Document of

The World Bank FILE orV&FOR OFFICIAL USE ONLY

Report No. 2541-ZA

ZAMBIA

THIRD RAILWAY PROJECT

STAFF APPRAISAL REPORT

November 26, 1979

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Kwacha

K 1.00 = US$1.30

WEIGHTS AND MEASURES

1 meter (m) = 3.28 feet (ft)

1 kilometer (km) 2 0.62 miles (mi)1 square kilometer (km ) = 0.386 square miles (sq mi)1 metric ton (ton) = 2,204 pounds (lb)

GLOSSARY OE' ABBREVIATI[ONS

AfDB - African Development BankCIDA - Canadian International Development AgencyCTC - Centralized Traffic ControlEEC - European Economic CommunityGDP - Gross Domestic Product:KfW - Kreditanstalt fur WiecderaufbauMPTC - Ministry of Power, Transport and CommunicationsNTC - National Transport CorporationODA - Overseas Development AdministrationOPEC - Organization of Petroleum Exporting CountriesSIDA - Swedish International Development AuthoritySNCZ - Societe Nationale des Chemins de Fer ZairoisTAZARA - Tanzania-Zambia Railwa,y AuthorityzImco - Zambia Industrial and Mining Corporation LimitedZR - Zambia RailwaysZTRS - Zambia-Tanzania Road Services

c.i.f. - cost, insurance, freightlb/yd - pounds per yard

GOVERNMENT OF ZAMBIA AND ZAMBIA RAILWAYSFISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

ZAMBIA

THIRD RAILWAY PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

* I. THE TRANSPORT SECTOR .................................... 1

A. Economic and Geographic Background .... ............. 1

B. The Transport System ............................... 1

C. Zambia's Foreign Trade Routes ...................... 3

D. Transport Policy and Planning. 5

E. Past Bank Group Projects in the Sector. 6

II. ZAMBIA RAILWAYS (ZR) .................................... 6

A. Introduction. 6

B. Organization, Management and Staff. 7

C. Training. 8

D. Track ......... ;... 11

'E. Signalling and Telecommunications .14

F. Motive Power and Rolling Stock .15

G. Workshops and Depots .17

H. Operations .17

I. Past and Present Traffic .18

J. Budget, Accounts, Audit and Insurance .19

III. THE PROJECT .21

A. Scope of the Project .. 21B. Details of the Project .. 22

C. Cost Estimates .. 24

D. Financing and Procurement . .26

E. Disbursements .. 27

F. Project Execution, Environment and Employment 27

G. Operational Targets .. 28

IV. ECONOMIC EVALUATION .30

A. Forecast of Future Traffic .30B. Project Benefits and Economic Return .32

C. Risk and Sensitivity Analysis .35

This report has been prepared by Messrs. Parthasarathi (Senior Economist),

R. Masthagen (Railway Engineer), B. Rollins (Senior Financial Analyst),and W. Jackson (Consultant), on the basis of their findings during an

Appraisal Mission in Zambia in January-February 1979. Mr. Delvoie(Financial Analyst/Economist) participated in completing it.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Table of Contents (Continued) Page No.

V. FINANCIAL EVALUATION .................................... 40

A. Past Financial Performance ..... .................... 40B. Financial Forecasts ................................ 45C. Projected Income Statement ..... .................... 46D. Projected Cash Flow ................................ 48E. Financial Risk ..................................... 48F. Projected Balance Sheets ..... ...................... 50G. Future Financial Objectives ..... ................... 50H. Impact of Inflation on ZR's Finances ............ ... 53I. Financial Internal Rate of Return ............... ... 56

VI. RECOMMENDATIONS ......................................... 59

ANNEX 1 Past Bank Group Financed Transport Projects in Zambia ... 60ANNEX 2 Related Documents and Data Available in Project File .... 62

Map No. IBRD 14252Map No. IBRD 14253

I. THE TRANSPORT SECTOR

A. Economic and Geographic Background

1.01 Zambia is a land-locked country in the southern half of Africa,

depending for its international surface routes on its neighbors -- Tanzania,Malawi, Mopambique, Rhodesia, Botswana, Angola and Zaire. With an area of

750,000 km , the country consists of a high plateau ranging in elevation

from 1,000 m to 1,500 m, intersected by the valleys of the Zambezi River

and its tributaries. It has2a population of 5.2 million and a population

density of only seven per km . Per capita income is US$480 equivalent.

1.02 The dominant feature of the Zambian economy is the mineral

wealth in the northern (Copperbelt) region, with its reserves of copper

ore. The mining of copper ore and its processing into copper, with cobalt

as a byproduct, constitute the country's most important economic activity.

Both the copper and cobalt produced are almost entirely exported. The mineral

industry accounted for about 25% of GDP and, with refining, for over 90% of

export earnings in 1976.

1.03 Since exports and imports each constitute around 40% of GDP, thecountry is particularly dependent on its transport network and its access to

seaports through neighboring countries. To maintain current levels of eco-

nomic activity, about 2.5 million tons of goods (including petroleum andpetroleum products) must move in and out of the country each year. As a

natural corollary, considerable emphasis is placed on external trade routes

in transport investments.

B. The Transport System

1.04 The transport system within Zambia comprises approximately 35,000

km of roads, 2,000 km of railways, 150 airports and a 1,700-km oil pipeline

from Dar es Salaam to Ndola in the copper-producing areas. Traditionally,

railways carried the bulk of Zambia's external trade, but because of recentpolitical developments resulting in the interruption of external railway

connections in Rhodesia and Angola, a significant proportion of trade has

recently been carried by road transport through Tanzania, Malawi and, more

recently, Mozambique. The internal transport system has mainly developed

along the line-of-rail, since this area contains most of the important

mining and industrial activities in the country and nearly all of the urban

centers. In recent years, however, greater emphasis has been given to pro-

vinces away from the line-of-rail, and in particular to providing paved road

access to the principal towns in these provinces.

-2-

Railways

1.05 Zambia has two railways operated by two different entities. ZambiaRailways (ZR) extends from Victoria Falls Bridge on the Rhodesian border tothe Copperbelt area in the north where it links up, via Zaire, with theBenguela Railway to the Angolan port of Lobito. The Tanzania-Zambia Railway(TAZARA) links up with ZR at Kapiri Mposhi and extends to the port of Dar esSalaam in Tanzania. Details of ZR are given in Chapter II.

Tanzania-Zambia Railway

1.06 TAZARA is jointly owned by the Governments of Zambia and Tanzania.Its construction, financed by a Chinese loan of about US$400 million, startedin 1970 and service began in October of 1975. The Railway extends 1,850 kmfrom Dar es Salaam to Kapiri Mposhi in Zambia where it connects with ZR. Itsroute length in Zambia is 880 km.

1.07 With its 1,818 wagons and 85 locomotives, TAZARA's planned annualcapacity was one million net tons in each direction. Due to operationalproblems which arose after Chinese experts began leaving in 1977, the effec-tive capacity is less than half of that planned. In 1978, TAZARA's exporttraffic was 609,000 tons and import traffic 304,000 tons. The most urgentoperational problem is the poor availability of motive power due at least inpart to lack of trained personnel for maintenance work and lack of foreignexchange to purchase needed spare parts. The track in certain portions ofcentral Tanzania has been adversely affected by heavy rains earlier this yeardue to poor soil conditions. Chinese experts have recently returned to assistTAZARA, on both locomotive maintenance and track, and it is expected that itscapacity will improve.

Roads and Road Transport

1.08 Zambia has about 35,000 km of roads, of which 19,000 km are primaryand secondary roads under the responsibility of the Roads Department of theMinistry of Public Works and 16,000 km are tertiary roads administered byRural Councils. Of the former, 4,600 km are asphalt-paved, 7,600 km areall-weather gravel, and the remainder earth.

1.09 The total vehicle fleet in the country numbers about 160,000 growingabout 9% p.a. and comprising 59% automobiles, 18% light commercial vehicles,11% trucks and the rest other vehicles. About 40% of the trucks are operatedby the Zambian Government-owned National Transport Corporation (NTC) and theZambia-Tanzania Road Services (ZTRS) jointly owned by the Governments ofZambia and Tanzania and by Italian private interests. ZTRS operates on theDar es Salaam route and Contract Haulage, a subsidiary of NTC, mainly on theBeira (Mozambique) route. United Bus Company, a subsidiary of NTC, owns 75%of the buses and 25% of the taxis in the country.

Air Transport

1.10 There are 150 airports and airfields in Zambia, 52 of which areGovernment owned. Lusaka International Airport handles all internationaltraffic. The national air transport company, Zambia Airways Corporation,

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established in 1967, has received assistance from Alitalia and, more recently,from Aer Lingus, under management contracts. Operating with three Boeings707's, one Boeing 737, and four Hawker Siddley 748's, the airline's traffic in1976 included 77,000 international passengers, 167,000 domestic passengers,and 21,000 tons of international freight.

Pipeline

1.11 A 1,700-km pipeline, completed in 1968 and jointly owned andoperated by the Tanzanian and Zambian Governments, carries all of Zambia'scrude oil imports, amounting to 850,000 tons annually and a further 50,000tons for Zaire.

C. Zambia's Foreign Trade Routes

1.12 Before Rhodesia's Unilateral Declaration of Independence in 1965,practically all of Zambia's external trade passed through Rhodesia and theport of Beira in Mozambique. Since then, Zambia began gradually to reduceits dependence on this route. Even so, in 1972, just before the Zambian-Rhodesian border closure in early 1973, almost two-thirds of Zambia's externaltrade used this route, as can be seen from the following table:

Zambia's Foreign Trade by Routes('000 tons)

1970 1971 1972 1973 1974 1975 1976 1977 1978

Lobito/Zaire-Rail 305 445 314 807 947 566 135* 132* 98*

Dar-Road 501 516 412 484 590 660 571 337 226

Dar-Rail 0 0 0 0 0 115 675 937 913

Mombasa-Road 0 0 0 113 172 24 34 4 0

Mozambique-viaMalawi Road/Rail 24 38 46 150 135 195 119 59 71

Mozambique-viaMalawi-Road 0 0 0 0 0 40 93 9 33

South Africa-viaRhodesia Rail 1,691 1,438 1,331 40 0 0 0 0 136

Air and Other 8 9 8 78 62 61 30 65 52

TOTAL 2,529 2,446 2,111 1,672 1,906 1,661 1,657 1,543 1,529

* Exports to Zaire.

1.13 Since 1973 until mid-1975 the rail route via Zaire to Lobito inAngola became the most important export/import route. With the opening ofTAZARA at that time, which coincided with the closure of the Angola-Zaireborder, the Dar road and rail routes became the most important. However,as these routes were unable, for a variety of reasons, to move the goods inand out of Dar efficiently and speedily, Dar port has gradually become con-gested, with congestion starting on shore with accumulatiDn of unloaded goodswhich hampered ship loading and unloading operations. This has graduallyspread to ships with long delays at berth resulting from low productivity and

consequent further delays to ships in obtaining berthing space.

1.14 Although efforts are being made to find solutions to Dar port'sproblems, it must be emphasized that a permanent solution will call forsustained efforts to improve the TAZARA operations and maintenance. TAZARA'smajor problems are: (i) the long turnaround time of wagons (35 to 45 days)

cutting the effective capacity of available wagons to about one-half of thatplanned, and (ii) the low availability of locomotives due to design, mainte-nance and spare parts problems. Recently, the Chinese ha-ve sent 800 techni-cians back to Tanzania to help improve maintenance and operations. But spareparts for maintenance continue to be a problem due to the foreign exchangeproblems of Tanzania and Zambia and their consequent inability to make promptpayments for them.

1.15 There is another route to the sea at present for Zambia's export/import traffic -- to South Africa Ports via Rhodesia and Botswana, whichZambia shares with Zaire -- which can relieve some of the pressure on the Darroute. Other routes that may be considered for the long run are:

(i) Lobito in Angola via the Benguela Railway. As alreadyexplained, this route has been closed for over three years.A EEC rehabilitation project to reopen this route is presentlyunder discussion, and financing for the most urgent investmentshas been arranged. However the security situation is still amajor problem and is likely to hamper normal operations for quitesome time.

(ii) Matadi via Zaire: This route through Zaire, which was closed duringthe 1978 unrest in Shaba province, is now used to the full by Zairewhich is planning to improve its capacity to handle a greaterproportion of its own export/import traffic.

(iii) The Mozambique Road Route (bypassing Rhodesia): The directroad link to Mozambique is expensive and possible only inthe dry season until an all-weather road now under construc-tion is completed. Th-i is several years away.

(iv) The Malawi Route: ,hi- involves an expensive road hauland transshipment to rail and suffers from ineffectivetelecommunication artd current deficiencies of the Mozambicantransport network.

(v) Namibian Route: Tfhe Zambian Government is explorirng thepossibility of building a rail link along the Caprivi Stripto Walvis Bay. Without considering the political problemsin the area, it may require ten years for completion.

- 5 -

1.16 Thus, in practice, Zambia has only two routes to the sea open at

present for its copper exports as well as imports - the Dar es Salaam route

served by both rail and road and the southern rail route. Of these, the

Dar es Salaam rail route is the cheaper, K 71 per ton for copper exports,

compared with K 140 by road to Dar es Salaam and K 112 on the southern rail

route. If and when it is available, the Lobito route will be marginally

cheaper at K 69 per ton. (All these comparison exclude port charges and ocean

freight charges). Unfortunately, since the capacity available to Zambia on

the routes open to it is inadequate to meet its needs for essential exports

and imports, cost is not a prime consideration, as its objective is to use to

the maximum whatever route is open to it.

D. Transport Policy and Planning

Policy

1.17 The Zambian Government does not have a well-developed policy for

the transport sector as a whole. It has so far confined itself to developing

ad hoc measures to deal with specific problems as and when necessary. 1•or

instance, after the border closure with Rhodesia in 1973, a Contingency Plan-

ning Secretariat was set up in the President's Office to ensure the movement

into and out of the country of essential imports and exports over the limited

facilities available on the other routes. This Secretariat continues to per-

form this function. The Government seeks to control the flow of external

trade through ZR and NTC which it fully owns as well as TAZARA and ZTRS in

which it has a part ownership. The Government's approval is necessary for

increases in the tariff rates of the parastatal companies in both rail and

road transport. Private truck operators, who provide most of the domestic

road haulage, generally follow the rates set by NTC and ZTRS.

1.18 In order to assist the Government in developing a coherent and

consistent transport policy, it is proposed to finance, under the proposed

project, the services of an expatriate transport economist for the Ministry

of Power, Transport and Communications (MPTC), who will help set up a Trans-

port Planning Unit to undertake policy formulation and review investment

planning in the sector (see also paras. 1.19 and 3.14). Included in his terms

of reference will be a study of alternatives to rail passenger services which

are now operated at a loss (para. 5.03).

Planning

1.19 MPTC is responsible for transport planning, but has little real

planning capacity. Recent attempts to set up a Transport Planning Unit in the

Ministry have not been successful. In view of its importance, it is proposed

to assist the Government in this task by financing the services of an expatriate

expert for two-three years under the proposed project (para 3.14). The actual

work of planning is now carried out by the Government agencies concerned.

ZR's planning could, however, be improved by strengthening its Planning Unit

by the addition of an economist/statistician, who would initially be an

expatriate; provision is made for this in the project.

- 6 -

1.20 A somewhat ambitious long-term sectoral plan, which will be part ofthe Third National Development Plan (TNDP), has been drawn up for 1979-83 by aTransport Coordinating Committee, set up by the National Commission for Develop-merit Planning (NCDP). The Committee consists of representatives of theContingency Planning Secretariat, NCDP, MPTC, the national transport companiesand other Ministries.

1.21 Under the Second National Development Plan (SNDP) (1972-76, laterextended to 1977) investments totalling K 311 million were made in the trans-port sector, or 28% of total public investment. Funds aLlocated to thetransport sector were used for: construction of TAZARA (40%); ZR, the oilpipeline, and air and water transport (33%); and road construction (27%).

1.22 Zambia's investment plans for external transport have to takeinto account the many transport alternatives which may be available to thecountry. With the border with Rhodesia now open, the reopening of the BenguelaRailway may bring about surplus transport capacity since, in eEficientoperation, TAZARA alone can carry all of Zambia's imports and exports.Zambia, of course, has an inherent interest in using TAZARA as much as poss-ible, as it has a 50% interest in it. However, it is unlikely that Zambiawill depend on any one external route, particularly in the light of eventsthat have recently disrupted transportation in neighboring countries, empha-sizing the risks to Zambia of depending on any one route for its foreigntrade. Also, an additional factor affecting external transport will be theavailability and capacity of seaports at the end of the routes.

E. Past Bank Group Projects in the Sector

1.23 The Bank Group has extended assistance to Zambia for five projectsin the transport sector -- two for railways (Loan 74-ZA for 14.0 million in1953 and Loan 197-ZA for 9.5 million in 1958) and three for highways (Loan469-ZA for 17.5 million in 1966; Loan 563-ZA for 10.7 million in 1968 andCredit 1566-ZA and Loan 798-ZA for 11.25 million each in 1978) (Annex 1). Therailway projects and the earlier highway projects were completed successfully.The two railway loans were both made before Zambia's independence.

II. ZAMBIA RAILWAYS (ZR)

A. Introduction

2.01 What is now Zambia Railways formerly comprised the NcrthwesternRegion of the Rhodesia Railway, with a regional office in Kabwe. The railwayheadquarters at that time was in Bulawayo, Rhodesia.

2.02 The last year of railway operations in Zambia by the RhodesiaRailway is considered to be 1964. Because of the political inrest at the

time in both Rhodesia and Zambia, a system of wagon control was arrangedbetween the countries known as the Unitary Railway System, with ownershipof all motive power and rolling stock left in Zambia at that time vestingequally in the two countries. Wagon distribution and maintenance were placedunder the jurisdiction of a separate Unitary Railway Board. This Board wasalso charged with ensuring that Unitary wagons would remain in Zambia or bereturned there as soon as possible after leaving that country. Motive powerwas operated internally only within each country.

2.03 In 1965, Rhodesia made its Unilateral Declaration of Independence(UDI) from Britain and in 1967 Zambia became independent. The Unitary RailwaySystem, which had been in effect since 1965, formally ceased to function withZambia's independence, when most of the expatriate management and staff inZambia chose to relocate in Rhodesia in the employ of the Rhodesia Railway.This left Zambia Railways critically short of management, supervisory, andtechnically skilled personnel, with a resultant decline in operational effi-ciency. In 1971, at the request of Zambia, the Government of Canada arrangedfor a railway management team to assist in staffing, training, and bringingZR's plant and equipment back to a normal operating condition. A Canadianteam continues to provide key assistance to ZR.

B. Organization, Management and Staff

2.04 During the period 1964 to 1967 the railway system in Zambia wasoperated by the "Unitary System" which was owned jointly, and equally, byZambia and Rhodesia. ZR was incorporated by the Zambia Railways Act, 1967which became effective July 1, 1967, to replace the Unitary System in Zambia.In return for certain assets transferred to ZR the Government received anequity of K 35.0 million in permanent capital and K35.0 million in redeemablecapital. In December 1978, the Government announced that effective January 1,1979, ownership of ZR, together with certain other parastatal organizations,would be transferred to the Zambia Industrial and Mining Corporation Limited(ZIMCO), a government holding company of which the Prime Minister is theChairman. These organizations were to constitute subsidiaries of ZIMCO.

2.05 The Government announcement further indicated that as of January 1,1979, ZIMCO would be given the powers to approve all budgets and corporateplans of all the subsidiaries, including ZR, and would set their corporatetargets. All Government members on the Board of Directors and all the seniormanagement of each subsidiary would be appointed by ZIMCO, which shall alsodetermine their conditions of service and appointment. ZIMCO would determinethe terms and conditions of employment of the personnel employed by the sub-sidiaries within the framework of overall Government policy and also approveprices and, presumably, tariffs set by its subsidiaries, except those whichmay be fixed only by the Government. The ZIMCO Board is answerable to theMinistry responsible for finance since the Minister of Finance is the share-holder of all investments of the Government.

2.06 Although ZIMCO is acting in certain of the capacities outlinedabove - for instance, it has appointed the General Manager of ZR and itsExecutive Director for Transportation and Energy is the new Chairman of the

- 8 -

Board of ZR - the legislative steps necessary for the establishment of alegal relationship between ZR and ZIMCO have yet to be taken. It is not clearwhether ZIMCO would assume all the powers given to the Minister responsiblefor Transport under the Zambia Railways Act which includes, inter alia, thepower to give directions to the Board of ZR, approve decisions of the Board on(i) important questions of railway policy, especially those of an internationalcharacter requiring an agreement with a foreign government, (ii) any radicalor major changes of rates and fares, and (iii) the raising of new capital. TheZIMCO Board has prepared a plan of action in this connection, which includesthe revocation of the Zambia Railways Act and the incorporation of ZR underthe Companies Act with a share capital of K 80,000,000. No action has yetbeen taken on the proposed plan of action although there have been intensivediscussions within the Government. There is no indication as to when thenecessary legislation will be introduced and passed by the Zambian Parliament.

2.07 The ZR General Manager reports to the Board of Directors whosechairman is an Executive Director of ZIMCO. The General Manager is assistedby an Assistant General Manager in a staff position, who is at: present theleader of the Canadian team working in ZR under CIDA financing. Reporting tothe General Manager are the heads of the following departments: admin-istration, accounting, commercial, personnel, and operations (includingtransport, civil engineering and mechanical engineering) as well as internalaudit, labour relations, research, programming and training. Although thisimposes an extensive administrative burden on the General Manager, it seems tobe working reasonably well, as the Assistant General Man,ager in practiceassists the General Manager in overseeing the departments. For operating andmaintenance purposes, ZR is divided into three districts - Northern, Centraland Southern - with headquarters at Ndola, Kabwe, and Livingstone, respectively(Chart 20203 on page 9). Each is under the jurisdiction of a Superintendent-Transportation, who reports directly to the Operations Nanager.

2.08 The present ZR management is young, competent, and aggressive. Butit continues to be dependent on expatriate staff at senior and middle managementlevels and in certain jobs requiring a high degree of technical proficiency. Thetotal ZR staff numbers about 8,000, of whom 50 are expatriates. Thirty of thepositions held by expatriates are shown on the organization chart (page 10). Theremaining 20 expatriates hold technical jobs at lower levels at headquarters andin the districts. ZR expects that expatriate assistance can be substantiallyreduced in about five years and the needs met partly by local training inZambian institutions and at the ZR training school, and partly by overseastraining. In the past, labour relations have generally been pood, as ZR hasregularly reviewed salary, wage levels every two years to offset inflation.

C. Training

2.09 ZR has a well established training center in Kabwe for pre-serviceand in-service training. The center is headed by a Zambian and is organizedin three units: Engineering Training, Supervisory and Adult Education, andOperations Training. The center also has units for training in administrationand secretarial services. The school can train about 1,000 students per year.

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ZAMBIA RAILWAYSOPERATING DISTRICTS

\~~~CHINGOLA 133 96 CHILILABOMBWE 30.93 /

1ANOjUN 0 7 MUFULIRA

AW CHAMBISHI 97 9 O UFULI RA 34 09

NKANA -KITWE 66.01

SAKANIA--- 809. 19

AIE BORDER 77S

NDOLA 7- 18 NORTH ERN D I S T R I C T (NORTHERN a STRICT HEADQUARTERS)

.WANA MKUBWA 771 43

LUANSHYA 37 15 KM 687.01 I KM 687.01

CKAPtRI MPOSHI 658.25

CENTRAL D IS5T R I C T >'\3KABWE-- 594. 44;S / SYSTEM AND CENTRAL DISTRICT HD0RS. )

P, . } CHISAMBA 52700O SAKA 473.98

KM 426 01 __ ____ KFE460 ----

K UE426.1 -- KM -2 .

SOUTHER N Di STR I CT/

4KM 68701 LUANSHYA 37 15 KMZAUKA687.01

PMOZE 317924VMULOBESR 101.25 O .

,'~ ~ ~ ~ ~ ~ ~ ~~~~~~~SSE AND CENTRALR DISTRICT HEAQURRSS).)v

MBA PALMGRCSA 5 27 00V. FALLS 0RIDGE 0 00 ---t 5\>~~~~~~~~~~~~V

KMEI 4ORDE M 46 01 2

…INGSAONE 42.0-20203

SOUTHERN DISTRICTITRCT EAQUkTRSMGROVE 2MAZAU4A 78K0

V. FALLS BRIDG0.0-0

MULOBESRHOESI BOD1R.25

World Bank - 20203

4 [~~~3 02ZEr'iW,

10~~~~~~~> A

e~ ~ ~~~~~~~~~~~ AX S '

O 00

000~~~~~~~~~~~~~ 01

However, only 513 students are expected to undergo training during 1979, ade-

quate to meet ZR's present needs. The hostel, which can accommodate only

206 students, will be a future constraint to increasing the numbers undergoing

training.

2.10 The center's teaching programs at the lower levels seem to be suffi-

cient for the present needs of the railway. It is also adequately equipped

except for the need to upgrade training aids in the fields of signals and

telecommunications. For the training of employees in business administration,

management and accounting, several educational institutions in Zambia are

offering courses which are open to railway employees. However, regular

Government employees have preference.

2.11 There are no training facilities in Zambia for senior management

and senior technical specialists. ZR provision for overseas training is very

limited due to a combination of factors -- shortages of funds and of trainable

personnel. ZR needs overseas training for staff in the junior engineering and

technician levels also and has prepared a program to cover this need.

D. Track

2.12 ZR operates a total of 1,273 km of 3'6" (1,067 mm) single track,

of which 848 km (Nkana-Kitwe to Victoria Falls Bridge) are main line and

the remaining 425 km are branch lines. It is organized into three operating

districts as follows:

(a) Northern District (Kishitu and north): 358 km divided

into seven subdivisions, with headquarters in Ndola;

(b) Central district (Kafue - Kishitu): 261 km divided

into two subdivisions, with headquarters in Kabwe; and

(c) Southern district (Kafue and south): 654 km divided

into four subdivisions, with headquarters at Livingstone.

2.13 Until recently the standard weight of rail for ZR main line opera-

tions was 91 lb/yd. ZR is progressively replacing lighter 80 lb/yd. rails

on the main line; it has already upgraded 566 km to the heavier rail standard.

As only two countries manufacture 91 lb/yd. rail which has a unique rail

section and requires conforming sleepers and other materials, ZR has decided,

early in 1979, to adopt 90 lb/yd. rail as the standard for future rail renewal.

The branch lines consist of 80 lb/yd. and 60 lb/yd. rail of various ages

(Charts 20200 and 20201 on pages 12 and 13 respectively).

2.14 Except for 47 km of track north of Choma where there are steel

sleepers, the main line has wooden sleepers, whose condition varies from fair

to poor. Branch lines have a mixture of wooden and steel sleepers, but steel

predominates. Sleeper spacing varies from 1,340 to 1,394 sleepers per km on

the main line and from 1,293 to 1,394 sleepers per km on branch lines. Nearly

- 12 -

ZAMBIA RAILWAYSWEIGHT OF RAIL

CHILI LABOMBWE30.9

CHINGOLA134.0

MOFULIRA34.1

N A -* NKANA-KITWE

SAKANIA (ZAIREi809.2

NDO LA

LUANSHYA 781 8

37.1

LEGEND

91 LB/yD RAIL ON WOOD

80 LB/yo RAIL ON WOOD

80 LB/y 0 RAIL ON STEEL jP

60 LB/yD RAIL ON WOOD _PO

60 LB/yD RAIL ON STEEL _ _KAPIRI MPOSHI

658.2Figures in km

KABWE594.4

L USAKA474.0

KAFUE426.0

NEGA NEGA407.6

MONZE317.9

MOOKAMUNGAMULOBEZI 272.0

162. 6

KALOMO MASUKUJ

ZIMIBA 51.0

LIVINGSTONE* u ~~~~~~~~~~8.9

PALM GROVE

0.0 VICTORIA FALLS BRIDGE

TO BULAWAYO RHODESIA IZIMBABWEIWorld Bank 20200

- 13 -

ZAMBIA RAILWAYSAGE OF RAIL

C)CH ILlILABOMBWE11 30.9

CHINGOLA134.0

s ~~MUFULIRA~~~~~~34.1

_NKANA-KITWE66.0

SAKANIA IZAIRE)

27.4 809.2

. NDOLA

LUANSHYA 0 8.37.1

LEGEND

10 Years or Less

10- 25 Years no

25 Years or More -

KAPIRI MPOSHIFigures in km 658.2

KABWE594.4

> USAKA0.0 VCOIF474.0

t AUE

MULOBE L

162.6 an CHOMA 20:

\ 216F;t 9 ~~~MAZUKU\. ,w' ~~~~~~~~65.4

dL IV INGSTON E8.9

- - -- - - - - 1 0.0 VICTORIA FALLS SR IDGE

TO BULAWAYD, RHODESIA IZIMBABWE

Wnrdd Rank-2(lvn1

- 14 -

200,000 wooden sleepers have been in service for up to 20 years. The averagelife of wooden sleepers in use is about 15 years. A brief outline of sleepersinstalled follows:

1955 or earlier 15% of total;1960-1965 55% of total;1965-1970 20% of total; and1971 or later 10% of total.

The sleeper replacement problem has become acute because the major supplier -

Zambezi Sawmills at Mulobezi - has not met ZR's annual requirement of sleepersfor the past six years. Only about 110,000 wooden sleepers have been receivedin this period when 720,000 were needed, or about 15% of the requirements.

2.15 In the main line between Victoria Falls Bridge and Mookamunga, adistance of 272 km, there are 181 curves with a minimum radius of 280 m.This section is proposed for rail relaying and general track strengthening.Between Mookamunga and Ndola (509 km) there are 321 curves, with a minimumradius of 200 m. In the 154 km between Ndola and Chingola, there are 136curves, with a minimum radius of 250 m.

2.16 Track maintenance is supervised by four Superintendents - Track,one each for the northern and central districts and two for the southerndistrict. Each Superintendent is assisted by two Permanent Way Inspectors.This is a satisfactory arrangement.

2.17 Some 376 accidents were reported in 1978, a somewhat large numberfor the network size and traffic volume, but derailments due to track condi-tions are very few, although speed restrictions are prevalent because of railand sleeper conditions. As the sleeper supply on hand is negligible, derail-ments tie up traffic until replacements can be found for track repair.

E. Signalling and Telecommunications

2.18 The main line between Nkana-Kitwe and Livingstone is equipped withCentralized Traffic Control (CTC) which was installed during 1961-64. Thedesign is by General Railways Signal Company (U.S.), manufactured partly inthe U.S. and partly in the U.K. Installation was made by General Electricof U.K. Control is at four locations with panels at Ndola, Kabwe, Monzeand Livingstone. Eighty stations are connected to the circuitry involvingmore than 800 track signals. There is no signalling on the main line betweenNkana-Kitwe and Chingola or on the branch lines. Where no signals exist,trains are operated by electric token instruments or manual tokens, or on a"one train only" system.

2.19 ZR has its own telecommunications system which it installed andmaintains. Exchanges are located as follows:

Nkana-Kitwe 50 lines,Ndola 150 lines,Kabwe 500 lines,Lusaka 100 lines, andLivingstone 100 lines.

- 15 -

Smaller exchanges of from 10 to 40 lines are located at several smaller points.ZR also has its own network of teleprinters which are connected through an

automatic exchange. Twenty such teleprinters are located at various pointson the railway system. Voice and telegraph channels have been providedthroughout the telecommunications network by means of an overhead wire system.There are 15 voice channels between Kabwe and Ndola, ten between Ndola and

Nkana-Kitwe, ten between Kabwe and Monze, and three between Kabwe andLivingstone. Between Choma and Mazuku, VHF equipment is installed to control

coal traffic movements. In addition, ZR leases microwave channels from thePost and Telecommunications Department for communications between its head-

quarters at Kabwe and important line points (Chart 20202 on page 16). Thetelecommunications sytem is subject to frequent interruptions and many linesare overloaded. This causes severe problems in the communications betweenheadquarters and stations.

F. Motive Power and Rolling Stock

2.20 The locomotive fleet is made up of 64 main line locomotives and 12shunters which are also used in main line service in combination with the mainline locomotives. These are all of the same make with a rating of 2,150 hpand 1,650 hp respectively. Of these, 34 are less than five years old and42 less than 12 years old. Six of these are heavily damaged. Thus, only 70locomotives are fit for regular service. Availability is rather low (63%) dueto the six damaged locomotives and to the lack of spare parts. On average,only 48 locomotives are available for service, of which ZR has leased out onemain line locomotive to Malawi, while itself leasing four from South Africa.For minor yard service and track maintenance, ZR has another 15 dieselhydraulic low-power (540 hp) shunting locomotives, but these have a very poorrecord of availability, and currently only two units are in service.

2.21 The wagon fleet consists of 2,669 wagons acquired after independenceand 3,296 wagons belonging to the Unitary Railway System. Of the former, some1,000 are less than five years old and the remainder less than 15 years old.All these wagons are in good condition except for 107 which were heavilydamaged in derailments. However, a further 150 wagons are idle awaitingspare parts. Three years ago, 266 wagons were impounded in Angola when theAngola-Zaire border was closed; their present condition is not known. Ofthe fleet, 1,880 wagons are open, 100 covered, 160 tank and 445 hopper. Theremaining 84 are livestock, explosives and service wagons.

2.22 Wagons belonging to the Unitary System are much older. Some 2,000are more than 30 years old; many of these are more than 50 years old. Thesewagons are in poor condition and cannot be used in transit traffic. AllUnitary System wagons are due for scrapping by 1995. Due to the poor condi-tion of these wagons and to lack of spare parts, the average availabilityof all wagons is only 80%.

2.23 For its passenger traffic, ZR has 93 coaches, 86 from Japan andseven from the U.K. and 17 railcars, 14 from Japan and three from the U.K. Ofthe passenger coaches, seven are close to 30 years old and 86 under five years

- 16 -

ZAMBIA RAJLWAYSCOMMUNICATION NETWORK

CHILLABOMBWE 8

CHINGOLA CASAKANIA

NORTHERN

DISTRICTKITWE

NOO LSWANA

LUANSHYA 0-M'KUBWA

INTERNAL OPEN-WIRE

CARRIER NET WORK KASHITU

SECTION NO. OF SPEECH CHANNELS

NDOLA-KITVWE 10

KABWE-NDOLA 15 1KASWE-L/STONE 3 _ NEW KAPtRt

KABWE-MONZE 8 KAPIRI-MPOSHI MPOSHI

IDROPS AT

CHISAVIBA I CENTRAL

LUSAKA KABW Ffl DISTRICT

KAFUE KABWE, 500 i2

MAZABUKA)

KABWE-NEW KAPIRI 12

KASWE-KAPIPI MPOSHI 3 CHISAMBA

LUSAKA i,

KAFUE T __

MAZAatiKA

MON ZEf

PEMBA D

C140MAg & 8 SOUTHERN

DISTRICT

KALOV<OX MASUKU * CTC CONTROL CENTRE

K DATA PRINTER INTERCONNECTED

ZiMBA ~~~~~~~~~THROIJGH KABWE TERMINALEXCHANGE

O TELEPHONE EXCHANGE

LlVtNGSTONE @ RADIO TELEPHONE LINK

TELEPRINTER

UVorli1 R-ok - 20271

- 17 -

old. The railcars are all less than 19 years old. The Japanese coaches have

been found to be too sophisticated for use in a developing country with lack

of qualified technicians and lack of foreign exchange for procurement of the

necessary spare parts. Thus their availability is low (less than 70%) and

many coaches are idle awaiting spare parts. Availability of railcars is also

low (about 50%). Recently delivery of spare parts in an amount of K 1.0

million has started. During rehabilitation, the coaches will be modified to

better suit the available maintenance technology in Zambia.

G. Workshops and Depots

2.24 The workshop for the overhaul and major repair of locomotives,

coaches and wagons is located at Kabwe. It was put into operation in 1971.

Depots for running maintenance of locomotives are located at Kabwe, Ndola,

Kitwe and Livingstone; only the Kabwe depot can undertake 60,000 km servicing

the other three being limited to 30,000 km servicing. For all other repair

services the locomotives have to be sent to the Kabwe workshop. Minor repair

of wagons is carried out at repair track locations in Ndola, Kabwe and

Livingstone, but for all other repairs must be sent to the Kabwe workshop.

Passenger coaches are serviced at Kitwe and Livingstone terminals.

2.25 The Kabwe workshop, is well equipped and has adequate capacity for

the present traffic. The shop capacity can readily be increased by improved

work methods. However, some locomotive parts cannot be repaired without

specialized equipment, which has to be acquired. The capacity of the Kabwe

running depot is not sufficient to handle 60,000 km service on all locomotives,

and extension is necessary. The other depots are adequate, although improve-

ments could be made.

2.26 Repair of wagons can be made more efficiently and better by simple

improvements in the facilities available. Lifting of wagons for the changing

of bogies is now done with primitive equipment on tracks laid without concrete

slabs. Nor do the tracks have protection from rain; repair work is stopped

for long periods during the rainy season. By paving the ground on which the

track is laid and installing a roof over some of the sidings, the repair of

wagons could be much improved.

H. Operations

2.27 At the present time, main line train composition ranges from 25

wagons (1,145 gross tons) to 35 wagons (1,590 gross tons) per train with

one main line locomotive. On occasion, an assisting shunting locomotive is

employed which will permit up to 60 wagons to be hauled. Branch line train

composition ranges from 15 wagons (860 gross tons) to 25 wagons (1,145 gross

tons). Crossing loops average 500 to 600 m in length.

2.28 ZR's normal operating practice has been to return train service

personnel to their home terminals whenever possible. But it has recently

- 18 -

started to run trains through terminals with a minimal time delay in orderto speed up traffic movement. This has meant train crews having to tie upovernight away from their home terminal, necessitating the building of bunkhouse accommodations at several locations along the main line.

2.29 Daily traffic density on the main line averages as follows:

Goods GoodsThrough Local Pick-up Passenger TotalUp Down Up Down Up Down Up Down Up Down

Victoria Falls Bridgeto Choma 2 2 1 1 2 2 5 5

Choma to Ndola 5 5 1 1 1 1 2 2 9 9

Ndola to Nkana-Kitwe 6 6 2 2 8 8

Nkana-Kitwe to Chingola 6 6 6 6

In addition to the above, two extra local goods trains operate daily on theLusaka subdivision in each direction, plus a local pick-up train each waydaily beween Lusaka and Kafue, and a local goods train each way daily betweenKabwe and Lilayi. On the Kapiri Mposhi subdivision there is one extra goodstrain daily each way, and three local goods trains daily each way betweenKapiri Mposhi/Lukanda and Kabwe for TAZARA traffic. Branch line operationsconsist of local goods trains sufficient to handle the traffic. In additionrail car service operates daily each way on the Mulobezi subdivision.

2.30 ZR is looking into different ways to improve its operation of whichone is to electrify the railway. Zambia has surplus of electrical power andelectric traction is also less costly in operation at a certain level oftraffic and more reliable than diesel traction. The railway is thereforeconsidering undertaking a feasibility study of railway electrification.ZR is also studying train operations to improve locomotive and wagon turn-around time and the utilization of its equipment.

I. Past and Present Traffic

2.31 ZR's freight traffic in the past few years has averaged about 5million tons a year. In 1978, it comprised about 3.0 million tons of localtraffic, 1.4 million tons of exports and imports and 0.6 million tons ofZairian transit traffic. More than half the local traffic (coal, ore,copper) and almost the entire export traffic relate to the mining and refiningof copper (see Table on page 20).

2.32 The fluctuations in ZR's total traffic can be directly related tothe capacity of the link routes to the sea. Thus the drop in 1977 and 1978can be traced to the decline in TAZARA's efficiency and traffic carried ata time when the truck fleet of ZTRS was being allowed to run down with theinauguration of TAZARA in 1975. The recovery in export/import traffic in 1978

- 19 -

is directly traceable to the reopening of the Zambia-Rhodesia border by the

Zambian Government in the latter half of 1978 enabling the movement of exports

and imports via the Rhodesian Railway.

2.33 The average length of haul for the different types of traffic

is as follows:

Traffic Haul on ZR (km)

Local 187

Exportsvia South 823

via TAZARA 164

via Lobito 169

to Zaire 74

Importsvia South 532via TAZARA 162

via Lobito 16

Transit (Zaire) 809

Average 279

The external route used by exports and imports thus have an important bearing

on ZR's finances as well as its investment requirements, the Southern route

generating the most revenue and requiring the most investments in locomotives

and rolling stock, the Dar route considerably less, and the Lobito route the

least.

2.34 Passenger traffic has been steadily growing, touching 1.5 million

in 1978. Passenger-kms were 371 million in that year for an average journey

length of 238 km. All passenger traffic is domestic traffic.

J. Budget, Accounts, Audit and Insurance

2.35 Under the Zambia Railways Act, 1967, the ZR Board is empowered to

approve draft annual operating and capital budgets which must then be sub-

mitted to the Minister of Power, Transport and Communications before the

commencement of each financial year for his final approval. This procedure,

however, will be altered when the ownership of ZR is transferred to ZIMCO

(para. 2.04). Annual accounts, together with the auditors' report, are sent

as soon as possible after the end of each financial year to the Minister who

is responsible for presenting them to the National Assembly. The accounts so

prepared follow an acceptable commercial format. The audit-rs are appointed

by the Board with the approval of the Minister. The current auditors are

Coopers & Lybrand who are acceptable to the Bank.

- 20 -

ZAMBIA RAILWAYS

Past Traffic

1976 1977 1978(Est.)

A. Local Traffic

Petroleum 213 210 -Coal 628 579 -Fertilizers and Chemicals 275 207 -Cement and Construction Materials 617 355 -Maize and klour 501 304 -Sugar 69 73 -Other Agriculture Products 7 21 -Copper 394 381 -Ores, Concentrates, etc. 1,101 977 -Miscellaneous 194 184 -

Sub-total 3,999 3,291 3,053

B. Exports 358 559

C. Imports 353 412 664

D. Transit Traffic 389

Zairian Exports 281 307 307Imports 263 216 304

544 523 611

E. TOTAL 5,254 4,785 4,717

- 21 -

2.36 ZR is self-insured except for motor vehicles and cash. This is anaccepted practice with Government-owned railways.

III. TtiE PROJECT

A. Scope of the Project

3.01 The proposed project is based on a five-year investment plan for1979-1983 prepared by Zambia Railways and involving a total investment ofK 142 million in 1979 prices. The plan was reviewed by the Bank with ZR,and it was concluded that it was too optimistic with regard to both ZR'simplementation capacity and to the possibility of getting the necessaryfunds in time. ZR, therefore, agreed to postpone some items beyond 1983,thus reducing the scope of the investment plan by some K 30 million.The project will cover the last four years of the reduced plan, with therequirements of the first year - 1979 - being met by ZR and the Governmentwith such financing as has already been arranged.

3.02 The proposed investments are urgently needed to avoid a deter-ioration in ZR's operations and a reduction in its transport capacity.The project will help modernize the rolling stock fleet and increase itsutilization and thereby its effective capacity to handle the expected growthin traffic up to 1986. Locomotives will, be rehabilitated, maintenancefacilities improved, and track upgraded to facilitate the operation ofheavier trains in the future. The project will provide for:

(a) renewing 112 km of track and extending and improvingcrossing loops;

(b) renewing the CTC system and improving the telecommunicationssystem;

(c) purchasing locomotives and wagons and providing for spareparts for locomotives and wagons;

(d) improving maintenance and handling facilities;

(e) staff housing;

(f) data processing facilities; and

(g) advisory services at senior aad middle management levelsand training at all levels to reduce and ultimately elimi-nate ZR's dependence on expatriate managerial and technicalpersonnel.

- 22 -

B. Details of the Project

(i) Track

3.03 In the Southern District of ZR, the 205 km of track betweenMookamunga and Livingstone represents the remaining 80 lb/yd mainline railsection due for upgrading. Rail on 191 km of track on this section is 30years old and on the remainder 18 years old. Wooden and steel sleepers onthis section vary in age from 15 to 30 years. The depth of stone ballast is100 mm to 150 mm and is badly in need of replacement.

3.04 The program proposed will help renovate 112 km of track with new90 lb/yd. rails welded into 120 ft. (36.6 m) lengths, with new stone ballast(from existing quarries), concrete sleepers, and a new CTC signalling system.In addition, it is planned to re-space and lengthen crossing loops at thesame time. Provision is made for a new bridge at Kafue as the presentbridge, which is over 60 years old, is in need of replacement.

(ii) Signals and Telecommunications

3.05 As the existing signalling system is 20 years old and obsoleteand as replacement parts are no longer available, a complete replacement ofthe present equipment is planned. The installation of new CTC signals andcircuitry should be coordinated and carried out concurrently with the trackrenewal program. Under the new system, control will be centered at Kabweinstead of at four locations as at present. The telecommunications networkwill be increased in capacity between all important stations.

(iii) Locomotives

3.06 The present locomotive fleet is insufficient to meet present trafficdemands. Trains are standing waiting for locomotives, in some cases to theextent that yards are blocked. Of the six locomotives which are heavilydamaged, four will be repaired, the remainder have to be scrapped. Ten newlocomotives have to be procured to enable ZR to carry the forecast traffic.These are included in the project.

(iv) Rolling Stock

3.07 ZR is operating more than 3,000 wagons belonging to the UnitaryRailway System. Some 900 of these old wagons have to be scrapped duringthe project period, while in addition another 100 heavily damaged wagonshave to be scrapped. ZR needs 1,100 wagons to replace the 1,000 wagons andto provide adequate capacity to carry the forecast traffic until 1986. Ofthese, 185 were delivered early this year, leaving a gap of 915 which theproject provides for. It is assumed that the turnaroun(d of wagons willimprove as visualized in Section G below. To help in this, the use of wagonsfor storage should be eliminated by the provision of storage facilities forgrain and other goods at critical distr-ibution centers. During negotiations,the Government agreed to have ZR undertake a study on how best this could bedone. It was also agreed that the study will be completed by December 31,1981. The required foreign experts' services would be f-inanced under thetechnical assistance credit (Cr. 873-ZA'). Also, two breakdown cranes areincluded in the project.

- 23 -

(v) Spare Parts

3.08 The availability of locomotives, wagons, passenger coaches and rail-

cars is low, principally because of lack of spare parts. By providing spare

parts for rehabilitation and regular maintenance, their availability can be

improved to acceptable levels (para. 3.25). To bring idle motive power and

rolling stock back into service, and to achieve acceptable levels of avail-

ability, the project provides for ZR's spare parts requirements for both

rehabilitation and regular maintenance for the project period. To ensure

proper locomotive and wagon availability in the future, a Government assurance

was obtained during negotiations that all reasonable action will be taken for

the prompt issuance to ZR of such import and other permits and licenses as

necessary for the acquisition and importation of essential spare parts. It is

estimated that about US$2.0 million equivalent of essential spare parts will

be required annually.

(vi) Workshops and Depots

3.09 Although the workshop in Kabwe is of modern design and well-equipped,

it lacks some minor equipment for repair of traction motors and generators.

As a result, these items have to be sent abroad for repair involving high

cost. The workshop also needs some minor machinery and tools for the motive

power, smithy and foundry shops as well as tools and machinery for assembling

new freight wagons which will be partly procured in a "knocked-down" condi-

tion. It also needs a new wheel lathe with a higher capacity. The project

provides for all of these.

3.10 As the Kabwe depot for running maintenance of diesel locomotives

does not have sufficient capacity, locomotives have to be sent to the main

workshop for service. Furthermore, the depot, which is an old steam locomo-

tive shop, has too low ceilings to carry out exchange of heavy locomotive

units conveniently. Present working methods are thus inefficient and costly.

To improve the maintenance and to reduce its cost, the project provides

for extension of the depot.

3.11 The sidings for wagon repair are uncovered, and primitive. Wagon

repairs are delayed for long periods during the rainy season resulting in

reduced wagon availability. ZR proposes to rebuild the repair tracks at

Ndola, Kitwe, Kabwe and Livingstone, laying the rail on concrete slabs,

providing roofing over the tracks, and equipping the working area with small

cranes. The project provides for this.

(vii) Handling Equipment

3.12 ZR is short of equipment for loading and unloading wagons resulting

in longer stay of wagons at the terminals than necessary and thus reduced

wagon utilization. By providing for handling equipment at major stations,

wagon utilization can be improved.

- 24 -

(viii) Staff Housing

3.13 Most of the employees live along the line of rail in houses owned byZR. Housing is also provided at Headquarters, as Kabwe is mainly a railway

town. No improvements have been made to these facilities for a number of

years. To retain its staff, ZR has to increase and improve the housing, for

which provision is made in the project. Most of the new housing, comprising

four-room cottages, is for lower level staff.

(ix) Data Processing Facilities

3.14 For the last 20 years ZR has been renting a computer for accounting

and statistical work. The computer company is now closing down its rentalbusiness in Zambia and ZR has, therefore, to purchase its own data processing

facilities, which the project provides for.

(x) Technical Assistance and Training

3.15 Until trained Zambian staff can take over all operations, ZR will

need expatriates either in executive positions or as advisers to help in ZR's

operations and to implement the project. In total, 190 man-years are provided

for in the project which also includes technical assistance in planning to

MPTC and ZR. In addition, consultants are needed for a productivity studyfor the Kabwe workshop, a railway electrification feasibility study and a

feasibility study to determine whether the railway line between Mulobezi andLivingstone should be upgraded or replaced by a road. ZR has agreed that the

terms of reference for the consultants and the qualifications and experienceof the selected consultants would be acceptable to the Bank Group.

3.16 Also included in the project are overseas and local training for

senior and middle level managers and equipment and materials for the Kabwetraining school to improve the training of skilled lower level staff. ZR

has about fifty expatriates in senior and middle management levels, who

will be gradually replaced over the next text years. Fifteen ZR staff will be

trained to take over some of these positions during the project period. It

has been agreed that ZR will submit a detailed t:raining program for senior and

middle level staff before loan/credit effectiveness.

C. Cost Estimates

3.17 The project cost is estimated at K 14'4.63 million (US$188.15 million

equivalent). Of this, K 100.02 million (US$130.15 million equivalent) is inforeign exchange and K 44.61 million (US$58-00 million equivalent) represents

local costs, of which K 2.99 million (US$3.89 aillion equivalent) is local

taxes. Details of the cost estimates are given on page 25.

3.18 The cost estimates prepared by ZR snd --viewed by the Bank are basedon recent quotations and bids for similar nate:i s and equipment, updated to1979 prices. A physical contingency of 25% ha- Been provided for replacement

of the Kafue Bridge since only preliminary studie; have been done so far.Quantities for other items can be considered flxed. Price contingencies havebeen provided as follows: for imported materi.lis and equipment, 1980 onward -6%; and for local costs: 1980 - 15%; 1981 - 10%; and 1982 onward - 7%. Theman-month cost of advisory services is approximately US$2,300 and for consul-tants' services for studies approximately US$8,900.

- 25 -

ZAMBIA

RAILWAY PROJECT

Cost Estimate - 1979 Prices

K'OOO US$'OOO (US* iilIion)

Local Foreign Total Local Foreign Total Bank Group FinarcinL

A. TRACK

1. Relaying, resleepering, reballasting112 km of 263 km, Moohamunga-Livingstone 3,908 8,255 12,163 5,080 10,731 15,811 10.73

2. Extension and renewal program -Crossing Loops 85 175 260 110 228 338 0.23

3. Plant and Machinery 165 1,500 1,665 215 1,950 2,165 1.95

4. Concrete sleeper plant 2,500 - 2,500 3,250 - 3,250 -

5. Replacenment of Kafue Bridge 1,800 4,200 6,000 2,340 5,460 7,800 -

Sub-total 8,458 14,130 22,588 10,995 18,369 29,364 12.91

B. SICNALLING & TELECOMMUNICATIONS

1. CTC - Renewal and upgrading 2,000 8,000 10,000 2,600 10,400 13,000 -

2. Telecommunications improvement 215 2,545 2,760 280 3,308 3,588 -

3. Expansion of telephone facilities 200 2,800 3,000 260 3,640 3,900 2.73

Sub-total 2X41 13,345 15,760 3,140 17,348 20,488 2.73

C. LOCOMOTIVE AND ROLLING STOCK

1. Main line locomotives (10) 640 6,260 6,900 832 8,138 8,970 _

2. Wagons (915) 2,400 24,100 26,500 3,120 31,330 34,450 2.00

3. Spare parts: Rehabilitation 250 2,500 2,750 325 3,250 3,575 _

4. Spare parts: Mfaintenance 500 5,000 5,500 650 6,500 7,150 2.5C

5. Breakdown cranes (2) 100 1,500 1,600 130 1,950 2,080 -

Sub-total 3,890 39,360 43,250 5,057 51,168 56,225 4.50

D. WORKSHOPS AND DEPOTS

1. Kabwe workshop equipment 150 1,600 1,750 195 2,080 2,275)

2. Kabwe, Ndola, Livingstone: 2.73

improvement of depots 750 500 1,250 975 650 1,625)

Sub-total 900 2,100 3,000 1,170 2,730 3,900 2.73

E. HANDLING EQUIPMENT 200 2,000 2,200 260 2,600 2,860 -

F. STAFF HOUSING 7,200 940 8,140 9,360 1,222 10,582 -

C. DATA PROCESSING FACILITIES 400 1,600 2,000 520 2,080 2,600 2.08

Hi. TECHNICAL ASSISTANCE

1. Advisory services (190 mtan years) 1,085 4,000 5,085 1,408 5,250 6,658 5.25

2. Studies 75 1,500 1,575 100 1,900 2,000 1.90

3. Training - Local 1,000 500 1,500 1,300 650 1,950 0.65

4. Training - Overseas 200 500 700 260 650 910 0.65

Sub-total 2,360 6,500 8,860 3,068 8,450 11,518 8.45

I. TOTAL

Without contingencies 25,823 79,975 105,798 33,570 103,967 137,537 33.40

Physical contingencies 900 2,100 3,000 1,170 2,730 3,900 -

Price contingencies 14,894 17,949 32,843 19,374 23,453 42,827 6.60

Taxes 2,989 - 2,989 3,886 - 3,886 -

GRAND TOTAL 44,606 100,024 144,630 58,000 130,150 188,150 40.00

November 1979

- 25a -

ZAMBIA

RAILWAY PROJECT

Financing Plan 1inc_uding contingencies)

(US$ million)

EECSpecialAction

Total IDA Bank Fund OPEC KfW SIDA Japan ADB REC I ODA ZR

I. FOREIGN COST

A. Track

1-3 Relaying, crossing loops andplant and machinery 16.00 16.000-- ---

5 Cafue Bridge 10.00 - - - - - - - - 10.00 -

B. Signalling and Telecommunications

1 CTC - Renewal and upgrading 12.30 - - - 12.30 - - - - - -

2-3 Telecommunications improvementand expansion 8.25 3.25 5.00 - - - - - - - -

C. Locomotives and Rolling Stock

i Locomotives (10) 10.00 - - - 10.00 - - _

2 Wagons (915) 38. 50 2.50 - - - 12.35 15.25 - 8.40 - -

3 Spare parts: Rehabilitation 4.00 - - - - 4.00 - _ _

4 Spare parts: Maintenance 7.95 2.75 - - 1.00 - 1.00 3.20 - - -

5 Breakdown Cranes (2) 2.50 - - - - - - 2.50 - - _

D. Workshops 3.35 3.00 - - - 0.35 - - - - -

E. Bandling Equipment 3.00 - - 3.00 - - - - - - -

F. Staff Housing 1.50 - - 1.50 - - - -

G. Data Processing Facilities 2.50 2.50 - - - - - - - - -

R. Technical Assistance 10.30 10.00 - - - 0.30 - - - - -

I Total Foreign Cost 130.15 50.00 5.00 4.50 23.30 13.00 16.25 9.70 8.40 10.00

II. LOCAL COST 58.00 - - - - - - - _ 4.00 54.00

III. TOTAL PROJECT COST 188.15 50.00 5.00 4.50 23.30 13.00 16.25 9.70 8.40 14.00 -

1/ EEC financing as part of rehabilitation of the Benguela Railway

Ebve ber 1979

- 26 -

D. Financing and Procurement

3.19 Of the total cost of the project amounting to US$188.15 millionequivalent, the foreign cost of US$130.15 million equivalent will be metfrom external borrowings. Of the local cost of US$58.00 million, US$54.00million will be met by ZR from internal resources and US$4.00 million from aU.K. credit. It is proposed that the Bank provide a loan of US$25.00 millionand an IDA Credit of US$15.00 million. The remainder of the foreign costs willbe met from other sources. The overall financing plan is as follows:

US$ million

Bank/IDA 40.00EEC Special Action Credit 5.00OPEC Fund 4.50Federal Republic of Germany 23.30United Kingdom 14.00SIDA 13.00Japan 16.25African Development Bank 9.70Zambia Railways 54.00EEC 8.40

Total 188.15

3.20 Details of the above financing arrangements are given on page 25a.Items for Bank Group financing are track material, telecommunications equip-ment, wagons and spare parts, workshop equipment, improvements to depots, dataprocessing facilities, studies and advisory services, and training. Financingarrangements from other agencies, except for wagons from EEC and for the newKafue bridge from the U.K., are firm. The effectiveness of these financingarrangements is a condition of effectiveness of the loan/credit, except forthe U.K. which has indicated that it can make a firm commitment only after its1980 budgetary process is completed, expected some time in April 1980. BankGroup funds will be on-lent to ZR; the conclusion of a satisfactory SubsidiaryLoan Agreement is also a condition of loan/credit effectiveness.

3.21 Equipment and material financed by the Bank Group will be obtainedthrough international competitive bidding in accordance with Bank GroupGuidelines except for:

(a) small orders for under US$50,000 each, but for not morethan US$500,000 in total; and

(b) critical spare parts which are essentially available onlyfrom the original equipment manufacturers. The amountinvolved is estimated at about US$1 million.

These items will be procured whenever possible through limited competitivebidding. Provision is made for a 15% preference for domestic manufacturers.

3.22 Equipment to be financed under the EEC Special Action Credit willbe procured in accordance with Schedule III of the EEC Special Action CreditAgreement, which limits bidding to EEC member-countries and IDA member-countries, which are eligible to receive Special Action Credits.

- 27 -

E. Disbursements

3.23 Disbursements from the loan/credit will be made on the basis of 100%

c.i.f. border for imported equipment and material or 75% when procured locally,

and 100% of the foreign exchange cost of training abroad, of expatriate

experts in Zambia for advisory services, and of studies. The schedule of

estimated disbursements is shown in the following table.

Cumulative

IBRD Fiscal Year Disbursement Disbursements

and Quarter during Quarter at end of Quarter %

(US$O000) (US$'000)

1980June 30, 1980 250 250 0.6

1981September 30, 1980 750 1,000 2.5

December 31, 1980 1,000 2,000 5

March 31, 1981 1,500 3,500 9

June 30, 1981 2,000 5,500 14

1982September 30, 1981 2,500 8,000 20

December 31, 1981 3,000 11,000 28

March 31, 1982 4,000 15,000 38

June 30, 1982 5,000 20,000 50

1983September 30, 1982 5,000 25,000 63

December 31, 1982 4,000 29,000 73

March 31, 1983 3,000 32,000 80

June 30, 1983 2,000 34,000 85

1984September 30, 1983 2,500 36,500 91

December 31, 1983 2,000 38,500 96

March 31, 1984 1,000 39,500 99

June 30, 1984 500 40,000 100

3.24 Disbursements from the EEC credit of US$5.0 million are expected to

be US$3.0 million in 1980 and US$2.0 million in 1981. The OPEC Special Eund

loan of US$4.5 million will be disbursed as follows: US$2.5 million in 1980

and US$2.0 million in 1981.

F. Project Execution, Environment and Employment

3.25 ZR, which will have direct responsibility for execution of the

project, is competent to do so with the assistance of expatriate advisers

- 28 -

included in the project (para. 3.15). The planned project implementationschedule and project progress and completion requirements were discussedand agreed during negotiations (Chart 20204 on page 29).

3.26 The project will have no adverse effect on the environment, or onemployment.

G. Operational Targets

3.27 The project is based on the following improvements in operationalnorms discussed during field appraisal and confirmed during negotiations:

Actual Objectives1978 1982 1984

1. Average diesel locomotive availability (%) 63 70 752. Productivity per available locomotive per year

(locomotive-km '000) 90 95 1003. Average wagon availability (%) 80 85 904. Average turnaround time (in days)

a. general freight domestic traffic 12 11 9b. general freight transit traffic 40 39 38c. minerals domestic traffic 8 7 6d. minerals transit traffic 40 39 38

5. Average wagon load (tonnes)a. general freight 25 25 25b. minerals 40 40 40

6. Productivity per available wagon per year(ton km '000) 240 260 300

7. Staff productivity('000 traffic units per employee)* 214 225 250

* Ton-kms plus passenger-kms.

3.28 Locomotive availability will be increased from 63% to 75% by 1984 bythe provision of spare parts for rehabilitation and for regular maintenance.For the same reason wagon availability is also expected to increase. Newwagons included in the project will also have a positive impact on avail-ability, which is expected to increase from 80% to 90% by 1984. Improvedtrack, signalling system and telecommunications will have an impact on loco-motive and wagon productivity and wagon turnaround time, by reducing speedrestrictions and train delays due to poor track and signalling failures, andto improved communications from headquarters to stations and from station tostation. Locomotive productivity is expected to improve from 90,000 km peravailable locomotive per year to 100,000 by 1984, wagon productivity from240,000 net ton km per available wagon per year to 300,000, and wagon turn-around time to various extents depending on the type of traffic. Turnaroundtime for wagons in export and import traffic will improve less as more of thewagon turnaround time is spent in transit. Average wagon load is not expected

ZAMBIARAILWAY PROJECT

IMPLEMENTATION SCHEDULE

Calendar Year 1979 1980 1981 1982 1983

Item Quarter 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

1. TRACKa. Prepare Specifications and Tender Documentsb. Advertise, Receive Tenders, Evaluate, Awardc. Delivery of Machineryd. Delivery of Track Materiale Construction of Concrete Sleeper Plantf. Relay ng of Trackg. Rebuilding of Kafue Bridge

2. SIGNALLING AND TELECOMMUNICATIONsa. Prepare Specifications and Tender Dcoumentsb. Advertise, Receive Tenders, Evaluate, Awardc Delivery of Materiald. Installation

3. LOCOMOTIVES AND ROLLING STOCKa. Prepare Specifications and Tender Documentsb. Advertise, Receive Tenders, Award I

c. Delivery of Locomotives

d Delivery of Wagons -= = = = m = - ma. Delivery of Wrecking Cranef. Delivery of Spare Parts (deferred maintenance)

4. WORKSHOPS AND DEPOTSa. Design, Prepare Specifications and Tender Documentsb. Advertise, Receive Tender, Award

c. Delivery of Material and Equipment -_ _ _ _d Construction and Installation m - T

5. STATION HANDLING EQUIPMENTa. Prepare Specifications and Tender Documentsb. Advertise, Receive Tenders, Awardc. Delivery

6. STAFF HOUSING -

a. Design, Prepare Specifications and Tender Documentsb. Advertise, Receive Tenders, Award _c Delivery of Material - - - _-

d Construction -

7. TECHNICAL ASSISTANCE

World Bank -20204

- 30 -

to increase as this is already high. As a result of all these improvements inutilization and availability, the staff productivity will also increase. Theproject will not, however, have any measurable impact on railway operations

before 1982.

IV. ECONOMIC EVALUATION

A. Forecast of Future Traffic

4.01 Future traffic on the ZR network will depend principally on twofactors: the level of activity in copper mining and refining, which willdetermine the level of exports, and the world price of copper, which willinfluence the country's export earnings and its ability to import goodsthat will move on ZR. A further factor that may continue to have a con-siderable impact is the state of its international transport connections,especially the operations of TAZARA and the port of Dar es Salaam. This lastfactor may not influence the overall tonnage of traffic, but will have adecisive influence on ton-kms of freight, as the alternative southern routerequires a much longer haul on ZR for import/export traffic. On the otherhand, if the Benguela Railway and Lobito port in Angola return to full opera-tion, the ton-kms carried on ZR will be less.

4.02 For purposes of estimating ZR's investment requirements under theproject, it is assumed that the Lobito route will reopen before the end of1979, that the southern route will continue to remain open, and that thecountry's foreign trade traffic carried by ZR will be shared among the variousroutes as follows: one-fourth for the Lobito route, one-third for the Southernroute and the balance for the Dar route. The forecasts shown on page 31, arebased on detailed studies carried out by ZR on the basis of discussions withthe principal customers -- the copper companies, the National AgriculturalMarketing Board, and others -- which were reviewed and updated by the Bank.It is assumed that ZTRS will continue to move around 200,000 tons of trafficper year in the Tanzania-Zambia corridor. (Should the Lobito route not reopenor ZTRS be able to ensure only a smaller volume of traffic, the ton-kms to becarried by ZR, and its locomotive and wagon requirements, would be longer.)

4.03 It is expected that freight traffic will increase from 5.0 milliontons in 1978 to 6.3 million tons in 1989, an annual growth of just over 2%.Local, export and import traffic will all share in this growth, but transittraffic to and from Zaire is expected to be smaller than in 1976-78, withthe prospective re-opening of the Benguela Railway to Zairian traffic. Theprincipal element in the forecast traffic growth is the projected increasein exports, some of it in copper but mostly in cement to Tanzania, Burundiand other neighboring countries.

4.04 In terms of ton-kms of freight, total traffic will grow from under1.4 billion in 1978 to an estimated 1.7 billion in 1989, an annual growth of 2%.

4.05 Passenger traffic growth is projected at around 4% per year through-out the projection period, somewhat faster than the forecast population growthof 3% per year.

ZAMBIA RAILWAYS

Traffic Forecast('000 tons)

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

A. Local TrafficPetroleum 250 251 260 268 279 307 323 339 348 357 365Coal and Other Fuels 601 584 590 596 601 661 679 696 69'6 696 696Fertilizers and Chemicals 276 276 292 303 311 341 351 362 363 365 368Cement and Construction Materials 387 374 381 386 391 430 444 458 460 463 466Maize and Flour 322 348 352 370 401 441 464 487 500 512 525Sugar 68 72 74 78 81 89 92 94 94 94 94Other Agriculture Products 121 115 129 133 141 155 160 167 168 170 170Copper 387 344 300 284 261 261 268 275 275 275 275Ores, Concentrates, etc. 944 879 880 835 836 845 867 889 889 889 889Miscellaneous 25 39 46 56 67 74 76 78 78 78 78

Sub-total 3,381 3,282 3,304 3,309 3,369 3,604 3,724 3,845 3,871 3,899 3,926

B. ExportsTo Zaire 82 115 117 119 122 125 128 128 128 128 128To Lobito 17 215 215 215 215 215 215 215 215 215 215To South 274 270 278 286 293 300 308 308 308 3(A 308To Dar es Salaam 439 448 456 46.3 469 482 494 494 494 494 494 W

Sub-total 795 1,048 1,066 1,083 1,099 1,122 1,145 1,145 1,145 1,145 1,145

C. ImportsFrom Lobito 12 230 232 233 236 241 246 246 246 246 246From South 294 289 296 304 311 319 327 327 327 327 327From Dar es Salaam 284 276 282 289 294 300 306 3C6 306 306 306

Sub-total 590 795 810 826 841 860 879 879 879 879 879

D. Transit TrafficZaire to South 124 120 122 124 125 129 132 132 132 132 132South to Zaire 248 240 244 248 252 258 265 265 265 265 265

Sub-total 372 360 366 372 377 387 397 397 397 397 397

E. TOTAL 5,138 5,4 35 5,546 5,590 5,686 52973 6,145 6,266 6,292 62320 6,347

March 1979

- 32 -

B. Project Benefits and Economic Return

4.06 The only alternative to the services provided by ZR is road transport,therefore, the overall cost of additional transport capacity to be provided bythe project was compared to the cost of the road alternative in order toevaluate the overall economic return. The main project components were alsoanalyzed separately to the extent that they generate benefits compared withthe next best (rail) alternative of their own. For calculating the return,foreign exchange costs were shadow-priced at 1.22 times the official exchangerate and taxes and price contingencies excluded.

(i) Spare Parts, Workshops and Depots

4.07 The main bottleneck in rail transport in the short: term is due tothe lack of spare parts for locomotives and wagons. The present availabilityof wagons and locomotives is very low but the provision of spare parts underthe project is expected to help increase the availability of locomotives andwagons from 63% to 75% and from 80% to 90% respectively. This improvementcorresponds to a saving of 14 locomotives at a cost of K690,000 per unit and638 wagons at a cost of K29,000 per unit. In addition, the improvements toshops and the productivity study (para 3.15) will also allow ZR to adopt moreefficient maintenance work methods. The resulting productivity increase inthese two areas is expected to result in a 5% saving in labor costs in 1983increasing to 25% in 1987, or a saving of K570,000 per year to ZR from 1987onward, of which 50% is assumed to be due to improved work methods and 50% toimprovements to shops. In the rate of return calculation only half of thelocomotive and wagon savings has been taken into account to reflect thedifference in economic life between the present fleet with spare parts versusnew equipment. It is not expected that the new locomotives would need mainte-nance spare parts during the first five years. These benefits give an eco-nomic return of 22% (on 11% of the project).

(ii) Track, Signalling and Telecommunications, and Handling Equipment

4.08 Speed restrictions and train delays presently occur for severalreasons. On the Mookamunga-Livingstone section, they are mainly due to thepoor rail and sleeper conditions, while on some other sections of the mainline, they are due to the lack of an adequate signalling system. Delays alsooccur because of slow loading operations due to the lack of appropriatehandling equipment. The alleviation of these problems is expected to reducethe turnaround times of wagons by an average of at least two days, resultingin a substantial increase in the effective capacity of locomotives and wagons.The provision of new equipment will also result in savings in maintenancecosts by increasing ttheir productivity. More specifically, the implementationof the project will result in the following savings:

(a) Turnaround Times: Based on the present turnaround timesof wagons and on improved availability due to the provisionof spare parts and specialized workshop equipment, ZR wouldneed 1,480 additional wagons to carry the projected 1986traffic level, as against only 240 if adequate handling

- 33 -

equipment, signalling and telecommunications system andtrack renewal are provided. Therefore, the difference of

1,240 wagons and a further 14 locomotives (whic,. would beneeded to haul these wagons) are a direct benefi.- of theproject.

(b) Maintenance Cost: Track maintenance savings are expectedto amount to K2,500 per kilometer per year from 1984 onward,or K300,000 for the whole renewal program, because of theprovision in the project of new maintenance equipment. A sumof K150,000 will also be saved yearly by 1984 in material andlabor costs by the installation of the new telecommunications'-1 s'dinalling system. Finally, the provision of handling equip-ment, such as forklifts and cranes, and the resulting change inhandling methods will enable ZR to reduce its labor costs by someK830,000 yearly from 1987 onward.

4.09 Projected over 25 years, these benefits yield an economic returnof 24% on the track related investments (on 32% of the project). Assumingthat 40% of the turnaround improvement is due to track upgrading, 50% tosignalling and telecommunications and 10% to the provision of handling equip-ment, the respective economic returns on these three components are 27%, 21%and 25%.

(iii) Locomotives and Wagons

4.10 The turnaround times and availability improvements expected .romthe other project components still leave a gap of 240 wagons to meet the 1986traffic level. In addition, ZR plans to scrap at least 2,000 wagons belongingto the Unitary Railway System by 1990. All these wagons are over 30 yearsof age, with most over 50, and in such poor condition that they cannot beused for international traffic. Of these, 900 are due for scrapping before1984. If new wagons are not provided, around 220 million ton km will haveto travel by road at higher economic cost (KO.04 for trucks versus KO.02 forrail in 1977). Assuming truck productivity to be 700,000 ton km per year(15 ton trucks; 70% load; 65,000 km per year), this traffic diversion wouldrequire the purchase of about 300 trucks at K40,000 per unit with an averageeconomic life of five years. To carry the 1986 traffic level, ZR will alsoneed ten additional main line locomotives, assuming that the locomotive leasedto Malawi will return, four locomotives leased from South Africa will bereturned and four of the six damaged locomotives will be repaired.

4.11 Projected over a 25-year period, the economic return on locomotivesand wagons (compared with the road alternative) is 21% (on 31% of the project).Instead of buying ten locomotives, ZR could lease them from South Africa, at acost of US$159,000 per unit per year. The return on purchasing the locomotivesversus leasing them is 22%.

- 34 -

(iv) Other Items

4.12 The economic returns on around 26% of the project components couldnot be specifically analyzed. These are the concrete sleeper plant, the KafueBridge (built in 1906 and needing to be replaced in order to maintain serviceto the south), training, staff housing and technical assistance for operationsand project implementation. They are, however, important to achieving theoverall project objectives and have been included in the economic evaluationof the project as a whole (except the technical assistance, which is treatedas an operating expense). The completion of the concrete sleeper plant (2% ofthe project) is fully justified as the least-cost method of producing sleepersfor ZR's track maintenance work and as the means for providing higher qualitytrack. The technical assistance and training component (8% of the project) isessential to strengthen ZR's operations; in addition, the training of Zambianstaff will enable ZR to be less dependent on expatriates in the future. Staffhousing (8% of the project), especially in remote areas along the rail line,is needed to help ZR to retain its experienced and trained staff.

(v) Overall Return

4.13 The project as a whole is designed to provide some 600 million tonkm of additional rail transport capacity yearly (around 130 million fromavailability improvements, 250 million from turnaround time improvements, 70million from additional wagon capacity and 150 million from wagon replacement)which would enable ZR to meet the 1986 projected traffic needs. Since theonly alternative to rail is road, if the project were not implemented theadditional traffic would have to be transported by road at higheir economiccost (KO.04 versus KO.02). In this case, it is assumed that the railway wouldconcentrate on mining, export and import activities, on which it has a greatercomparative advantage, and would give up local traffic in general goods toroad. This traffic diversion to road would also require the purchase of afleet of about 850 15-ton trucks. Compared with the road alternative, theoverall economic return on the total project over a 25-year period is 19%.

4.14 Only operating cost differences and replacement costs of thetrucking fleet were considered in the economic analysis. This is in fact avery conservative approach since, without the project, the road network wouldnot be able to carry the additional traffic without substantial improvements.The railway is in fact vital to the country's overall economy and the realbenefits of the project should also be viewed in a macroeconomic perspective.Without the project, it is likely that part of the additional traffic envisagedin the forecast would not materialize, resulting in transport being the majorbottleneck to economic development as Zambia's external transport problemshave demonstrated in the past.

- 35 -

C. Risk and Sensitivity Analysis

4.15 The foregoing economic evaluation should be understood in thecontext of two major risks, or uncertainties, which could alter the outcomeof the project. One is whether the forecast growth in the tonnage of freighttraffic will materialize, and the other concerns the directional break-up ofZambia's foreign trade traffic.

4.16 As regards the uncertainty over traffic growth, a sensitivityanalysis was carried out to test the economic return in the event of a com-plete stagnation in the level of traffic. This shows that the project wouldstill be justified because:

(a) if the track renewal program is not implemented, a furtherdeterioration of the track is likely to occur between 1985and 1990, which will increase the turnaround times of wagonsby at least one day. ZR will then need some 350 additionalwagons to maintain its present transport capacity or lose70 million ton-km traffic to road by 1990; and

(b) 2,000 wagons have to be scrapped before 1990, 900 of thosebefore 1984. This means a loss of 430 million ton-km ofannual capacity by 1990.

Therefore, in case of traffic stagnation, the full benefits from the projectwould be delayed by five years, but they would still yield an economic returnof at least 13%.

4.17 As for the other cause of uncertainty concerning the directionalbreak-up of Zambia's export/import traffic, the traffic projections used inthe evaluation assume that only about 40% of Zambia's foreign trade carriedby ZR would continue to use the Dar route, with the Lobito and southern routesaccounting for the remaining 60%. If, on the other hand, the Dar routeaccounts for 60% of ZR's external traffic and the other routes for 20% each,the economic return on the proposed project will decline to 18%; this isvery satisfactory. With 80% using the Dar route and 10% on each of the othertwo routes, the return will be 16%, still an acceptable figure.

4.18 However, these assumptions would not reduce significantly the projectsize since the turnaround time of wagons on the Dar es Salaam and the Southernroutes is about the same, despite the difference in distances. This is due totwo factors: i) the difference in wagon brake system between ZR and Tazara,and ii) the low efficiency of Tazara. Assuming these problems are overcome,the turnaround time of wagons using the Dar route should decrease from 40 to25 days. If this could be achieved rapidly, and assuming that 60% of thetraffic takes the Dar route, ZR would not need any additional wagons for thenext five years except for replacement and the requirements in locomotiveswould decrease from ten to six. The project size would then be smaller byabout K 8.0 million.

4.19 Any increase in the volume going south will increase the economicreturn, while any increase in the volume going to Lobito will reduce thereturn, although this would undoubtedly be advantageous to the country as awhole as this route is the cheapest. A combination of traffic stagnation and

- 36 -

(i) Spare Parts, Workshops and Depots

YEAR C 1 C 2 B 1. B 2

1 5283.00 0.00 0.00 0.00

2 2693,00 0.00 4295,00 0.00

3 3536.00 0.00 4295.00 0.00

4 1650.00 0.00 4295.00 50.00

5 (.00 235.00 4295.00 110.0(

6 0.00 235.00 0.00 165.00

7 0.(0 235.00 0.00 225.00

8-- 9 0.00 235.00 0.00 300.00

10-25 0.00 0.00 0.00 300.00

YEAR TOTAL. COST TOTAL. BENEFIT NET BENEFIT

1 52633.00 0.0( 52A3.00

2 2693.00 4295.00 1602.00

3 3536.00 4'295.00 759,00

4 1850.00 4345.00 2495.00

5 235.00 4405.00 4170.00

6 235.00 165.00 -70.00

7 235.00 225,00 -10.00

F8-- 9 235.00 300.00 65.00

110-25 (.00 300.00 300,00

*****fATE OF RETLJRN = 22.450 4/-- 0.050 PERCENT*****

- 37 -

(ii) Track, Signalling and Telecommunications, and Handling Equipment

YEA R C, 3 1 Es 2

1 6017.00 300.0 0,00

2 1.9330+00 135.0() 9276.00

3 11.077.00 240.00 92t76.00

4 3114.00 495.00 9276*.00

5 0.00 660.00 9276.00

6 0.00 710.00 9276.00

7 0.00 775,0() 9276.00

8-25 0.00 830 . 00 ((.0

YEAR TCTAL. C'OST TrTAI 1? E'NEI-T Nl:T ENEFIT

1 6017.00 30.00 -5987.00

2 :.9330.00 9411.00 -9919.00

3 11.077.00 9516.00 - 1561.00

4 3.1.14.00 9771.00 6657.00

5 00(( 9936.00 9936.00

6 0(00 9986600 9986.00

7 0.00 10051.00 100510(0

8-25 (.0( {330.00 830.00()

****FR ATE C11: F:;R'ESTRN = N 23,550 0so1-. 0,.05() 1'ERCENT*****

- 38 -

(iii) Locomotives and Wagons

rE ("I I :1. X 1

1. 1000 00 0 0 00 0 * 00

2 1 002,0. 00 -78 00O0 0

1 ~~,x.. 20. uo 2 it 2 00 1. 40 0u C

4 10020C) * 0 272 0 0 51SO0

;.) 0 *;9 00 2.'7 8;i 2 C. C )( 3680 * ( i 0

6 0 .00 :~~~~.W82 . 0 0 400*0

7 0 * 00 ~~~~~411.4 8. 00 JQ*f

*-;4 1 ; 1.. 0 Q00 C s 00 50 i 0 0 OE.i A) o (9f9 ;,T A9 I .." . i- ,1 I (iSJF 4/.J. {9F. -. fj

9EY .. s .... 1. ... e .( f . .. . ........ i: . . .... .... ...... . ... ....9

L1 I C0 02.,) 0 0 0 0; i 1 ') 9i

3 10020 * 00 lA t m 00 5~~~~~~~~38 J 0

X",0 * 00 0464

0 * 00 '~~~X1 (0 Cl -2 O

-~~~~~~~~~~~~ ')')4 04')

;:.i L S9 (9 ,.) (a O e S9 S9 s?i : O .;.' s. i ,'3 3; f09 iJ'3~ .4) II 's1 ?i { tJ~i1 6: j n Q* .:. ,.I i,, ( ,s 41 *ttt;,:3,{

- 39 -

(iv) Overall Return

Y E:A R C' 1 B 1 B 2

1 2:5864.00 1464.00 460.00

2 38786.00 6978.00 2760.00

3 31376 .00 6978.00 5060.00

4 2.0539.00 6978.00 7360.00

' 0.00 6978.00 9660.00

6 0.00 8442.00 11960.00

7 0.(O 13957.00 1.4260.00

E3-10 0(00 6978.00 1,4260.00

1. J. 0.(O 8442.00 14260.00

12 0:.' O.00 :1.3957.00 142.60.00

1 3-25 '.00 8784. 00 14260.00

YEAR T:OTAI. ClIST UTOTAL. BE. NEF IT NE'T' BE"NEF'I'T'

l. '.25864.00 1924.00 -23940.00

38786.00 9738.00 29048.00

3 31376.00 12038.00 19330.00

4 2.(0539.00 14338.00 -6201 .00

5'.v 0.00()O 16638.00 1.6638.00

6 0.00 20402.00 20402.00

7 0.00 282'17.00 28217.00

B 10 0.00 21238.00 21238.00

1 1 0 .00 22702.00 2270200

12. 0:' O.00 £' 28217.00 282.17.00

13-25 0.(O 23044.00 2.3044.00

***8**RA'T'E OF RET'UfRN 19.250 +/- 0.0'i PER(:ENT*****

- 40 -

closure of the southern and Lobito routes (a distinct possibility in view ofthe political situation in the areas concerned) will reduce the return tobelow 10%.

V. kINANCIAL EVALUATION

A. Past Financial Performance

Operating Results

5.01 ZR experienced a period of decline in profitability during the early1970's reaching a low in 1974 with an overall loss of K 6.1 million. In thatyear, and for at least two prior years, operating revenues failed to coverworking expenses (before provision for depreciation and interest). Commencingwith 1975, the downward trend was reversed and ZR's net income, after depre-ciation and interest, improved from a small loss of K 0.65 million in 1975 toa profit of K 3.7 million in 1978. In 1977 a dividend of K 1.0 million wasdeclared and paid. ZR is exempt from income tax. During the years of lossesthe Government provided a subsidy in most instances equal to the loss. Detailsare given on page 41.

5.02 In the years of operating losses, the subsidy provided by the Govern-ment covered (a) certain capital and replacement works and (b) the operatingdeficit. That portion of the subsidy which applied to the operating loss wastaken into income and the remainder credited to "Capital Reserve". As thispolicy does not contribute to fiscal discipline, it was agreed during negotia-tions that general operating subsidies will be discontinued and Governmentpayments to ZR will be limited to losses on services and the cost of capitalworks, provided specifically on Government directives. In this connection itshould be mentioned that ZR has been managing the Mulobezi line since 1973 onbehalf of the Government. Operating losses and essential capital works havebeen covered by funds provided by the Government. The assets are not theproperty of ZR.

5.03 In general, tariffs are cost-based, but certain commodities suchas coal and agricultural products have lower rates. Initially the tariffsfor these goods were set at 10% above cost, but as increases have been onlyinfrequently approved, costs have tended to rise above the tariff. Passengerservice does not operate at a profit and has so far been deemed by the Gov-ernment to be a social service.

5.04 ZR is currently receiving under CIDA financing, two traffic costingexperts to help set up a traffic costing unit to continually monitor andupdate cost data for tariff and operational purposes.

Cash Flow

5.05 Including the subsidy, ZR has shown positive cash flows in all yearsexcept 1975 and 1978. The shortfall in 1978 resulted from an unusually largeinvestment in fixed assets not completely covered by long-term debt comnbinedwith an increase in inventories and debtors (see para. 5.06). As a result ZRclosed 1978 with a net overdraft of K4.1 million. Details are given in thecash flow statement on page 42.

- 41 -

ZAMBIA RAILWAYS

Comparative Operating Statements

(K '000)

Year Ended December 31 1973 1974 1975 1976 1977 1978

Revenue:

Passengers 1,583 1,550 2,351 3,044 3,580 4,581Goods and minerals 15,544 17,181 24,248 33,730 33,754 36,534

Other 834 1,053 1,300 1,266 1,780 2,72817,961 19,784 27,899 38,040 39,114 43,843

Catering 607 389 342 528 757 939

Staff rents 509 541 609 631 665 728Miscellaneous 533 499 573 791 1,243 1.530

Total Revenue 19,610 21,213 29,423 39,990 41,779 47,040

Working Expenses:

Administration 5,949 6,445 7,729 8,665 8,465 10,3911'Operating and running 8,089 8-,710 9,384 11,293 11,221 11,317Maintenance 5,501 6,838 8,323 9,645 9,378 11,799Goods handling 1,234 1,665 682 907 2,504 2,163Catering 845 533 562 817 1,045 1,478

21,618 24,191 26,680 31,327 32,613 37,148

Operating Surplus (2,008) (2,978) 2,743 8,663 9,166 9,892

Provision for Depreciation 2,601 2,598 2,900 3,282 3,565 3,681

Net Operating Revenue (4,609) (5,576) ( 157) 5,381 5,601 6,211

Interest 564 550 494 1,947 2,372 2,502

Net Income (5,173) (6,126) ( 651) 3,434 3,229 3,709

Other:

Government subsidy 5,173 6,126 651 - - -

Non-operating income 1,827 2,165 374 - - -

1,827 2,165 374 3,434 3,229 3,709

1/ Includes a loss on foreign exchange of K1.86 million.

Source: Bank Staff.

May 1979

ZAMBIA RAILW4AYS

Cash Flow(K '000)

Year Ended December 31 1973 1974 1975 1976 1977 1978

Source of Funds:

1. Operating surplus (2,008) (2,978) 2,743 8,663 9,166 9,8922. Non-operating income 1,827 2,165 374 - - -3. Government subsidy 5,173 6,126 651 - - -

4. Capital receipts 3,433 500 2,158 ( 322) - -5. Long-term debt 1,837 6,717 10,507 3,703 6,562 18,4116. Decrease in non-cash

working capital - - - _ 3,558 _

Total Sources 10,262 12,530 16,433 12,044 19,286 28,303

Use of Funds:

1. Increase in fixed assets 3,379 8,419 12,944 4,716 10,032 22,7402. Unitary system assets ( 502) 115 278 153 72 443. Debt service:

Princiral 1,588 966 1,079 577 1,971 6,075Interest 564 550 494 1,947 2,372 2,502

4. Loss on unitary system 30 17 11 5 - -5. Increase "n non-cash

working capital 2,148 1,777 3,802 2,272 - 6,1176. Dividends - - - - 1,000 -

Total Uses 7,207 11,844 18,608 9,670 15,447 37.478

Annual Cash Surplus 3,055 686 ( 2,175) 2,374 3,839 (9,175)

Opening Cash Balance (2,663) 392 1,078 (1,097) 1,277 5,116

Closing Cash Balance 392 1,078 ( 1,097) 1,277 5,116 (4,059)

Source: Bank StaffMay 1979

- 43 -

Balance Sheets

5.06 The liquidity of ZR as measured by the current ratio showed a steadyimprovement during 1973-77 with a slight drop during 1978. Current assetscovered current liabilities by a safe margin. However, the amounts owing toZR, primarily by other parastatals, have risen to approximately 170 days'revenue. These should be reduced to the equivalent of 45 days' revenue byDecember 31, 1980. This was agreed during negotiations.

5.07 During the period 1964 to 1967 the railway system in Zambia wasoperated by Rhodesia Railways (as the "Unitary System") which was owned 50-50by Zambia and Rhodesia. Assets owned by the Unitary System, but operatedsince 1967 by ZR, are considered to be still the property of the UnitarySystem and are not recorded in the accounts of ZR. However depreciation hasbeen charged against operations to provide for their ultimate replacement.The off setting credit has been to a "depreciation reserve" which forms partof the "Reserves" included in the equity section of the balance sheet. Inaddition, in accordance with the agreement reached with the Unitary System,debtors, creditors and loans in Zambia outstanding at June 30, 1967 havebeen respectively collected or paid by ZR. The balance of this account atDecember 31, 1978 amounted to K40.3 million and is shown as an asset in theBalance Sheet of ZR. The final effect of the Unitary System accounts in theaccounts of ZR will be determined only after the dissolution of the UnitarySystem.

5.08 The debt/equity ratio increased from 14/86 in 1973 to 34/66 in 1978primarily due to the financing of additions to fixed assets during the period.Although profits have been increasing steadily the effect of the increasedlong-term debt was reflected in a sharp drop in the debt service coverageduring 1978.

5.09 Comparative balance sheets are given on page 44 and a schedule ofselected financial indicators are set out below:

Debt Times DebtWorking Operating Service Interest EquityRatio Ratio Coverage Earned Ratio

1973 1.01 1.23 - 14/861974 1.14 1.26 - 19/811975 0.91 1.01 1.75 - 25/751976 0.78 0.87 2.84 2.76 26/741977 0.78 0.87 2.30 2.36 28/721978 0.79 0.87 1.35 2.46 34/66

- 44 -

ZAMBIA RAILWAYS

Comparative Balance Sheets

(K '000)

Year Ended December 31 1973 1974 1975 1976 1977 1978

Assets 1/

Current AssetsCash 392 1,078 1035 3,934 5,291 1,478T)epositS - - - - - 2,000Debtors 6,070 6,830 12,343 16,018 10,705 16,965Inventories 5L690 6,067 6,163 7,703 7,877 10,414

12,152 13,975 19,541 27,655 23,873 30,857

Fixed Assets:

Cost 40,264 53,549 63,478 71,192 74,267 92,803Less depreciation 5,444 7,186 9,234 11,645 14,167 17.848

34,820 46,363 54,244 59,547 60,100 74,955Work in progress 8,746 3,880 6,895 3,870 10,621 15,515

43,566 50,243 61,139 63,417 70,721 90,470

Unitary System 39,653 39,768 40,046 40,199 40,2 7 1 40,315

Total Assets 95,371 103,986 120,726 131,271 134,865 161,642

Liabilities and Capital

Current Liabilities:

Bank Overdraft - - 2,132 2,657 175 5,537

Creditors 5,209 4,556 6,331 8,771 6,504 9,942Long-term debt - current 1,063 1,076 l,108 1,611 2,297 3,539

6,272 5,632 9Y 571 13,039 8,976 19,018

Long-term Debt:

Government 4,830 11,547 21,806 24,803 27,034Others 7,669 6,734 5,655 5,766 8,419Miscellaneous 219 188 436 454 161

12,718 18,469 27,897 31,023 35,614 47,950

Eouitv:

Permanent capital 35,000 35,000 35,000 35,000 35,000 35,000Redeemable capital 35,000 35,000 35,000 35,000 35,000 35,000Reserves 23,909 25,265 28,275 28,797 29,634 30,324Retained earnings (17,528) (15,380) (15,017) (11,588) ( 9,359) ( 5,650)

76,381 79,885 83,258 87,209 90,275 94,674

Total Liabilities and 95,371 103,986 120,726 131,271 134,865 161,642Capital -

I/ UTnaudited.

Source: Bank Staff.

May 1979

- 45 -

B. Financial Forecasts

5.10 The financial projections are prepared using a fixed monetary unit(1979) for all revenue and expense items and under the following assumptions:

(a) goods revenues are based on the traffic forecasts in Chapter 4.Passenger traffic, which has been increasing in recent years,is projected at a growth rate of 4% per annum. The tariffstructure used is the current one which includes increasesimplemented in January 1979;

(b) administration salaries are increased at 1% per year toallow for required increases in staff and replacement ofexpatriate staff currently funded by bilateral aid;

(c) most maintenance and running expenses are a function oftraffic carried and the variable portions have accordinglybeen increased in this manner. In this connection, 50% ofthe labor included in running cost has been assumed to befixed and the remainder variable in relation to tonnagecarried. Wagon maintenance is a function of time and, becauseof the age and condition of the old wagons, their maintenancecost has been calculated separately from the maintenance ofnew wagons by using the average cost per wagon incurred in1977, considered the most representative year. Buildingmaintenance has been taken at the 1978 level on existingbuildings plus 6% of capital cost per year on additions.Track and signalling maintenance is based on an engineeringevaluation;

(d) catering expense varies directly with passenger traffic andgoods handling varies with traffic excluding fuels, contruc-tion materials and minerals;

(e) improvements to shops and the productivity study are expectedto result in a reduction in the shop maintenance labor costof 5% per year for five years commencing in 1983;

(f) as further investments will be required beyond the projectperiod to sustain ZR, these have been included in the years1984-89 in the total amount of K 138.1 million;

(g) the project costs are included at the expected market costat date of acquisition of the assets. These include pricecontingencies for foreign goods at 6% per annum. Local costsinclude the following price contingencies:

1979 - 18%;1980 - 15%;1981 - 10%; and1982 onwards 7% per annum;

- 46 -

(h) the foreign costs of all investment items are treated aslong-term debts repayable in 15 years, after a grace periodof five years, with interest at 10% per year in accordancewith the Government's general policy regarding lending toparastatals. Debt service payments are calculated withfixed principal plus interest;

(i) provision for depreciation is calculated on a straight-linebasis over the estimated economic life of the assets andbased on historical costs;

(j) all local costs are deemed to be paid from internallygenerated funds with the exception of K3.08 million for theKafue Bridge expected to be financed by ODA; and

(k) all goods revenues are collected within 45 days of billingdate commencing with 1980.

C. Projected Income Statement

5.11 Based on the foregoing assumptions, ZR shows net operating revenues(before interest) ranging between K17.2 - K19.3 million per year during theprojection period. However, due to the high foreign cost component, which isrepresented by long-term debt, the interest charges substantially reduce thenet income from K 15.8 million in 1979 to KO.6 million in 1989. As a substan-tial part of the long-term debt is due to the Government this is considered tobe satisfactory. Details are given on page 47.

ZAMBIA RAILWAYS

Comparative Operating Statements

(K '000)YEAR ENDED DECEMBER 31

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

REVENt)E

TRAFFIC

PASSENGERS 4763. 4954. 5152. 5358. 5572. 5795. 6027. 6268. 6519. 6780. 7051.

GOODS 51039. 52741. 53944. 55103. 56387. 58481. 60173, 61715. 61719. 61723. 61729.

OIHER 2100. 2135. 2159. 2182. 2207. 2248. 2281. 2310. 2310. 2310. 2310.

SUBTOTAL 57902. 59830. 61255. 62643. 64166. 66524. 68481. 70293. 70548. 70813. 71090.

CATERING 743. 780. 820. 860. 904. 949. 996. 1046. 1098. 1153. 1211.

STAFF RENTS 1000 1000. 1000. 1000. i 1000. 100 1000. 1000. 0ooo

MISCELLANEOUS 1400. 1423. 1439. 1454. 1411. 1498. 1520. 1539. 1540. 1540. 1540.

TOTAL REVENUE 61045. 63033. 64514. 65957. 67541. 69971. 71997. 73E78. 741S6. 74506. 74841.

WORKING EXPENSES

ADMINISTRATION 9174. 9217. 9260. 9304. 9348. 9393. 9438. 9483. 9529. 9575. 9622.

OPERATING AND RUNNING 14096. 14697. 14821. 14905. 15097. 15670. 16015. 16257. 16309. 16365. 16421.

MAINTENANCE 10846. 11207. 11248. 11267. 11370. 11563. 11668. 11920. 11877. 12352. 12728.

GOODS HANDLING 2504. 2972. 3045. 3122. 3218. 3348. 3440. 3476. 3491 3506. 3531.

CATERING 1098. 1153. 1211. 1271. 1335. 1402. 1472. 1545. 1623. 1704. 1789.

_ _ _ _ _ _ _ _ _ _ _ -- - - --- _- - - - - -- - -- - - - - - - - - - - - - --- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

TOTAL WORKING EXPENSES 37719. 39247. 39586. 39870. 40367. 41375. 42033. 42681. 42828. 43502. 44091.

OPERATING SURPLUS 23326. 23786. 24928. 26087. 27174. 28596 29964. 31197. 31358. 31004. 30750.

PROVISION FOR DEPRECIATION 3955. 5230. 7346. 8836. 9629. 10417. 10976. 11562. 12073. 12819. 13565.

NET OPERATING REVENUE 19371. 18556. 17583. 17251. 17544. 18179. 18987. 19635. 19284. 18185. 17185.

INTEREST 3545. 4125. 5593. 8120. 10963. 12653. 13568. 14087. 14890. 15653. 16561.

NET INCOME 15826. 14431. 11990. 9131. 6552. 5526 5419. 5548. 4394. 2532. 624.--_ _ . _

- 48 -

D. Projected Cash Flows

5.12 The cash flow in total over the projection period will be positivebut during most years the annual amounts will be negative. The bank balanceshould remain positive until 1989, assuming accounts receivable are collectedon a current basis and the tariff schedule is adjusted to compensate forinflation.

5.13 The Zambia Railways Act provides that dividends may be paid at arate not to exceed 10% on the Permanent Dividend Capital. Dividends are notcumulative. Allowance is made in the projection for a 10% dividend (K3.5million) in years where the net income exceeds this amount as this is theGovernment's stated intention.

5.14 The projections assume that all local costs, including contingencies,(but with the exception of K3.08 million for the Kafue Bridge) are paid by ZRfrom internally generated funds. Based on this, ZR contributes 29% of thefinancing of the proposed project. The cash flow is set out in the table onpage 49.

5.15 In order to safeguard ZR's cash flow situation during the period ofimplementation of the proposed project, it was agreed during negotiations thatZR would not, without the prior approval of the Bank Group, undertake in anyone year investments beyond those included in the proposed project in excessof US$2.0 million equivalent.

5.16 ZR should maintain a reasonable relationship between its operatingsurplus and debt service requirements. During negotiations it was agreedthat, unless otherwise agreed with the Bank Group, ZR will not incur anydebt if its operating surplus for the fiscal year or the twelve consecutivemonths immediately before the date of occurrence whichever is greater, wouldbe less than 1.5 times the maximum debt service requirements of any succeedingfiscal year.

E. Financial Risk

5.17 If actual traffic carried fell below the projections by 11.0% duringthe project period ending in 1983 the internally generated funds would bedecreased by K19.79 million leaving a nil closing cash balance at December 31,1983. Under these circumstances ZR would still be able to pay the local costcomponent of the project, all working expenses, debt service charges and theannual dividend of K3.5 million despite the decrease in traffic. If dividendswere not paid traffic carried could drop 20% below the forecast and ZR wouldstill be able to meet its financial obligations through December 31, 1983.

ZAMBIA RAILWAYS

Cash Flow

(K '000)

YEAR ENDED DECEMBER 31

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

SOURCE OF FUNDS

OPERATrNG SURPLUS 23326. 23786. 24928. 26087. 27174. 28596. 29964. 31197. 31358. 31004. 30750.

LONG TERM DEBT 8679. 20626. 33506. 30893. 13527. 13786. 13935. 16786. 16385. 11257. 17834.

DECREASE IN NON CASH WORKING CAPITAL 6641. 4107. 24. 4541. 1749. 6187.

TOTAL SOURCES 38646. 48519. 58459. 56980. 45242. 44131. 43899. 47983. 47743. 48448. 48584.

USE OF FUNDS Z

INCREASE IN FIXED ASSETS 13702. 30061. 44417. 39561. 29321. 22184. 19736. 22508. 20164. 26349. 26349.

DEBT SERVICE

PRINCIPAL 3539. 3181. 3265. 3484. 2905. 7731. 9790. 9800. 9809. 9819. 16407.

INTEREST 3545. 4125. 5593. 8120. 10963. 12653. 13568. 14087. t4890. 15653. 16561.

INCREASE IN NON CASH WORKING CAPITAL 713. 259. 410. 83. 311.

DIVIDENDS 3500. 3500. 3500. 3500. 3500. 3500. 3500. 3500. 3500.

TOTAL USE OF FUNDS 24286. 40867. 56775. 55378. 46689. 46068. 46853. 50305. 48446. 51822 59628.

ANNUAL CASH SURPLUS 14360. 7652. 1684. 1602. -1447. -1937. -2955. -2322. -703. -3374. -11043

OPFNING CASH BALANCE -4059. 10301. 17954. 19638. 21239. 19793. 17855. 14901. 12579. 11876. 8502.

CLOSING CASH BALANCE 10301. 17954. 19638. 21239. 19793. 17855. 14901. 12579. 11876. 8502. -2541.

- 50 -

F. Projected Balance Sheets

5.18 The proposed project covers the four years 1980-83. For the purposeof financial evaluation, an estimate has been made of capital requirements forthe period 1984-89. These requirements are based on the continuation of exist-ing programs and in part include items postponed from ZR's present five-yearinvestment plan (para. 5.10 (f)).

5.19 Based on the assumptions set out in para. 5.10, ZR will remain ina liquid position through to 1988. However, during 1989 the impact of debtservice will be felt as a result of borrowing for the investment requirementsfor 1984-89. All financial indicators relative to long term debt will showimprovement after that date. The financing gap representing funds requiredbeyond the proposed Bank loan are shown in the balance sheet under the cap-tion "Long-Term Debt Required". Comparative projected balance sheets and aschedule of selected financial indicators are set out in the tables on pages51 and 52.

G. Future Financial Objectives

5.20 ZR's fixed assets are recorded in the books of account at historicalcost. It was agreed during negotiations that they would be revalued atcurrent replacement cost effective Janaury 1, 1981 and annually thereafter.

5.21 In order to generate net revenues sufficient to meet debt servicecharges and to continue to finance approximately 30% of its capital develop-ment program, it will be necessary for the Government and ZR to take allmeasures appropriate to achieve net operating revenues sufficient to yield anannual rate of return on net fixed assets in use of 8% from the year endingDecember 31, 1980. For the years after 1980, however, when the assets havebeen revalued at current replacement cost, should this result in excessivecash generation, the rate of return will be established by mutual agreementbetween the Government, ZR and the Bank. These were agreed during negotia-tions.

5.22 As wages represent a substantial part of working expenses, a clari-fication was sought during negotiations on ZR's wage policy as it relatesto adjustments to compensate for inflation. In the past wages have beenadjusted every second year but this has not necessarily called for an upwardrevision in tariffs. The attention of ZR and the Government was drawn to theneed to ensure that such adjustments are reflected in the tariff structure inorder to meet the financial objectives of ZR (see also para. 5.21).

ZAMBIA RAILW'AYS

Comparative Balance Sheets

(K '000)

YEAR ENDED DECEMBER 31

197Q 1980 1981 1982 1983 1984 1985 1986 198' 1989 1989

ASSETS

CURRENT ASSETS

BANK 10301. 17954. 19638. 21239. 19793. 17855. 14901. 12579. 11876. 8502. -2541.

DEBTORS 10487. 6502. 6651. 6794. 6952 7210. 7419. 7609. 7609. 7610. 7610.

INVENTORIES 7755. 7930. 8025. 8056. 8254. 8442. 8593. 8915. 9029. 9533. 9944

TOTAL CURRENT ASSETS 28543. 32386. 34313. 36089 34998. 33507. 30912. 29103. 28514. 25645. 15013

FIKED ASSETS

COST 116828. 148013. 185252. 224548. 258306. 281516. 301252. 323760. 343924. 370273. 396C22

LESS DEPRECIATION 21003. 25433. 31979. 40015 48844. 58461. 68637. 79399. 90672. 102692. 115457.

SUBTOTAL 95825. 122580. 153273. 184533. 209462. 223055. 232615. 244361. 253252. 267581. 281165.

WORK IN PROGRESS 5192. 4068. 11246. 11511. 7074. 6048. 6048. 6048. 6048. 6048. 6048.

TOTAL FIXED ASSETS 10O017. 126648. 164519. 196044. 216536 229103. 238663. 250409. 259300. 273629. 287213.

UNITARY SYSTEM 40315. 40315. 40315. 40315. 40315. 4031S. 40315. 40315. 40315. 40315. 40315.

TOTAL ASSETS 169875. 199349. 239147. 272449. 291850. 302926. 309891. 319827. 328128. 339589. 342541.

LIABILITIES AND CAPITAL

'Ia

CURRENT LIABILITIES

CREDITORS 5804. 6017. 6065. 6106. 6177. 6313. 6404. 6497. 6519. 6622. 6712.

CURRENT LONG TERM DEBT 3181. 3265. 3484. 2905. 7731. 9790. 9800. 9809. 9819. 16407. 16418.

TOTAL CURRENT LIABILITIES 8985. 9282. 9549. 9oIl. 13908. 16104. 16204. 16306. 16338. 23029. 23130.

LONG TERM DEBT

EXISTING 47950 44769. 41504. 38020 35115. 32761. 30399. 28027. 25646. 23255. 20854

BANK 1538. 8461. 2230' 30769. 30769. 28718. 26666. 24615 22564. 20513.

REQUIRED 8321. 27493. 54295. 70763. 80654. 91122. 99690. 1111O8. 122126. 134594. 140484.

SUBTOTAL 56271. 73800. 104260. 131090. 14653e. 154652. 158807. 165802. 172387. 180413. 181851

LESS CURRENT 3181 3265. 3484. 2905 7731 9790. 9800. 9809. 9819. 16407 16418.

TOTAL LONG TERM DEBT 53090. 70535. 100776 128185. 138807. 144862. 149007. 155992. 162568. 164006. 165433

EQUITY

PERMANENT CAPITAL 35000. 35000. 35000 35000 35000. 35000. 35000. 35000. 35000. 35000. 35000

REDEEMABLE CAPITAL 35000. 35000. 35000 35000 35000. 35000. 35000. 35000 35000 35000. 35000

RESERVES 31124. 31924. 32724. 33524 34324. 35124. 35924. 36724. 37524. 38324. 39124

RETAINED EARNINGS 6676 17608. 26098. 31729 34810. 36836. 38756. 40804. 41698. 44230 44854

TOTAL EOUITY 107800 119532 128822 135253 139134. 141960. 144680. 147528. 149222. 152554. 153978.

TOTAL LIARILITIES AND CAPITAL 169875 199349 239147 272449 291850 302926 309891 319827. 328128 339589 342541

- 52 -

Schedule of Selected Financial Indicators

Debt TimesWorking Operating Service Interest Debt/EquityRatio Ratio Coverage Earned Ratio1/ 2/ 3/ 4/ 5/

1979 0.62 0.68 3.29 5.46 33/671980 0.62 0.70 3.26 4.50 37/631981 0.61 0.72 2.81 3.14 44/561982 0.60 0.73 2.25 2.12 48/521983 0.59 0.74 1.96 1.60 50/501984 0.59 0.74 1.40 1.44 51/491985 0.58 0.73 1.28 1.40 51/491986 0.57 0.73 1.31 1.39 51/491987 0.57 0.74 1.27 1.30 52/481988 0.58 0.75 1.22 1.16 52/481989 0.58 0.77 0.93 1.04 52/48

1/ Working Ratio - Total operating expenses, excluding depreciation andinterest, divided by total operating revenue.

2/ Operating Ratio - Total operating expenses, including depreciation butexcluding interest, divided by total operating revenue.

3/ Debt Service Coverage - Net income before depreciation and interestdivided by the total of interest plus principal repayments.

4/ Times Interest Earned - Net income before interest divided by theinterest charges.

5/ Debt/Equity Ratio - The relative percentages of long-term debt andequity invested in the enterprise.

- 53 -

H. Impact of Inflation on ZR's Finances

5.23 The projected cash flow is stated in constant 1979 values exceptfor the amortization of long-term debt, both principal and interest, whichis shown in the actual current monetary values which will be paid each year.As the impact of these payments on the cash flow will decrease with infla-tion, a separate calculation has been made to determine the amounts involved.The total debt service payments over the projection period of K 199.5 millionin current values, will be reduced by inflation to K 140.8 million in 1979values. The result is that all annual cash surpluses will become positive.The details of the debt service deflation and the revised cash flow showingthe effect of inflation are set out in the tables on pages 54 and 55.

5.24 The projections assume that tariffs will be increased at regularand frequent intervals to offset the effect of inflation on working expenses.If the time lag between adjustment of tariffs becomes too long profits, andthe cash flow, will be adversely effected. For example, if the workingexpenses for 1980 are adjusted to the expected 1980 price levels, additionalrevenue amounting to K 5.9 million will be required to offset the increasedexpenses. This represents a 9.5% required increase in the 1980 goods revenue.However, if the increase in tariff is delayed until 1981 a 30.4% adjustmentwould be required at that time in order to preserve the cash flow. During aperiod of steady inflation a time lag of one year requires a tariff revisionof approximately three times the size of what would have been required if donein time.

ZAMBIA RAILWAYS

Debt Service Deflated to 1979 Monetary Unit

(K '000)

Current Monetary Unit l/ Deflated to 1979 Monetary UnitPrincipal Interest Total Principal Interest Total Decrease

1979 3,539 3,545 7,084 3,539 3,545 7,084

1980 3,181 4,125 7,306 3,001 3,891 6,892 414

1981 3,265 5,593 8,858 2,906 4,978 7,884 974

1982 3,484 8,120 11,604 2,925 6,818 9,743 1,861

1983 2,905 10,963 13,868 2,301 8,684 10,985 2,883

1984 7,731 12,653 20,384 5,777 9,455 15,232 5,152 1U,

1985 9,790 13,568 23,358 6,901 9,565 16,466 6,892

1986 9,800 14,087 23,887 6,580 9,458 16,038 7,849

1987 9,809 14,890 24,699 6,272 9,521 15,793 8,906

1988 9,819 15,653 25,472 5,980 9,532 15,512 9,960

1989 16,407 16,561 32,968 9,516 9,605 19,121 13,847

79,730 119,758 199,488 55,698 85,052 140,750 58,738

1/ From Page 49

Deflator Index:

1980-85 = 6%1986-89 = 5°'

ZAMBIA RAILWAYS

Revised Cash Flow giving Effect to Deflated Debt Service

(K '000)

Year Ended December 31 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

Annual Cash Surplus 1/ 7,652 1,684 1,602 (1,447) (1,937) (2,955) (2,322) (703) (3,374) (11,043)

Increase due to Debt 2/Service Deflation 414 974 1,861 2,883 5,152 6,892 7,84Q 8,906 9,960 13,847

Adjusted Cash Surplus 8,066 2,658 3,463 1,436 3,215 3,937 5,527 8,203 6,586 2,804 n

Opening Cash Balance 10,301 18,367 21,025 24,488 25,924 29,139 33,076 38,603 46,806 53,392 1

Closing Cash Balance 18,367 21,025 24,488 25,924 29,139 33,076 38,603 46,806 53,392 56,196

1/ From Page 49

2/ From Page 54

- 56 -

I. Financial Internal Rate of Return

5.25 In order to assess the financial soundness of the proposed project,the financial internal rate of return was calculated by projecting the operat-ing statements of ZR with and without the project setting out the profit beforedepreciation and interest. The projections are done in constant 1979 prices.

5.26 Without the project ZR reaches its traffic carrying capacity by 1980.In addition, 1,100 wagons would have to be scrapped by 1984. This combinedwith lower locomotive availability due to lack of rehabilitation spare partswould reduce the tonnage carried, and hence revenue from goods traffic, belowthe 1979 level. Other revenues which vary with tonnage would be reduced in asimilar manner.

5.27 Working expenses would be affected in several ways:

(a) maintenance labor costs will not be reduced if depots are notimproved and the productivity study is not implemented;

(b) maintenance costs for wagons will increase for the wagons notscrapped;

(c) maintenance costs for signals will continue to rise if the newsystem is not installed;

(d) fuel costs will drop with the decrease in traffic carried; and

(e) goods handling, which varies with traffic, will also decrease.

5.28 Operating statements setting out the position without the projectare given on page 57. The operating surplus shown is before depreciation andinterest.

ZAMBIA RAILWAYS

Comparative Operating Statements Without the Project

(K '000)

YEAR ENDED DECEMBER 31

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

REVENUE

TRAFFIC

PASSENGERS 4763. 4763. 4763. 4763. 4762. 4763. 4763. 4763- 4763. 4763. 4763.GOODS 51039. 48385. 45731. 43077. 37345. 34691. 32037. 29383. 26729. 24075. 21421.OTHERS 2100. 2100. 2100. 2100. 1785. 1785. 1785. 1785. 1785. 1785. 1785.

SUBTOTAL 57902. 55248. 52594. 49940. 43893. 41239. 38585. 35931- 33277. 30623. 27969.CATERING 743. 743. 743. 743. 743. 743. 743. 743. 743. 743. 743.STAFF RENTS 1Q00. 1000. 1000. 1000. 1000. 1000. 1000. 1000. 1000. 1000. 1000.MISCELLANEOUS 1400. 1400. 1400. 1400. 1190. 1190. 1190. 1190. 1190. 1190. 1190.

TOTAL REVENUE 61045. 58391. 55737. 53083. 46826. 44172. 41518. 38864. 36210. 33556. 30902.

WORKING EXPENSES

ADMINISTRATION 9174. 9217. 9260. 9304. 9348. 9393. 9438. 9483. 9529. 9575. 9622.OPERATING AND RUNNING 14096. 14096. 14096. 14096. 13311. 13311. 13311. 13311. 13311. 13311. 13311.MAINTENANCE 10846. 11151. 11239. 11293. 11089. 11270. 11395. 11496. 11552. 11611. 11672.GOODS HANDLING 2504. 2504. 2504. 2504. 2128. 2128. 2128. 2128. 2128. 2128. 2128.CATERING 1098. 1098. 1098. 1098. 1098. 1098. 1098. 1098. 1098. 1098. 1098.

TOTAL WORKING EXPENSES 37719. 38066. 3819S. 38296. 36974. 37200. 37370. 37517. 37618. 37724. 37831.

OPERATING SURPLUS 23326. 20325. 17539. 14787. 9852 6972. 4148. 1347. -1408. -4168. -6929.

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5.29 The financial internal rate of return with the project investmentsis 20%. The calculations are given in the following table:

Financial Internal Rate of Return(K'000)

Operating Surplus NetYear Ended Capital With Without CashDecember 31 Costs Project 1/ Project 2/ Net Flow

1980 28,458 23,786 20,325 3,461 (24,997)1981 43,333 24,928 17,539 7,389 (35,944)1982 38,416 26,087 14,787 11,300 (27,116)1983 27,401 27,174 9,852 17,322 (10,079)1984 28,596 6,972 21,624 21,6241985 29,964 4,148 25,816 25,8161986 31,197 1,347 29,850 29,8501987 31,197 1,347 29,850 29,8501988 31,197 1,347 29,850 29,8501989 31,197 1,347 29,850 29,8501990 31,197 1,347 29,850 29,8501991 31,197 1,347 29,850 29,8501992 31,197 1,347 29,850 29,8501993 31,197 1,347 29,850 29,8501994 31,197 1,347 29,850 29,8501995 31,197 1,347 29,850 29,8501996 31,197 1,347 29,850 29,8501997 31,197 1,347 29,850 29,8501998 31,197 1,347 29,850 29,8501999 31,197 1,347 29,850 29,8502000 31,197 1,347 29,850 29,8502001 31,197 1,347 29,850 29,8502002 31,197 1,347 29,850 29,8502003 31,197 1,347 29,850 29,8502004 31,197 1,347 29,850 29,850

137,608 753,278 99,216 654,062 516,454

Financial Internal Rate of Return: 20%

Sensitivity Analysis:

(1) Cost Increase of 10% 18%(2) Benefit Decrease of 10% 18%(3) Cost Increase of 10% and

Benefit Decrease of 10% 16%

1/ Prom page 47.

2/ From page 57.

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VI. RECOMMENDATIONS

6.01 During negotiations, agreement was reached with the Governmentand/or ZR, as appropriate, on the following matters:

(i) study on provision of storage facilities (para. 3.07);

(ii) foreign exchange for spare parts (para. 3.08);

(iii) domestic preference (para. 3.21);

(iv) project implementation schedule (para. 3.25);

(v) operational targets (para. 3.27);

(vi) subsidies (para. 5.02);

(vii) outstanding accounts receivable (para. 5.06);

(viii) investments beyond those included in project (para. 5.15);

(ix) debt service requirements (para. 5.16);

(x) revaluation of fixed assets (para. 5.20); and

(xi) return on net fixed assets in use (para. 5.21).

6.02 The following are conditions of loan/credit effectiveness:

(i) preparation of a training program for ZR staff(para. 3.16);

(ii) effectiveness of other external financing arrangements(para. 3.20); and

(iii) conclusion of a satisfactory Subsidiary Loan Agreement(para 3.20).

6.03 Project progress and completion reporting requirements wereagreed during negotiations (para. 3.25).

6.04 On the basis of the above, the project provides a suitable basisfor a Bank loan of US$25.0 million and an IDA credit of US$15.0 million to theGovernment of Zambia to assist with the rehabilitation/investment programof Zambia Railways.

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ANNEX 1Page 1

ZAMBIA

RAILWAY PROJECT

Past Bank Group Financed TransportProjects in Zambia

Credit/Loan Year Amount Scope Status(US$ million)

1. Loan 74-ZA 1953 14.0 Locomotives, Satisfactorilyrolling stock, completed.workshop and trackimprovement.

2. Loan 197-ZA 1958 9.5 Locomotives, Satisfactorilyrolling stock, completed.workshop equipmentand track materials.

3. Loan 469-ZA 1966 17.5 Reconstruction and Satisfactorilybituminous paving completed onof sections of the time.Great East Road(251 miles) andGreat North Road(122 miles) andconsultant servicesfor detailed engineer-ing and supervisionof construction.

4. Loan 563-ZA 1968 10.7 Reconstruction to Satisfactorilytwo-lane bituminous completed onpaved standard of time.one section of theGreat North Road(235 miles); threeweighbridges on theGreat North Road;and consultantservices for de-tailed engineeringand supervision ofconstruction.

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ANNEX 1Page 2

5. Credit 1978 11.25 Improvement of Loan/Credit1566-ZA and and maintenance of the became effectiveLoan 798-ZA 11.25 primary and second- in May 1978.

ary road network; apilot rural roadmaintenance program;a feasibility study,and, if justified,detailed engineeringof the Mansa-kawambwa-Nchelenge road(240 km) or such otherroad(s) as may beagreed; and technicalassistance for opera-tions and training.

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ANNEX 2

ZAMBIA

RAILWAY PROJECT

Related Documents and Data Availablein Project File

1. General information for the appraisal prepared by Zambia Railways.

2. Zambia Railways' Investment Plan for 1979-1983.

3. Summary of Zambia Railways' operating statistics.

4. Details of Zambia Railways' fleet of locomotives and rolling stock.

5. Estimate of Zambia Railways' locomotive and wagon requirements.

6. Zambia Railways' annual reports.

7. Computer runs on the economic return.

8. Computer runs on the financial evaluation.

9. Computer runs on the financial return.

10. Zambia Railways' Marketing Report, August 1977.

11. Draft Final Report on the Assessment of Canadian Technical Assistanceto Zambia Railways, W.B. Jackson and Associates, October 1977.

12. Preliminary Report on above, March 1977.

April 1979

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