZ in leveraging this interest and attractingniche players by providing the right incentives.

2. Main sector issues and Government strategy:

The main transport sector issues are: (a) the high cost of transport; (b) perceptions of an uneven playingfield between rail and road; (c) the high level of financial support from the Govemment to all transportsub-sectors; (d) the poor condition of rail and road infrastructure; (e) the high rate of accidents and poorrecord of safety; and (f) the slow rate of regional consolidation.

High Cost of Transport. The overall cost of transport in Zambia continues to be excessively high. Roadtariffs range from US$0.07 to 0.10 per net ton kilometer (ntkm). Although still lower than the averageroad tariff, the average rail tariff (about US$0.04/ntkm) is almost twice the level of efficiently runrailways, such as in USA. Moreover, ZR rail users currently have to face costs induced by unpredictabilityof operations, frequent delays, improper handling and storage of goods, derailments, and accidents. Theabnormally high transport costs are eroding the global competitiveness of most commodities and adverselyaffecting exports. The main reason for the continuing high transport costs is the absence of effectiveinter-modal and intra-rail competition. The absence of competition is in tum the result of the railways'declining performnance and its inability to provide an acceptable level of services. The Government'sstrategy to reduce these costs is to create conditions that would enhance inter and intra-rail competitionwithin the country. Inter-modal competition is proposed to be enhanced by enabling both the railways andthe road hauliers to operate more efficiently, the railways through the involvement of private sector in theoperation and management of key railway functions, and the road hauliers through provision of improvedroads, facilities for training of entrepreneurs and staff, and easing of border crossing facilities. Intra-railcompetition is proposed to be enhanced by opening the railway infrastructure to more than one operatorafter an agreed period of exclusivity for the concessionaires.

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Perceptions of an Uneven Playing Field. ZRL has for many years been stressing the absence of a levelplaying field for the rail and road sub-sectors, arguing that: (a) road user charges amount to only a fractionof the entire cost of road maintenance, whereas the railways are required to maintain their infrastructure bythemselves without any financial support from the Government; and (b) the road user charges for thelarge-capacity road vehicles, which are the railways' main competitors, do not adequately reflect therelationship between high axle loads and the resulting road degradation. This situation, according to ZRL,has so far given an unfair advantage to the road hauliers and has been the main cause of the railways'declining traffic. The fact, however, is that in spite of the road user charges being low, the road tariffs inZarnbia have continued to remain substantially higher than the corresponding rail tariffs. An efficientlyperforming and customer focused ZR could have maintained its share of fl-eight traffic at a considerablyhigher level in spite of the stated disadvantage. Even so, the Government's strateg' is to increase road userfees to cover short term maintenance and upkeep of all roads. This would definitely benefit the railways.However the projections of traffic, and hence the concession fees, are based on the current cost recoverylevels for roads.

High Level of Govemment Financial Support to the Sector. The Govemment currently providessubstantial financial support to all the transport sub-sectors. In the road sub-sector, despite GRZ's effortsto improve cost recovery, revenues continue to lag behind the road network's capital and maintenancerequirements. In the railways sector, although the Govemment is no longer providing a direct operatingsubsidy to ZRL, it has from time to time been forced to write off its loans as ZRL has never been in aposition to service them. Continuous neglect of maintenance of assets by ZRL has caused those assets todeteriorate to such an extent that a substantial injection of private or public capital would be necessary toprevent the railways from collapse. The Government's strategy to reduce its financial support to thesesectors is to continue improving cost recovery from road users and to open the rail sector to private sectorparticipation.

Deteriorating Condition of Inftastructure. Despite the high tariffs and substantial past investments, therail infrastructure is in very poor condition. Three reasons account for this: (a) the poor quality ofmaintenance, which has resulted in faster-than-normal deterioration of the infrastructure; (b) concentrationof huge amounts of funds on certain sections of the infrastructure and development of these sections tounnecessarily high standards while starving others of even the minimum basic maintenance; and (c)adoption of highly sophisticated technology both in track and signaling and high dependence on imports ofparts and skills. The road infrastructure has similarly suffered due to the shortage of funds caused byinadequate cost recovery from road users, lack of enforcement of axle load regulations, and inefficientmaintenance. As the Government's capacity to finance the required capital expenditure remains poor, thetransport infrastructure is at considerable risk of further deterioration. The Government Strategy toimprove the infrastructure is to open the rail sector to private participation and increase the road usercharges to cover at least the short-term marginal cost of roads.

High Rate ofAccidents and Poor Record of Safety. The rate of accidents on both roads and railwaysremains very high. Inadequate safety consciousness, lack of investment in safety equipment and training ofstaff, and inadequate enforcement of safety regulations have been the main reasons for the high rate ofaccidents. The Government's strategy is to emphasize improved traffic management as well as improveand enforce safety regulations.

Inadequate environmental management. An environmental audit of the railways has shown the absence ofan environmental policy and environmental management plan, as well as non-compliance with theestablished environmental and safety standards. The Environmental Council of Zambia (ECZ) has limited

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capacity to enforce these standards. The Government Strate2v with regard to railways is to strengthenECZ so that it monitors compliance with the environmental and safety standards.

Slow Rate of Regional Integration. In spite of expressed intentions, the railways in the region have not yettaken concrete steps to integrate their functions and activities and thereby take advantage of the economiesof scale and specialization necessary to achieve the high levels of efficiency and productivity expected ofrailway systems. There is marked reluctance on the part of individual railways to give up any facilities orfunctions. The concessioning of the railways could trigger regional integration, as the private sector seeksto gain from advantages of scale by entering into appropriate contractual agreements with the neighboringrailways and other service providers. The Govemment does not yet have a clear strategy in this regardexcept to make ZR a strong link between South Africa and DRC. The Govemment's expectation is that theprivate operators, in their search for efficiency and productivity gains, will be more likely to work with theneighboring railways to integrate many of the railway functions.

Governmnent Strategy for the Rail Sub-sector

Privatization. To address the issues described above, GRZ has decided to seek private sector participationin the operation and management of the railways. The agreed mode of private sector participation wouldbe private concessioning of infrastructure and selling or leasing of locomotives and rolling stock. Privatesector participation is aimed at dealing with problems normally associated with public ownership andmanagement, viz., inefficiency, over investment, waste, excess employment, financial losses, and atproviding capital to address issues of deferred maintenance.

StaffRationalization. Staff rationalization is a key component of the GRZ strategy to improve efficiencyand cost effectiveness of public enterprises in general and the railways in particular. On July 1, 1998, ZRLhad a staff of 5,082 plus 800 "casual" workers. This has progressively been brought down to 3,293 bynatural attrition as well as retrenchment. The optimal staffing level for ZRL, however, is much lower.According to the ZRL management, the optimal level is 1800, while according to the consultants therailways can be run efficiently by only 800 staff. The potential concessionaires would probably settle on astaffing level between 800 and 1800, thus requiring retrenchment of staff of between 1400 and 2400:

Regulatory Framework. The responsibility for safety and environment-related regulation for the railwaysis currently exercised in an informal and unsatisfactory manner by ZRL itself. To avoid the inherentconflict of interest, GRZ's strategy is to strengthen the existing regulatory bodies within and outside MCT,and to enforce technical, environmental and economic regulation more effectively. The regulatory bodieswould be expected to deal with many of the issues discussed above, such as uneven playing field,inadequate competition, and fair trade practices. The Govemment plans to explore the need for furtherdevelopment of the regulatory framework and/or institutions.

ZRL Restructuring/winding up. Eventually ZRLwill hand over the freight and passenger business toconcessionaires. The future role of ZRL as an entity has still to be defined. ZRL may have need tocontinue operating as a downsized state owned company with the responsibility of spinning off theremaining commercial and non-commercial activities (i.e., not taken over by the concessionaires such asguest-houses, clinics, football teams and police), discharging all its liabilities, selling off the remainingassets, and finally winding itself up. ZRL may also have to be retained if: (i) no proposals are received forthe passenger concession and ZRL is required to continue operating these services; and (ii) ZRL is requiredto serve as a holding company holding the infrastructure assets on behalf of the government.

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3. Sector issues to be addressed by the project and strategic choices:

The proposed project will assist GRZ and ZRL in the:

1. Finalization and operationalization of private concessions for ZR's freight and passenger operations,with the objective of reducing transport costs, improving the condition of infrastructure, contributing tothe Government's revenues, reducing accidents and improving safety, and improving compliance withenvironmental standards;

2. Rationalization of staff through: (i) retrenchment of surplus staff; and (ii) counseling, retraining, andre-deployment of retrenched staff, with the objective of reducing costs of operation and facilitating thesuccessful operationalization of the concession;

3. Strategic maintenance of key assets during the concessioning process and until the take over by theconcessionaire with a view to improving the performance of the railways during the concessioningprocess and enabling the concessionaire to maximize performance in the shortest possible time aftertakeover;

4. Development of an appropriate cost-effective regulatory franework with a view to improvingcompliance with environmental and safety standards;

5. Appropriate winding up/restructuring of the residual ZRL after take over of the core railway system bythe concessionaire and spin-off of the remaining assets/activities; and

6. Strengthening of the Ministry of Communications and Transport (MCT) with a view to enhancing itsconceptual and analytical capacity and the refinement and elaboration of the transport sector policy.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The project would consist of the following components:

(A) Railway Concessioning(B) Staff Rationalization

* Staff Retrenchment* Pension Obligations

(C) Assets Rehabilitation(D) Environment Mitigation(E) ZRL Restructuring/Winding Up(F) Regulatory and Legal Framework(G) MCT Strengthening(H) Social Mitigation

Project Component A: Railway Concessioning

Cabinet, at its meeting on March 7, 2000, considered and approved the concessioning of ZR asrecommended by ZPA. To implement this decision and facilitate the private concessioning of the railways,the following studies have been completed: (i) environmental impact assessment and audit study; (ii) assetvaluation study; (iii) in-house social impact assessment study of the staff retrenched so far by ZRL; and(iv) social impact assessment study by external consultants.

The concessioning proposal finalized by ZPA envisages three separate concessions as follows:

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* a geographically separated but verfically integrated short-haul, inter-mine freight service concessioncomprising the Ndola-Chingola section plus branches;

* a geographically separated but vertically integrated long-haul freight service concession comprising themain line (Sakania-Livingstone); and

* an operating concession for a specified set of passenger services, being operated as public serviceobligations.

This component would finance advisory services to implement the agreed concessioning proposal,including: (i) advisory services, which ZPA may require to design, negotiate, implement and monitorthe concession agreements; (ii) legal assistance required for preparation and negotiation of concessions,articles of incorporation and shareholder agreements, as well as for contract interpretation and disputeresolution; (iii) assistance in addressing questions of finance, accounting, asset valuation, and resourcemobilization; (iv) assistance in specialized technical matters, including those pertaining to theenvironment; and (v) assistance in market intelligence and assessment. Inputs for this componentwould comprise consultant services and technical assistance.

Project Component B: Staff Rationalization

This component has two sub-components: (i) Staff Retrenchment; and (ii) Pension Obligations.

StaffRetrenchment. Based on the concessioning experience so far and confirmed by the estimatesproduced by ZRL as well as the consultants who undertook the Private Sector Participation Study, theconcessionaires are likely to engage only between 800 to 1800 staff out of the current 3,300. To be onthe safe side and to avoid a situation of shortfall of funds to finance retrenchment, the allocation offunds for this component is based on an estimated staff employment of 900 by the concessionaire and acorresponding staff retrenchment of about 2,400 staff.

ZRL has recently negotiated with RWUZ a retrenchment package which comprises 3.2 months ofsalary for every year of service. Using this package and assuming that all staff (3,300) would beretrenched, ZRL has estimated the cost of retrenchment to be about US$21.0 million. Theproportionate cost of retrenchment of 2,400 staff would come to about US$15.2 million. Acontingency of 15% has been provided in addition to cope with any variations in the package or thenumber and categories of staff to be retrenched.

The sequence of retrenchment, as developed in agreement with ZPA/ZRL/GRZ, is as follows: (a) 700staff would be retrenched immediately after the Credit becomes effective, the criteria to be used foridentifying the surplus staff having already been agreed with the unions; (b) the remaining staff wouldbe retrenched after the concessionaires have selected the staff according to their requirement.

Pension Obligations. In the past ZRL has defaulted on transferring pension contributions from staff to thePension Fund. Consequently the staff, who are entitled to pension benefits under the Zambia RailwaysPension Rules (either a refund of contributions or a defetred pension on reaching the retirement age),cannot be paid their dues by the Pension Fund. The responsibility for this accumulated liability lies withZRL. It is quite certain that the retrenchment efforts will get stalled unless ZRL meets this liability prior tocommencement of the retrenchment process. ZRL has assured that the balance, about US$1.0 millionequivalent, would be paid to the Pension Fund by December 31, 2001.

This component would finance the severance payments of permanent staff to be retrenched, and would beimplemented by ZRL.

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Project Component C: Assets Rehabilitation

The component would finance three key components to address simultaneously the three major operatingconstraints, viz., inadequate availability of locomotives, poor condition of track, and excessive sidelining ofwagons on account of non-availability of wheels. The items to be financed comprise: (a) materials andequipment for the overhaul of five main line locomotives; (b) strengthening of track by replacing a certainpercentage of sleepers for the 377 kms of track that is fitted with wooden sleepers and replacing woodensleepers in poor condition with concrete sleepers to complete the rehabilitation of the Chisamba-Lusakasection; and (c) procurement of about 2,000 wagon wheels.

Locomotives. The overhaul of five mainline locomotives is overdue, and the longer the overhaul ispostponed the more expensive this would become. The cost for rehabilitation is estimated to beUS$240,000 per locomotive. Allocation: US$1.2 million (IDA).

Track sleepers. Replacement of one in every four sleepers is the most economical way of improving thetrack condition in the short-term. Accordingly the project would include US$0.9 million for 60,000sleepers (IDA) and about US$2.0 million (GRZ) for fastenings, ballast, rails, and crossings. Thecomponent would also include 35,000 concrete sleepers to complete the rehabilitation of theChisamba-Lusaka section at a total cost of US$1.5 million (IDA). This section of track is important as ithas accounted for a large percentage of total derailments in the recent past. The section already hasconcrete sleepers and use of wooden sleepers is not compatible. Allocation: US$2.4 million (IDA) andUS$2.0 million (ZRL).

Wagon wheels. Many wagons are running on wheels that have reached their technical limit of wear andneed to be replaced. The interchange loss on account of detention of defective wagons amounted to aboutUS$ 1.0. million during 1999. About 2,000 wheels are proposed to be procured at a cost of US$ 1.1 millionto be financed by IDA.

Project Component D: Environmental Mitigation

This component would comprise procurement of pollution-control equipment, such as oil separators and fumeextractors, with the objective of bringing the railways into compliance with national and international standardsfor pollution control. These items have been identified and costed in a Environment Study Report.

Project Component E: ZRL Restructuring/Winding up

The future role of ZRL as an entity has yet to be defined. It is possible that ZRL may need to continueoperating as a downsized state-owned company with the responsibility of spinning-off the remainingcommercial and non-commercial activities (i.e., those not taken over by the concessionaires such as guesthouses, clinics, and police), discharging all its liabilities, selling off the remaining assets, and finallywinding itself up. ZRL may also have to be retained if: (i) no proposals are received for the passengerconcession and ZRL is required to continue operating these services; and (ii) ZRL is required to serve as aholding company to hold the infrastructure assets on behalf of the government.

This component would comprise a study on the new role of ZRL and the hiving off of core and non-corebusinesses and technical assistance for the implementation of the study recommendations. Inputs for thiscomponent would comprise consultancy services and technical assistance.

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Project Component F: Regulatory and Legal Framework

This component would include assistance to assess/identify the effectiveness of the existing scope,functions, and instruments of the regulatory framework; (ii) recommend the sectoral coverage andaccountability relationships for the regulatory institution(s).

The component would also include the provision of equipment and technical assistance services to enablethe launching of the identified agency(ies) and the preparation of its staff. Additional finance providedunder this component would cover the technical aspects of the regulatory framework. Consultant servicesfor technical assistance and studies would be targeted at the development of the required capabilities withinMCT or any other institution identified for this purpose, to enable that institution to discharge its role in aneffective manner as a supervisor of the concession contracts.

The component would also include provision of technical assistance services for the setting up by theBorrower of an Escrow Fund to be used for the payment of: (i) the retrenchment benefits pertaining to theservice of eligible employees of ZR; (ii) operating expenditures of any residual part of ZR in the event ofwinding up, reorganization or privatization; (iii) debt service obligations; and (iv) costs of environmentalmitigation measures required.

Project Component G: MCT Strengthening

This component would include a study to (i) review and refine the framework for developing and overseeingtransport policy; (ii) define the new functions of MCT to discharge its role; (iii) assess MCT'sorganizational structure in the framework of this evolving role; and (iv) determine staffing requirements,taking into account GRZ's civil service reform program. The component would also include the provisionof consultant services for technical assistance to enable the implementation of the reconmmendations of thestudy. Inputs for this component would comprise consultancy services and office equipment.

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Project Component H: Social Mitigation

As indicated earlier, between 1400 and 2400 staff could be retrenched during the next one year. ZRL plansto retrench 700 workers as soon as the Credit becomes effective and funds are available. While theretrenchment payments will help, the loss of employment could have a seriously adverse impact on workersunless the retrenchment process is carefully planned and implemented. Previous experience ofretrenchment in ZRL has not been encouraging, as about 5% of the retrenched workers have found formalemployment, another 20% have opened small enterprises, and another 5% have moved to the villages andpresumably smallholder agriculture.

The project has been designed to provide a comprehensive professionally organized approach to mitigatingthe social imnpact of retrenchment. The component would be implemented by the National Social SafetyNet (NSSN), within the Ministry of Labour and Social Security (MLSS), which has substantial previousexperience in mitigation and training activities, and is being developed using the results andrecommendations of a major social mitigation assessment study. Counseling will be undertaken byexperienced professional organizations well in advance of actual retrenchment in order to prepare workersfor the initial period, especially with regard to the use of retrenchment compensation. Retraining andre-orienting workers to altemative employment will utilize approved public and private training institutes,and assistance in resettlement will be considered. It has also been agreed that additional mitigationmeasures will, if necessary, be funded through the concession escrow account.

Project Cost Summary

Railway Concessioning Privatization 1.00 3.2 1.00 3.7Staff Rationalization Public Enterprise 16.90 54.5 15.20 56.3

ReformAssets Rehabilitation Railways 6.70 21.6 4.70 17.4Environmnental Mitigation Pollution Control 0.30 1.0 0.30 1.1

/ WasteManagement

ZRL Restructuring/Winding up Public Enterprise 0.50 1.6 0.50 1.9Reformn

Regulatory and Legal Framework Privatization 0.80 2.6 0.80 3.0MCT Strengthening Institutional 0.50 1.6 0.50 1.9

DevelopmentSocial Mitigation Safety Nets 1.00 3.2 1.00 3.7Contingencies 3.30 10.6 3.00 11.1

Total Project Costs 31.00 100.0 27.00 100.0Total Financing Required 31.00 100.0 27.00 100.0

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2. Key policy and institutional reforms supported by the project:

The focus of the Project is on institutional reform. Key institutional reforms include: (a) private sectorparticipation in the operation and management of the railways; (b) staff rationalization and re-deploymentof redundant staff, (c) corporate restructuring of ZRL to enable it to spin-off the residual functions/assetsafter take over of the main railway operations by the concessionaire and its eventual winding up; (d)restructuring of MCT and enhancement of its conceptual and analytical capacity; and (e) establishment of aregulatory framework.

3. Benefits and target population:

The proposed restructuring, downsizing, and concessioning of ZR is expected to result in a significantimprovement in the railway's operating efficiency and quality of service benefiting all stakeholders.Specific benefits for various stakeholders are expected to be as follows:

a) for the customers - reduced transport costs; better quality and predictability of services; improvednational and international competitiveness; reduced accidents and lesser darnage to goods and life;

b) for the govemment - a better return on its investment in railways; increased revenue from the concessionfees and taxes; improved quality of infrastructure; and lower spending on road rehabilitation andmaintenance;

c) for the concessionaires and investors - an opportunity to get handsome returns on their investments; andd) for the neighboring countries - reduced transport costs on their international traffic passing through

Zambia.

4. Institutional and implementation arrangements:

Implementation period. The project would be implemented over a period of 36 months, i.e., from January1, 2001 to December 31, 2003. A mid-term review will be carried out jointly with IDA and the followingimplementing agencies, no later than 18 months after the effective date of the Credit.

Executing Agencies:(i) for Concessioning of Railways component: ZPA;(ii) for Staff Rationalization, Assets Rehabilitation, Environmental Mitigation, and ZRLRestructuring/Winding up components: ZRL;(iii) for Regulatory Framework and MCT Strengthening components: MCT; and(iv) for Social Mitigation component: NSSN.

MCT will be responsible for the overall coordination of the Project. This will involve the overallsupervision of the components, preparation of project reports, coordination of the mid-term review,maintenance of special accounts, and ensuring timely replenishment of the three special accounts by theirrespective implementing agencies.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

The altematives for the revitalization of ZR have been under consideration for quite some time. ThePrivate Participation Study financed through the PHRD grant discussed a number of options beforerecommending the selected option (see detailed discussion in Annex 2). Of the many options considered,the option of outright sale of the railways was rejected on account of serious political concerns. Thefollowing five options were considered and the first four were rejected. However, some features of the third

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and the fourth options were integrated into the option that was finally recommended, viz., the fifth one.The options considered were: (a) Restructuring but no privatization; (b) Restructuring and strengtheningthe railways prior to concessioning; (c) separation of infrastructure from operations and concessioning ofinfrastructure and licensing of multiple operators; (d) one integrated concession for the freight andpassenger services; and (e) separate concessions for the freight and passenger services as well for theinter-mine and inter-city freight services.

1. Restructuring but no privatization. Privatization of railways in the developing world being arecent phenomenon, the track record of success is still in the process of building up. Combined with manyother concerns over private participation in a strategic institution such as railways, ZRL (under theprevious management) had suggested that the restructuring of the railways along with staff reduction beundertaken, but its privatization be postponed to a later date. The main argument of ZRL management wasthat a downsized and restructured railway could achieve the same type of results as expected from a privaterailway, while avoiding the dysfunctional aspects that are associated with private management such asasset stripping, undermining of public service obligations, profiteering etc. This suggestion was, however,rejected mainly for two reasons. First, the lessons of the Fourth Railways Project and of other railwayprojects in sub-Saharan Africa have been that improvements in operational and financial performancewithin the parastatal framework are slow and unsustainable. Even though compared to past railwayprojects, the "restructuring but no privatization" would have sought more intensive restructuring of therailways and substantial staff retrenchment, the problems normally associated with parastatals, i.e.,inadequate motivation and accountability, government interference, lethargy, bureaucratic rules, wouldhave proved major constraints to any effective improvement in operating efficiency. Second, inherent in thesuggestion was the need for injecting substantial fresh capital for the rehabilitation of infrastructure andother assets, estimated between US$60 million to US$100 million. Not only could the railways not affordsuch a high level of investment, but also GRZ was in no position whatsoever to mobilize resources of thisorder. The private sector on the other hand could be expected, first, to develop a more pragmatic andphased programn of investment, and, second, to mobilize the optimal level of funds required.

2. Strengthening the railways before concessioning. The rationale for this alternative has been that arestructured and improved railway could prove to be more attractive to potential concessionaires leading toa higher value of the concession overall. This altemative was, however, rejected for two reasons. First, theattractiveness of a railway for a potential concessionaire depends less on its current condition orperformance than on its potential. In any case, the condition of the infrastructure and its assets would havebeen reflected in the concessionaires' offer. Second, the claim that the railways' performance could beimproved within a parastatal framework even with substantial inputs has not been proved by pastexperience. The focus of most past railway projects was on rehabilitating infrastructure, creating adequateoperational capacity; developing operations and management support systems, organization restructuring,assets rationalization, performance indicators; and performance contracts between the railways and thegovernments. However, in spite of substantial inputs, these projects generally have failed to improve therailway performnance. In most cases, the railway performance actually deteriorated. In some cases, therailways have deteriorated to such an extent that their revitalization has become more difficult andexpensive.

3. Separation of infrastructure from operations. Such an arrangement is expected to lead tointra-rail competition and, subsequently, to increased operating efficiency and reduced costs. Even so, theoption was rejected because of the somewhat uncertain and controversial outcome of such a separation inUK, the only country to do so. Zambia was assessed to be too small a railway system for suchexpernmentation.

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4. Single integrated concession for freight and passenger services. The option was assessed to bequite appropriate for ZR and eventually may be preferred by the potential bidders. However, since ZRL'sthree key businesses, viz., inter-mine freight, inter-city freight, and passenger traffic, have very differentcharacteristics, a single concession might not be of interest to one concessionaire. If the issue was forcedand the bidders were required to bid for all the three businesses as a single concession, the price offered bythe concessionaires could have turned out to be sub-optimal. Inter-mine freight operations arecharacterized by substantial tonnage but have a very short haul. The locomotive and wagon characteristicsare more appropriate for shunting (switching) operations, the customers are almost always the same,competition is low, and the operational schedules need to be decided in very close consultation with thecustomers. Average speeds are generally quite low and there is a need to keep the costs low by usinginnovative methods particularly for track maintenance and assets utilization. Inter-city freight services aregenerally long-haul operations, particularly for transit and intemational freight. Both marketing andoperations require maintaining close coordination with the neighboring railway systems. Customers'expectations of the quality of service are quite high. The range of goods, customers, origin-destinationcombinations, quality of service, and tariffs is normally very wide and requires complex planning andscheduling capabilities. The operations are required to be carried out in a highly competitive environment.The passenger services are perceived to be loss-making and are being provided as public serviceobligations. The utilization of the assets is generally low, but tariffs have to be kept low. Even so, thevisibility of the quality of service is high, tolerance for accidents is very low and risks are high.

5. Separate integrated concessions for the inter-mine freight and inter-city freight services andoperating concession for the passenger services. In view of the concems with a single integratedconcession, it was decided that three separate concessions would be offered and the bidders would be giventhe opportunity to bid for one or more of these three concessions. The question of whether one or threeconcessions, would thus be decided by the preference of the bidIders and the value of their bids. This optionhas the potential of maximizing the value of the concession (s).

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Implernentation Development

Bank-financed Progress (IP) Objective (DO)

Rehabilitation of ZRL assets Fourth Railway Project S U(completed)

Reforn of the road sector policy and Road Sector Investment S Sinstitutional framework, strengthening Programof the local construction industry andrehabilitation and maintenance of theroad network

Other development agencies

SIDA - Formulation andimplementation of a Restructuring

Program for ZR and immediateimprovement of ZR performance

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IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

Lesson 1: The performance of most railways in sub-Saharan Africa has been characterized by inefficiency,loss of market share, back-log of infrastructure maintenance, and consequently, huge recurring losses.Intemal reforms - corporatization, performance contracts, internal organizational restructuring -businessand profit center approach or functional integration, and many other combinations of functional anddivisional units, geographical decentralization - have failed to stem the declining trend. It is quite apparentthat a parastatal framework within which most railways currently operate - inadequate authority,motivation, commitment, and accountability; continuing govemment interference; and politically-motivatedinvestment and operating decisions - is inappropriate for an environment that is progressively becomingmore competitive. Private sector participation in the operation and management of railways (henceforthreferred to as privatization) is considered essential for improving their performance and making themoperate as financially self-sustaining entities. GRZ's eventual commitment to privatizing the railways inZambia has been the main factor in the Bank agreeing to support GRZ through ZRRP.

Lesson 2: Every railway in the sub-Saharan African region is over-staffed (some to the extent of about 200to 300 percent). Whether managed as it is or through private participation, the railways are unlikely tobecome financially viable unless surplus staff is retired/retrenched. Even though retrenchment of staff is apolitically and socially sensitive issue and difficult to implement, the issue has to be addressed. Tominimize the adverse social impact of the change, it is important that the staff rationalization scheme isdesigned in close consultation with the staff and their representatives, with in-built steps for staffcounseling, retraining, and assistance in their re-deployment. The proposed Project staff rationalizationcomponent has been designed keeping the above considerations in mind and with full formal and informalconsultations with the unions.

Lesson 3: Massive investments in infrastructure, locomotives, rolling stock, and communication systemshave generally been ineffective in improving reliability or efficiency, pardy because the investments werenot always directed at removing the most critical constraints, and partly because the publicly-managedrailways could not effectively manage big projects, modem technology or complex equipment. Theproposed Project would, therefore, leave it for the concessionaires to take and implement key investmentdecisions.

Lesson 4: Railway managements generally find it difficult to effectively manage commercial operationswhile simultaneously restructuring/privatizing the system. Separation of these tasks can lead to betterimplementation. To a large extent, these tasks are already separated in as much as ZRL is focusing onoperations and ZPA is managing the concessioning process. The Project would continue to support thesetwo separate tasks until the core operations are transferred to the newly incorporated concessioningcompanies. The concession design would also ensure that the concessionaire is not forced to manage thedisposal of left-over assets and activities along with managing the core operations. These residual activitieswould be the responsibility of ZRL.

Lesson 5: A change in the legislative framework affecting the railways is important, as most pastlegislation has been generally restrictive of their autonomy, particularly with regard to organizationalrestructuring, commercialization, and privatization. A lot of changes in the legislative framework havealready been made. However, the framework would need further modification to enable effectiveprivatization of railways, removal of any restrictive clauses, separation of infrastructure from operationsand introduction of competition on rail, and effective regulation. The Project includes review andmodification of the current legal and regulatory framework.

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4. Indications of borrower commitment and ownership:

(a) The approval of the privatization option went through the following steps, which demonstratesignificant borrower commitment and ownership:

1. Based on the pleas of the customers, encouraging results of privatization within Zambia and intemalconsultations, the Govemment asked ZPA in 1998 to examine the feasibility and options for privatizingthe railways;

2. the privatization of the railways was approved by the Board of ZRL;3. ZPA engaged intemational consultants to examine various options and make recommendations;4. simultaneously, SATCC engaged consultants to study options for concessioning ZR and make

recommendations;5. these recommendations were discussed in a meeting comprising representatives of ZRL, ZRL's Board

of Directors, the Ministry of Finance and Economic Development (MFED), MCT, MCTI, ZPA, SIDA,the World Bank, and the consultants;

6. the selected option was then sent to the Cabinet for approval; and7. the option was commented upon by all the concemed Ministries of the Government before being

approved by the cabinet.

(b) In spite of a crippling cash constraint, ZRL started implementing in March 1998 a retrenchmentprogram and has already reduced its staff from 5,882 to a little less than 3.300 and paid off theretrenchment benefits by borrowing the needed amount on commercial terms. ZRL backed by its Boardand MCT is fully committed to the implementation of the restructuring and privatization of ZR.

5. Value added of Bank support in this project:

For the past ten years or so, the Bank has been intensively involved in promoting the restructuring andprivatization of railways through concessioning all over the world. In termns of consensus-building, theBank's main efforts have been: (i) arranging two high profile seminars, one on restructuring of railways inBulawayo, Zimbabwe in 1992, and the other in Abidjan on railway concessioning in 1996; (ii) activeparticipation in seminars arrnged by regional institutions and individual railways, round-table conferences,study tours and exchange visits; and (iii) publishing articles and books relating to railwayrestructuring/privatization. The Bank has supported a number of railway projects in Latin America,sub-Saharan Africa, Eastem Europe, and Asia to restructure and privatize the railways. Thecomprehensive support included financing of advice on privatization, consultants and advisory services forbidding process, staff retrenchment and rationalization measures, setting up of regulatory bodies, and keyinvestments in infrastructure. As a result, drawing from this vast experience, the Bank can addconsiderable value to the GRZ's efforts to restructure and privatize ZRL. Additionally, the Bank hassupported four railway projects in Zambia and is familiar with the performance history of the railways, theproblems it has faced and the successes and failures of the past. Even after the closing of the last RailwaysIV Project, the Bank has been assisting GRZ through a PHRD grant in: (i) clarifying and concretizing theconcepts behind restructuring and concessioning; (ii) providing continuous analysis of project features; and(c) coordinating with the donor agencies to develop an integrated approach towards the railways. Bycontinuing its involvement and extending its assistance to the areas not covered under the previous projects,and by making available to GRZ its vast experience worldwide, IDA would be able to assist GRZ and ZRLin bringing the process to a successful conclusion.

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E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):* Cost benefit NPV=US$47.9 million; ERR = 28.1 % (see Annex 4)O Cost effectivenessO Other (specify)

Key Issues

Transport costs. One of the expectations from the private concessioning of the railways is that theefficiency gains will be shared by the key stakeholders. As a key stakeholder, the customers would expectthe transport costs to be reduced, either in the form of reduced tariffs or improved quality of service. It isexpected that the concessionaire, in order to increase his profits, would need to increase his share of thetraffic by offering better quality of service and attractive tariffs. One can assume, however, that theconcessionaires would resort to the minimum possible tariff reductions and/or quality enhancements, justenough to wean away traffic from road. If the road tariffs remain high, the transport cost reductions for theexisting rail customers may remain limited. In order not to depend solely on the rail-road competition andconcessionaire's strategy, the Project would facilitate introduction of intra-rail competition a few years afterthe commencement of the concession. The concession agreement would require the concessionaire to allowaccess to other operators after an agreed initial period of, say, five years. Even the prospects of intra-railcompetition should result in better service to the customers.

Fiscal Impact. One of the expectations from the concessioning of the infrastructure, maintenance facilitiesand leasing/sale of locomotives, rolling stock, and other operating assets is that GRZ's revenues, net ofrestructuring and other railway-related costs, would increase as a result of: (i) increased corporate incometax payable by the concessionaires; and (ii) income from concession fees, leasing fees, and licenses. Threemajor risks to realizing this expectation are: (a) lower than expected concession and leasing fees offeredby the bidders; (b) a major part of the income from the concessions is spent on the residual ZRL and theregulatory body that is proposed to be established; and (c) the income is spent on promoting otheruneconomic public service obligations by the Govemment. To maximize GRZ's income from theconcessioning process, the concessioning proposals include: (i) using the intemational competitive biddingprocess for selecting the concessionaires; (ii) inviting the potential bidders to bid for the passenger,inter-mine freight, and inter-city freight concessions in any preferred combination, viz., one, two or all thethree, thus enhancing the scope of bidding and, with at, the opportunity for enhancement of theconcession value; and (iii) including the possibility of renegotiating concession fees as part of thediscussion to extend the closing date of the concession. To minimize the expenditure of additionalrevenues for railway related activities in the post-concessioning period, it has been proposed that: (i) theresidual ZRL be restructured or wound up in the shortest time possible, and that (ii) all such decisions aretaken in consultation with the Bank.

Stripping ofAssets. There has been widespread concern that the concessionaires, motivated by short-termgains, may allow the infrastructure to deteriorate, thus inflicting a huge cost on the economy at a laterdate. To mitigate against asset stripping, the concessionaire will be expected to capitalize, and allconcession contracts would be required to provide for an independent periodic (yearly or two-yearly) auditof the infrastructure assets along with a system of penalty or reward.

Public Service Obligations. The potential concessionaires' proposals will certainly be based on theassumption that they would be free to decide as to which freight traffic to accept and which to ignore, andwhich line or part of line to operate. For operations that are loss-making, but, in GRZ's view socially or

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economically relevant and undertaken at the behest of the government, the concessionaires would expect tobe adequately compensated. It has been agreed with GRZ that the public service obligations to betransferred to the concessionaires would be identified on the basis of proposals ftom the bidders.

Public Financing of Infrastructure Rehabilitation. The concessionaires in general would prefer to havethe inftastructure of the railways handed over to them in a reasonably good condition. They might insiston Government sharing responsibility for whatever rehabilitation is required. Necessary or desirable assuch investments by GRZ might be, such financing increases Government's risk and forces it to delay orabandon other important investrnents. GRZ would like to avoid making investment commitments andtaking responsibility for the implementation of the necessary rehabilitation projects.

2. Financial (see Annex 4 and Annex 5):NPV=US$ 65.6 million; FRR = 38.6 % (see Annex 4)

Pension Liability. ZRL has for many years defaulted on transferring pension contributions from staffunder the Zambia Railways Pension Rules to the Pension Fund. Consequently, the staff, who are entitledto pension benefits under the Zambia Railways Pension Rules (either a refund of contributions or a deferredpension on reaching the retirement age), cannot be paid their dues by the Pension Fund. The responsibilityfor this accumulated liability lies with ZRL, and it has agreed to pay the arrears by December 31, 2000.

Investments prior to concessioning. As can be seen from the project description, an allocation of US$7.0million has been allocated to enable ZRL to meet its pressing requirements for maintenance and liquidatingaccumulated environment-related liabilities. This has been done after making sure that: (i) the investmentswould make a substantial difference in reducing derailments and enhancing operating efficiency andcapacity and, consequently, the level of traffic; and (ii) the funds can be spent speedily and certainly priorto the take over by the concessionaire. The expected increase in traffic as a result of this investment isabout 0.15 million tons, equivalent to revenue of about US$3.0 million. Excluding the benefits that wouldaccrue as a result of reduction in derailments, the payback period of the proposed investment (IDA -US$5.0 million and GRZ - US$2.0 million) is estimated to be no more than two years. The investmentwould also ensure that the concessionaires would not have to take time to do the same thing and would bein a position to receive enhanced level of revenue right from the date of commencement. This would resultin an enhancement in the value of the concession.

Retrenchment package. The retrenchment package used in 1998 and 1999 comprised 4 months of salaryfor every year of service. Subsequently, the salary structure was revised and a lot of allowances wereamalgarnated with the basic salary. Coincidentally, the term of the 1998 ZRL-Union agreement onretrenchment also lapsed and, therefore, a fresh agreement was negotiated by ZRL with the unions inAugust 2000. According to this agreement, the retrenchment package now comprises 3.2 months of salaryfor every year of service. This package was arrived at by taking into account the increase in the basicsalary resulting from the amalgamation of allowances in the basic salary, the extent of inflation vis-a-vispay increases during the last two years, the extent of unemployment in the country, and the difficulty facedby the retrenched staff in getting reemployed (only 5% of the 1998 retrenchees were able to get reemployedin the formal sector). The real value of the package and hence the allocation of funds for retrenchment,however, remained unchanged.

Fiscal Impact:

See above.

3. Technical:

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Infrastructure Standards. The setting of standards has a direct impact on the operating cost since higherstandards will often mean increased cost of maintenance, expensive track maintenance equipment, and highcost of depreciation. The use of standards that are appropriate for the service proposed could lead toconsiderable cost savings. When finalizing concession contracts, some govemments insist on maintaininghigh standards at high cost, without realizing that this could lead to a considerable reduction in theconcession fees revenues. This is true for sub-Saharan African railways. The technical standards areproposed to be defined in general terms, requiring the concessionaires to ensure safety and maintain assetsin such a condition as to avoid accidents. In particular, the standards for the safe running of the passengerservices would be defined in more specific terms. Beyond that, the concessionaire would be left free toadopt standards of maintenance as appropriate for the traffic levels and business requirements.

Compliance with Standards. Provisions in the contract would be made for periodic independentinspections using computerized track recording cars or independent auditors to assess the degree to whichthe standards are being maintained and linking the quality of maintenance to penalties/rewards.

Accident Investigations. Provisions would be made in various concession contracts for independentinvestigation of accidents, at least for those accidents where public property or human lives are involved.

4. Institutional:

Regulatory Framework. The setting up of a supportive regulatory framework is essential to ensure that theconcession contracts are implemented properly and rigorously. To avoid excessive, subjective, orundefined regulation, the concession contracts will be developed in an exhaustive manner, leaving very littlefor subjective interpretation. The task of the regulatory body would then be to enforce what has alreadybeen agreed upon in terms of maintaining technical and safety and environment-related standards. Insteadof setting up a separate regulatory body, GRZ proposes to establish a special unit within MCT to monitorcompliance with concession agreements. Additionally, in compliance with the requirements under theRailways Act, the Railway Inspectorate Unit under MCT would be adequately strengthened. Since theconcessionaires would be free to adopt a freight tariff policy and the passenger tariffs would be specified inthe bidding documents, no substantive issues of economic regulation are involved. For broader economicregulation involving adherence to competition policy and fair trade practices, the Project's preference is forthe issues pertaining to rail transport to be also addressed by a multi-lateral regulatory body withappropriate mandate and skills such as the Competition Commission. Environment-related regulations areproposed to be enforced by the Environment Council of Zambia.

ZRL's Role after Concessioning. Eventually, ZRL would need to be wound up unless there are activitiesthat need to be performed and the concessionaires are not prepared to undertake that responsibility. In anycase, immediately after the take over by the concessionaires, ZRL will need to continue operating as adownsized state-owned company with the responsibility of spinning-off the remaining commercial andnon-commercial activities (i.e., not taken over by the concessionaires such as guest-houses, clinics, footballteams and police), discharging all its liabilities, and selling off the remaining assets. When all these tasksare completed, ZRL would also have the responsibility of winding itself up. To ensure that the process isnot unnecessarily prolonged and the task of winding up ZRL is executed efficiently, an independentadministrator would be appointed for a specific period of time. The monitoring of the concessionagreements would be handled by MCT or some other institution identified by GRZ.

Role of SATCC. SATCC, the specialized body under Southern Africa Development Council (SADC)dealing with transport issues, has recently advised the different railways in the region regarding

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implementation programns aimed at private sector participation in the management and operation ofrailways. These discussions are aimed at improving the performance of the transport sector in the region.ZPA has kept that advice in view while finalizing the concession design, and the concessioning proposalsare consistent with the directions/intentions of SATCC.

Linkages to Neighboring Countries. To achieve optimal results, the railway systems in neighboringcountries that are linked to the railway network in Zambia must also improve their perfonnance.Conversely, the continuing non-performance of the neighboring countries' railway systems could seriouslyundermine the performance of the railways in Zambia. Malawi, and Mozambique are currently in theprocess of privatizing their railway systems. Privatization of the South African and Zimbabwe railways isunder serious consideration. The newly incorporated companies/concessionaires in Zambia would need toreach an agreement with the neighboring countries on: (i) accessing each other's markets as well as onhaulage and track usage charges; (ii) sharing each other's facilities, particularly the expensive ones; and(iii) developing a common marketing and pricing strategy. The Project would include provisions fortechnical assistance to enable development of such mutually-beneficial agreements.

Tanzania-Zambia Railway (Tazara). The route over Tazara to the port of Dar es Salaam is the shortestand the least expensive for international overseas freight traffic of Zambia and DRC, provided Tazara andthe port of Dar es Salaam operate efficiently and provide acceptable levels of service. Though oftremendous benefit to customers and the Zambian economy, the route offers much less revenue to ZRLthan would be available to ZRL if the freight were routed through the port of Durban (the average haul forthe Dar es Salaam route is about 100 km, whereas the one to Durban is more than eight times). Given thisdifferential, the concessionaire could have a tendency to try to manipulate the traffic to move through theport of Durban. In order to prevent that and enable the traffic to flow unhindered in accordance withcustomers' preferences, the concession agreement would stipulate that Tazara would be provided withtrackage rights over the sections between Kapiri-Mposhi and Kitwe in the north and Lusaka in the south,these two being the key origin/destination points for the bulk of Zambia's overseas traffic. For DRCtraffic, the same would be handled by ZRL after Ndola. User charges and any reciprocal trackage rightson Tazara would be left to be negotiated between the concessionaire and Tazara.

4.1 Executing agencies:

Executing Agencies: (i) for Concessioning of Railways Component: ZPA; (ii) for Staff Rationalization,Assets Rehabilitation, Environmental Mitigation, and ZRL Restructuring/Winding up Components:ZRL/ZRL Board; (iii) for Regulatory Framework and MCT Strengthening Components: MCT; and. (iv)for Social Mitigation Component: NSSN. MCT will be the overall Project Coordinator includingcoordinating compilation of the quarterly reports from the different implementing agencies.

4.2 Project management:

ZRL is currently managed by an expatriate group being financed by SIDA. The group has alreadyreversed the declining trend of ZRL's performance and has put in place effective management andoperational systems. SIDA has agreed to extend the term of the contract of this group until the conclusionof the concessioning process. Additionally, ZRL recently retrenched about 1,500 staff on their own andhave already acquired considerable experience in dealing with staff rationalization issues. A tentativetimetable for the implementation of the various components has already been agreed to with ZR and there isno reason to believe that the timetable will not be adhered to. There is no doubt that the Projectcomponents assigned to ZR would be effectively managed.

ZPA has successfully privatized many public enterprises in Zambia and has considerable cumulativeexperience and skills in this area. Assisted by consultants, ZPA will be able to effectively manage the

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concessioning component of the Project. The timetable for the concessioning process has been agreed toand work is progressing according to schedule.

Discussions with MCT have indicated that the Ministry is engaged in a serious exercise within the Ministryto develop sub-sectoral strategies and a more dynamic transport policy. The initiative for the regulatoryand the Ministry strengthening components has come from the Ministry itself and the implementation of thetwo components is expected to proceed well.

NSSN has considerable experience in implementing a variety of measures aimed at assisting the retrenchedstaff in getting re-employed or self-employed. NSSN has adequate capacity to deal with the staff that areproposed to be retrenched under the Project.

4.3 Procurement issues:

The main features of the procurement arrangements are as follows (values within parentheses indicate theapproximate value of goods and services proposed to be obtained through the specified procurementmethod and are inclusive of physical and price contingencies):

Goods would be procured through:(i) Intemational Competitive Bidding (US$4.3 million);(ii) National Competitive Bidding (US$1.0 million); and(iii) Limited International Bidding, limiting the intemational bidding to original equipment

suppliers (US$0.8 million).(iv) Shopping (US$0.2 million).

Consultants' services would be procured through:(i) Quality and Cost Based Selection (US$2.0 million); and(ii) Selection Based on Quality of Consultants (US$0.3 million).

Training and retraining of retrenched staff would be procured through mutual consultation(US$1.1 million).

4.4 Financial management issues:

ZRL will be the implementing agency for the Asset Rehabilitation and Environment Mitigation, StaffRetrenchment, and the Restructuring of ZRL/Winding Up Components. An Implementation Committee,headed by a Project Manager, has been established to undertake the day to day implementation of theproject. The Accounts Section will be managed by the Head of Management Accounting on a full timebasis. Support to the Management Accountant will be made by three Senior Accountants (Treasury,Infrastructure and Workshops) from the existing ZRL establishment. The Management Accountant will beresponsible for ensuring that financial management and reporting procedures for the ZRL component of theProject will be acceptable to the World Bank, GRZ and ZRL's Board of Directors. Existing disbursementprocedures, as outlined in the World Bank's Disbursement Handbook, will be followed, i.e., DirectPayment, Reimbursement and Special Commitment (if appropriate).

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ZRL's financial management systems will support management in their deployment of resources with thepurpose of ensuring economy, efficiency and effectiveness in the delivery of outputs required to achievedesired outcomes. ZRL's financial management system will be expected to produce timely, understandable,relevant and reliable financial information that will enable management to plan, implement, monitor, andappraise the project's progress towards achievement of the stated goals. ZRL's current financialmanagement arrangements meet the minimum requirements to comply with the Bank's OP/BP 10.02.

ZPA will be responsible for implementing the Railway Concessioning component of the project. They willalso handle the funds for the Staff Counseling, Re-deployment and Social Mitigation component that willbe implemented by the National Social Safety Net (NSSN). ZPA is familiar with handling donor funds andhas been responsible for privatization of numerous public enterprises. A core team headed by a ProjectManager and including a professionally qualified accountant has been formed to spearhead the project.The financial management system successfully used in accounting for more than two hundred privatizedenterprises will be used to manage the IDA resources for the project. This system meets the Bank'sminimum requirements to comply with OP/BP 10.02.

MCT is currently assembling staff to implement the Regulatory Framework and MCT Strengtheningcomponents. For MCT to deliver on the aforementioned objectives, its financial management system willbe based on the Financial Management Action Plan.

The Project accounts, SOEs and the Special Account will be audited each year by an independent auditingfirm under terms and conditions satisfactory to IDA. In addition to the annual financial statementsconforming to Intemational Standards on Auditing (IFAC Standards), the audit report will includecomments on the accuracy and propriety of expenditures withdrawn under SOE procedures and the extentto which these can be relied upon as a basis for credit disbursements. Audit reports will be submitted toIDA no later than six months following the end of the Borrower's fiscal year. In addition, ZRL would berequired to submit annual entity audit reports also within six months following the end of the Borrower'sfiscal year.

5. Environmental: Environmental Category: B (Partial Assessment)3.1 Sumnmarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

ZR already has a fairly elaborate company policy with associated rules and procedures for safety andhealth at work. However, an environment audit identified the following key issues pertaining toenvironmental compliance:

(a) ZR has no environmental policy or an environment management system, though there is a growinginterest to formulate one;

(b) ZR has no site-specific safety and occupational health plans;(c) Appropriate protective equipment, clothing and accessories are in short supply;(d) Environmental knowledge and skills are inadequate;(e) Handling of hazardous wastes generated by the railways does not conform to cleaner production

practices. These wastes include fuel, lubricants, furnace heavy metal slag, and waste waterscontaminated with caustic soda;

(f) Arrangements for collection and disposal of solid wastes - scrap metal, furnace slag, machine shopswarf, saw dust, and waste coke - are haphazard;

(g) There is no formal self-inspection program for facilities for storage of petroleum fuel andlubricating oils located within ZR premises;

(h) Small quantities of acids and caustic soda sometimes find their way into drains; oily discharges are

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freely discharged into open spaces;(i) Potential health hazards - paint fumes, final metal dust, and noise - need more attention;

(j) The environmental impact of ZRL's track weed control program has not been assessed;

(k) There is no environmental emergency preparedness and response plan; and

(I) The capacity of the Environmental Council of Zambia (ECZ) to enforce environmental regulation

is limited and a lot of environmental violation goes by default.

The major liability issues include: (a) operations without environmental permits or licenses on water,

wastes; (b) lack of monitoring of pollutants; (c) disposal of wastes into unauthorized areas; (d) lack ofenvironmental preparedness and response plans; and (e) environmental, occupational health, and safety

liabilities arising out of copper concentrate droppings on the copper-belt.

The summary of the environmental audit report would be attached to the concession agreement and the

concessionaires would be required to fully meet the environmental standards. The environmental regulation

would be the responsibility of the railway regulator to be appointed as a part of the Project. The appointed

regulator would work in consultation with and with guidance from ECZ.

5.2 What are the main features of the EMP and are they adequate?

An Environmental Management Plan (EMP) is not required at this stage. Developing and handling the

EMP would be the responsibility of the concessionaires that are selected and with whom concession

agreements are signed. The concession agreements would hold the concessionaires responsible for EMP

and would be subject to regulation.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: June 16, 2000.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA

report on the environmental impacts and proposed environment management plan? Describe mechanisms

of consultation that were used and which groups were consulted?

The consultants who were appointed to undertake the EA have consulted the stakeholders during the study

stage.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

The concessionaire would be required to submit a timetable to complete the actions that would be specified

in the bidding documents. Once the timetable is agreed, the same will form the basis of monitoring

compliance. The regulatory body, proposed to be established under the Project, and the ECZ would also be

setting up mechanisms to monitor the impact on the environment.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and speciA.y the project's social

development outcomes.

StaffReduction. As the retrenchment package has already been agreed between ZRL's management and

the staff unions, problems of administration are not likely to arise. However, to address the social,

economic and psychological problems of retrenchment, a social mitigation component has been added to the

Project.

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Assistance to Retrenched Staff. Based on a series of interviews, questionnaires and experience elsewhere,mitigation measures are proposed as follows: First, the computation of retrenchment packages would bereviewed by outside independent audits for accuracy. Previous experience has shown the staff havingserious complaints with regard to the accuracy of these computations. Second, retrenchment packages willbe paid on time, to avoid entirely the problems encountered by retrenchees in the past with having toborrow from money lenders to cover the gap between loss of work and receipt of the package. Third,provision has been made under the Project for staff counseling (both money management andpsychological), retraining, and re-deployment. Fourth, a special cell would be established within ZRL toaddress the grievances of staff that have been retrenched.

Problems ofpast retrenchment/issues of staff re-deployment. The experience so far with the 1,500 staffalready retrenched has not been encouraging. Only about 5 percent of the retrenched staff reportedly havefound employment in the formal sector, another 20 percent have opened small businesses, and another 5percent have migrated to the villages. The rest are still contemplating their options, which appear to befew. Informal discussions suggest that staff have negative feelings about retraining. Staff that are older,uneducated, or work in offices were particularly skeptical of the usefulness of training. Part of the reasonfor this poor experience is that the counseling and retraining effort was launched much after the retrenchedstaff had already left. Under the Project, the counselors would be appointed in advance of the retrenchmentcommencement date. Expert staff would be engaged to develop more options to get staff re-deployed.

Poverty focus. The main focus of the Project is on reducing transport costs and making the Zambianeconomy globally more competitive, reducing GRZ's budgetary deficit, and reducing the allocation for roadmaintenance. These outcomes by themselves are expected to lead to lower costs of agricultural productsand also to make more funds available with the Government for other priority sectors. However, theProject would also seek to include a few poverty-related actions in the agenda for negotiations with theconcessionaires. The intention would be to reach an agreement with the concessionaires to include thefollowing in the list of items to be monitored:

* Reducing isolation: The indicator for this would be the number of small wayside stations that are keptoperational and those that are closed to any passenger or freight operations. The extent to which thesmall stations are kept open would facilitate personal mobility as well as open the way for ruralinhabitants to enter into some trading of agricultural commodities.

* Contracts for weed control: The indicator would be the number of small contracts for weed control ontracks awarded to the local inhabitants of villages located along the railway line. Awarding suchcontracts can be cost effective for the concessionaire as well enable avoidance of the use of chemicals,thus reducing environmental degradation.

* Passenger ridership: In spite of the considerable deterioration in the quality of passenger services inrecent times, the excessive time it takes from point to point compared to the corresponding bus trips,and the odd times at which the train reaches certain stations, there are a number of people who stilltravel by train because the train fares are cheaper and all they can afford. With a little better service,these numbers can increase as has been experienced in many countries. So, passenger ridership wouldbe an important indicator of improvement in the passenger services. The increased ridership wouldalso make the passenger services financially more viable.

AIDS Control. The concessionaire would also be persuaded to allocate a certain budget for controllingHIV/AIDS in consultation with specialized agencies and institutions within Zambia. This budget could be

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used for: (a) AIDS-related awareness training to staff and famnily; (b) supply of condoms to staff whoappear more vulnerable; (c) one to one staff counseling; and (d) for implementing other measures as may beadvised by the specialized agencies.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The primary beneficiaries of the proposed Project would be GRZ and the rail users, both freight andpassenger. The proposed Project has been designed with GRZ, MCT and ZPA, leading the process ofdesigning and implementing the restructuring and privatizing of ZR. Also, GRZ signed a bilateralagreement in September 1997 with SIDA for the purpose of allowing an intemational consultant to manageZR and formulate and implement a Restructuring Program to establish an efficient and sustainable railwaysystem in Zambia. The Program, including the Retrenchment Plan, was approved by the ZR Board inMay 1998, and extensively discussed and agreed with staff unions. Regarding the rail users, they havebeen intensively and formally consulted and interactions of the marketing department and the topmanagement with the key rail users. The Bank teams have also been frequently speaking to the main railusers.

The primaxy affected group has been the ZR staff. Formal negotiations with RWUZ have been held andagreements have been reached on all aspects of staff retrenchment.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

Extensive discussions were held with the staff unions of Zambia Railways with regard to the issuespertaining to staff retrenchment and mitigation of adverse social impacts of retrenchment.

6.4 What institutional arrangements have been provided to ensure the prcject achieves its socialdevelopment outcomes?

Even though the main railway operation would be concessioned, the residual ZR would continue todischarge its responsibility towards the staff who have been retrenched.

6.5 How will the project monitor perfornance in terms of social development outcomes?

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) O Yes 0 NoNatural habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes 0 NoForestry (OP 4.36, GP 4.36) O Yes NoPest Management (OP 4.09) O Yes NoCultural Propert (OPN 11.03) O Yes * NoIndigenous Peoples (OD 4.20) O Yes * NoInvoluntary Resettlement (OD 4.30) 0 Yes 0 NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes 0 NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes 0 NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60) 0 Yes 0 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

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F. Sustainability and Risks1. Sustainability:

The long-term sustainability of the rail system in Zambia would be considerably enhanced under theProject, which aims at: (a) long-term private concessioning of ZR; (b) reorienting ZRL's remainingoperations to their most competitive and productive advantage; (c) transparent selection of the privateconcessionaire in order to optimize the value of the concession; (d) addressing implementation issues insufficient detail in the concession agreements so as to preempt any possible legal action; and (e) setting upof a credible, independent, and fast system for the settlement of disputes.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

fi~ ~ ~ Rs Ris Rat-n Risk Miiato 'Me.a Xiigv'-urOi t A From Outputs to ObjectiveThe concessionaires' perfonnance maytum out to be inadequate due to:

(i) The concessions not being well M Improve concession design through: Legal anddesigned leaving much for subjective financial advisory support, consultation withinterpretation. major stakeholders, and incorporating lessons

from similar concessions awarded in the region.(ii) The regulatory framework not being M Consultancy support and technical assistanceeffective in enforcing the terms of the incorporating steps for resolving disputes in thecontract. concession agreements.

(iii) The appropriate institutional M Formation of consultative group witharrangements not being in place for quick representation from key stakeholdersresolution of disputes.

(iv) The performance of the neighboring M Encouraging the neighboring railways torailways continuing to be below restructure and privatize.expectation.

(v) GRZ does not completely honor the M Encouraging the concessionaires to signterms of the Concession Agreement. operations agreements with neighboring

railways early and setting up of a multi-sectoralregulatory body.

From Components to OutputsGRZ does not remain completely M Formal cabinet approval obtained beforecommitted to concessioning of the rail starting the concessioning process.system in a transparent manner.

Intemational interest in concession is not M Careful attention to the bidding design. Moreas expected. publicity.

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GRZ does not take adequate steps to M A letter of transport policy to be obtained fromcreating a competitive and a level playing the Government.field for all transport modes.

The level of redeployment of retrenched S Staff counseling to be a part of the Project.staff is lower than expected.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

G. Main Credit Conditions

1. Effectiveness Conditions

(a) each of the Subsidiawy Financing Agreements has been executed on behalf of the Borrower, ZPAand ZR respectively; and

(b) the Borrower has adopted the Project Implementation Plan in form and substance satisfactory tothe Association.

2. Other [classify according to covenant types used in the Legal Agreements.]

Other dated covenants include:

(a) ZR shall, no later than December 31, 2001, pay not less than US$1 million equivalent into thePension Fund, and no later than 6 months after Credit effectiveness, pay in full all remaining arrears ofpayments due and payable to the Pension Fund; and

(b) the Borrower shall, no later than December 31, 2001:(i) furnish to the Association drafts, in form and substance satisfactory to the Association, of thelegislation under which (A) concessions are to be granted under the Project, and (B) the regulatorymechanism is to be set up; and(ii) establish an Escrow Fund in forrn and substance satisfactory to the Association.

H. Readiness for Implementation

C 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

[A 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

21 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

1] 4. The following items are lacking and are discussed under loan conditions (Section G):

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1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.] 2. The fbllowing exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

Yash Pal Kedia Maxyvonne Plessis-Fraissard Yaw An3qTeam Leader Sector Manager Country anager

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Annex 1: Project Design SummaryZAMBIA: RAILWAYS RESTRUCTURING PROJECT

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Three strategic areas 1. The date of take over of the 1. ZPA database Concessionaires will performidentified under the CAS are: railways by private according to expectations andremoving constraints to concessionaires the concession agreementssustainable, diversified 2. Freight traffic carried by the 2. Statistics of MCT and thegrowth; improving railways, which would be a Railwaysgovernance; and increasing proxy indicator for theaccess to basic services and efficiency of operations anddirect poverty interventions, quality of serviceInadequate infrastructure hasbeen identified as a majorbottleneck for privateinvestment and growth.Private concessioning of ZRhas been specifically identifiedas a priority area.

Project Development Outcome I Impact Project reports: (from Objective to Goal)Objective: Indicators:The Project development The Development Objectivesobjective is to enable ZR, are closely linked to the CASthrough restructuring and objectivesprivatization, to substantiallyincrease its operatingefficiency, reduce its cost ofoperations, and configure itsfreight services and tariffs tomeet customers' requirementsand expectations, and,consequently, to increase itsshare of the local,international and transitfreight traffic. Efforts of aprivatized and efficient ZR toincrease its share of freighttraffic are expected to resultin:(a) Heightening of rail-road (a) Freight traffic on rail and (a) Records of thecompetition and, the percentage of total traffic concessionaires, MCT, andconsequently, overall for all modes of transport the regulatory bodyreduction in transport costsleading to the Zambianeconomy becomingprogressively morecompetitive andgrowth-oriented.

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(b) Balancing of the (b) Same as (a) (b) Same as (a)respective share of freighttraffic between rail and roadmodes and a significantreduction of traffic on road,particularly long-haul andbulk traffic, leading to asignificant reduction in theideal budgetary allocation offunds for the maintenance,rehabilitation and expansionof the road network inZambia.(c) The ZR-linked (c) Transit traffic on rail and (c) Records of theinternational rail corridors total concessionaires, MCT, andbecoming more efficient and Ministry of Commerce, Tradecost effective leading to more and Industrytrade between countries alongthese corridors, viz., SouthAfrica, Mozambique,Zimbabwe, Zambia, Zaire,Botswana, Uganda (after thesetting up of inter-gaugetransshipment facilities inTanzania), and Angola (afterthe reopening of the Lobitorail link);(d) ZR becoming financially (d) Income tax paid by the (d) Records of the Ministry ofself-sustaining and being in a concessionaires Finance and Economicposition to reward its capital Developmentproviders;(e) GRZ being able to reduce (e) Total cash flow from the (e) Records of theits budgetary deficit through concessionaires to GRZ Concessionaires and MFEDreceipt of concession fees,taxes, and hire and leasecharges; and(f) Zambia generating more (f) Same as (c) (f) Same as (c)foreign exchange through shiftof considerable transit andinternational traffic frommostly foreign road hauliers toZR.

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Output from each Output Indicators: Project reports: (from Outputs to Objective)

Component:A. Concessioning of ZPA/GRZ records and Satisfactory proposals from

railways concession contracts the potential concessionaires

1. Concession negotiations By June 2001commenced2. Concessions By September 2001operationalizedB. Staff Rationalization ZR/GRZ records

1. Retrenchment of surplusstaff completed By September 20012. Staff retraining andre-deployment completed By June 20023. Social mitigation measurescompleted By June 2002C. Assets Rebabilitation By June 2001 ZR/GRZ records

D. Institutional Refonn ZPA/ZR/GRZ records1. The regulatory framework By June 2001agreed and the inspectorateestablished2. Strengthening of MCTcompleted By December 2003E. Restructuring of ZR ZR/GRZ records1. Spin-off remaining By December 2002activities and assets2. Winding up By June 2003

Project Components / Inputs: (budget for each Project reports: (from Components to

Sub-components: component) Outputs)

Railway Concessioning US$1.0 millionStaff Rationalization US$17.9 millionAssets Rehabilitation US$6.7 millionEnvironmental Mitigation US$0.3 millionZRL RestructuringfWinding US$0.5 millionUpRegulatory and Legal US$0.8 millionFrameworkMCT Strengthening US$0.5 million

Contingencies US$3.3 million

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Annex 2: Detailed Project DescriptionZAMBIA: RAILWAYS RESTRUCTURING PROJECT

The project would consist of the following components:

(A) Railway Concessioning(B) Staff Rationalization

* Staff Retrenchment* Pension Obligations

(C) Assets Rehabilitation(D) Environment Mitigation(E) ZRL Restructuring/Winding Up(F) Regulatory Framework(G) MCT Strengthening(H) Social Mitigation

By Component:

Project Component 1 - US$1.00 million

(A) Railway Concessioninif

Background. ZR's performance has been declining since 1975, more sharply since 1989. Freight traffic,6.2 million tons in 1975, declined to 4.5 million tons in 1989 and to 1.4 million tons in 1997. Thecondition of the infrastructure and operating assets is among the worst in sub-Saharan Africa. GRZ, as thesole shareholder of ZRL, did not intervene effectively to halt the declining trend except to change the chiefexecutives of the railways from time to time. It was no surprise that this strategy actually tumed out becompletely counter productive. All this time, powerful suggestions were made to the government by donorsas well as key customers to seriously consider involvement of the private sector in the operation andmanagement of the railways. In response, GRZ did take a decision to privatize ZRL in principle, but theimplementation of the decision was deferred to later date due to commitment of GRZ's priorities in othersectors of the economy.

However, in March 1998, GRZ signed a bilateral agreement with the Swedish Intemational DevelopmentCo-operation Agency (SIDA), under which an intemational consultancy firm commenced a contract tomanage ZRL. The objective of the contract was to formulate and implement a Restructuring Program toestablish an efficient and sustainable railway system in Zambia. Since the commencement of the ZRLmanagement contract: (i) the continuous decline in the level of freight traffic carried by ZR has beenreversed with the traffic in 1999 being 1.61 million tons (1.43 million tons in 1997) and is projected to be1.65 million tons for the current year (2000). In ZRL's view, the traffic for the year 2000 could be asmuch as 1.8 million tons if ZRL were to succeed in mobilizing US$5 million for undertaking urgenttargeted repairs to track, wagons, and locomotives; (ii) staff has been reduced from about 5,500 to a littleless than 3,300; (iii) significant historic debts and obligations have been paid off, (iv) new systems andfinancial controls have been put in place, and (v) output from the railway works has substantiallyincreased. Significant though the reversal of the declining performance since the commencement of themanagement contract has been, it is not enough to transform Zambia Railways into a competitive, efficient,financially viable railway transport system with sufficient capacity to meet the transport needs of thecountry and its neighbors. In their inception report, the team managing ZR under the management contracthas underscored the urgency of privatizing the railways to ensure its long-term viability.

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The continuing poor performance of the railways, combined with evidence of successful turnaround ofmany railways in Latin America and sub-Saharan Africa after private concessioning and the continuingdemand from customers for better service, finally made GRZ agree seriously to consider private sectorparticipation in the operation and management of the railways. GRZ in 1998 asked the ZambiaPrivatization Agency (ZPA) to explore the various privatization options and to recommend the mostappropriate one for GRZ's approval. That set in motion the initial preparatory work pertaining to thepossible privatization of the railways.

Using a PHRD grant approved in 1994 to facilitate preparation of a possible railway restructuring projectincluding privatization of railways, ZPA launched a Private Sector Participation Study, immediately aftergetting the mandate from the Cabinet. The study was completed in March 1999. The recommendedprivatization option, i.e., the private concessioning of the railways, was intensively discussed in a series ofmeetings involving ZRL, ZRL's Board, the Ministry of Finance and Economic Development, the Ministryof Communications and Transport (MCT), the Ministry of Commerce, Trade and Industry (MCTI), themain consultants who had prepared the report, and ZPA. Agreement was reached on an option discussed indetail in the next paragraph. The recommended option was then formally reviewed by the concernedMinistries, i.e., MCT and MCTI, and a memo recommending the consensus option was then sent to theCabinet for approval. Cabinet at its meeting held on March 7, 2000 considered and approved theconcessioning of ZR as recommended. Concurrently, the following studies have been completed tofacilitate private concessioning of the railways: (i) environmental impact assessment and audit study; (ii)asset valuation study; (iii) an in-house social impact assessment study of the staff retrenched so far byZRL; and (iv) a social impact assessment study by extemal consultants.

Main features of the concessionin2 proposal. The concessioning proposal finalized by ZPA envisages threeseparate concessions as follows:

a geographically separated but vertically integrated short-haul, inter-mine freight service concessioncomprising Ndola-Chingola section plus branches;

3 a geographically separated but vertically integrated long-haul freight service concession comprising themain line (Sakania-Livingstone); and

3 an operating concession for a specified set of passenger services, being operated as public serviceobligations.

The bidders would be given the option to bidfor one, two, or all three of the concessions. The award ofthe concessions would be based on the net present value of the concession fees offered by the bidders. Thediscount rate and the evaluation procedure would be specified in the bidding documents. When bidding forthe passenger service concession, the bidders for the freight concession would still need to separatelyindicate the concession fees (positive or negative) for the passenger services concession. The bidders forthe passenger services concession would be allowed to offer a negative fee structure, if necessary.

To avoid the possibility of no proposal being received for the passenger services concession, the main linefreight bidders will be required to ensure that there is a related bidder for passenger services who willoffer a price for providing passenger services either in conjunction with or separate from the freight bidder.These bids would be evaluated along with independent bids for the passenger services.

The scope of the two freight concessions would include infrastructure as well as a clearly identified set ofcore operating assets comprising locomotives, wagons, and maintenance equipment. These assets will bespecified in the bidding documents. The infrastructure (fixed assets) including the signaling system and

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real estate would continue to be owned by a Government department or a 100% government owned assetholding company to be identified by GRZ, but would be maintained and rehabilitated by theconcessionaire(s) during the period of the concession. The main workshop would be included under theinter-city freight concession and the inter-mine freight concessionaire would be free to enter into anagreement with the inter-city concessionaire for the overhaul of its locomotives and rolling stock or withany of the neighboring railways or private workshops in Zimbabwe.

The scope of the passenger services concession would comprise sale/lease of an identified number of coreoperating assets such as locomotives, passenger coaches and maintenance facilities. Passenger servicesspecified in the bidding documents, deemed as public service obligations, would be provided access overthe infrastructure of the two freight concessions on concessionary terms, which would be specified in thebidding documents. The freight concessionaires would be required to maintain the infrastructure tostandards adequate for the running of passenger services that would be specified in the bidding documents.The passenger services concessionaire would be free to enter into an agreement with the inter-cityconcessionaire for the overhaul of the locomotives and passenger coaches or with other public or privateworkshops in the region.

Existing passenger rail services are considered to be essential public services. However, these are not seento be financially viable (at least in the foreseeable future) and therefore may not attract bidders for theconcession without the Government offering to provide a subsidy. Bidders for the concession will also beconcemed about Government's ability to pay the subsidy when it falls due. It will only be feasible to havean independent passenger operator if there is assurance that the operator will be paid fully and on time,which supports the creation of an escrow fund to receive freight payments and ensure that the passengeroperator is paid before the govemment uses the funds for general purposes. First call on funds in theconcession escrow account would be a way to provide a guarantee of payment (and at no cost toGovernment). Establishing such an account would be included as a covenant in the Development CreditAgreement.

Trackage rights to Tanzania-Zambia Railway (Tazara). The route over Tazara to the port of Dar EsSalaam is the shortest and the least expensive for the intemational overseas freight traffic of Zambia andDRC, provided Tazara and the port of Dar Es Salaam operate efficiently and provide an acceptable level ofservice. Though of tremendous benefit to custotners and the Zambian economy, the route offers much lessrevenue to ZRL than would be available to ZRL if the freight were to be routed through the port of Durban(the average haul on ZR network for the traffic routed through the port of Dar Es Salaam is about 100 kmswhereas the one through the port of Durban is more than 800 kms). Given this differential, theconcessionaire could have a tendency to try to manipulate the traffic to move through the port of Durban.In order to prevent that and to enable the traffic to flow unhindered in accordance with the customers'preference, the freight concession agreements would stipulate that the concessionaires would be required toreach an agreement with Tazara with regard to trackage rights over the sections between Kapiri-Mposhiand Kitwe in the north and Lusaka in the south, these two being the key origin/destination points for thebulk of Zambia's overseas traffic.

Component description. This component would finance advisory services to implement the agreedconcessioning proposal. More specifically, the component would cover: (i) the costs of advisory services,which ZPA may require to design, negotiate, implement and monitor the concession agreements; (ii) legalassistance for preparation and negotiation of concessions, articles of incorporation and shareholderagreements, as well as for contract interpretation and dispute resolution; (iii) assistance in addressingquestions of finance, accounting, asset valuation, and resource mobilization; (iv) assistance in specializedtechnical matters, including those pertaining to the environment; and (v) assistance in market intelligenceand assessment.

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Component inputs. Inputs for this component would comprise consultant services and technical assistance.Base cost (without contingencies) of the component is estimated at US$ 1.0 million to be financed by IDA(3.0% of the total Project cost).

Project Component 2 - US$16.90 million

(B) Staff Rationalization

Background. In the early 1980s, ZRL had a staff strength of about 9,000. Over the years, the staffstrength has been brought down by controlling new recruitment and encouraging voluntary separations. Atthe time of the take over by the management contract group, the staff strength was 5,500 including 800casual staff. One of the main components of the Restructuring Program developed by the contractmanagement was to reduce the staff to about 3,300. To determine the right size of staffing within thecompany, each department was asked to review its objectives and human resource requirements. Amethodology for selecting personnel for retrenchment was agreed with the Railway Workers Union ofZambia (RWUZ). Since funding for implementing the retrenchmnent plan was not readily available, thesurplus staff was sent on transitional leave. Employees sent on transitional leave continued to receive theirfull pay until they were paid their termnination packages in full.

The agreed retrenchment packages comprised 4 months of salary for each completed year of serviceplus long service gratuity pay, and resettlement allowances. This is the same package as is offered tostaff who retires normally after either reaching the normal retirement age or having completed aminimum qualifying years of service. ZRL also offered to pay part of the retrenchment benefits in theform of houses. The houses were valued in terns of the market prices as per the Government's policyon sale of houses. If applicable, the price of the house was deducted from the total package to arrive atthe total cash payable. For an average employee who has served 16 years and has a monthly salary ofK 0.2 million, the package would be K 16.2 million. As the average price for a house is K 5.5 million,the net cash outlay for ZRL would thus be K 10.7 million for those retrenchees who agreed to thepurchase of houses. These retrenchment packages, though visibly high, were considered comparablewith those of other parastatals scheduled for privatization such as the Zambia Consolidated CopperMlines Limited (ZCCM), as can be seen from the table below.

ZRL has already achieved the staff retrenchment target that it set for itself. The staff sent on transitionleave have all been retrenched and the current staff strength is a little less than 3,300. Part of thefinancing requirement was met from the payments received from the final settlement of the unitarysystem and, for the rest, ZRL has taken a commercial loan of about US$3.5 million.

Component description. This component would have two sub-components: (i) Staff Retrenchment;and (ii) Pension Obligations.

StaffRetrenchment. Based on the concessioning experience so far and confirmed by the estimatesproduced by ZRL as well as the consultant who undertook the Private Sector Participation Study, theconcessionaires are likely to engage only between 800 to 1800 staff out of the current 3,300. To be onthe safe side and to avoid a situation of shortfall of funds to finance retrenchment, the funds allocatedfor this component is based on an estimated staff employment of 900 by the concessionaire and acorresponding staff retrenchment of about 2,400 staff. Additionally, a price and physical contingencyof 15% has been provided to ensure adequate availability of funds for retrenchment in case theconcessionaires decide to select less than 900 staff.

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ZRL has negotiated with RWUZ a different salary structure for the staff under which a number ofallowances have been integrated into the base salary. The retrenchment package has also beenrenegotiated by ZRL with RWUZ. According to this agreement, the retrenchment package wouldcomprise 3.2 months of pay for every year of completed service. The total cost of retrenchment wouldstill remain the same as for the package that was used by ZRL to retrench its staff in 1998 and 1999.

Using the recently negotiated package and the staff age and service profile, and assuming that all staffwould be retrenched, ZRL had estimated the cost of retrenchment to be about US$21.0 million. On thesame basis, the proportionate cost of retrenchment of 2,400 staff would come to about US$15.2million. A contingency of 15% has been provided in addition to cope with any variations in thepackage or the number of staff to be retrenched.

The sequence of retrenchment, as developed in agreement with ZPA/ZRL/GRZ, is as follows: (a) 700staff would be retrenched immediately after the Credit becomes effective, the criteria to be used foridentifying the surplus staff having already been agreed with the unions; (b) the remaining staff wouldbe retrenched after the concessionaires have selected the staff according to their requirement. Thesequential steps in case of (b) would be as follows:

3 the concessionaires would identify the staff to be engaged through their own due diligence;e the concessionaires would, in consultation with the trade unions, define the terms of employment of

staff, which would in general be as good as or better than the emoluments and current conditions ofservice;

- the selected staff would be offered the letters of employment, and the remaining staff would beretrenched using the agreed terns of retrenchment;

- notwithstanding the agreement with the trade unions, the selected staff would be within their rightsunder the Employment Act of Zambia to refuse the offer, under the Employment Act, "rights arisingunder any written contract of service shall not be transferred from one employer to another unless theemployee bound by such contract consents to the transfer and particulars thereof are endorsed upon thecontract by a proper officer." In case the staff refuse to be transferred, they have a right to beretrenched and paid the severance payments; and

3 the staff, who refuses the concessionaires' offer, will not be eligible to get the offer again before threeyears.

It is understood that a major concern of the staffjoining the concessionaires pertains to theconsideration of the service with ZRL in computing the package when they eventually retire or areretrenched by the concessionaire. Obviously, staff getting transferred to the concessionaires would beeligible for pension at some point of time. The concessionaires would in all probability, depending thenew conditions of service, be prepared to pay the retirement benefits, but limited to the number of yearsthe staff has been employed with them. For the years of service with ZRL, the payment responsibilitywould lie with GRZ/ZRL or a successor company of ZRL. Unless this money is guaranteed to thestaff, the staff would be reluctant to take a risk. To address this concern, the Development CreditAgreement (DCA) has a condition requiring that the Government guarantee such payment when it isdue and that the balance in the proposed Escrow account would be used by the Government for generalpurposes only after the balance in the Escrow account is sufficient to meet retirement/retrenchmentliabilities pertaining to the period of service with ZRL. Further, the proceeds of the IDA Credit couldbe used for severance payments (only in case of retrenchment and not retirement) during the period ofthe Project, which should be enough for the stabilization of staffs employment with theconcessionaires.

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Pension Obligations. In the past, ZRL has defaulted on transferring pension contributions from staff tothe Pension Fund. Consequently the staff, who are entitled to pension benefits under the Zambia RailwaysPension Rules (either a refund of contributions or a deferred pension on reaching the retirement age),cannot be paid their dues by the Pension Fund. The responsibility for this accumulated liability lies withZRL. It is quite certain that the retrenchment efforts will get stalled unless ZRL is enabled to meet thisliability. ZRL has indicated that a substantial portion of the arrears has already been paid off by ZRL andthat US$1.0 million equivalent would be paid into the Pension Fund by December 2000 and the remainingarrears within six months of Credit effectiveness, i.e., roughly by April 2001. This is also reflected as adated covenant in the DCA.

Component inputs. This component would finance the severance payments of pennanent staff to beretrenched. The component would be implemented by ZRL. The total Base cost of the component withoutany physical and price contingencies is estimated at US$16.9 million (about 56% of the total Project cost)to be financed by IDA (US$15.2 million for retrenchment packages) and GRZ (US$1.7 million for pensionscheme obligations).

Project Component 3 - USS 6.70 million

(C) Assets Rehabilitation

Backaround. The infrastructure and operating assets that the contract management group (the Group) tookover were in very poor condition. Frequent locomotive failures and derailments have made the operationsvery inefficient and unsafe. The resulting decline in traffic and revenues, huge staff-related costs, and theGovemment's inability to provide any financial support have so far been making it difficult to provide foradequate maintenance. This in turn is making it difficult for the railways to increase its share of the freightmarket.

One of the first actions of the Group was to identify the staff really required for operations and send theremaining surplus staff on transition leave. The latter staff have since been retrenched (see details undercomponent 2) partly by the ZRL having taken a commercial loan of about US$3.5 million. The Group alsopursued accounts payable. These steps have made more funds available for maintenance and the conditionof the assets has shown some improvement. However, a lot more needs to be done and urgently. Theconcessioning process could take quite some time, definitely not less than about 15 months. In the absenceof specific targeted interventions, the gains of the past two years could be lost.

The proposed investments are expected to pay for themselves manifold in a short period of time byreducing the incidence of derailments and making more capacity available for traffic on offer.Additionally, these investments will enable the concessionaire to take less time to get organized for seriousmarketing and, therefore, will make the concession more attractive to the potential bidders. The package tobe supported under the Project in advance of the concession has been arrived at after ensuring three keyconsiderations: (i) the investments would unequivocally add value to the quality of the railway systemwhich the concessionaires would also acknowledge, and would not become redundant by any futuredecision of the concessionaires; (ii) the identified tasks were capable of being completed within a year, i.e.,before the expected date of commence of the concession; and (iii) the investments address weaknessesidentified as the most critical in the railway system.

Component description. The component would finance three key sub-components simultaneously toaddress three major operating constraints, viz., inadequate availability of locomotives, poor condition oftrack, and excessive sidelining of wagons on account of non-availability of wheels. The items to befinanced comprise: (a) materials and equipment for the overhaul of five main line locomotives; (b)

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strengthening of track by replacing a certain percentage of sleepers for the 377 kms of track that is fittedwith wooden sleepers and replacing wooden sleepers in poor condition with concrete sleepers to competethe rehabilitation of the Chisamba-Lusaka section; and (c) procurement of about 2,000 wagon wheels. Thecomponent would also finance procurement of environmental mitigation equipment to assist ZRL inliquidating the accumulated environmental liability.

Locomotives. Five mainline locomotives are overdue overhaul and the longer the overhaul is postponed themore expensive this would become. The costs for rehabilitation at US$240,000 per locomotive areconsidered reasonable. Allocation for materials and equipment: US$1.2 million by IDA.

Track sleepers. Sleepers needed for the replacement of one in every four sleepers is the most economicalway of improving the track condition in the short-term. Even though use of wooden sleepers is to bediscouraged on environmental grounds, in this case it would be agreed to because of there being noalternative short of shutting down the railway. Nearly half of the main line network is fitted with woodensleepers and almost all of the sleepers are far older than their permissible age and need to be replaced.Taking into account environmental concems, the final solution would lie in replacing these with concretesleepers. While wooden sleepers can be replaced one at a time and in any order, say one in every 4sleepers, which is the proposal here, it is not possible to do so using concrete sleepers. Use of concretesleepers would mean that all sleepers would have to be changed in one go in any particular section. Thiscould take a long time, about five to six years, and also considerable resources, in the order of US$20 to 30million. The track cannot hold together for such a long time. In the short-term, some thing else would needto be done. The optimal strategy to meet both the short - and long-term objectives - within a very seriousfinancial constraint, would be to: (i) replace one in 4 sleepers with wooden sleeper (cost less than US$2million); (ii) start replacing all the wooden sleepers with concrete ones at a time and pace dictated by theavailability of funds; (iii) transfer good wooden sleepers from the concretized section to one selected sectionfitted with wooden sleepers; and (iv) take up this selected section for fitment of concrete sleepers the last ofall. This strategy would mean short-term improvement of the track and a strategy to phase the fitment ofconcrete sleepers as convenient and affordable. Moreover, the life-expired wooden sleepers released fromthe track will definitely be available for alternative use, leading to reduced deforestation. Allocation:US$0.9 million for 60,000 sleepers by IDA and about 2.0 million by GRZ for fastenings, ballast, rails, andcrossings. Also, 35,000 concrete sleepers at a total cost of US$1.5 million by IDA to compete therehabilitation of the Chisamba-Lusaka section, which has accounted for a large percentage of derailmentsin the recent past. The section already has concrete sleepers and use of wooden sleepers is not compatible.

Wagon wheels. Many wagons are running on wheels, which have reached their technical limit of wear andneed to be replaced. Only 500 wagons out of a fleet of 2,600 are fit to cross the border. All other wagonsare getting rejected at the border. The interchange loss on account of defective wagons amounted to aboutUS$1.0. million during 1999. About 2,000 wheels are proposed to be procured at a cost of US$1.1million.

Component inputs. The base cost of the component without any physical and price contingencies would beUS$6.7 million (21% of the total project cost) to be financed by IDA (US$4.7 million) and GRZ (US$2.0million).

Project Component 4 - US$0.30 million

(D) Environmental Mitigation

Component description. This component would comprise procurement of pollution-control equipment such asoil separators and fume extractors with the objective of bringing the railways to comply with national andinternational standards in pollution control. These items have been identified and costed in a Environment

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Study Report.

Component inputs. The base cost of the component without any physical and price contingencies would beUS$0.3 million (1% of the total project cost) to be financed by IDA US$0.2 million and GRZ (US$0.1million).

Project Component 5 - US$0.50 million

(E) ZRL Restructuring/Windins up

Background. Eventually ZRL will hand over the freight and passenger business to concessionaires. Thefuture role of ZRL as an entity has still to be defined. ZRL may have need to continue operating as adownsized state owned company with the responsibility of spinning-off the remaining commercial andnon-commercial activities (i.e., those not taken over by the concessionaires such as guest-houses, clinics,and police), discharging all of its liabilities, selling off the remaining assets, and finally winding itself up.ZRL may also have to be retained if: (i) no proposals are received for the passenger concession and ZRL isrequired to continue operating these services; and (ii) ZRL is required to serve as a holding companyholding the infrastructure assets on behalf of the government. The future structure of ZRL would dependupon the outcome of the concessioning process.

Component description. The internal studies have identified the staff required for the carrying out of ZRL's residual activities as follows:

1. Dealing with the pending and future court cases: 10 staff;2. Dealing with the maintenance, disposal, and account of residual assets not taken over by the

concessionaires: 17;3. Operating the passenger services on Mulobezi line: 27;4. Operation of the passenger services: 261; and5. Security services: 500.

In all probability, with the condition that the freight bidders would need to ensure a bid for the passengerservices as well, the concession for passenger services will be awarded. It is also very likely that theconcessionaires would make their own arrangements for security either by engaging the necessary police orby subcontracting. The surplus police would be retrenched like all other staff. In such a case, the residualZRL would be managed by a total staff of 54 until it is wound up.

Component inputs. Inputs for this component would comprise consultancy services and technical assistance inorderly winding up of ZRL. Base cost of the component without any physical and price contingencies isestimated at US$0.5 million (2% of the Project cost) to be financed by IDA.

Project Component 6 - US$0.80 million

(F) Reulatorv Framework

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Component description. This component would include assistance to: (i) assess/identify the effectiveness ofthe existing scope, functions, and instruments for the economic regulatory framework; (ii) recommend thesectoral coverage and accountability relationships for the regulatory institution(s) (iii) define the staffing,internal organization, operating costs and financing mechanisms for a new safety and environment-relatedregulatory agency; and (iv) prepare the required draft legislation.

The component would also include provision for equipment and technical assistance services to enable thelaunching of the identified agency (ies) and the preparation of its staff. Additional finance provided underthis component would cover the technical aspects of the regulatory framnework. Consultant services for astudy and for technical assistance would be targeted at the development of the required capabilities withinMCT or any other institution identified for this purpose, to enable it to effectively discharge its role as asupervisor of the concession contracts.

The component would also include provision of technical assistance services to restructure ZRL, establishan holding company or a unit within MCT to be responsible for: (i) keeping an account of the assets,concessioned or leased under the Project; (ii) taking inventories of said assets and reconciling theinventories with records; (iii) monitoring compliance with the concession agreements; and (iv) undertakingphysical inspections of assets and ensuring compliance with the standards prescribed for the assets in theconcession agreements.

The component would also include provision of technical assistance for the setting up by the Borrower ofan escrow fund to be used for the payment of: (i) any subvention for passenger services operated as publicservice obligations in case the passenger services concession is awarded as a stand-alone concession; (ii)the retirement and /or retrenchment benefits pertaining to the service of eligible employees of ZambiaRailways; (iii) operating expenditures of the Holding Company, the Regulatory Body; and any residual partof Zamnbia Railways in the event of winding up, reorganization or privatization; and (iv) the costs of anymitigation measures required under Part H of the Project.

Component inputs. Base cost of the component without any physical and price contingencies is estimated atUS$0.8 million (about 2% of the Project cost) to be financed by IDA.

Project Component 7 - US$0.50 million

(G) MCT Strengthenin2

Component description. This component would include a study to (i) review and refine the framework fordeveloping and overseeing transport policy; (ii) define the new functions of MCT to discharge its role; (iii)assess MCT's organizational structure in the framework of this evolving role; and (iv) determine staffingrequirements, taking into account GRZ's civil service reform program. The component would also includethe provision of consultant services for technical assistance to enable the implementation of therecommendations of the study. Inputs for this component would comprise consultancy services and officeequipment.

Component inputs. Base cost of the component without any physical and price contingencies is estimated atUS$0.5 million (about 2% of the Project cost) to be financed by IDA.

Project Component 8 - US$1.00 million

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(H) Social Mitil!ation

It is estimated that only about one-third of the current staff, about 1,100 workers, will be required by theconcessionaire. ZRL already plans to retrench 700 workers, as soon as funds are available. While theretrenchment payments will help, the loss of employment will have a seriously adverse impact on workersunless the process is carefully planned and implemented. Previous experience of retrenchment in ZRL hasnot been very encouraging: about 5% of the retrenched workers have found formal employment, another20% have opened small enterprises, and another 5% have moved to the villages and presumablysmallholder agriculture. The project has been designed to provide a more comprehensive professionallyorganized approach to mitigating the social impact of retrenchment: (i) the component will be implementedby the National Social Safety Net (NSSN) which has substantial previous experience in mitigation andtraining activities; (ii) the component is being developed using the results and recommendations of a majorsocial mitigation assessment study; (iii) counseling will be undertaken well in advance of actualretrenchment in order to prepare workers for the initial period, especially with regard to the use ofretrenchment compensation; (iv) counseling will be undertaken by experienced professional organizations;(v) retraining and re-orienting workers to alternative employment will utilize approved public and privatetraining institutes; and (vi) assistance in resettlement will be considered. It has also be agreed thatadditional mitigation measures will, if necessary, be funded through the concession escrow account.

Component inputs. The total Base cost of the component without any physical and price contingencies isestimated at US$1.0 million (about 3% of the total Project cost) to be financed by IDA.TOTAL PROJECT COST

As indicated in the table below, the total Base Cost of the Project has been estimated at about US$27.7million. Physical and price contingencies, estimated at US$3.3 million, have been calculated as follows:(a) 15% for the staff retrenchment component in view of the uncertainty of the staff numbers that theconcessionaires would eventually accept; (b) 10% for all other components. Total Project cost is estimatedat US$3 1.0 million.

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PROJECT COSTS(USS million)

CategoriesImplem % of Consult Staff

Component enting Costs Total &Tech Train Redun Equip FinancinAgency Local Foreign Total Cost Assist ing dancy ment IDA ZRL

A. Railway Concessioning ZPA 0.20 0.80 1.00 3 1.00 1.00

B. Staff Rationalization ZRL 16.90 0.00 16.90 55 0.00 0.00 16.90 15.20 1.70Staff Retrenchment 15.20 0.00 15.20 49 15.20 15.20Pension Obligations 1.70 0.00 1.70 5 1.70 1.70

C. Asset Rehabilitation ZRL 2.00 4.70 6.70 22 6.70 4.70 2.00

D. Environment Mitigation ZRL 0.10 0.20 0.30 1 0.30 0.30 0.00

E. ZRL Restructuring/Winding up ZRL 0.10 0.40 0.50 2 0.50 0.50

F. Regulatory Framework MCT 0.10 0.70 0.80 3 0.80 0.80

G. MCT Strengthening MCT 0.10 0.40 0.50 2 0.20 0.10 0.20 0.50

H. Social Mitigation NSSN 1.00 0.00 1.00 3 0.10 0.90 1.00

Total Baseline Cost 20.50 7.20 27.70 89 2.10 1.00 16.90 7.70 24.00 3.70

Price and physical contingency (*) 2.70 0.60 3.30 11 0.20 0.10 2.30 0.70 3.00 0.30

Total Project Cost 23.20 7.80 31.00 100 2.30 1.10 19.20 8.40 27.00 4.00

(1) 15% on staff retrenchment and 10% on the rest rounded to nearest figure

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Annex 3: Estimated Project Costs

ZAMBIA: RAILWAYS RESTRUCTURING PROJECT

Railway Concessioning 0.20 0.80 1.00Staff Rationalization 17.90 0.00 17.90Asset Rehabilitation 2.00 4.70 6.70Environment Mitigation 0.10 0.20 0.30ZR Restructuring/Winding up 0.10 0.40 0.50Regulatoiy Framework 0.10 0.70 0.80MCT Strengthening 0.10 0.40 0.50

Total Baseline Cost 20.50 7.20 27.70Physical Contingencies 1.35 0.30 1.65Price Contingencies 1.35 0.30 1.65

Total Project Costs 23.20 7.80 31.00Total Financing Required 23.20 7.80 31.00

Goods 2.40 6.00 8.40Works 0.00 0.00 0.00Services 0.45 1.85 2.30Training 1.10 0.00 1.10Staff Redundancy 19.20 0.00 19.20

Total Project Costs 23.15 7.85_ 31,00Total Financing Required 23.15 7.85 31.00

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Annex 4: Cost Benefit Analysis SummaryZAMBIA: RAILWAYS RESTRUCTURING PROJECT

Background

ZR Systemn. The geographical setting of Zambia makes ZR a critical link in the logistic chain forintemational traffic of Zambia, the Democratic Republic of Congo (DRC), and now also of Tanzania andUganda. Much of this traffic originates from or is destined to the ports in South Africa, Zambia, Tanzania,and Angola but quite a lot is inter-country regional traffic. ZR has a total track length, all single track, of1,273 kms, out of which 848 kms is main line. The ZR rail system links with the Zimbabwe rail network atLivingstone/Victoria Falls and onwards to the ports in South Africa and Zambia, Tanzania-ZambiaRailways at Kapiri Mposhi and onwards to the port of Dar-es-Salaam, and the DRC at Sakania.

Past Performance. The traffic volumes of ZR have been falling for many years. Freight traffic exceeded6 million tons in 1975, representing over 1.4 billion net ton-kilometers (ntkms). By 1988, the traffic haddeclined to 4.5 million tons, and by 1998 to 1.4 million tons. This precipitous decline in ZR's performancecan be attributed to the inefficiency, excess employment, low productivity, waste, lethargy of operations,lack of incentives, and inadequate accountability normally associated with the railways managed asparastatals. The performance worsened even more rapidly after the liberalization of the Zambian economyduring the 1990s, in particular the liberalization of the transport sector which resulted in demand for highquality service and emergence of a powerful trucking sector. Traffic on offer also declined due to a declinein Zambia's economy, ZCCM's performance, collapse of DRC's economy, and slowing down of theeconomy of the neighboring Zimbabwe. The declining traffic and revenues and the continuing retention ofstaff at an unnecessarily high level and, consequently, the resulting high costs of operations have left ZR ina financially precarious condition. Inadequate maintenance has led to ZR being a wom out system.Derailments are an almost daily occurrence and ZR has a poor record of accidents. Vandalism of signalshas badly affected traffic control. As a result, the railways are failing to canry all the traffic on offer.Details of actual freight and passenger traffic from 1975 until 1999 are indicated in the table below.

Future Prospects. In spite of the deterioration of the ZR system in recent years, quick revitalization of ZRis possible. The expatriate management group that commenced its work in March 1998 has already takensome steps in this direction. Within two years, the staff has been reduced from about 5,500 to a little lessthan 3,300. The morale of the remaining staff has shown a visible improvement. Locomotive and rollingstock availability has improved. As a result, the declining trend of traffic has been reversed. The freighttraffic for the year 2000 is projected at 1.8 million tons but is likely to be around 1.65 million tons. Aspecially designed and speedily-executed package of about US$5.6 million under the proposed ZRRPwould be targeted at further improvement of critical inputs, viz., track, locomotives, and rolling stock.Execution of three or four such specifically designed and targeted packages in the course of the next fewyears would make the system reliable enough for handling all the trffic on offer. However, forsustainability, more investments, particularly in infrastructure, would be required in future.

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ZRL's Past and Current Performance

Actual Projected

1980/ 198&5 1990/ 1991/ 1992/ 1993/ 19941 1995/ 1996/ 1997/

1975 1981 1986 1991 1992 1993 1994 1995 1996 1997 1998 1998 1999 2000 2001 2002 2003 2004 2005

Freight (000 Tons)

Transit 381 640 569 440 323 160 89 47 48 161 93 171 204 224 224

Import 270 880 430 395 401 982 371 193 250 234 270 212 249 249 316

Export 50 470 593 436 398 471 384 309 345 332 235 296 260 235 235

Domestic 5500 2380 2960 2161 2108 1840 1672 1333 1225 955 817 953 897 942 1025

Total 6201 4370 4552 3432 3230 3453 2516 1882 1868 1682 1415 1632 1610 1650 1800 1980 2178 2396 2468

Freight (MiUlion NTKM)

Transit 115 53 33 28 85 67 122 131 137

Import 416 167 104 140 161 182 148 150 186

Export 177 141 110 1I1 128 90 139 104 78

Domestic 364 290 195 181 161 133 145 155 166

Total 1072 651 442 467 535 472 554 540 544.5 572 629 692 710 727

_________ Passengers (000)

_ 1 1 1 793 906 1156 1509 950 1265 1246 1095 800 8191 868 572 629 692 761 784

Staff Strength

Penmanent 9850 8257 8054 7867 7965 7929 5285 5181 5027 3386 3297 1100 1000 900 800 800

Casual 1839 1124 999 819 335 334 576 800 20 20 8 0 0 0 0 0

Total 11689 9381 9053 8686 8300 8263 5861 5981 5047 3406 3305 1100 1000 900 800 800

Summary of Benefits and Costs:

The economic rate of return (ERR) for the project has been calculated on the basis of costs and benefits tothe Zambian economy in the "With" and "Without" scenarios over a 20 year period. In calculating thecosts to the economy, it has been reasonably assumed that the concessionaire will be largely or entirelyforeign owned, that concessionaire investmnent in ZR will be financed from overseas resources, and that allprofits from the concessioned railway, net of taxes, will be repatriated overseas. The Zambian economywill be affected by: (i) the change in the level of employment and employment income; (ii) the level ofconcession fees paid to GRZ; and (iii) more efficient rail services and the consequent diversion of freighttraffic from road to rail. In the analysis of the costs and benefits, all transfer payments made within theeconomy have been effectively excluded and no distributional weights have been attached to factorincomes/consumption. The underlying basis for the analysis is outlined below.

The "Without" Scenario

Following the completion of the present management contract, ZR is operated very much inthe same manner, as previously.There would be no fwuther staff retrenchment, due to lack of financial resources, but the level ofemployment would fall by about 100 workers/year, through natural attrition. Employment wouldstabilize at a level of 1800, the level considered necessary for operations under parastatalownership and management.The present average wage rate for ZR workers would remain constant, in real termns.ZR will not have the resources to make major investments, but to avoid a dramatic decline in

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operating capacity, US$5 million will be invested over the next five years.ZR's freight traffic will decline by 2% annually as a result of declining operating efficiency,brought about by inadequate maintenance and investment. This is probably rather optimistic andthe rate of decline could be much faster.

* Fixed costs and the variable cost/ton-km remain constant in real terms.* Average ZR revenue of US$ 0.0519 ton-km remains constant, although this is again optimistic

given the probable decline in operational efficiency and service levels.

The 'With" Scenario

The impact of private management on formerly parastatal railway operations in developing countries hasgenerally been dramatic with substantial reductions in cost levels and significant increases in traffic levels.Experience elsewhere cannot necessarily be applied in every situation and thus very conservativeassumptions have been adopted in the analysis of the 'With" scenario.

Project Commencement: It is assumed that the concession would commence operations during thelatter part of 2001. The year 2002 has been taken as the first year for the economic analysis.Implementation ofphysical investment: The Project funds allocated for asset rehabilitation wouldbe utilized before the start of the concession, i.e., before the latter part of 2001. With the resultingimprovement in the condition of the track, availability of wagons, reliability of locomotives, it isassumed that the level of freight traffic would be increased by 5%, i.e., from 1.65 million tonnes to1.73 million tonnes and 572 million ton-kms..Staffreirenchment: The Project funds for staff rationalization would be available as soon as theproposed Credit becomes effective, well before the takeover of the ZR by the concessionaire. It isassumed that approximately 50% of the present ZR labor force would be retrenched prior toconcessioning, and that the concessionaire would take over an initial labor force of 1100 workers.With the introduction of revised working practices and improved equipment, the concession wouldthen reduce the workforce, over the next three years, to approximately 800 workers. Thereafter,there will be a gradual increase in the labor force as the level of operations staff are recruited tohandle increased levels of freight traffic.Traffic Projections: Over-optimistic traffic forecasts in donor-funded railway projects have beenmore the rule than the exception (though this has usually been within the context of state ownedand operated railways). Despite the very positive impact of concessioning on rail traffic elsewhere,the analysis has assumed very modest traffic growth. It is assumed that in the first year ofconcessioning, ZR traffic will attract 5% additional traffic and in each of the next two years anadditional 10%, reflecting diversion of some road freight traffic back to rail. Thereafter, traffic isassumed to grow at about 2.5% per annum, significantly below the expected growth of theZambian economy. The growth rates used in the analysis are very modest compared to the average14% estimated by the consultants working for ZR.Staff costs: As soon as the Credit becomes effective, the current management of ZR willcommence retrenching staff, with the intention of retaining only about 2,600. The concessionaire isexpected initially to employ 1,100 but will further reduce the level to about 800 as increasedefficiency and labor productivity is achieved, From year 5, it is assumed that staff will begin toretire, at about 5% per annum. The concessionaire will pay the retirement benefit for the yearsduring which the staff were employed under the concession, and GRZ will be responsible for theretirement benefits for the period of employment prior to concessioning. It is assumed that theconcessionaire will raise wage rates by an average of 25% as part of the plan to increaseproductivity.Variable costs: While substantial efficiencies could be achieved with regard to both fuel and spareparts consumption, a relatively small reduction in variable cost has been assumed in the analysis; a

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reduction in cost from US$ 0.0156/ton-km to US$ 0.0147/ton-km (approximately, 6% over thefirst two years of the concession). Much more substantial cost savings are thought possible frombetter management and control of fuel and spare parts.Fixed costs: The fixed costs of ZR are assumed to remain unchanged, though savings in real estateas well as in the motive power and rolling stock fleets should be achievable.Concession management costs: The concessionaire is expected to need only a very smallexpatriate senior management team, but the individual costs of the personnel will be relatively high.A cost of US$ I million has been assumed in the analysis to approximate the additional costs ofexpatriate managers; possibly, four managers at an average cost of US$250,000.Investment by the concessionaire: While the concessionaire's investment strategy cannot be fullyanticipated, it might be expected that it will be the minimum level consistent with the need to caterfully for potential traffic demand, at a commercially acceptable service level. The presentmanagement has estimated the investment requirement as some US$60 million, but it is quite clearthat ZR's revenues cannot support such a level of up-front investment. The Asset Valuation Studyindicated that about US$ 12 million would be sufficient to allow ZR to operate reasonablyefficiently and safely for the foreseeable future. For the purposes of the analysis, concessionaireinvestment of US$ 15 million has been assumed, spread over the first six years of the concessionperiod.Distribution of ZR surplus: The concessionaire is expected to require a 20% post tax rate ofreturn on the investments made in ZR and to pay back investments over a five year period. Theoverall return on investment would be about 35%, reflecting the perceived risks of investing in ZRAny residual surplus is assumed to go to GRZ in the form of concession fees, royalty payments orcorporate taxesRetrenched workers and use of retrenchment payments: Overall, some 2,500 workers areexpected to be retrenched and will receive approximately US$16 million in retrenchment benefits,On the basis of past retrenchment, it is expected that about 10% of the retrenched workers willobtain altemative formal employment, at about the same wage salary scale. Other retrenchedworkers are expected to take up smallholder agriculture, and it is assumed that about 25% ofretrenchment payments will be invested in informal economic activities, and that such investmentwill generate rates of return of about 15%.Road freight costs: These costs, US$0.08/ton-km, are based on the tariffs charged by roadhauliers as reported in the "Private Sector Participation Study". While these are financial costs,they are broadly indicative of economic costs to the Zambian economy: (i) much of theinternational freight traffic is hauled by foreign owned trucking companies; and (ii) the taxes paidby truckers on fuel, vehicles and other inputs partly offset the cost of attributable road maintenancecosts. The trucking sector is already very competitive and a more competitive railway service isunlikely to result in a significant impact on trucking tariffs.Economic benefits of diverted roadfreight traffic: Without the concessioning of ZR, there wouldbe significantly higher levels of road freight traffic. While rail tariffs are well below road freighttariffs, rail service levels are usually inferior to those provided by the trucking sector. Estimatingthe economic benefits on the basis in the difference in the tariff levels would thus be anoverestimation. Based on the assumption of a straight line demand curve, economic benefits havebeen estimated at 50% of the difference in the tariff levels.Economic benefits to residual "without" rail traffic: The concessioning of ZR is expected toresult in both an expansion in capacity and a substantial improvement in the level of rail service.Existing rail traffic will benefit from the improved level of rail service. The level of economicbenefit to these residual rail service is unlikely to be very substantial, however, as such users areclearly relatively insensitive to the level of service (otherwise they would not be using ZR). Thesebenefits have not been estimated.

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There may be other economic benefits from the concessioning of ZR, but have not been included in theanalysis because of the uncertainty regarding their level. These might include: (a) an increase in passengertraffic and revenues; (b) an improvement in the level of service to passengers; (c) some reduction in roadmaintenance costs; (d) more productive use of ZR's non-core assets; and (e) reduced environmentaldegradation, railways being considered less polluting than road transport.

Results of the Economic Analysis

The results of the economic analysis for the base case assumptions for the project are as follows:

(i) ERR 28.1%

(ii) NPV (12%) US$47.9 million

The overall ERR is well above the level considered acceptable (10% - 15%) for transport sectorinvestment. The 20% post tax return on capital obtained by the concessionaire is not included in this ERR.

Benefits: 68.4 95.8 103.9

Costs: 20.5 30.2 19.7

Net Benefits: 47.9 65.6 84.2

IRR: 28.1 38.1

The opportunity cost of many of the workers retrenched from Zambian Railways is very low. Financial retums tothe railway will thus be significantly higher than economic returns to the economy.2Net public sector surplus with and without project.

Main Assumptions:See above.

Sensitivity analysis / Switching values of critical items:

The economic analysis is based on a large number of assumptions, and it is important to test whetherplausible changes in these assumptions would result in unacceptably low ERR. An extensive sensitivityanalysis has been performed. Given the very positive ERR in the base case, it is particularly important todeternine what factors, or combination of factors, could result in a marginal or negative ERR:

- 48 -

Sensitivity Analysis: Pessimistic Scenarios NPV ERR(US$m) (%)

1. Base case 47.9 28.1

2. Retrenched workers: no alternative employment and no investment 40.3 24.9

3. Concessionaire takes 30% return and makes $30 million investment 20.2 18.6

4. Traffic in "without" scenario remains constant at 545 million ton-km 27.8 22.7

5. Annual traffic growth in "with" situation only 2% per annum 10.5 16.1

6. No increase in rail traffic "with" concessioning -14.2 3.6

7. No increase in rail traffic "with" scenario, concessionaire invests only $5 million -0.3 11.8

8. Traffic in "without" scenario constant, growth in "with" scenario 3% per annum 4.6 13.8

The crucial factor for the economic viability of the project is the increase in rail traffic, resulting from themore efficient rail services provided by the concessionaire. It is implausible that the concessionaire wouldinvest substantially without additional rail traffic, and it can be reasonably assumed that Scenario 6 is quiteunrealistic. The very worst case scenario (Scenario 7) still generates a marginally acceptable ERR. It ishighly unlikely that ZR could be concessioned unless potential concessionaires expect that they will be ableto increase the level of freight traffic substantially, nor is it likely that GRZ would accept the very lowconcession fees implicit in the low traffic scenarios.

A faster rate of traffic growth after concessioning, or a more rapid decline in traffic without concessioningwould obviously increase the level of economic benefits above the base case level. Both such scenarios arevery plausible, as are significant reductions in railway operating costs under concessioned management. Arather different scenario would be very rapid decline in the performance of ZR and its outright closureafter, for example, five years.

Sensitivity Analysis: Optimistic Scenarios NPV ERR(US$m) (%)

1. Base case 47.9 28.1

2. Annual traffic growth in "with" scenario 10% for 3 years and then 3% 64.4 32.5

3. "With" Fixed and unit variable costs reduced 10% annually for first two years 62.3 32.9

4. Traffic in "without" scenario declines 3% annually 56.7 30.2

5. Scenarios2+3+4 88.2 39.0

6. ZR closed after 5 years "without" concessioning 119.6 38.6

Overall, the economic analysis indicates that the project is robust, in tenns of benefits to the Zambianeconomy. It is possible that the potential concessionaire will discount the potential of ZR when makingthe initial offer for concession fees, but once the potential is realized will be prepared to increase the levelof fees in order to extend the period of the concession.

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Annex 5: Financial Summary

ZAMBIA: RAILWAYS RESTRUCTURING PROJECT

Years Ending2001 - 2003

|Year 1 |Year 2 |Year 3 |Year 4 | Year 5 | Year 6 1 Year 7Total Financing Required

Project CostsInvestrnent Costs 18.0 8.0 5.0

Recurrent CostsTotal Project Costs 18.0 8.0 5.0 0.0 0.0 0.0 0.0Total Financing 18.0 8.0 5.0 0.0 0.0 0.0 0.0

FinancingIBRD/IDA 16.0 7.0 4.0Government 2.0 1.0 1.0

Central 2.0 1.0 1.0Provincial

Co-financiersUser Fees/BeneficiariesOthersOthersOthersOthersOthers

Total Project Financing 18.0 8.0 5.0 0.0 0.0 0.0 0.0

Main assumptions:

Financial Analysis Summary

For computing the FRR:

(a) the costs constitute the combined investments by GRZ (for staff rationalization and initial targetedinvestments estimated at US$24 million etc.) and those by the concessionaires (estimated at US$15million);

(b) the traffic has been assumed to increase as in indicated in the section on economic analysis withrevenues increasing proportional to ntkms; and

(c) unit costs have been assumed as in the ERR computation and expenditure assessed accordingly.

The financial rate of return on the combined investments made in Zarnbia Railways by GRZ and theconcessions has been estimated at 38.6%. It is clear that the financial rate of return is sufficient to permitthe concessionaire to make an acceptable return on his investments while also providing substantialconcession fees and corporate taxes to be paid to GRZ.

- 50 -

Sensitivity analysis. With traffic and cost scenario of the ERR traffic sensitivity case, i.e., zero percentgrowth of traffic in the first three years and 3 % annual growth thereafter, the FRR comes to 21%. If thecost reductions are also zero, then the FRR would be 5 %. It is obvious that, if after a huge investment ofover US$50 million, there is neither a growth in traffic nor a reduction in the operating cost, then the returnon investments will be dismal.

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Annex 6: Procurement and Disbursement Arrangements

ZAMBIA: RAILWAYS RESTRUCTURING PROJECT

Procurement

For procurement arrangements see Table A andfor Prior review thresholds see Table B.

The main features of the procurement arrangements are as follows (values within parentheses indicate theapproximate value of goods/works/services proposed to be obtained through the specified procurementmethod and are inclusive of physical and price contingencies):

Goods would be procured through:

(i) International Competitive Bidding (US$4.3 million);(ii) National Competitive Bidding (US$1.0 million); and(iii) Limited intemational bidding, limiting the intemational bidding to original equipment

suppliers (US$0.8 million).(iv) Shopping (US$0.2 million)

Consultants' services would be procured through:

(i) Quality and Cost Based Selection (US$2.0 million); and(ii) Selection Based on Quality of Consultants (US$0.3 million).

Training and retraining of retrenched staff would be procured through mutual consultation(US$1.1 million).

US$17.3 million will be disbursed towards severance payments and US$1.9 million towards pensionpayments.

Note: Figures in () are inclusive of contingencies.

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Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

1. Works 0.00

.____________________ o 0 0 0 (0.00)2. Goods 6.40 1.00 1.00 8.40

(4.30) (1.00) (1.00) 0 (6.30)3. Services 2.30 2.30

o) () (2.30) 0 (2.30)4. Training 1.10 1.10

o OO0 (1.10) 0 (1.10)5. Severance Payments 17.30 17.30

o 0 (17.30) 0 (17.30)6. Pension Payments 1.90 1.90

.. ___________________ _ o) () 0 0 O (0.00)Total 6.40 1.00 23.60 0.00 31.00

(4.30) (1.00) (21.70) (0.00) (27.00)

"Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies

v Includes civil works and goods to be procured througlh ntionlu shopping, consulting services, services ofcontracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) re-lending project funds to local governuentunits.

- 53 -

Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

A. Firms 2.00 0.30 0.00 0.00 0.00 0.00 0.00 2.30(2.00) (0.30) (0.00) (0.00) (0.00) (0.00) (0.00) (2.30)

B. Individuals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)

Total 2.00 0.30 0.00 0.00 0.00 0.00 0.00 2.30(2.00) (0.30) (0.00) (0.00) (0.00) (0.00) (0.00) (2.30)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther =

N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Credit.

- 54 -

Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review'

1. Works

2. Goods >US$100,000 ICB All>US$ 100,000 LIB All>US$30,000 NCB All<US$30,000 Shopping

3. Services >USS100,000 QCBS (Firm) All>US$50,000 CQ (Firm) All>US$50,000 Individual*<US$50,000 Individual*

Total value of contracts subject to prior review:

Overall Procurement Risk Assessment

Low

Frequency of procurement supervision missions proposed: One every 12 months (includes specialprocurement supervision for post-review/audits)

* All terms of reference will be subject to prior review.

Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

- 55 -

Disbursement

Allocation of credit proceeds (Table C)

Table C shows the allocations of the proceeds of the Credit. The proceeds of the IDA Credit of US$27.0million will be disbursed over the Project period, i.e., from the date of effectiveness to December 31, 2003.A period of six months will be allowed after the closing date to request disbursements for expendituresincurred prior to the closing date.

Use of Statements of Expenditures (SOEs). All applications to withdraw proceeds from the Credit will befully documented except for: (a) expenditures of contracts with an estimated value of US$ 100,000 each orless for goods; and (b) technical assistance contracts with firms costing less than the equivalent ofUS$100,000 and technical assistance contracts with individuals costing less than the equivalent ofUS$50,000, and all force account works, recurrent operational costs, and training. Disbursement andwithdrawal procedures are detailed in the World Bank Disbursement Handbook (1992 edition).Documentation supporting expenditures claimed against SOEs will be retained by the implementingagencies for review when requested by IDA supervision missions and project auditors. All disbursementsare subject to the conditions of the Development Credit Agreement and the procedures defined in theDisbursement Letter.

Special Account. To facilitate disbursements of eligible expenditures for goods and services, theGovernment will open three Special Accounts in a commercial bank under terms and conditionssatisfactory to IDA, to cover parts of IDA's share of eligible expenditures. One Special Account shall bein the name of ZRL (ZRL Account); a second Special Account in the name of ZPA (ZPA Account); and athird Special Account in the name of the MCT (MCT Account). The authorized allocation of the SpecialAccount for ZRL would be US$2.5 million and those for ZPA and MCT US$0.25 million each covering anestimated four months of eligible expenditures to be financed by IDA. In view of the fast track nature ofthe project and the expected early utilization of funds to ensure achievement of project success, theAuthorized Allocations shall not be limited to below the specified amounts at any time during the project.Zambia Railways, MCT, and ZPA will be responsible for submitting monthly replenishment applicationsfor their respective accounts with appropriate supporting documents for expenditures. To the extentpossible, all of IDA's share of expenditures should be paid through the Special Account.

Table C: Allocation of Credit Proceeds

Expenditu, ato,otn Slin

Goods 5.60 100% of foreign and 90% of localexpenditures (*)

Consultant Services 2.10 100% of foreign and local expendituresTraining 1.00 100% of foreign and local expendituresSeverance payments 16.20 100% of local expendituresUnallocated 2.10

Total Project Costs 27.00

Total 27.00

(*) No local expenditures in these categories are anticipatedHowever, if a local expenditure incur the above articulated rule will apply..

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Accounting, Financial Reporting, and Auditing Arrangements

Zambia Railways Limited (ZRL)

Zambia Railways Limited (ZRL) will be the implementing agency for the Asset Rehabilitation andEnvironment Mitigation, Staff Retrenchment, and the Restructuring of ZRL/Winding Up Components. AnImplementation Committee, headed by a Project Manager has been established to undertake the day to dayimplementation of the project. The Accounts Section will be managed by the Head of ManagementAccounting on a full time basis. Support to the Management Accountant will be made by three SeniorAccountants (Treasury, Infrastructure and Workshops) from the existing ZRL establishment. TheManagement Accountant will be responsible for ensuring that financial management and reportingprocedures for the ZRL component of the Project will be acceptable to the World Bank, GRZ and ZRL'sBoard of Directors. Existing disbursement procedures, as outlined in the World Bank's DisbursementHandbook, will be followed, i.e., Direct Payment, Reimbursement and Special Commitment (ifappropriate).

ZRL's financial management systems will support management in their deployment of resources with thepurpose of ensuring economy, efficiency and effectiveness in the delivery of outputs required to achievedesired outcomes. ZRL's financial management system will be expected to produce timely, understandable,relevant and reliable financial information that will enable management to plan, implement, monitor, andappraise the project's progress towards achievement of the stated goals. ZRL's current financialmanagement arrangements meet the minimum requirements to comply with the Bank's OP/BP 10.02.Outline of Disbursement Procedures for Severance Payments. The procedures would entail the followingkey steps:

(a) Once staff is declared surplus, the ZRL would complete the retrenchment formalities and compute theseverance and pension withdrawal payments for each staff.

(b) The retrenchment papers would then be sent to the necessary authorities for endorsement.(c) ZRL would then prepare invoices for groups of staff providing computation details for each individual

staff included in the invoice with regard to the severance payments.(d) These invoices would be audited by an independent auditor. This auditor would certify that the

computation of severance and pension withdrawal payments is in accordance with the Governmentapproved staff retrenchment formula.

(e) ZRL would make the severance payments to the staff in accordance with the invoices from the specialaccount.

Zambia Privatization Agency (ZPA)

ZPA will be responsible for implementing the Railway Concessioning component of the project. They willalso handle the funds for the Staff Counseling, Re-deployment and Social Mitigation component that willbe implemented by the National Social Safety Net (NSSN). ZPA is familiar with handling donor funds andhas been responsible for privatization of numerous public enterprises. A core team headed by a ProjectManager and including a professionally qualified accountant has been formed to spearhead the project.The financial management system successfully used in accounting for more than two hundred privatizedenterprises will be used to manage the IDA resources for the project. This system meets the Bank'sminimum requirements to comply with OP/BP 10.02.

- 57 -

Ministry of Communication and Transport (MCT)

MCT is currently assembling staff to implement the Regulatory Framework and MCT Strengtheningcomponents. For MCT to deliver on the aforementioned objectives, its financial management system willbe based on the Financial Management Action Plan, with the following key features:

(a) A competent financial manager supported by appropriately qualified staff with oversight provided by afinancial management committee that would manage the funds.

(b) An internal controls/financial procedure manual would be prepared describing detailed internal controlprocedures.

(c) Internal auditing will be undertaken on a regular basis.(d) The accounting system would be based on a sound information technology.(e) The financial manager, in consultation with the financial management committee, would prepare the

project's monthly/quarterly/annual cash flow forecast.(f) The project funds would be accounted for by on a cash basis.(g) The World Bank procurement procedures should be observed as outlined in guidelines: procurement

under IDA credits and guidelines for the use of consultants by World Bank borrowers and by theWorld Bank as executing agency.

(h) Detailed internal control procedures over financial management issues relating to staff rationalizationwill be documented in the financial procedure manual to be prepared.

(i) A fixed assets register will be prepared, regularly updated and periodically checked.(j) A procurement management report will be presented quarterly by the procurement officer to the

financial management committee.(k) The Financial Manager will be responsible for preparing a monthly status of funds report for the

financial management committee, quarterly/annual financial statements, dedicated accountstatement/reconciliation, and Statement of Expenses (SOE) withdrawal schedule (if appropriate); and

Audit. The Project accounts, SOEs and the Special Account will be audited each year by an independentauditing firm appointed by the Auditor General under terms and conditions satisfactory to IDA. In additionto the annual financial statements conforming to Intemational Standards on Auditing (IFAC Standards), theaudit report will include comments on the accuracy and propriety of expenditures withdrawn under SOEprocedures and the extent to which these can be relied upon as a basis for credit disbursements. Auditreports will be submitted to IDA no later than six months following the end of the Borrower's fiscal year.In addition, ZRL would be required to submit annual entity audit reports also within six months followingthe end of the Borrower's fiscal year.

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Annex 7: Project Processing ScheduleZAMBIA: RAILWAYS RESTRUCTURING PROJECT

Time taken to prepare the project (months) 12 12First Bank mission (identification) 01/15/99 02/15/99Appraisal mission departure 06/26/2000 06/23/2000Negotiations 08/12/2000 10/10/2000Planned Date of Effectiveness 01/15/2000

Prepared by:

Yash Pal Kedia

Preparation assistance:

PHRD Grant

Bank staff who worked on the project included:

iNam.e SNpecialityYash Pal Kedia Team Leader/Principal Railway SpecialistSimon Thomas Sr. Transport EconomistStephen Brushett Sr. Operations OfficerAberra Zerabruk Sr. CounselSteve Gaginis Sr. Disbursement OfficerPascale Dubois Sr. CounselFrancesco Sarno Principal Procurement SpecialistCyprian Fisiy Sr. Social ScientistBrighton Musungwa Sr. Financial Management SpecialistSerigne Omar Fye Environment SpecialistImogene Jensen Sr. EconomistGualberto Lima Canpos Operations AnalystAnnette Minott Program Assistant

- 59 -

Annex 8: Documents in the Project File*ZAMBIA: RAILWAYS RESTRUCTURING PROJECT

A. Project Implementation Plan

Borrower Implementation Plan, including Procurement Plan, May 2000Procedures Manual and Reporting Scheme, May 2000

B. Bank Staff Assessments

Aide Memoires:February 1999 IdentificationSeptember 1999 PreparationMarch 2000 Pre-AppraisalJune 2000 Appraisal

C. Other

Specialized Study Reports

Environmental Impact Assessment and Audit Study, Z. Phiri and P. Zulu, December 1999Zambia Railways Private Sector Participation Study, CPCS Transcom Ltd, March 1999Infrastructure Assets Valuation Study, RITES, September 1999Operating Assets Valuation Study, RITES, September 1999Staff Retrenchment Study, Zambia Railways Limited, January 2000Social Impact Assessment, Zambia Railways Limited, April 2000Social Impact Study of the Reorganisation and Concessioning of Zambia Railway Ltd., Kane Consult, July2000Three Year Revival Plan, Zambia Railways Limited, Hifab/DE-Consult, November 1998Privatisation/Restructuring of Zambia Railways, Project Proposal Document, National Social Safety Net,May 2000Social and Economic Restructuring of Zambia Railways, Project Implementation Plan, National SocialSafety Net, July 2000Zambia Rail Concessioning Economic and Financial Analysis, Electronic File, The World Bank, May 2000*Including electronic files

- 60 -

Annex 9: Statement of Loans and Credits

ZAMBIA: RAILWAYS RESTRUCTURING PROJECT

Difference between expectedand actual

Original Amount in USS Miblons disbursements

Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev d

P003218 1995 Zambia AGRICULTURE SECTOR I 0.00 60.00 0.00 15.75 19.89 1.21

P003249 1999 Zambia BASIC ED SEC INV PRG 0.00 40.00 0.00 30.48 15.55 2.42P044324 1997 Zambia ENTERPRISE DEVELPMNT 0.00 45.00 0.00 36.21 33.75 0.00P040642 1998 Zambia ERIPTA 0.00 23.00 0.00 4.00 4.62 0.00P003253 1997 Zambia Environmental Support Program 0.00 12.80 0.00 9.91 5.15 0.00

P039016 2000 Zambia FISCAL SUJST. ADJ CREDIT 0.00 140.00 0.00 93.72 0.00 0.00P003239 1995 Zambia HEALTH SECTOR 0.00 56.00 0.00 28.07 29.29 0.00

P064064 2000 Zambia MINE TOWNSHIP SERVICES PROJECT 0.00 37.70 0.00 36.93 0.00 0.00

P003236 1998 Zambia NATIONAL ROAD 0.00 70.00 0.00 41.26 -2.75 0.00P035076 1998 Zambia POWER REHAB 0.00 75.00 0.00 70.46 80.31 0.00P050400 2000 Zambia PUB SVC CAP (PSCAP) 0.00 28.00 0.00 27.42 0.00 0.00P003210 1995 Zambia SOCIAL RECOVERY II 0.00 30.00 0.00 0.38 4.03 0.00P063584 2000 Zambia Social Investment Fund (ZAMSF) 0.00 64.70 0.00 61.92 -1.25 0.00P003241 1995 Zambia URBAN RESTRCT &WATER 0.00 33.00 0.00 6.07 3.07 1.93

Total: 0.00 715.20 0.00 460.568 171.66 5.56

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ZAMBIASTATEMENT OF IFC's

Held and Disbursed Portfolio20-Sep-2000

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1998 AEFAmakaCotton 1.30 0.00 0.00 0.00 1.30 0.00 0.00 0.001994 AEF Big Five Car 0.52 0.00 0.00 0.00 0.52 0.00 0.00 0.001998 AEFDrilltech 0.16 0.00 0.15 0.00 0.16 0.00 0.15 0.001999 AEF Esquire 0.40 0.00 0.00 0.00 0.40 0.00 0.00 0.001997 AEF JY Estates 0.89 0.00 0.00 0.00 0.89 0.00 0.00 0.001995 AEFKailaLodge 0.10 0.00 0.00 0.00 0.10 0.00 0.00 0.001997 AEF Pentire 0.53 0.00 0.00 0.00 0.53 0.00 0.00 0.002000 APC Ltd. 2.50 0.00 0.00 0.00 1.50 0.00 0.00 0.001972/73 Bata Shoe ZA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001997 Finance Banlk 3.75 0.00 0.00 0.00 1.25 0.00 0.00 0.001997 IMDHZ 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.002000 KCM 0.00 5.20 24.80 0.00 0.00 5.20 3.70 0.001998 Nicozamn 0.00 0.30 0.00 0.00 0.00 0.30 0.00 0.001999/00 Zamcell 3.30 0.44 0.00 0.00 0.00 0.44 0.00 0.00

Total Portfolio: 13.45 6.44 24.95 0.00 6.65 6.44 3.85 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic1999 AEF Kembe Estate 1300.00 0.00 0.00 0.001999 AEF Mpelembe 700.00 300.00 0.00 0.002000 AEF QNet 340.00 0.00 80.39 0.002000 Lusaka InterCon 4600.00 0.00 0.00 0.001997 Safari Intl. 2000.00 0.00 750.00 0.00

Total Pending Commitment: 8940.00 300.00 830.39 0.00

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Annex 10: Country at a GlanceZAMBIA: RAILWAYS RESTRUCTURING PROJECT

Sub-POVERTY and SOCIAL Saharan Low-

Zambla Africa Income Development diamond'a999

Population, mid-year (miltihns) 9.9 642 2,417 Life expectancyGNP per capita (Atlas method, USS) 330 500 410GNP (Atlas nuthod, US$ billions) 3.2 321 988

Average annual growth, 1S93S90

Population (X) 2.5 2.6 1.9Labor force (%) 2.8 2.6 2.3 GNP Gross

Most recent estimate (latest year available, 193-S99) per primary

Pov *rty (% of population below national poverty line) 73 c ,Urban population (% of total population) 44 34 31Life expectancy at birth (years) 45 50 60Infant mortality (per 1,000 live births) 114 92 77Child malnutrition (% of children under 5) 27 32 43 Access to cafe waterAccess to improv ad water source (% of population) 43 43 64Illiteracy (% ofpopulation age 15.) 22 39 39Gross primary enrollment (% of school-age population) 89 78 96

Male 92 85 102 -Zar,bis -Low-income groupFemale 86 71 86

KEY ECONOMIC RATIOS and LONOGTERM TRENDS

1075 1960 1098 1909Economic ratlos'

GDP (US$ billions) 3.3 4.0 3.2 3.1Gross domestic inv estment/GDP 14.2 10.8 18.3 17.5Exports of goods and services/GDP 45.6 26.8 26.7 22.3 TradeGross domestic sav ingslGDP 23.2 3.8 3.9 -1.1Grose national sav lngs/GDP 15.0 -7.1 -3.6 -6.8

Current account balance/GOP 1.1 -5.6 -17.8 .15.8Interest paymentsGIDP 2.8 1.9 2.8 5.2 Domestic InvestmentTotal debt/GDP 91.3 188.0 215.5 206.9 SavIngsTotal debt service/exports 22.1 13.8 25.8 38.1Present value of debtIGDP 170.3 125.7Present v alue of debtbexports 575.9 454.5

Indebtedness197949 1550-99 lose 1999 1999-03

(average annual growth)GOP 1.1 0.2 -1.9 2.4 4.7GNP per capita -3.2 -1.8 -51 2.2 2. - Zambia - Low-income groupExports of goode and servicee -3.1 2.9 5.0 4.9 11.8

STRUCTURE of the ECONOMY

(% of GDP) 1379 1086 1903 1390 Growth of Investment and ODP (%)

Agriculture 18.5 21.2 21.2 24.6 10oIndustry 29.1 24.5 so

Manufacturing 13.0 12.0Serv ices 49.7 50.9 s-1 98 97 98 so

Priv ate consumption 52.9 82.5 84.9 91.5 -100General government consumption 23.9 13.7 11.2 9.6Imports of goods and services 38.6 33.8 39.2 40.9 GODI -o-GDP

1379080 16099-9 1998 1999 Growth of exports and Imports (%)(average annual growth)Agriculture 3.8 3.4 1.8 13.7 202Industry -3.8 -11.3 -4.9

Manufacturing 3.3 1.8 2.8 o \

Serv ices 5.7 4.4 5.2

Private consumption 3.2 0.4 -1.3 2.e 46 94 107 a aGeneral gov ernment consumption -3.8 -5.5 -14.8 -15.8Gross domestic inv estment -3.6 3.3 9.3 8.7 20Imports of goods and services -2.3 1.3 4.8 1.6 - Exprts c.-Imports

Gross national product -0.2 0.9 -2.9 4.4

Note: 1999 data are preliminary estimates.

The diamonds chow four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

-63 -

Zambia

PRICES and GOVERNMENT FINANCE

1979 1989 1988 1999 Inflation (%)Domestic prices(96 change) 200Consumer prices 9.7 127.7 24.4 26.8 150Implicit GDP deflator 21.3 80.9 19.6 21.7 100

Govemment flnance 50(% of GOP, includes current grants) 0

Current revenue .. 18.6 18.7 17.6 94 95 96 97 98 99Current budget balance .. -4.4 1.4 2.6 -GDPdebtor c cPIOverall surplus/deficit .. -6.6 -9.8 -10.0 _

TRADE

1979 1989 1998 1998 Export and Import levels (USS mill.)(US$ millions)

Total exports (fob) 1,408 1,410 816 755 1,200Copper .. 1,233 365 372Cobalt .. 84 155 95 sooManufactures .. 36 194 188

Total imports (cif) 756 901 971 871 600Food .. 14 108 0Fuel and energy .. 103 42 115 300Capital goods .. 372 539 523 0

Export pnce index (1995=100) . 92 70 69 93 94 95 96 97 so 99Import price index (1995=100) 55 79 87 88 *Exports *InporsTerms of trade (1995=100) .. 116 81 79

BALANCE of PAYMENTS

(US$ nillions) 1979 1989 1998 1999 Current account balance to GDP (%)Exports of goods and services 1,523 1,493 919 842 0Imports of goods and services 1,212 1,281 1,253 1,169Resource balance 311 212 -334 -327

Net income -169 -406 -215 -156 4*Net current transfers -105 -28 -27 -16 I 'll " 'Current account balance 37 -222 -576 -499 12

Financing items (net) -146 487 365 518Changes in net reserves 109 -265 211 -19 -ts

llemo:Reserves including gold (US$ nifrons) 191 123 69 50Conversion rate (DEC, localAJSS) 0.8 13.8 1,862.0 2,388.0

EXTERNAL DEBT and RESOURCE FLOWS1979 1989 1998 1999

(US$ ilions) Composition of 1999 debt (USS mill.)Total debt outstanding and disbursed 3,047 6,709 6,982 6,518

IBRD 336 501 42 33 G: 329 A: 33IDA 1 253 1,562 1,704 F 121

Total debt service 340 206 247 331 704IBRD 41 0 25 12IDA 0 0 16 16

Composition of net resource flowsOfficial grants 58 194 257 214 EZ895Official creditors 305 90 -54 66Private creditors 1 11 -11 -20 _ 1,171Foreign direct investment 35 164 72 163 _Portfolio equity 0: 2as

World Bank programCommitments 11 0 75 213 A-8RD E- BlateralDisbursements 28 4 43 156 B. IDA D- Other rmutiateral F - PruatePrincipal repayments 13 0 25 13 C-IMF G-Short-trmNet flows 16 4 18 143Interest payments 29 0 16 15Net transfers -13 4 2 128

Development Economics - 64 - 9/9(00

AdditionalAnnex No.: 11

Social Impact AssessmentZAMBIA - RAILWAYS RESTRUCTURING PROJECT

Purpose and Objectives of Study

Faced with shrinking revenues and financial support from the Government, ZR has been reducing its staffsince 1990. The staff strength, about 10,000 in 1990, currently stands at about 3,300. Staff reduction wasachieved mainly through natural attrition and voluntary early retirement until 1998, when for the first time,2,000 staff were retrenched involuntarily. The downsizing process has not as yet reached its end and morestaff retrenchments are in the offing, even though the estimates of such retrenchments vawy. The optimalstaff strength for the current and potential traffic, according to ZR is about 1,800 while, based on recentexperience, the potential concessionaires could be expected to settle for no more than 800 to 900 staff.That would mean a further retrenchment of between 1,500 and 2,400 staff.

Given the extent of retrenchment required, a Social Impact Study was carried out to: (a) assess the socialand economic impact of retrenchment on staff who were retrenched in 1998 and 1999 and theircommunities; (b) make recommendations for more efficiently and effectively managing the retrenchmentexercise with minimal economic and social costs to both the retrenchees and the company; and (c) makerecommendations for improving ZR's program of action for the mitigation of any potential negative socialeffects on future retrenchees and identify programs beneficial to them. Brief excerpts are indicated below.The main report is available in the Project files.

Methodology,

A total of 396 people from five main groups were targeted for this assessment. The groups were: (a)workers currently employed in ZR; (b) trade union representatives; (c) middle management; (d) topmanagement; and (e) workers who were retrenched in 1998 and 1999. The locations covered wereLivingstone, Choma, Pemba, Kafue, Lusaka, Kabwe, Kafulafuta, Ndola, Kitwe, Chingola andChililabombwe. Survey instruments used included questionnaires, focus groups and semi-structuredinterviews.

Impacts

Impact on Retrenched Workers and their Community. The two positive aspects of retrenchment, as far asthe retrenched workers were concemed, were the opportunity to invest money in long desired items such asa house, and the opportunity to go into another field of endeavor, such as agriculture. The main complaintsof already retrenched workers involved the size of and, even more so, the delays with which the severancepayments were made. These delays led to financial hardship, as some retrenched workers had to take outhigh interest loans to "tide" them over until receipt of the payoff from ZR. A relatively small percentage,18 percent, invested the money in ways to generate more income. Other than late payments, therespondents identified three seriously negative aspects of retrenchment as follows: (i) poverty anddestitution due to the loss of a reliable source of income; (ii) loss of the social services (e.g., clinics,schools, recreation facilities) provided by ZR, and (iii) the stigma attached to sudden "unemployed" status,causing former workers to be looked down on by family as well as members of their communities.

Impact on the Workers and Management of ZR. On the part of the remaining workers at ZR, there have

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been complaints of overwork. In addition, there seems to have been a misconception that a decrease in stafflevels would result in a pay hike for the remaining staff. There have also been reports of resentmenttowards staff who have been retrenched and then rehired on a contract basis at a higher salary (theseseparations were financed by ZRL with their own funds and restrictions on rehiring were not imposed).

Manaeement of the Retrenchment Prosram

Staff surveyed felt that ZR had not properly managed the past two retrenchment exercises andrecommended that the process be looked at two levels - at the company level and at the level of the staffbeing retrenched. At the management level, a restructuring exercise should clearly explain the redefinedgoals, and objectives envisioned. The current organizational structure should be reviewed against the newmission objectives. With respect to those being retrenched, the main areas in which the retrenchmentprocess needs improvement are as follows:

* Pay packages should be paid on time: According to the study, 48% of the staff retrenched and 53% ofthe staff still employed regarded this item as the most crucial.

* Provision ofadeguate notice of the impending retrenchment: Notices should be given in timely andsensitive fashion. Once identified, staff should be given six months notice of retrenchment.

* Proper Job evaluation: Both retrenched workers and current ZR workers complained of the number ofemployees who had been retrenched, then rehired at a higher salary. One recommendation from thesurvey was that a skills assessment be done, and a uniform percentage of employee be retrenched in alldepartments regardless of the manpower situation in these departments. The perception of faimessclearly is an issue.

Mitigation of Negative Social and economic Impact

Counseling: Staff claimed that during the previous two retrenchment exercises, there was no provision forstaff counseling. The need for staff was emphasized with counseling focusing on the need to plan one'sfuture in light of the change, including guidance on how to manage the sudden receipt of a large amount ofmoney, how to invest in a new business, and how to acquire and use new skills.

Training: Much of the training ZR employees have received is unusable outside ZR. The studyrecommended that training in the areas of farming, business management; mechanics/electrical, civilengineering, accountancy, craft among others should be explored. To this end, the National Social SafetyNet has a big role to play, as well as other organizations such as Future Search, Micro and Small ScaleEnterprises, TEVET, and the Public Welfare Association. Retrenched workers interested in farming shouldbe encouraged to participate in the Land Resettlement Scheme, which gives free land to persons who wishto engage in productive agriculture.

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