Document of The World Bank FOR OFFICIAL USE ONLY Report No: 16061 PROJECT COMPLETION NOTE FORMER SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA SEVENTH RAILWAY PROJECT (LOAN 3068 - YU) October 22, 1996 Energy, Environment and Transport Division Country Department II Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be disclosed without World Bank authorization. Currency Equivalent Currency Unit = Yugoslav Dinar (Din) Exchange US$1.00 = 13.8 Din (1991) WEIGHTS AND MEASURES Metric System FISCAL YEAR OF THE GOVERNMENT OF FORMER SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA January 1 - December 31 ABBREVIATIONS PCN - Project Completion Note RTE - Railway Transport Enterprise SFRY - Socialist Federal Republic of Yugoslavia FOR OFFICIAL USE ONLY PROJECT COMPLETION NOTE FORMER SOCIALIST FEDERAL REPUBLIC OF YUGOSLAVIA SEVENTH RAILWAY PROJECT (LOAN 3068 - YU) This is the Project Completion Note (PCN) on Former Socialist Federal Republic of Yugoslavia - Seventh Railway Project (Loan 3068 - YU). It was prepared by Peter Parker and reviewed by Messrs. Christian Duvigneau, Acting Chief (EC2ET) and Franz Kaps, Acting Director (EC2DR). This Note is in lieu of an Implementation Completion Report because the loans were lapsed prior to effectiveness. It is based on internal Bank memoranda, supervision reports and direct knowledge of the project. A. Background. Objectives and Description 1. The Seventh Railway Project was appraised April 26, 1989 with a view to supporting the ongoing economic reform program of the former Socialist Federal Republic of Yugoslavia (SFRY). The Project was an integral part of the Bank's development strategy for the transport sector, focusing on improving the efficiency and financial position of some of the largest public enterprises in the country. Key objectives of the Project were to support the new momentum for reform within the railway sector, reduce operating costs and increase operating efficiency, assist the railways to compete more effectively for traffic, increase locomotive availability and improve the railways' financial position. 2. The Loans were granted to four Railway Transport Enterprises (RTEs) with the guarantee of the SFRY as follows: Belgrade - $59 million, Ljubljana - $31.9 million, Novi Sad - $14.6 million, and Zagreb - $32.5 million. The project comprised the investment plans of the four RTEs, which operated 85% of the country's main trunk line. The Project was estimated to cost $907.1 million of which $138 million would be financed by the Bank loans under the Project, $7.0 million from the Sixth Railway Project, $626.4 million from local sources and $135.7 million in anticipated co-financing. The Bank loans were to cover the foreign exchange components of selected high priority investments - mainly materials and equipment, and the cost of technical assistance and training 3. The investment plans included track renewal, reconstruction of line sections, improvement of stations and junctions, change of the electric system on a line section, modernization of signaling and telecommunications equipment, installation of an information system, provision of traction and rolling stock, track maintenance equipment, locomotive spare parts and technical assistance. The investment plans were estimated to be sound at the time; in particular, each major investment item was estimated to have an This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherise be disclosed wiLhout World Bank authorization. economic return grater than 12%, to be covered by a satisfactory financing plan, and was within the implementation capability of the concerned RTE. A Project Action Plan was agreed at Negotiations covering specific measures for improving the productivity and efficiency of the existing railway system. C. Major Factors 4. The four Loans were approved on May 23, 1989 and the loan documents were signed on November 13, 1990. The delay in signature of the Loan documents was due primarily to a reorganization of the banking system which made it difficult to obtain local bank guarantees, a change in the law on railway subsidies, and the reorganization of the railways in Serbia. Due primarily to delays resulting from the deteriorating political situation, the terminal dates of effectiveness were extended twice to February 28, 1992. 5. Rail freight traffic fell about 20% in Slovenia and 40% throughout SFRY between its peak in the mid-1980s and the first half of 1991. Rail passenger traffic fell 40- 50% during the same period. Traffic then fell even more sharply following the approach and the start of war. Partly as a result, the RTEs' financial performance deteriorated. During the first nine months of 1991, RTEs Belgrade (including Novi Sad) and Zagreb achieved operating ratios excluding compensation of 180 and 217 respectively, while RTE Ljubljana achieved an operating ratio of 182 in 1990. This compares with appraisal targets of 110 ( RTE Ljubljana 98) from 1991 onwards. The RTEs submitted action plans to improve their financial performance before the outbreak of the war, which were satisfactory in the case of RTE Ljubljana, incomplete in the case RTE Zagreb. and unsatisfactory in the case of RTE Belgrade. 6. The Bank then concluded that the objectives of the project could not be achieved: * A principal objective was to assist the railways to compete for international traffic by making coordinated investments and operating improvements on the main trunk line, and by extending a common rail operating information system throughout SFRY. The breakup of the country made it difficult to achieve this technological unification. * A second objective was to improve the railways financial performance. The RTEs financial performance continued to deteriorate, the ability to generate counterpart funds became doubtful, and the situation was not expected to improve soon. 7. The Bank wrote to the Borrowers on February 28, 1992, noting that in the immediate future the Railways would need to concentrate on organizing their traffic interchanges and collaboration on an international basis, establish their new organizational structures, repair war damage and survive financially. The Bank expressed its readiness to help the railways in this endeavor, but pointed out that it would be entirely different from the one appraised under the Seventh Railway Project, and called for a fresh start. The letter then stated that in accordance with the provisions of Section 12.04 of the General Conditions, therefore, the Loan and Guarantee Agreements for the Seventh Railway Project had lapsed as of February 28, 1992. The borrowers were not required to pay commitment charges on their Loans. C. Lessons Learned 8. The outbreak of the war, and consequent inability to achieve project objectives, could not have been anticipated at the time of project approval. n:\pp\yug\2rail icn.doc u  MI RpERAPHiC Report No: 16OA Tvne: "CNN