Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. 2552 PROJECT PERFORMANCE AUDIT REPORT SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) June 19, 1979 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - i - FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) Table of Contents Page No. PREFACE iii PROJECT PERFORMANCE AUDIT BASIC DATA SHEET iv HIGHLIGHTS v PROJECT PERFORMANCE AUDIT MEMORANDUM I. Introduction 1 II. Project Results 1 III. Issues 5 IV. Conclusions 8 Annexes 1. RENFE: Estimated (1971-76) and Actual (1971-77) Revenues, Expenses, and Net Income 10 2. RENFE: Passenger Traffic 1971-1977 11 3. RENFE: Actual Traffic by Commodity - 1971-1977 12 4. RENFE: Staffing and Salaries 13 5. Borrower's Comments 14-16 ATTACHMENT: PROJECT COMPLETION REPORT I. Introduction 17 II. Project Preparation and Appraisal 19 III. Project Implementation and Cost 19 IV. Traffic and Operations 21 V. Financial Performance of the Borrower 24 VI. Institutional Development 26 VII. Economic Reevaluation 29 VIII. The Role of the Bank 31 Tables 1. Studies Carried out or Underway by the Consejo Superior de Transportes Terrestres 33 2. RENFE Investments 1972-1975 34 3. Execution of RENFE Plan for 1972-75 35 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Page No. 4. RENFE: Actual Traffic by Commodity - 1971-1975 36 5. RENFE: TECO Container Network Statistics 37 6. RENFE: Passenger Traffic 1971-1975 38 7. RENFE: Key Indicators 39 8. RENFE: Operating Statistics 40 9. RENFE: Motive Power and Rolling Stock 41 10. RENFE: Income Statement - 1974 and 1975 42 11. RENFE: Estimated (1971-79) and Actual (1971-75) Revenues, Expenses, and Net Income 43 12. RENFE: Staffing and Salaries 44 13. RENFE: Overall View of Estimated and Actual Financial Evolution 45 14. Forecast and Actual Balance Sheets: December 31, 1971-75 46 15. Passenger Train Accidents 47 Annexes 1. Status of Commitments 48 2. Draft Letter to RENFE (page 1) (page 2) 49-50 3. Draft Letter to Consejo Superior de Transportes Terrestres 51 4. Objectives of the 1972-1975 RENFE Plan 52-54 5. Economics of Track Renewal 55-58 Figure 1: RENFE Organization Chart 59 Maps - iii - PROJECT PERFORMANCE AUDIT REPORT SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) Preface This report presents a performance audit of the Spain Third Railway Project for which Loan 772-SP for US$90 million equivalent was closed fully disbursed in August 1976. It consists of a memorandum pre- pared by the Operations Evaluation Department (OED) and a Project Com- pletion Report (PCR) prepared by the Bank's Europe, Middle East and North Africa Regional Office. OED has reviewed the PCR against the Appraisal and President's Reports, the Minutes of the Executive Directors' meeting which considered the project, and has discussed the project with Bank staff. Moreover, ad- ditional information,provided by the Borrower covering the period since the preparation of the PCR in December 1976 was reviewed and reflected in the audit memorandum. The Borrower also sent written comments on the an- dit, which are reflected in the audit memorandum and attached as Annex 5. While agreeing with the main conclusions of the audit, the Borrower, in his comments, pointed out the forces beyond his control which contributed to the Railway's financial deterioration, the efforts he made to contain costs, and the difficulty of making quantitative assessment of economic benefits of track renewal. Finally, the Borrower informed the audit of the compact he entered into with the Government recently, which, he be- lieves, would provide an improved basis for railway operation and plan- ning as well as for more efficient transport policy for the Government. OED gratefully acknowledges the cooperation of the Borrower. On the above basis, the audit finds that the PCR covers rea- sonably well the experience with, and the issues arising from, the proj- ect execution. The audit points out, however, the insufficient treatment in the PCR of the technical aspects of the project and the economics of track upgrading. It also discusses in some detail the inadequate super- vision of the project and the question of a continued limited supervision of the Borrower's operation after project completion.  PROJECT PERFORMANCE AUDIT BASIC DATA SHEET SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ Million) 519.1 646.0 Overrun (%) 24.4 Loan Amount (US$ Million) 90.0 90.0 Disbursed ) 90.0 Rena ed as of 12/31/78 2.0 Borrower's Obligation ) 89.0 1/ Date Physical Components Completed 6/74 8/76 Proportion Completed by above Date 2/ 1002 3/ Proportion of Time Overrun 72% Economic Rate of Return (%) 14.4 12.0 Financial Performance Poor Institutional Performance Satisfactory Cumulative Estimaged and Actual Disbursements US Million) FY72 FY73 FY74 FY75 FY76 FY77 (i) Estimated 20.7 57.2 90.0 90.0 90.0 90.0 (ii) Actual 1.3 18.8 69.0 82.8 89.8 90.0 % of (ii) to (i) 6.3 32.9 76.7 92.0 99.8 100.0 OTHER PROJECT DATA Original Actual or Item Plan Current Estimate First Mention in Files of Timetable Negotiations 3/71 5/ -/71 Board Approval 5/71 6/29/71 Loan Agreement 6/71 6/30/71 Effectiveness 11/01/71 12/29/71 Closing Date 6/30/74 8/05/76 Borrower Red Nacional de los Ferrocarriles Espanoles (RENFE) Executing Agency Same Fiscal Year of Borrower January 1 - December 31 Follow-on Project None MISSION DATA Month/ No. of No. of Date of Item Year Weeks Persons Man-Weeks Report Appraisal 11/70 4 4 16 12/29/70 Supervision I 3/72 1 1 1 4/07/72 Supervision II 4/72 3 3 9 6/28/72 Supervision III 10/72 1 1 1 12/05/72 Supervision IV 6/73 2 2 4 8/09/73 Supervision V 9/74 2 2 4 11/09/74 Supervision VI 9/75 2 2 4 11/12/75 Completion 5/76 2 2 4 12/13/76 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Pesetas (Ptas) Appraisal Year Average (1970) Exchange Rate: US$1 - 70.000 Intervening Years' Average 1971 US$1 = 69.516 1972 US$1 - 64.273 1973 US$1 - 58.243 1974 US$1 = 57.688 1975 US$1 - 57.407 Completion 1976 US$1 - 66.903 1/ Including US$11.0 million for exchange adjustment. 2/ Estimate not available. 3/ Estimate. See the qualification made to this estimate in para. 15.  -v - PROJECT PERFORMANCE AUDIT REPORT SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) Highlights Loan 772-SP, the Third Railway Project in Spain, was a part of the Bank's continuing effort to help modernize the RENFE's physical as- sets as well as its mode of operation. Specifically, the loan of US$90 million equivalent was to support the first three-year program of RENFE's 1971-75 Plan for capital investment which was estimated to cost about US$519 million. The project had two principal objectives: to achieve and maintain financial viability for RENFE and to improve the Government's organization for comprehensive planning for the transportation sector (para. 5). The project was completed in August 1976, 26 months behind the appraisal schedule, representing 72% delay in time, with a cost overrun of about 25% (para. 4). The financial targets were not achieved (paras 6-8) and the efforts to rationalize railway operation and to improve the Govern- ment's overall transport planning produced somewhat mixed results (paras 9-12). The reestimated economic rate of return is 12% against the appraisal estimate of 14.4% (para. 13). The following points may be of particular interest: - deterioration in RENFE's financial conditions (paras 6-8); - change in project definition during project execution (paras 14-15); - lack of operational targets in project formula- tion (paras 16-17); - need for economic evaluation of expenditures on track renewal (paras 18-20); and - the question of Bank supervision of projects after the completion of their physical com- ponents (paras 22-23).  PROJECT PERFORMANCE AUDIT MEMORANDUM SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) I. Introduction 1. The Third Railway Project for Spain (Loan 772-SP) was a part of the Bank's continuing effort to help modernize the RENFE's physical assets as well as its mode of operation, thereby improving both its oper- ational efficiency and financial condition. In view of this continuing nature of Bank efforts, the Project Performance Audit Report dated Jan- uary 15, 1975 (SecM75-23) reviewed all three of the Bank-financed rail- way projects in Spain - the First Project (Loan 387-SP), the Second (Loan 507-SP) and the Third (Loan 772-SP) while the last named project was still being implemented. The PPAR concluded that, on the whole, the RENFE's Modernization Program, which was supported by the three loans totalling US$205 million, "has succeeded in transforming RENFE from an antiquated enterprise into a modern company. The positive effects are reflected not only in RENFE's operational efficiency, but also in the attitude of its management and a large proportion of its staff, who consider RENFE an un- dertaking operating in a competitive environment that must show a profit, and be efficient". The PPAR also commented, among other things, that per- haps more.emphasis should have been put on the technical aspects of rail- way operation, and that the size of the track renewal program may have been larger than needed. 2. The Regional Projects Department prepared a Project Completion Report on the Third Project (Loan 772-SP) in December 1976, which showed a somewhat somber picture of operational and financial results, mainly due to an economic downturn in Spain in recent years. The PCR, however, con- tained some upbeat notes on the operational and financial prospects of RENFE for the years 1977, 1978 and beyond. Partly for this reason, OED's performance audit of this project has been postponed until now to avoid letting what might have been temporary adversities unduly influence the evaluation of RENFE's performance. Unfortunately, the information recently received from RENFE indicates further deteriorations in its operational and financial conditions, instead of any improvement as hoped for in the PCR. 3. This memorandum summarizes the findings of the PCR and reviews the developments since its preparation in 1976. This is then followed by discussions on a few issues arising from this audit - (a) the definition of the project, (b) the relationship between financial targets and opera- tional improvements, (c) track improvement investments and their economic return, and (d) the question of continued supervision of the project after its physical components are completed. II. Project Results 4. The physical and institutional components of the project have been completed and the loan was fully disbursed in August 1976, which was 26 months behind the appraisal schedule, with.a cost overrun of about 25%. - 2 - The cost overrun as well as execution delays are only approximate esti- mates as changes in project definition during the project period render it difficult to make a precise comparison (see Issues). 5. The project had two principal objectives: to achieve and main- tain financial viability for RENFE and to improve the Government organiza- tion for comprehensive planning for the transportation sector. For vari- ous reasons (discussed below), the financial targets were not achieved. Measures to improve Government organizations have been taken, but their impact on improved transport coordination is somewhat mixed. Financial Targets 6. The PCR (Chapter V, Financial Performance) shows a generally unfavorable financial picture of RENFE operations up to 1975, the latest year for which actual data were available at the time it was prepared. The increases in costs were about three times as fast as those of the revenues between 1974 and 1975 (35% vs. 13%) producing a net deficit for 1975 of 12.2 billion pesetas instead of the appraisal forecast of a sur- plus of 1.7 billion pesetas. As a result, both the operating and working ratios deteriorated to 135 and 121, respectively, over the appraisal ex- pectation of 100 and 80. The PCR, however, noted RENFE's official fore- cast at that time, which suggested that the working ratio, for example, would improve to below 100 by 1978, assuming steady recovery of the na- tional economy. These expectations have so far not been realized accord- ing to the latest information (Annex 1). Instead, according to the infor- mation given to the audit by RENFE, the net loss increased to 30.2 billion pesetas by 1977, the latest year for which actual data are available, and the operating and working ratios further deteriorated to 149 and 137, respectively. 7. RENFE appears to ascribe its financial difficulties partly to its relationship with the State.l/ While the Government permitted a num- ber of upward adjustments of tariff, the revenue per traffic unit in real terms appeared to have declined between 1971 and 1977. In any event, these Government-approved tariff adjustments were not sufficient to make up for the inflation. Moreover, the personnel cost, which accounts for some two- thirds of the total operating expenses, went up in real terms through size- able wage and salary increases. Whether, if given freedom, RENFE could im- plement tariff increases sufficient to cover the rising cost is not at all 1/ RENFE informs the audit that, in order to streamline its relationship with the State and also to assure its financial viability, it has en- tered into a compact with the Government in 1979. The agreement, de- signated as Contract-Program (Contrato-Programa), is a renewable an- nual exercise, in which actions and programs that exceed such a time scope can be dealt with, thereby providing a latitude for long-term planning. Under the Contract-Program, the State and RENFE would agree on such basic issues as the way to take into consideration the fluctua- tions in economic conditions in judging RENFE's performance, transpor- tation coordination and tariff policy, and phasing out of uneconomic lines and services, etc. -3- clear. RENFE, in fact, says that any substantially higher tariffs over the present level would cause a large diversion of traffic to road; it also recognizes that the railway tariff increases during the past few years were greater than those for road as well as air transport. Through a Government policy, RENFE is presently subsidized by a road tax, which accounts for about 5% of its total revenue (see para. 12). Whether road transport is more subsidized than RENFE after paying the road tax is not clear. 8. A part of the reason for the unfavorable financial results was that the freight traffic did not increase as projected although passenger traffic slightly surpassed the projected level (Annex 2). The commercial freight traffic fell from the 1974 level of 11.5 billion ton-km to the level of about 9.8 billion ton-km in 1975 and 1976, and there vas only about 5% growth between 1976 and 1977 at 10.4 billion ton-km, still more than 1 billion ton-km below the 1974 level (see Annex 3). On the cost side, the personnel cost, the largest item of expense, jumped by 81% from 26.6 billion pesetas in 1975 to 48.4 billion pesetas in 1977 (Annex 1). A loan covenant specified that the size of the staff should be reduced from 85,000 in 1970 to 65,300 by 1975. This target has not been realized; RENFE was able to reduce the staff to 72,000 by 1976, which was the lowest point ever reached (see Annex 4). Then, there was a slight increase in staff in 1977. The major factor for the increase in staff cost, however, was the above-mentioned increases in wages. The PCR noted a 21% increase in personnel cost between 1974 and 1973 but, as noted above, it nearly doubled between 1975 and 1977.1/ Materials expense also rose by about 65% during the same period which is substantially more than the general inflation rate. The project investments were to improve the productivity of RENFE so that a financial equilibrium would be reached by 1975. But these rapid increases in cost seem to suggest that the productivity gains were not substantial or were offset by the managerial inability to reap the benefits of productivity gains, e.g., the non-achievement of staff re- duction target.2/ The relationship between productivity gains and finan- cial results will be considered under Issues. Institution-Building for Transport Planning 9. The project achieved fairly successful results in strengthening and reorganizing the RENFE management into what is called a system of "Management by Objectives" and in making RENFE operations more commer- cially oriented (see PCR, Chapter VI, Institutional Development, and An- nex 4), and also in strengthening the Government's transport planning ca- pacity. However, some of the major tasks assigned to these agencies for im- proved transport coordination and operation are progressing only slowly. 1/ Using 1969 as base year, the RENFE's wage index went up to 496 in 1977 while the cost of living index in Spain rose only to 286. 2/ RENFE comments that the problem of work stoppage (paro) and the change in political conditions in the country make staff reduction difficult. However, RENFE continues, considerable results have been achieved from other actions to cut costs, such as reduction in overtime. 10. The Loan Agreement required RENFE to study 55 low density traf- fic lines (some 4,000 km) and take measures to close unprofitable lines unless the Government undertook to subsidize RENFE for the continued oper- ation of these lines. At the time of PCR preparation in 1976, only 155 km of lines were abandoned and on 314 km of lines either passenger or freight service was discontinued, with no studies under execution on some 1,600 km. By October 1978, all 55 lines had been studied to varying degrees and a to- tal of about 700 km of lines were abandoned and passenger or freight ser- vices were discontinued on 561 km. RENFE, however, intends to carry out additional studies on those lines on which it has not made a final deci- sion as to the nature of recommendations it would make to the Government; it intends to carry out additional studies with, among other things, the external benefits, alternative costs for the community, and avoidable in- vestment cost in mind. 11. One of the major objectives of the project was, in addition to improvement of the organization and management of RENFE itself, to streng- then the Government's capacity to coordinate investments in the transport sector and to formulate an adequate transport policy. This was done by means of strengthening and broadening the functions of the Superior Coun- cil of Land Transport (CSTT), which was established under the First Railway Project (Loan 387-SP), to formulate and implement transport coordination measures, mainly concerning roads and rails. CSTT's functions were fur- ther broadened by the Royal Decree of March 30, 1978 which expanded its responsibility to cover air and sea transport as well as some responsi- bility for the communication sector in addition to the previous authority over land transport. The agency was consequently renamed as the Transport and Communication Study Institute (IETC). 12. One of the priority tasks for IETC was to formulate measures to replace the existing taxes on public road transport on routes parallel to railway lines called "Canon de Coindicencia" (a 1947 law), the proceeds of which are turned over to RENFE. A draft bill for road user taxes which would abolish this cross-subsidization was prepared by IETC and was sent to Parliament for legislation in January 1977. The latest communication from IETC indicates that this bill has not yet been discussed by the Parliament. Re-estimated Economic Return 13. The Appraisal Report indicated rates of return ranging between 12% and 24% for various components of the project with a weighted average return of 14.4%. The PCR indicates re-estimated returns of 10% on electri- fication, which is lower than the appraisal estimate due both to the higher cost and slower growth of traffic, and 25%-30% for dieselization, which is higher than the appraisal estimate due to oil price increases. The weighted average return for these two items is shown to be 12%. The Appraisal Re- port gave 12%-17% estimated return for track renewal, but the PCR suggests that a meaningful calculation of the rate of return is not possible for track renewal because of the difficulty of isolating track renewal cost from maintenance expenditure. This question is discussed under Issues. -5- III. Issues The Definition of the Project 14. Loan 772-SP (of US$90 million to finance specified items) was to support the first three-year program of RENFE's 1971-75 Plan for capital investments estimated to cost about US$519 million, and this part of the Plan was defined as the project. The Five-Year Plan, 1971-75, was to cost 66 billion pesetas (US$940 million equivalent). This plan was reviewed by Bank staff and an enactment of legislation incorporating the Plan was a condition of loan effectiveness. It was further agreed that no important changes in the Plan would be made without the agreement of the Bank. 15. According to the PCR, however, RENFE later prepared a Four-Year Plan for 1972-75 which was to cost over 69 billion pesetas, and this be- came the framework of their investment program replacing the Five-Year Plan. The major change in this new plan from the old one appears to be the increase in electrification of lines from 3.4 billion pesetas to 13.4 billion pesetas. However, there is no information either in the PCR or Bank files with which to check the details of the change between the two Plans. Whether this change in the investment program was discussed and agreed with the Bank is not clear. The PCR (p. 15) says that "there were changes which RENFE made in its investment program which the Bank either did not question or did not make an issue about", adding that "these chan- ges do not appear to have had an adverse impact on RENFE". The PCR explains this omission in the supervision process by the light supervision which the Bank carried out on this project "because RENFE had by the time of their Third Project displayed a great deal of institutional maturity and sophis- tication". Even if a very close supervision may not have been considered necessary in the case of RENFE, it is not clear how one can justify the neglect of consultation on the major changes in the investment program. Such a consultation to agree on a revised project is necessary both to de- termine the soundness of such changes and to maintain an agreed framework of project supervision. This is so especially in light of the PCR state- ment that the changes in the objectives of the Plan are partly responsible for the shortfalls in achieving the goals in 15 of the 18 targets of the Plan. In the absence of such an agreement, it is not possible to compare the actual performance of the project with the appraisal expectation (PCR, p. 3). The comparison made in the PCR between "the proposals and achieve- ments" under the Four-Year Plan therefore provides only an indirect, and often inadequate, basis to judge the extent of achievement of the original objectives set out under the agreed Five-Year Plan. Financial Goals and Operational Targets 16. The PCR suggests (p. 8) that, contrary to what was pointed out in the previous PPAR, the emphasis put on financial goals over the tech- nical aspects of RENFE.operations in the formulation of the project is shown to be justified by the events that have transpired since then, i.e., the economic recession and the consequent traffic decline which were re- sponsible for the unsatisfactory financial results in recent years. This - 6 - audit holds the view that the very aim of financial improvement can better be served by giving equal, if not more, emphasis on technical aspects of railway operations. For realizing a sound financial position of a rail- way depends on both improved operational efficiency and appropriate finan- cial policies, e.g., timely adjustments of tariff rates. In view of this, with hindsight, it appears to have been an important shortcoming in the project formulation not to have agreed with the Borrower on specific opera- tional targets such as car turnaround time, train loads, operating speeds or equipment utilization factors (PCR, p. 7). Using such agreed targets as a goal, improvements in RENFE's productivity should have been more closely monitored during project supervision. 17. The Appraisal Report indicates that one of the objectives of RENFE's 1971-75 Investment Plan was "to improve productivity by an average of 10.4% per year" (para. 5.02) which was considered realistic (para. 5.13) and that the weighted average economic rate of return on the project - which consisted of operating cost savings and improved utilization of equipment - is more than 14%. These indicated rates are potential bene- fits from the project investments which could be realized if a realistic program to achieve the projected productivity increase utilizing these in- vestments is prepared and implemented. (Investments by themselves may not bring about the hoped-for benefits; coupled with a realistic action program which is judiciously implemented, they may result in economic as well as financial benefits.) In any event, in addition to the changes in the de- finition of the Investment Plan which were discussed above, the lack of agreed operational targets would have made a close review of RENFE perfor- mance by Bank supervision missions difficult even if it was attempted. As a result, instead of giving emphasis on reducing costs through operational improvements, remedial measures to financial deficit appear to have been sought primarily through increases in tariffs. This is not to argue that the need for tariff increases may be ignored in the face of increasing labor cost and high inflation; it is to point out what appears to have been a re- lative neglect of close monitoring of the technical possibilities of cost reduction which might have, to some extent, helped contain the rise in the amounts of deficits. Economics of Track Renewal 18. For the period 1972-75, the RENFE plan for track renewal was to relay about 5,000 km of rails, much of it replacing the existing lighter rail of 45 kg/m with 54 kg/m, at a cost of about 20.3 billion pesetas. The actual achievement was to renew the tracks for about 2,400 km, less than one-half of the planned volume of work, at a cost of about 26.0 bil- lion pesetas. This means that the unit cost of track laying was more than doubled. The main reason for this appears to have been the considerable improvements that had to be made to the substructure and realignments of lines, the need for which was not fully appreciated at the time the Invest- ment Plan was prepared (Supervision Report, June 28, 1972, para. 4.01). Both relaying the track with the heavier rails and the structural and re- alignment works were needed to allow for the train speeds up to 140 km/ hour. The Appraisal Report foresaw the need for such a speed for passenger - 7 - trains on the main network; whether similar speeds were considered neces- sary for freight trains is not clear. In any event, the case for the high cost track investment would not be strengthened by an argument for the very high speed level for freight trains, which generally is not required. 19. The Appraisal Report suggested a range of economic rates of re- turn on the track investment of 12% to 17% based on the following types of benefits: reduced track and rolling stock maintenance, improved safety of operations, higher speeds, and reduced fuel consumption. It would have been desirable to know whether the more substantial track improvement than originally planned is still justified by comparing the actual cost and estimated benefits from the larger investment. The PCR, however, does not present a re-estimated rate of return, citing the difficulty of iso- lating track capital improvement costs from maintenance expenditures; in- stead, it endorses RENFE's practice of basing track upgrading dacisions on its "Manuals of Standard Practice of Track Maintenance" which, it says, "are based on accumulated data in RENFE's engineering departments". Con- ceivably, RENFE's "Manual" is a suitable shorthand method for determining merits of certain types of investment. Yet, when the matter to be decided is a major question of whether or not the more than doubling of the cost of work that amounts to some US$300 million equivalent and accounts for nearly 40% of the project costs should be accepted, some more detailed analysis than the "Manual" is clearly called for, e.g., a comparison of the benefits from the higher train speed and the increased cost of invest- ment. This is not to say that very accurate quantifications are possible in all cases; it is only to say that some objectively acceptable analysis of track upgrading is needed. A review has recently been made by the Bank's Central Projects Staff on the methods of economic evaluation of rail track renewal and upgrading as well as other railway investment. 20. In order to justify the application of its rules in investment decisions, a "Manual" has to be an embodiment of the results of such an analysis; it should not be a substitute for the latter. It is therefore difficult to argue, as does the PCR, that economic analysis is not possible but a "Manual" - or "rule-of-thumb" - can be relied on as an adequate basis for investment decisions. 21. The PPAR dated January 15, 1975 showed a rather low (6%) rate of return for the track program in the First and Second Projects. In the absence of the analysis suggested above, there is no basis to assume that the return on the track investment under the Third Project is any higher. Supervision after Project Completion 22. Although the loan is completely disbursed and the project com- pleted, the PCR suggests that, in view of the financially very precarious condition of RENFE, "it would appear to be desirable for the Bank to con- tinue with limited supervision of RENFE to assist them in developing a strategy to return them to financial viability" (p. 2). No action was taken on this suggestion. - 8 - 23. The case for limited supervision of RENFE might have merited more serious consideration by the Bank than appears to have been given, and the audit understands that RENFE welcomed such an initiative on the part of the Bank staff. The physical construction work, upon the comple- tion of which project supervision normally stops, is not an entire proj- ect; Bank projects almost always include the so-called "soft-ware" com- ponents, e.g., institutional development objectives, which are not neces- sarily "completed" when physical construction work is over. Also, the fact that a country passes through the threshold of the national income level of developed countries as did Spain recently, may not mean that, starting from that point of time, its institutions which have been receiv- ing the Bank's help find no need for further assistance. The Bank's pol- icy on supervision after project completion is clearly stated in the Opera- tional Manual Statement (No. 3.50 - Project Supervision).l/ IV. Conclusions 24. The Third Railway Project made a substantial contribution to strengthening RENFE operations, which was the Bank's continuous effort begun with its First Project in 1964. The "Management by Objectives" approach was initiated under the project, which, although it did not ac- complish all the objectives - indeed in a number of cases, the accomplish- ment fell far short of the target - has introduced a rational management method to RENFE. The project also contributed to institutional develop- ment both within RENFE and on national Government level. However, the fruits of the institutional improvements have been slow to materialize - actions on non-economic lines and on the archaic institution of cross- subsidization between highway and railway transportation (Canon de Co- incidencia) have not yet been fully carried out. 25. The Bank did not supervise the project closely. As a result, a major revision of project definition did not appear to have been dis- cussed and agreed with the Borrower. There is a doubt as to the justi- fication of some of the changes, such as the much larger investment in electrification and the substantially heavier work involved in track upgrading. 26. Much of the cost reducing effects of the project appears to have been lost due to the inability to reduce staff following the target set at loan negotiations. Due partly to this and partly to external circumstan- ces, the railway's financial conditions continued to deteriorate to this day. It is difficult to determine whether the possible benefits of the 1/ Both the Region and Central Projects Staff feel that the Bank could not afford to make staff input for post project supervision, nor would such supervision prove effective in influencing the Borrower's policies. This audit does not necessarily disagree with these views. The sug- gestion was not to undertake post project supervision but, in light of the established policy for such an undertaking, the PCR's suggestion for post project supervision (para. 22) should have been carefully con- sidered even if the Bank in the end decided against it. The audit's re- view of files and discussions with projects staff did not produce evi- dence that the decision to reject the suggestion was made deliberately. -9- project had been fully realized as there was no realistic program to achieve the hoped-for productivity increase, i.e., specific operational targets. The ten objectives for the 1972-1975 Plan were too broad and, in some ca- ses, unrealistic to be used as targets for productivity improvement. 27. The suggestion to continue with limited supervision of RENFE in light of its precarious financial situation was not acted upon. How strong the RENFE's case for continued Bank supervision is cannot be determined based on this audit's limited knowledge of RENFE's managerial capability, although RENFE's apparent desire to continue to receive Bank advice seems to be an indication that the case merits consideration. PROJICT PERFORMAME U0IT IjW"Uj( SPAIN THIRD RAILWAY PW:MCT (LON 772-SP) SIM: ESTIMATED (1971-76) AND ACTUAL (1971-77) REVENUES, EXPENSES. M W INCOME (Million pesetas) 1971 1972 1973 1974 1975 1976 1977 Ap2r. Actual Ap. Actual Ar. Actual Ar. Actul f . Actual A . Actual Actual Operating Revenues Passenger 9410 9078 10070 10008 10340 12200 10610 12613 1080 14382 11130 18357 21422 Freight 9010 8773 9740 9841 10190 11681 10930 14049 11500 14553 11800 18830 23404 Miscellaneous: Mail 380 903 940 943 990 1020 1030 1101 1070 1226 1100 1836 2270 Canon de Coincidentia 1610 1550 2170 1902 2370 2163 2580 2296 276 2596 2990 2536 2070 Other 1140 1530 1520 1846 1730 1601 1790 3572 150 5304 1970 6130 7383 Total Miscellaneous 3630 3983 4630 4691 5090 4784 5400 6969 5700 9126 6Q60 10502 11723 Total Operating Revenues 26050 21834 24440 24540 25620 28665 26940 33631 28080 38061 28990 47689 56549 Operating Expenses Personnel 14910 14690 15340 16188 14500 17830 13650 21944 12890 26618 12890 36054 48367 Power 1920 1991 1880 2058 1860 2263 1890 3235 1910 3566 1940 4116 4454 Other 5870 4626 5520 4789 5450 5558 5390 6586 5360 12615 5300 16924 21928 Total Operating Expenses (excluding depT#ctption) 22700 21307 22740 23035 21810 25651 20930 31765 20160 42799 20130 57094 74749 Net Cash Operating Revenues (650) 527 1700 1505 3810 3014 6010 1866 7920 (4738) (8860) (9405) (18200) (deficit) Interest 750 693 730 752 950 1025 1100 1761 1190 2485 1200 3521 5610 Net Cash Income (Loss) (1400) (166) 970 753 2860 1989 4910 105 6730 (7223) (7660) (12926) (23810) Depreciation Expense 3850 3130 4070 3860 4370 4410 4680 4532 5040 4999 5450 5682 6385 Net Income (Loss) (5250) (3296) (3100) (3107) (1510) (2421) 230 (4427) 1690 (12222) (2210) (18608) (30195) '1 Ratios- Operati /2 (%) 130 120 120 119 113 113 105 116 100 135 98 139 149 Working (%) 111 105 102 102 94 97 86 101 80 121 77 126 137 Return on Average Net Fixed Assets in Use (%) -7.3 -5.0 -5.0 -4.6 -3.0 -3.3 -1.2 -4.2 0.1 -9.3 0.4 /1 Without taking into account the revenue from the Canon de Coincidencia. /2 Defined as the rat o of total operating expenses to total operating revenue (including depreciation). /3 Defined as the ratto if total operating expenses to total operating revenue (excluding depreciation). /4 Net income (loss) (before charging interest and excluding Canon de Coincidencia) as percentage of average net fixed assets in use (See table 14 for years 1971 to 1975; later years estimated as follows, in pesetas billionso 1976: 143.0; 1977: 157.0; 1979: 170.0; 1980: 185.0). Source: Appraisal estimates 1971-1976, Appraisal Report PTR-89 (Loan 772-SP). Actuals - RENFE. - 11 - ANNEX 2 PROJECT PERFORMANCE AUDIT MEMORANDUM SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) RENFE: Passenger Traffic 1971-1977 Passengers Passenger-Kilometers (Million) (Billion) Appraisal Actual Actual Forecast % Actual/Forecast 1971 166 13.47 13.34 101 1972 178 14.39 13.68 105 1973 193 15.64 14.02 112 1974 199 16.08 14.36 112 1975 200 16.15 14.69 110 1976 206 16.69 16.36 102 1977 212 17.16 16.70 103 Source: Appraisal Report and RENFE - 12 - ANNEX 3 PROJECT PERFORMANCE AUDIT MEMORANDUM SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) RENFE: Actual Traffic by Commodity - 1971-1977 (Million Net Ton-Km) 1971 1972 1973 1974 1975 1976 1977 Petroleum Products 1,305 1,453 1,587 1,684 1,501 1,436 1,440 Iron and Steel 903 1,151 1,082 1,312 1,347 1,238 1,286 Minerals 1,413 1,161 1,450 1,847 1,394 1,192 1,144 Fertilizers 483 581 482 432 475 462 458 Cement, Lime, etc. 342 522 523 474 525 393 443 Coal 883 743 679 172 509 381 404 Wine 145 151 132 145 1/ 1/ 1/ Sugar Beats 267 221 245 165 187 253 219 Grain, Flour, etc. 492 653 397 356 640 625 737 Other Commercial Traffic 1L990 1,793 3,898 4,335 3,155 3,862 4,236 Total Commercial Traffic 8,223 8,429 10,475 10,922 9,733 9,842 10,367 Mail 330 334 372 366 375 381 372 Service Traffic 818 930 665 781 585 543 686 Subtotal 1,148 1,264 1,037 1,147 960 924 1,058 GRAND TOTAL 9,371 9,693 11,512 12,069 10,693 10,766 11,425 1/ Included in "Other Commercial Traffic". Note: At the middle of 1975, the criteria for the calculation of data were changed. Nevertheless, the figures shown for 1975 have been modified to permit a comparison. Source: RENFE - 13 - ANNEX 4 PROJECT PERFORMANCE AUDIT MEMORANDUM SPAIN THIRD RAILWAY PROJECT (LOAN 772-SP) RENFE: Staffing and Salaries Minimum Average Cost of Staffing Salary Salary Living Index Index Index Index 1969 1969 = 1969 = 1969 Staffing = 100 = 100 = 100 = 100 1969 88,216 100 100 100 100 1970 82,624 94 117 112 106 1971 78,972 89 155 138 114 1972 76,960 87 171 159 124 1973 73,377 88 206 182 140 1974 72,733 82 244 231 162 1975 72,028 81 308 285 189 1976 71,990 81 415 374 226 1977 72,274 82 565 496 286 Source: RENFE - 14 - ANNEX 5 Borrower's Comments (Translation from Spanish) RED NACIONAL FERROCARRILES ESPANOLES Office of the President Madrid, April 11, 1979 Mr. Shiv S. Kapur Director Operations Evaluation Department Washington, D.C. My dear friend: I am attaching herewith the comments on the Project Performance Audit Report on Spain Third Railway Project (Loan 772-SP). As you will notice, in principle, it has seemed to me adequate to blend some of the information contained in such report and, especially, to state with some detail the new orientation of the relations RENFE-State which, in my judgment, can constitute a firm basis for a better development of RENFE's activities in the future. Sincerely yours, Ignacio Bayon Marine - 15 - ANNEX 5 Page 2 In principle, the document is correct in general terms, but we consider it useful, however, to blend some of your points and give major emphasis to some others. Financial Equilibrium The inflationary process that has taken place during the last few years and especially since the economic crisis has led to an important increase in the salaries and provisions prices of RENFE. Even though ta- riffs have also increased, such increase has been lower than costs in spite of the fact that they have increased more than the tariffs of other means of transportation (by road and aviation). It is certain that a higher increase in tariffs might have produced a serious regression in traffic, already felt at the level of real tariffs. Other causes of the deviation in the financial equilibrium agreed upon have consisted in the lack of methodical arrangement of the transport sector and in the policy for financing of RENFE followed by the Government. We fully agree that technical aspects of the railway management, measured by the necessary indicators, must have as much or more importance than the financial aspects. In fact, RENFE has dealt in a serious manner with these technical aspects, in which acceptable results have been achieved. Reduction of Costs With respect to reduction of costs as a means of remedying the financial deficit, action has been taken on that situation and considerable results have been achieved, such as. the reduction of overtime. In the years prior to the agreement, strong action had been taken in this field and that is the reason why more spectacular results had been achieved ear- lier; furthermore, and with reference to the reduction of personnel, the situation of work stoppage (paro) and the change of political conditions in the country have made it unfeasible. Renovation of the Lines The audit insists on the need to make an economic analysis of the renovations of the lines, which is supposed to have a weak yield (pro- fitability). We believe, on the contrary, as does the PCR, that this anal- ysis is not possible,and that it would not lead to valid decisions either. As a matter of fact, the renovation of the lines is basically an operation of replacement, required by technical reasons, and thus, should it not be carried out, the deterioration of the lines is such that it.causes increasing limitations to traffic, particularly in speeds, which can result at the short run in losses in travelers and consequently in revenues. Besides, this fact implies a grave deterioration of RENFE's services to the country or, in other words, a loss in efficacy of the railway transport. - 16 - ANNEX 5 Page 3 Future Planning The course of events in the last few years, and particularly the financial disequilibrium, have led RENFE to a replanning of its re- lationship with the State. After consideration of various causes of ac- tion, it has been concluded - and this has been accepted and put into practice by the Government - that the best formula to ensure the via- bility of RENFE is through the Contract-Program. The Contract-Program agreed upon for 1979 has an annual dura- tion, though the plan of action included in it has objectives and actions that by their own nature exceed such time scope. The novelty consists in that the Contract-Program establishes not only the general objectives but also designs the precise conditions and foundations to make the exact adherence to them possible. In this sense, various themes are agreed upon, such as: (a) macroeconomic hypotheses that affect RENFE's activity in a very important manner; (b) measures on transport policy, to be taken by the Government, relative to a tariff policy, equalization of conditions of competition (ful- fillment of legislation on transport, creation of a rate of infrastructure, etc.) and orienta- tion of some traffic of goods to the railway; (c) measures of rationalization of the exploitation to be taken by RENFE in matters of closing and economic exploitation of the lines, substitution of services, array of stations, conservation of lines and materials, and grade crossings. With this statement, it is feasible to relate the financial deviations with the macroeconomic hypotheses and with the goals agreed upon to be carried out both by RENFE and by the Government, allowing the passing of judgment on RENFE's management with a much broader perspective than that provided purely by an analysis of the economic results. An aspect that should be highlighted is that, according to the Contract-Program for 1979, a General Railway Plan 1980-1991 is being pre- pared, which is a State's Plan for the Railways, and which will allow the political bodies of the country to adopt a decision on the options of the railway policy; it will also allow the enterprise to act with a directrix of adequate time dimensions. The operational articulation of this General Plan will be realized through successive Contract-Programs. - 17 - ATTACHMENT SPAIN - LOAN 772-SP THIRD RAILWAY PROJECT PROJECT COMPLETION REPORT I. INTRODUCTION The physical and institutional components of the project have been satisfactorily completed and the loan was fully disbursed in August 1976. However, the financial statements for 1975 have indicated a serious deteri- oration in RENFE's financial situation. The Working Ratio has deteriorated from 97 in 1973 to 101 in 1974 and 121 in 1975, compared with forecasts of 86 and 80 respectively. In 1975 the deficit after charging interest was over 12 billion pesetas (about US$180 million) compared with the applaisal forecast of a surplus of 1.7 billion pesetas (about US$25 million). The situation was caused by a serious recession in Spain in 1975, but was exacerbated by political instabilities which prevented adequate tariff increases, cost- cutting measures, and new transport regulatory measures from being implemented. Annex 1 shows the status of commitments made by the Borrower and Guarantor. Because the Operations Evaluation Department fissued a report on January 15, 1975, entitled "Performance Audit of the Spanish Railways 1964-1973 Modernization Program" which deals with all three railway loans to Spain (387-SP, July 31, 1964; 507-SP, August 4, 1975; and 772-SP, June 30, 1971), this Project Completion Report for Loan 772-SP will address the followimg matters: (a) an updating of the information contained in the Performance Audit Report; (b) a review of changes in the physical, operational, and financial situation of the Spanish Railways (RENFE) since the Performance Audit Report was prepared; (c) an economic reappraisal of the principal components of Loan 772-SP; (d) a discussion of the conclusions reached in the Performance Audit Report, in particular those relating to the economics of track renewal; and (e) recommendations to RENFE and the Spanish Government. This report will not deal with the processing of the loans, the performance of RENFE under the first and second loans, or any other matters which were adequately dealt with in the Performance Audit report. - 18 - Summary and Conclusions One of the two principal objectives of the Third Railway Proj:qct was to achieve and maintain financial viability for ZENFE. The Performance Audit Report noted that slow but steady progress had been made in this area from 1969 through 1973. However, because of the energy crisis, which hit late in 1973, and its subsequent adverse effects on the Spanish economy, RENFE's financial situation deteriorated sharply in 1974 and 1975. Net cash available after charging interest fell from 2.0 billion pesetas in 1973 to 0.1 billion pesetas in 1974, and in 1975 there was a cash loss of 7.2 billion pesetas. Including depreciation charges of 5.0 billion pesetas, the 1975 loss was 12.2 billion pesetas (US$180 million). The situation was exacerbated by the political uncertainties in Spain which limited RENFE's ability to undertake adequate cost-cutting and revenue-raising measures in the face of declining freight traffic. The losses are being covered by non-reimbursable state subsidies. For the first three months of 1976, revenues are up 37% and costs are up 32% compared to 1975. Nevertheless, RENFE expects its net cash loss to grow to 9 billion pesetas in 1976 because interest payments rise by about 2.5 billion pesetas. The loss is expected to decline in 1977 and 1978, and RENFE expects to show a positive net cash income in 1979. However, this is based on assumptions of renewed growth of the Spanish economy, as well as an ability of RENFE to raise tariffs and reduce staff. The present situation is sufficiently serious as to raise questions about RENFE's ability to meet debt service from its own resources as well as the burden on the Spanish Government to finance both the deficits and RENFE's future investment program. Consequently, despite the fact that the loan is completely disbursed, it would appear to be desirable for the Bank to continue with limited supervision of RENFE to assist them in developing a strategy to return them to financial viability. Draft action letters to RENFE and the Consejo Superior de Transportes Terrestres (CSTT) which make such a recommendation are presented in Annexes 2 and 3. The second principal objective of the loan was to provide for improvement in the Government organization for comprehensive planning of the transport sector. CSTT, which had been established within the Ministry of Public Works in 1964, had by the late 1960's lost momentum due to lack of political support. Under the Guarantee Agreement for the Third Railway Project, the Government agreed to broaden the structure and functions of the CSTT and to strengthen its organization. The CSTT now has both an adequate staff of transport economists and specialists and an adequate budget. It has carried out and is carrying out, generally with consultants, a number of useful studies on various aspects of the transport sector in Spain. (A list of these studies is shown in Table 1.) However, the CSTT has had mixed results in implementing the results of these studies. For example, it has successfully brought about improved effectiveness of highway weighing stations which in turn has reduced average truck-axle loads. On the other hand, the establishment - 19 - of a road users' tax expected to replace the Canon de Coincidencia has still not taken place. The difficulties in implementation are due to the political uncertainties in Spain which increased during the period immedi- ately following the completion of CSTT's initial studies. CSTT's near-term effectiveness will be in large measure a function of the degree of political stability during this present transitional period. RENFE officials themselves acknowledge that the Bank's involvement and intervention has had a direct and salutary impact in the following specific instances: (a) the close dealings between the Commercial Department's field "delegations" and shippers; (b) the close relationship between the Commercial Department and Transportation Department regarding thd establishment of new services; (c) the rapid progress that wAs made in the dieselization and electrification of ZENFE; (d) the rationalization of the maintenance of motive power and track; and (e) improvements in freight car turn-around time. II. PROJECT PREPARATION AND APPRAISAL The Third Railway Project was a direct follow-on to two earlier projects, and generally attempted to achieve goals set for but not achieved by the earlier projects. A description of the relationship between the three projects, and of the preparation and appraisal of the Third Project is adequately presented in the Performance Audit Report and will not be expanded upon here. III. PROJECT IMPLEMENTATION AND COST RENFE Investment Plan Despite the fact that the Third Railway Project is defined as the first three years of the five-year investment plan for 1971-1975, RENFE itself worked under a four-year investment plan for 1972-1975. As a result, it is difficult to determine the status of execution of the five- year plan as described in the Appraisal Report. As a surrogate measure, this report will examine the status of the four-year plan as defined by RENFE. Table 2 shows the actual investments broken down by category. Table 3 shows the proposals and achievements under the plan. In only six of the 18 categories were the targets achieved. The shortfalls and deviations are attributed primarily to inflation (which was 17.9% in 1974 and 14.1% in 1975) and to changes in the objectives of the plan. At the end of the 1972-1975 plan, the status of RENFE is as follows: - 93.6% of the "Basic Routes" are laid with continuous welded rail - No load limits remain on any bridges on the "Basic" and "Complementary Routes" - 20 - - All rolling stock is made of steel - Bogie wagons comprise 14% of the freight car fleet - Average freight car capacity has been increased 19%, and net load has increased 17% in the four-year period - 55% of freight traffic is carried in single-purpose trains - Productivity per car in net ton-km/year increased 47% in the four-year period - Steam traction has been eliminated - Average load per passenger train increased 6% in the four-year period - Average load per freight train has increased 13% in the four-year period - Installation of compressed-air brakes has begun - New lines have been placed in service between Malaga and Fuengirola via Torremolinos and between Barcelona-Sants and Barcelona Airport. Madrid-Barcelona High-speed Line Although the project neither appears in the next four-year RENFE Plan nor has been submitted to or approved by the Government, RENFE has proceeded with the preparation of engineering and economic studies of a proposed new high-speed line (210 km/hr) from Madrid to Barcelona. The studies are being carried out by INECO (RENFE's consulting subsidiary). The proposed alignment has been selected, and detailed engineering down to the level of the design and location of catenary poles and culverts has been completed. The Consejo Superior de Transportes Terrestres, on the other hand, says that they are unaware of any studies on the new line being underway, and, that if any were underway, they were reasonably certain that the project would show up to be an uneconomic undertaking. The Consejo feels that because: (a) there is good air service between Madrid and Barcelona, (b) there is only one city of any size (Zaragoza) between the two, (c) the cost of constructing a high-speed line through mountainous terrain is very high, and (d) the running time could never be competitive with air, it is unlikely that they would approve the project. Nevertheless, various RENFE staff members informally asked the mission if it would be possible for the Bank to appraise this project for a possible Bank loan. They recognized that the Bank was phasing out its lending program to Spain, but they said that it was not the money but - 21 - rather the Bank's appraisal and approval they sought, in order to assist them in arranging financing for the project. The mission informed the RENFE staff members that the Bank did not appraise such railroad construction projects in is6lation but rather as a part of a railway's overall investment program and added that such a full appraisal of RENFE's situation was not being budgeted for at the Bank because of the change in Spain's membership category. Nevertheless, the RENFE staff members said they would send copies of the summary volumes of the study dealing with the economics of the project to the Bank for review. No further mention of the matter was made by either the President or Director-General. IV. TRAFFIC AND OPERATIONS The Spanish economy went through a severe recession ia 1975. GNP rose only 0.8% compared to 5.4% in 1974, and the industrial sector actually dropped 2.5%. Gross capital formation fell by 3.3%, whereas it rose by 5.4% in 1974. This decline in economic activity meant that the growth in passenger traffic virtually stopped (up to 0.4%) and net ton-kms of freight traffic declined by 7.6%. Even though this represents a serious decline in freight traffic, it was nonetheless not as bad as that experienced on some other EEC railways: Belgium -26.0% Luxembourg -23.5% Germany -20.6% Netherlands -19.3% Italy -17.9% France -16.9% Denmark -15.6% Freight Traffic Table 4 whows actual freight traffic figures by commodities. Three categories make up 45% of RENFE's traffic: mineral ores, petroleum products, and iron and steel. These, of course, are all well suited to transportation by rail. From 1974 to 1975 iron and steel traffic fell 12%, mineral ores dropped 4%, and petroleum traffic grew only 1%. However from 1971 to 1974, traffic had grown at an annual rate of 10%, so that even with the 7.6% decline in 1975, 1975 net ton-kms were still 2.6% above the appraisal forecast. RENFE's Transportation Department conducted an analysis to determine the distribution of its freight traffic among the originating stations. The results of the study were as follows: - 22 - 5 of the stations originated 67% of the freight traffic 10% " 82% " 15% " 90% 20% " 94% 50% i 99.3% " and in the light of these results RENFE is continuing with its program of freight station closures. If half of the present freight stations could be closed, only 0.7% of the freight traffic would be affected, and even this traffic need not be lost if a limited number of "mobile agencies" (agents with vans to handle billing of shipments) were established to replace the closed stations. Perhaps RENFE's main commercial and managerial success in the past five years has been its containerized freight (TECO: Trenes Expresos de Contenedores) system. The system, which is based on recommendations contained in a consultant's study I/carried out under the Second Railway Project, became operational in 1974 with five terminals in service: two in Madrid (1 international, 1 domestic), two in Bilbao and one in Barcelona. Because of the track improvements which had been carried out under all three railway projects, TECO trains were able to run on faster-than-truck- competitive overnight schedules between all three pairs of these cities. In 1974, ten TECO trains operated daily. In mid-1975, two new terminals were opened at Valencia and Vigo, and the number of daily TECO trains was increased to 20. In 1976, four additional terminals are scheduled for opening at Seville, Irun, Port-Bou, and Barcelona. Beyond 1976, lt additional terminals are planned for Huelva (Bank Port Project), Puertollano, Santander, Zaragoza, Tarragona, Cadiz, Alicante, Badajoz, Valladolid, Miranda, Oviedo, Algeciras, La Coruna, and Bilbao. TECO network statistics are shown in Table 5. The number of containers carried increased 26% from 1974 to 1975, and the tonnage increased 48%. As a further inducement, RENFE is now running TECO trains that carry one customer's containers exclusively. Forty-four of these trains now run every week in addition to the regularly scheduled common-carriage TECO trains. The TECO network, modeled after British Rail's "Freightliner" system, operates solid trains of containers that bypass all marshaling yards and run direct from terminal to terminal on overnight schedules. Shippers may either bring containers to the terminals themselves, or RENFE, using contract truckers, can provide pickup and delivery service for a fee. RENFE charges a relatively high tariff for moving containers (e.g., Madrid-Barcelona, loaded container - approximately 130,000 pesetas; 1/ Transmark, subsidiary of British Rail - 23 - empty container - approximately 10,500 pesetas) which is nonetheless below road tariffs. By providing a faster and more reliable schedule, they have been able to attract substantial business away from trucks. Over 90% of the container traffic moving in TECO trains was diverted from trucks; only 10% came from RENFE carload freight services. Passenger Traffic Table 6 shows RENFE's passenger traffic performance for 1971-1975. Passenger traffic grew at an annual rate of 6% from 1971-1974 (as compared to an appraisal forecast of 2.5%) but the growth came to an abrupt halt in 1975 due to the recession. RENFE expects the traffic to grow at the former rate from 1976 onward. (The mission did not obtain any breakdown on the passenger traffic by services offered; e.g., commuter, intercity local, intercity express, Talgo, etc.). Operating Statistics Table 7 shows the Key Indicators which reflect RENFE's operating performance. It should be noted that all but one of the indicators show continuous improvement over the period 1966-1975. The only indicator which does not show, "improvement" is average cargo per train, but it should be pointed out that increases in train size do not always represent an operational improvement. Larger trains mean reduced frequency of trains which in turn can mean longer transit times for freight and thereby reduced commercial effectiveness. General Operating Statistics are shown in Table 8. Significant figures in that table include those for average length of haul, which show a decline from 327 km in 1971 to 292 km in 1975. This primarily reflects RENFE's successful inroads into shorter-haul traffics which previously moved by truck. Net ton-kilometers per route-km increased 34% from 1971 to 1974, representing a significant improvement in utilization of physical plant. This indicator, however, decreased by 8% in 1975 as a result of the traffic decline that year. As the Performance Audit Report pointed out, it is unfortunate that no operating targets were set for the Third Railway Project. The lack of targets makes it more difficult to give an objective analysis of RENFE's operating performance, and it is conceivable that by having set some meaningful targets, RENFE's performance could have been even better than what they were able to achieve. Table 9 shows the evolution of RENFE's motive power and rolling stock fleet from 1963 to 1974. During that period, the number of loco- motive units decreased by 66%, the number of passenger cars by 46%, and commercial freight cars by 49%. This, of course, occurred during a period in which passenger traffic increased by 36% and freight traffic by 58%. - 24 - V. FINANCIAL PERFORMANCE OF THE BORROWER Financial The Performance Audit Report concluded that "the Plan of Action should have put relatively more emphasis on the technical aspects of railway operations and probably less emphasis on RENFE's financial goals."-V At the time that report was being prepared, that was probably not an incorrect view. However, the events that have transpired since then -- the recession, the decline in traffic, and the growing deficit -- have brought about a financial situation which needs close attention. During the final two years of the project, when the problems developed, disbursements under the loan were approaching completion, and consequently the Bank lacked adequate leverage to convince the Spanish authorities to take remedial actions which would in any event have been difficult to achieve. Staff reductions and major tariff increases are usually not practicable in periods of growing unemployment and inflation. Table 10 shows RENFE's Income Statements for 1974 and 1975 and Table 11 shows forecasts for the period 1971-1979 and actuals through 1975. Costs rose 35% from 1974 to 1975 while revenues increased only 13% (the same as had been budgeted). The principal components of the cost increase were personnel costs, which rose 21%, and material costs, which rose 92%. Total revenue for 1975 was close to RENFE's revised budget but expenditures was 17% above the budget forecast. Table 12 shows the evo-. lution of RENFE staffing and its costs over the seven-years since 1969 and compares them with the changes in cost of living. Staff has declined by 19% and average salary has increased by 185%. While the cost of living in Spain has increased by only 89%, it has been railway management policy to bring RENFE salaries more into line with those of other sectors. If salaries had only kept pace with inflation from 1969 to 1976, personnel costs would have been 9 billion pesetas less in 1975. Of the 92% increase in material costs, only about 15% is due to price increases, the remaining 75% being ascribed to accounting adjustments to meet the national accounting plan, including the adoption of accounting for materials on an accruals basis. The 1975 material costs include the value of all materials and services received in 1975 plus bills held over from 1974 and the 1975 results and Working and Operating Ratios are therefore not directly comparable to previous years. Interest charges rose by 41% from 1974 to 1975 and are abQut 3-1/2 times greater in 1975 than in 1972. This primarily reflects the borrowing undertaken to finance electrification and other parts of the RENFE plan. 1/ Performance Audit Report, p. 38 - 25 - On the revenue side, tariff increases brought about a 14% increase in passenger revenues from 1974 to 1975 despite growth of traffic of less than 1%. Nevertheless, the 1975 passenger revenues were 5% less than the budget estimate. Likewise, freight revenues were up 4% (despite an 8% decrease in traffic), but were also about 5% less than the budget estimate. Revenue from the Canon de Coincidencia was 2.6 billion pesetas, an increase of 300 million over the previous year, but 158 million below the budget estimate. Estimated and Actual Working and Operating Ratios are compared in Table 13. It should be noted that the Working Ratio dropped below 100 in 1973, in line with the Appraisal Report forecast which probably led to the Performance Audit Report concluding that more than sufficient attention had been paid to the financial health and well-being of RENFE. However, instead of continuing to improve as forecast at appraisal, the Working Ratio worsened, rising slightly to 101 in 1974 but sharply to 121 in 1975. RENFE's official forecast is that it will drop to 116 in 1976 and will return to its 1973 level only in 1978, assuming steady recovery of the Spanish economy. Both the Current and Liquid Ratios (Table 13) which had improved from 1972 throught 1974, although falling short of Appraisal Report targets deteriorated to 1.3 and 1.0 respectively. The Debt/Equity Ratio (Table 14) in 1973 was close to the Appraisal Report estimate of 15/85, but increased borrowings, which were primarily undertaken to accomplish the electrification objectives, brought the debt-equity ratio up to 23/77 by the end of 19751/ instead of the target of 14/86. The Rate of Return on Net Fixed Assets - has remained negative and an improvement from -5.0% in 1971 to -3.3% in 1973 was not maintained. The rate for 1975 was -9.3% and a positive rate of return is not now forecast until 1979 or 1980, compared with the appraisal expectation of achieving it in 1975 or 1976. Canon de Coincidencia The Canon de Coincidencia, which became law in 1947, provides for a tax on public road transport, both freight and passenger, on those routes which run parallel or essentially parallel to railway lines. The tax is collected by the Treasury and phid to RENFE. The original aim of the tax was to compensate RENFE for those traffics which had developed because of the railway and had been subsequently diverted to road transport. For scheduled passenger services, the tax is a function of journey length and can be as high as 11% of the revenue. For non-scheduled passenger services, the tax is a fixed amount per seat. For freight vehicles, the tax is a function of capacity (not axles or axle-load) and the radius of activity of the vehicle (either national, regional, or local). 1/ Calculated without benefit of revenues from the Canon de Coincidencia - 26 - Despite this protection for the railways, trucks became the dominant mode of freight transport in Spain during the 1950's and 1960's, thereby negating the original, somewhat questionable, justification for the Canon. The Plans of Action in all three railway projects recognized that (a) the Canon brought about distortions in the transport sector (e.g., as between public road transport and private, on which there was no tax), (b) the tax on road users was unrelated to the costs they incurred, and (c) the Canon provided income to RENFE in a manner unrelated to RENFE's efficiency or performance. However, because of: (a) the ease of collection of the tax, (b) the lack until recently of adequate road user cost data, (c) political pressures from private truckers and RENFE, and (d) recent political instabilities that have made it difficult to enact any new legislation, the tax is still in existence, providing 2,596 million pesetas to RENFE in 1975. The CSTT informed the mission that a new law has been drafted which, if enacted, would suppress the Canon de Coincidencia and establish a system of road user charges on all commercial vehicles, both public (i.e., common carrier) and private above a specific weight limit, probably six tons. The new charges based on consultant's studies carried out under the Third Railway Project would vary according to the number of axles, axle-loads, total loaded weight and distance traveled. The CSTT is uncertain as to when this law might be enacted, probably not before 1977. They provided the mission with a technical note describing the draft law, but not with a copy of the actual document. As noted above, RENFE for a long time opposed the suppression of the Canon for fear that they would lose the tax revenues. However, RENFE now supports the new legislation because it feels that thv new road user taxes would shift freight currently worth 5 to 7 billion pesetas annual net income from road to rail. VI. INSTITUTIONAL DEVELOPMENT Management and Organization Noteworthy among RENFE's management accomplishments has been the establishment of a functioning system of "Management by Objectives." It was first applied in preparing the 1972-1975 RENFE Plan and provided ten objectives to be met during that period. Annex 4 lists those objectives and describes the degree of accomplishment. The eighth objective called for the creation of a long-term strategy for RENFE and the establishment in 1972 of a department of strategic objectives. The department was duly established and has drawn up a plan incorporating the basic philosophy and the following general and specific objectives and action programs:- - 6 general policies for normal operations - 13 general policies for handling service breakdowns - 27 - - 5 permanent general objectives - 48 specific objectives - 177 strategic action programs - 1219 action subprograms with 6700 key activities and 9500 identifiable results The planning process encompasses three cycles: (a) long-term strategic plan, (b) four-year plan, and (c) budget and annual program. The system appears to be operating well for it gives managers specific targets against which their departments' performances can be measured. Each department has been provided with a Strategy Supervision and Analysis Office to work for the manager in preparing departmental objec- tives and monitoring departmental performance. Most managers seemed enthusiastic about the system. The Appraisal Report had noted that there had been a high hurnover rate among top management of RENFE. Between 1967 and 1970 four Presidents and three General Managers had been in office. Fortunately, a greater degree of continuity has been achieved in the succeeding years. The same General Manager has served throughout the period of the projgct. In 1975, the President resigned to become Minister of Housing and the President of the Consejo Superior de Transportes Terrestres, a man who had had close dealings on a policy level with RENFE management,became the new President of RENFE. In order to provide a structure which it felt would be more responsive to the system of "Management by Objectives," RENFE changed its regional organization in early 1976. The geographical coverage of each region was not altered, but the lines of authority and responsibility were changed significantly. Previously, the various regional operating department heads (transportation, traffic, equipment, fixed plant) received policy guidance from their respective department heads in Madrid, but reported to and were responsible to their Regional General Managers, who in turn reported to the Deputy General Manager in Madrid. RENFE's current headquarters organization chart is shown in Figure 1. Under the new organizational structure, the regional department heads report directly to and are responsible to the heads of their respective operating departments back in Madrid. The Regional General Managers' new function is to serve as the local coordinator of the operating departments. They do not prepare investment and operating budgets, but merely review and comment on the budgets submitted to them by Madrid. However, even though direct control over operations has been removed from the Regional General Managers, they do retain control over regional personnel, accounting, medical, and social (housing and commissary) departments. - 28 - RENFE's new structure, which had not been discussed in advance with the Bank, is somewhat more centralized than what the Bank would normally advocate, In fact, a serious shortcoming appears to be removal of responsibility from the Regional General Manager. Nevertheless, RENFE staff appeared to be satisfied with the change, and it has not been functioning long enough for any major difficulties to appear. A major organizational accomplishment has been the successful strengthening of the commercial (i.e., marketing) and data processing departments. The Commercial Department has the ability and responsibility to determine the costs of moving the various commodities hauled and consequently to negotiate profitable rates. The department has 37 "Commercial Delegations" or sales offices scattered around Spain and the authority to negotiate tariffs (within limits determined by Commercial Department headquarters in Madrid) is delegated to the Sales Managers at each, along with the ability to negotiate special services (e.g., unit train movements, etc.) for large shippers. The staffs of these offices maintain close contact with shippers, and also receive commissions for additional profitable traffic attracted. The field staffs have con- sequently been quite aggressive in their pursuit of RENFE goals, and probably helped to minimize the traffic loss in 1975. The Data Processing Department has played a key role in RENFE's successes. Its traffic and costing statistics are essentiel for the Commercial Department. Waybill preparation at the TECO container terminals is carried out automatically with remote computer terminals, and the department hopes to have the billing for carload freight traffic automated by mid-1977. The passenger reservation system is now automated with 220 remote terminals, expanding to about 400 by the end of 1978. Locomotive utilization, timetabling, dispatching programs are now in use along with routine accounting programs and programs for the management of cash, personnel, spare parts inventory, and TECO (container) operations. The department does not as yet have a car-tracing capability, but RENFE is considering the acquisition of the TOPS System from the Southern Pacific Railroad (US). At present the department has a staff of about 400, but this is expected to decline to about 250 as the programming work is completed and new programs become operational. Studies of Light Density Lines The Loan Agreement required RENFE to carry out studies on 55 light density lines (4009 kilometers), and, on a case-by-case basis, to submit to the Government an application for total or partial closure of each line and for payment of losses if the permission to curtail service is withheld or delayed for more than six months after the submission of the application. The results of the studies and subsequent government action are as follows: - 29 - Secondary Routes All service discontinued and line dismantled 155 km Passenger service disconinued 264 km Freight service discontinued 50 km Application to discontinue service submitted but denied 557 km No application to discontinue service based on study results 631 km No study made 1607 km Subtotal 3264 km Basic and Complementary Routes No application to discontinue service submitted based on study results 441 km No application to discontinue service submitted for political or operational reasons 310 km Subtotal 751 km Grand Total 4015 km For 1975, the subsidy required for those services above still in operation was 3.0 billion pesetas. An additional 0.3 billion peseta subsidy was required for those uneconomic lines studied during the First and Second Projects but not closed. RENFE requested and received these specific subsidies from the Government. Detailed data regarding study dates, revenues, costs, and subsidy applications for the 55 lines is in a RENFE report entitled "Lineas Deficitarias," dated April 26, 1976, which will be kept in project files. VII. ECONOMIC REEVALUATION The Performance Audit Report contains a detailed benefit-cost analysis of the RENFE Plan as a whole and for the investments in track renewal, dieselization and electrification. For this Project Completion Report, a reexamination of the three major investment categories to deter- mine the effect of changes in traffic and costs in the past two years has had a material effect on the rates of return. These three categories represent 69% of RENFE's capital investments for 1972-1975. However, the rate-of return calculations include investments and benefits from earlier years as well as those during and following the 1972-1975 period. Because the track, dieselization, and electrification-programs did not start concurrently, the rates of return were calculated using differing time periods for each. - 30 - Track Annex 5 is an expanded discussion on the Economics of Track Renewal, addressing the difficulty in isolating track capital improvement expenditures from maintenance expenditures, and in calculating meaningful rates of return. It presents a qualitative justification for concluding that it was an economically sound decision for RENFE to maintain and upgrade its heavy traffic lines to a high-quality level where the rate of deterioration is minimized. However, there are a number of additional benefits to be derived from track improvements. There are reductions in accidents with both passenger and freight trains. Table 15 shows RENFE's declining passenger casualty rate. Whereas ten years ago RENFE's passenger casualty rate was about equal to that in the United States, and its passenger-kilometrage was about half of that in the U.S.,RENFE's casualty rate is now aboyY 1/100 of that in the U.S. with approximately equal traffic levels. Not only is the direct cost of freight train accidents reduced through improved track, but also reduced is the cost of claims for freight damaged by shock and vibration. The same reduction in shock and vibration also results in reduced rolling stock maintenance costs. Furthermore, improved track enables higher running speeds. In the case of passengers, the reduced travel times will generate new traffic and/or divert existing traffic from other modes, depending on the particular travel market. Most freight markets are not as time-sensitive as the passenger markets, so the improvement in running time does not have as great a direct effect. However, the reduction in running time does enable a railway to improve its reliability in meeting freight delivery schedules and thus will enable the railway to re-attract freight from trucks, which was originally lost because of unreliable service. The improved speed characteristics of the track also enabled RENFE to establish high-speed container services between principal cities. Without the improved track, this service, which is designed to carry higher-valued and more time- sensitive commodities than convential carload freight services, would not be competitive with trucks and therefore could not be a commercial success. Dieselization The Performance Audit Report calculated the rate of return on investment in diesel locomotives (to replace steam locomotives) to be in the range between 22.5% and 27.7%. This calculation was made in 1974 and apparently did not take into account the full effect of the rise in petroleum prices which occurred that year. The effect of such rises is to raise the rate of return on diesel investments because of the greater energy conversion efficiency of diesels. Because virtually all the 450 1/ RENFE Memorias and the U.S. Department of Transportation, Federal Railroad Administration, "Summary and Analysis on Railroads in the United States," Bulletin No. 143. - 31 - steam locomotives in RENFE's fleet at the end of 1974 burned fuel oil rather than coal, RENFE was able to reduce its consumption of petroleum products by about 350,000 tons annually by converting to diesels. Using current fuel and diesel oil prices, the rate of return on diesel investment is now estimated to range from 25 to 30%. The increase in the rate of return is relatively-small because the largest portion of the dieselization investments took place in the years 1965-1969, although some investments took place through 1974, and the increased benefits accrue only after 1974. The Performance Audit Report also made the point that a program for increasing the average trainload of steam-locomotive-hauled-trains would have a rate of return similar to diesels if the cost of the program were equal to 40% of the cost of dieselization, and a higher return if the cost were less. However, this was not a valid alternative to con- sider because the steam locomotives, by the very nature of their age, size, and design, were not capable of being modified to increase their load carrying ability. Therefore, elimination of steam power was the logical, and economically justified, decision for RENFE. Electrification The Performance Audit Report showed an estimated rate of return on electrification of 12%. Despite the increase in diesel fuel prices, which normally would have increased the rate of return in favor of electrification, the recession 1974 and 1975 caused a sufficiently large drop in traffic to lower the rate of return to approximately 10%. This figure was calculated on the assumption that normal growth in freight and passenger traffic would resume in 1977. VIII. THE ROLE OF THE BANK In retrospect, the Bank's diagnosis of problems and its definition of loan objectives and appropriate covenants appears to have been quite successful. Of course, the knowledge gained about the Borrower (and by the Borrower about the Bank) during the two immediately preceeding Bank operations with RENFE made the whole pro- ject definition and appraisal process that much simpler. Because RENFE had by the time of this Third Project displayed a great deal of institu- tional maturity and sophistication, the Bank did not supervise this project as closely or place as stringent reporting requirements on RENFE as it does with other projects and borrowers. Consequently, for example, there were changes which RENFE made in its investment program which the Bank either did not question or did not make an issue about. However, these changes do not appear to have had an adverse impact on RENFE. - 32 - Throughout most of the period of execution of this project, the long intervals between supervision missions caused no difficulties. However, as the project neared completion, the Spanish recession caused major financial problems for RENFE. Because of the interval between missions, these problems were not detected by the Bank until they had become quite serious. However, it is also likely that the Bank would have had little success in assisting RENFE to alleviate these problems even if the situation had been known by the Bank earlier. Therefore, it was probably a sound allocation of Bank resources to have minimized its supervision of RENFE at this stage of RENFE's development.. - 33 - Table 1 SPAIN - Loan 772-SP Third Railway Prolect Studies Carried Out or Underway by the Consejo Superior de Transportes Terrestres Nationwide Survey of Average Fuel Consumption and Distances Covered by Motor Vehicles on Interurban Roads and in Urban Areas Structure of Services for Transport of Interurban Passengers Economies of Scale in Road Freight Transport Road Costs and Road User Charges Study of the Motivations of Private Freight Transport Study of Interregional Freight Flows Determination of Highway Freight Traffic (tons, ton-kilometers, average load) Determination of Number of Road Vehicles Manpower in the Transport Sector Establishment of a National Freight Account Relationship between Transport and Regional Development Energy Consumption in Road-building and Maintenance and in Automobile and Truck Assembly Air Passenger Travel Market Sea Freight Market Hazardous Materials Shipping Truck Terminals for Major Cities Urban Bus Lanes Urban Area Studies for Valencia, Asturias, and Barcelona Source: CSTT December 1976 - 34 - SPAIN - Loan 772-SP Table 2 Third Railway Project RENFE INVESTMENTS 1972-1975 (millions of pesetas) Track 26,047 Stations 5,259 Motive power 3,179 Diesel railcars 990 Rolling stock 2,914 Workshops, depots & stores 1,550 Telecommunications 1,565 Safety installations 4,159 Electrification 13,416 Social plant 2,340 General overhead 1,812 Special investment for personnel reduction 6,268 Special repairs for damage and emergencies 10 Investment for high speed 46 Investment in inventory (243) Financial investments 55 Total 69,367 Source: RENFE December 1976 - 35 - SPAIN - Loan 772-SP Table 3 Third Railway Project EXECUTION OF RENFE PLAN FOR 1972-75 Comparative Quantities at time of Proposed Achieved % Achieved Appraisal 1971-5 1971-3 Plan Project Way and track Grade crossings eliminated 971 594 61 Grade crossings protected 448 598 133 Track renewal 5008 km 2409 km 48 6378 3218 Yards and terminals Classification yards 5 1 20 Container terminals 7 7 100 Motive power Road Diesel units 54 48 89 61 32 Diesel railcars Rapid railcars 42 0 0 42 - Talgo coaches 42 16 38 68 52 Rolling stockil Coaches 17 0 0 57 57 Vans 115 90 78 115 90 Freight cars 803 699 87 1713 1529 Containers 3881 662 17 4137 1312 Safety Installations CTC 1364 km 1364 km 100 Automatic block 1046 km 277 km 26 Electrification New Lines electrified 698 km 494 km 71 Electric locomotives 42 46 110 42 15 Traineets 30 52 167 30 30 Trailers for trainsets. 30 83 277 30 30 Expenditures on RENFE Plan (millions of pesatas) 1972 1973 1974 1975 Total Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast 13,820 13,176 13,105 13,068 15,37613,232 18',443 13,260 60,744 52,736 /1 Does not include rolling stock acquired by lease. Source: RENFE December 1976 - 36 - Table 4 SPAIN - Loan 772-SP Third Railway Project RENFE - Actual Traffic by Commodity - 1971-1975 (Million Net Ton-Km) 1971 1972 1973 1974 1975 Appraisal Report forecast for 1975 Petroleum Products 1,305 1,453 1,587 1,684 1,703 1,510 Iron and Steel 903 1,151 1,082 1,312 1,158 1,580 Minerals 1,413 1,161 1,450 1,847 1,779 2,030 Fertilizers 483 581 482 432 344 550 Cement, Lime etc. 342 522 523 474 465 290 Coal 883 743 679 172 585 950 Wine 145 151 132 145 163 J0k Sugar Beats 267 221 245 165 200 160 Grain, Flour, etc 492 653 397 356 331 740 Other Commercial Traffic 1,990 1,793 3,898 4,335 3,862 2,650 Total Commercial Traffic 8,313 8,434 10,525 11,522 10,590 10,640 Mail 330 334 372 366 374 400 Service Traffic 818 930 665 781 738 370 SUB TOTAL 1,148 1,264 1,037 1,147 1,112 770 GRAND TOTAL 9,461 9,698 1,562 1 702 11,410 Note: At the middle of 1975,the criteria for the calculation of data was changed. Nevertheless, the figures shown for 1975 have been modified to permit a comparison. Source: RENFE, Memorias December, 1976 - 37 - SPAIN - Loan 772-SP Table 5 Third Railway Project RENFE: TECO Container Network Statistics 1974 1975 1976 Later Years Terminals 5 7 11 25 Daily trains 10 20 n.a. n.a, Containers carried 83,300 104,691 n.a. n.a. Tons carried 808,274 1,194,816 n.a. n.a. Revenue (million pesetas) n.a. 459 612 (forecast) n.a. Containers in fleet n.a. 1,243 1,964 n.a. Source: RENFE December 1976 - 38 - SPAIN - Loan 772-SP Table 6 Third Railway Project RENFE: Passenger Traffic 1971-1975 Passengers Passenger-kilometers (million) (billion) Appraisal Actual Actual Forecast Actual 1971 166 13.47 13.34 101% 1972 178 14.39 13.68 105% 1973 193 15.64 14.02 112% 1974 199 16.08 14.36 112% 1975 200 16.15 14.69 110% Source: Appraisal Report and RENFE, Memorias December 1976 - 39 - SPAIN - Loan 772-SP Table 7 Third Railway Project RENFE - Key Indicators 1966 1970 1972 1973 1974 1975 Operating Efficiency Average Cargo per Freight Car (1964 = 100) 108.0 142.4 144.2 148.0 148.0 154.4 Average Cargo per Train '1964 = 100) 98.9 124.9 120.7 131.2 134.1 129.0 Average Speed, Passenger Trains Commercial: Average of Steam, Electric, and Diesel (Km/h) 46.4 47.4 47.4 47.7 48.8 Running: Steam (Km/h) 50.3 46.4 48.1 49.9 50.0 51.7 Electric (Km/h) 56.6 61.2 63.4 63.5 63.0 65.6 Diesel - Line (Km/h) 52.5 53.1 55.1 55.8 56.0 56.9 - Talgo(Km/h) 81.5 82.3 84.3 84.1 83.0 84.7 Average Speed, Freight Trains Commercial: Average of Steam, Elec- tric, and Diesel(.i/h) 23.8 24.1 23.2 23.9 26.0 Running: Steam (Km/h) 37.3 38.6 37.8 38.3 38.0 39.2 Electric (Km/h) 41.3 41.4 43.1 43.6 44.0 46.2 Diesel (Km/h) 36.7 39.0 39.5 41.1 42.0 43.9 Availability Steam Locomotives (%) 68.7 72.6 63.2 47.0 57.6 N.A Electric Locomotives (%) 84.3 88.0 87.6 84.2 82.6 83.2 Talgo Locomotives (%) 92.9 94.7 94.7 84.2 93.8 N.A. Diesel Locomotives (%) 91.7 84.8 85.7 83.8 81.7 83.3 Passenger Cars (%) 78.8 82.9 80.8 85.4 86.6 90.0 Freight Cars (%) 79.3 84.2 87.2 87.5 91-5 95.3 Staff Efficiency Traffic Units per Man-Hour Worked 87.0 127.6 147.1 169.0 192.6 SOURCE: RENFE, Memorias December 1976 - 40 - Table 8 SPAIN - Loan 772-SP Third Railway Project RENFE - Operating Statistics 1971 1972 1973 1974 1975 I. Network Total Route-Kms 13,476 13,504 13,396 13,432 13,482 Non-electrified Lines (km) 10,385 10,380 9,982 9,985 9,829 Double track (km) 602 620 562 562 505 Single track (km) 9,783 9,760 9,420 9,423 9,324 Electrified Lines (km) 3,091 3,124 3,414 3,447 3,653 Double track (km) 1,414 1,475 1,490 1,507 1,565 Single track (km) 1,677 1,649 1,924 1,940 2,088 II. Passenger Traffic Total passengers (mln) 167 178 193 199 200 Passenger -km (mln) 13,533 14,391 15,640 16,079 16,146 Average distance of trip (km) 81 81 81 81 81 Passenger-km per Route-km ('000) 1,004 1,068 1,176 1,208 1,197 III. Preight Traffic Total net tons (mln) 28.9 31.2 37.6 42.1 40.0 Net tons-km (mln) 9,461 9,698 11,561.0 12,668.0 11,702 Net tons-km steam traction (mln) 517 530 984.0 678.0 Net tons-km diesel traction (mln) 4.001 3,943 4,311.0 4,925.0 Net tons-km electric traction (mln) 4,943 5,225 6,266.0 7,065.0 Average haul (km) 327 311 307 301 292 Net tons-km per route-km ('000) 702 720 858 943 868 IV. Operations Locomotive-km ('000) 174,467 179,469 183,118 180,242 175,971 Total train-km, passenger ('000) 81,565 84,313 84,403 82,926 83,753 Steam train-km, passenger ('000) 783 584 861 858 212 Diesel train-km, passenger ('000) 47,006 47,135 46,274 45,175 45,604 Electric train-km, passenger ('000) 33,776 36,594 37,268 36,893 37,937 Total train-km, freight ('000) 41,875 42,867 46,926 47,389 46,001 Source: RENFE, Memorias December, 1976 -41- Table 9 SPAIN - Loan 772-SP Third Railway Project RENFE: MOTIVE POWER AND ROLLING STOCK 1963 1966 1968 1970 1972 1974 I. Motive Power Locomotives 3,741 2,726 1,857 1,712 1,398 1,242 Steam 3,173 1,857 850 642 339 134 Diesel 228 506 633 686 693 715 Electric 340 363 374 384 367 393 Electric Trainsets 197 236 293 287 304 318 Diesel Railcars 88 250 356 393 373 368 II. Rolling Stock 1/ Passenger Cars 3,445 3,134 2,616 2,325 1,967 1,871 Baggage and Mail Cars 2,624 1,721 1,400 1,053 820 255 2/ Commercial Freight Cars 66,148 57,055 52,006 46,421 36,027 33,903 3/ Service Freight Cars 1,727 2,119 2,156 1,965 2,050 2,051 4/ Private Freight Cars 12,739 12,274 11,831 10,597 10,485 10,956 1/ Includes sleeping cars. 2/ Commercial freight cars include flatcars, boxcars, cattlecars, tankcars and hoppers. 3/ Service freight cars include hoppers, mobile stations, tank and special cars. 4/ Private freight cars include flatcars, boxcars, cattlecars, hoppers and special cars. Source: RENFE - Memorias, 1963-1972, 1974 - 4Z - -SPAIN - Loan 772SP Table 10 Th1::d Railway Project RENFE - Inccrie Statement - 1974 and 1975 Operational Results Total Results1 1974 1975 % 1975 % Actual Actual Change Budget-2 Actual Change Operating Revenues Passenger 12,613 14,382 14 15,210 14,444 -5 Freight 14,049 14,553 4 15,408 14,580 -5 Mail 1,101 1,226 11 1,201 1,226 2 Canon de Coincidencia 2,296 2,596 13 2,754 2,596 -6 Other 3,572 5,304 48 37 5,304 41 Total Operating Revenues 33,631 38,061 13 38,333 38,150 -0.5 Operating Expenses Personnel 21,944 26,618 21 24,326 27,835 14 Energy and Fuel 3,235 3,566 10 3,710 3,648 -2 Material and OthersJ3 6,586 12,615 92 9,725 12,744 31 Total Operating Expenses (Excluding Depreciation) 31,765 42,799 35 37,761 44,227 17 Net Cash Operating Revenues (Deficit) 1,866 (4,738) 572 (6,077) Interest 1,761 2,485 41 2,500 2,55 Net Cash Income (Loss) 105 (7,223) (1,928) (8,634) Depreciation 4,532 4,999 5,000 5 Net Income (Loss) (4,427) (12,222) (6,928) (13,698) RatiosJ4 Operating (%) 116 100 120 139 Working (%) 101 80 106 125 /1 Including revenues and expenditures not chargeable to operational results. /2 RENFE estimate in 1974 7 Net of expenses charged to investments. A Excluding revenue from the Canon de Coincidencia. Source: RENFE - December 1976 SPAIN - thAN 772-SP PROJECT COMPILETION REPORT THIRD RAILWAY PROJECT RiENFE; ESTIMATED (1971-79) AND ACTUAL (1971-75) REVENUES, EXPENSES, AND NET INCOME (Million pesetas) 1971 1972 1973 1974 1975 1976 1977 1978 1979 Renfe Renfe Renfe Renfe ApPr. Actual APt. Actual APPr. Actual Apr. Actual Ap- Actual Ap let. Eat. Bat. Operating Revenue. Passenger 9410 9078 10070 10008 10340 12200 10610 12613 10880 14382 11130 19230 21316 22381 23500 Freight 9010 8173 9740 9841 10190 11681 10930 14049 11500 14553 11800 19116 21738 24347 28000 MIscellaneous: MaIl 880 903 940 943 990 1020 1030 1101 1070 1226 1100 1737 1935 2240 2345 Canon do Coincidencia 1610 1550 2170 1902 2370 2163 2580 2296 2780 2596 2990 3147 3663 3939 4333 Other 1140 1530 1520 1846 1730 1601 1790 3572 1850 5304 1970 A 4151 4452 5057 Total Miscellaneous 3630 3983 4630 4691 5090 4784 5400 6969 5700 9126 6060 8495 9749 10631 11735 Total operating Revenues 26050 21834 24440 24540 25620 28665 26940 33631 28080 38061 28990 46841 52803 57359 63235 Operating Expenses Personnel 14910 14690 15340 16188 14500 17830 13650 21944 12890 26618 12890 33666 35532 35104 34525 Pe*r 1920 1991 1880 2058 1860 2263 1890 3235 19)0 3566 1940 3982 3585 3500 3600 Other 5870 4626 5520 4789 5450 5558 5390 6586 5360 12615 5300 1324 13119 13075 12986 Total Operating Expenses (excluding depreciation) 22700 21307 22740 23035 21810 25651 20930 31765 20160 42799 20130 50772 52236 51679 51111 Pet Cash operating Sovenuoa (deficit) (650) 527 1700 1505 3810 3014 6010 1466 7920 (4738) 8660 (3931) 567 5680 12124 J7terest M0 693 730 752 950 1025 1100 1761 1190 2485 1200 5112 5536 5756 6304 Not Cash Income (los) (1400) (166) 970 753 2860 1989 4910 405 6730 (7223) 7660 (9043) (4969) (76) 5820 DEprociation Expense 3850 3130 4070 3860 4370 4410 4680 4532 5040 4999 5450 5367 6443 7494 8053 Net Income (toss) (5250) (3296) (3100) (3107) (1510) (2421) 230 (4427) 1690 (12222) 2210 (14410) (11412) (7570) (2233) M.tios a Operating ( ) 130 120 120 119 113 113 105 116 100 135 98 128 119 111 100 Working (1) 111 105 102 102 94 97 86 1O 80 121 77 116 106 96 87 Etomgn aerlle Not Fixed-Asset in Us a) -7.3 -5.0 -5.0 -4.6 -3.0 -3.3 -1.2 -4.2 0.1 -9.3 0.4 -8.6 -6.1 -3.4 -0.1 Ithout taking Into account thq revenue from the Canon de Coincidencie. 2 Defined as the ratio of total operating expenses to total operating revenue (including 4spreciation). LI Defined so the ratio of total operating expenses to total operating revenue (exciuding deprecistion). 4 4et Income (lose)(before charging Interest and excluding Canon do Coincidencia) as percentage of ayerage net-fixed espets In use (see Table 14 for years 1971 to 1975; later vears estiated as follo.s, in peetas billions: 1976: 145.0; 1977: 1$7.0; 1979: 170.0; 1980: 185.0.) Source; Estioates Ire 1911 - 1976 Appraisal Report P11-89 (Loan 772-SP) Actuals for 1971 - 1976 from Rente detorias (1971-1974), and "Inforacw 9conomico. Ejercicin 1975". - 44 - SPAIN - Loan 772-SP Table 12 Project Completion Report Third Railway Project RENFE: Staffing and Salaries Minimum Average Cost of Staffing 3alary Salary Living Index Index Index Index Staffing 1969=100 1969=100 1969=100 1969=100 1969 88,216 100 100 100 100 1970 82,624 94 117 112 106 1971 78,972 89 155 138 114 1972 76,960 87 171 159 124 1973 73,377 83 206 182 140 1974 72,733 82 244 231 162 1975 72,028 81 308 285 189 Source: RENFE "Informe Economico Ejercicio 1975" December 1976 - 45 - SPAIN - Loan 772-SP Table 13 Project Completion Report Third Railway Project RENFE: OVERALL VIEW OF ESTIMATED AND ACTUAL FINANCIAL EVOLUTION 1971 1972 1973 1974 1975 1. Net surplus or deficit (billion ptas.) 1964 estimate 0.29 0.65 1.90 n.a. n.a. 1967 " 1.53 1.98 3.10 n.a. n.a. 1971 " -5.25 -3.10 -1.51 0.23 1.69 Actual -3.30 -3.11 -2.42 -4.43 -12.22 2. Operating Ratio 1964 estimate 93 91 87 n.a. n.a. 1967 " 89 87 85 n.a. n.a. 1971 " 1/ 130 120 113 105 100 Actual 1/ 121 119 113 116 135 3. Working Ratio 1964 estimate 78 76 71 n.a. n.a. 1967 " 76 74 71 n.a. n.a. 1971 " 1/ 111 102 94 86 80 Actual 1/ 105 102 97 101 121 4. Current Ratio 1964 estimate 1.3 1.4 1.9 n.a. n.a. 1967 " 2.0 2.0 3.9 n.a. n.a. 1971 " 2.5 2.5 2.2 2.1 1.9 Actual 1.5 1.2 1.4 1.6 1.3 5. Liquid Ratio 1964 estimate 0.8 0.8 1.2 n.a. n.a. 1967 " 1.1 1.0 2.0 n.a. n.a. 1971 " 1.3 1.4 1.2 1.0 1.0 Actual 0.8 0.7 0.8 1.1 1.0 1/ The actual Operating and Working Ratios and the 1971 estimate do not include revenue from the Canon de Coincidencia. Source: Estimates from Appraisal Reports, Actuals from RENFE - "Informe Economico del Ejercicio," 1973, 1974, 1975. SPAI¥ - þ1an 772-SP roreuat end otal Balano* Sheot., Deo~me 31, 1971-75 1971 1972 1973 19711 1975 tpprial ÅpRe-.al Appraiml ppApprataal ZEtimt* lotual Etia Actual Eti-te ctal &~tetimt. Act.l stimta Atal :.- - -- - - - - -.- - - -.- - -- - - - - .. r -roogtaa Fållions- . - -- - - - - - - - - - -- - - - -- - - - --- - -- - - - - - --- Gro ng f ted A 1.ts in sep 303.9 02.9 15.6 122.2 127.1 1U6.6 139.2 155.2 152.0 177.5 usc Aola.td Dproaticc 1B.2 17. 22 2 22.2 6 27. 30.9 31.1 8 »et ~ Austa lae e. -c . m = , . = 44•M WoTk-in-progr~ss • O. - 0.2 - 0.2 - 0.2 s.bta get n aånte 05.7 45.9 93.b 100.1 100.7 113.4 - 108.. - 124.3 136.2 142.8 Non--r-nee 30 yr. Plan ~ omee (lass A~r atioo)ä . 3.5 3.3 5.0 4.7 6.5 5.8 7.9 7.0 9.0 9.2 Inventeante, I1~n, B~nd. and Deposilt _0. 0.5 0.3 0.3 0.5 0.3 _-.. stotal Othmr a-q.rren$ As.et. 3.9 3.8 5.3 5.2 6.8 6.3 8.2 7.5 9.3 9.7 set 0r et t O~ret LD90t41 Ca.b and B Balenano 2.9 4.4 3.4 1.4 2.8 2.2 2.2 2.3 2.1 2.7 Inetrlas 4.1 5.2 3.9 6.2 3.7 7.8 3.6 9.1 3.. 9.8 ?rade Debtc-. e ac, belh rötalmed lp ~h acounLö fcr splanatory purpcnoj. - 47 - Table 15 SPAIN - Loan 772-SP PROJECT COMPLETION REPORT THIRD RAILWAY PROJECT PASSENGER TRAIN ACCIDENTS Year Deaths Injuries Total Passenger- Casualties per Casualties Kilometers 107 psgr-km X 10g- 1960 0 346 346 7.3 47.4 1961 37 411 448 7.8 57.4 1962 0 185 185 8.8 21.0 1963 5 343 348 10.1 34.5 1964 3 235 238 11.4 20.9 1965 35 384 419 12.2 34.3 1966 25 253 278 12.5 22.2 1967 1 255 256 12.4 20.6 1968 33 247 280 11.8 23.7 1969 0 126 126 12.6 10.0 1970 2 79 81 13.3 6.1 1971 9 46 55 13.5 4.1 1972 73 36 109 14.4 7.6 1973 0 1 1 15.6 -0.1 1974 3 2 5 16.1 0.3 SOURCE: RENFE, Memorias December, 1976 U v ii P L Ep1 w u03 m[ U ffi 4 - s k *f.j~i J I~ ~ 1 I~ 1 II I' - 49 - DRAFT LETTER TO RENFE ANNEX 2 Page 1 Excm. Senor Placido Alvarez Fidalgo El Presidente Red Nacional de los Ferrocariles Espanoles Plaza de los Segrados Corazones No. 7 Madrid Spain Dear Senor Alvarez: I should like to offer our belated thanks for the courtesy and assistance extended by you and your staff to the railway mission which visited RENFE early in the summer. This mission was the last regular supervision mission we shall send for the third loan to RENFE which has now been completely disbursed. Nevertheless, we shall continue to have an interest in RENFE's financial health and operational performance. We recognize that RENFE's present financial situation has largely been brought about by circumstances beyond the control of either RENFE or the Spanish government. In fact, RENFE's performance, when compared with the performance of other European railways during this recessionary period, continues to reflect well the quality of RENFE management. Nevertheless, we feel that every effort must continue to be made to raise revenues and control costs. Furthermore, proposed investments should be reviewed critically in order to keep future capital costs in line with the expected traffic base. In the attached letter to the Secretary General of the Consejo Superior de Transport Terrestres we have once again pressed for new trans- port regulations, the abolition of the Canon de Coincidencia, and tariff increases for RENFE. We recognize the political constraints which may militate against immediate action on these matters, but we feel that action on all of them is necessary to re-establish RENFE's financial health. In view of the success which RENFE has had in meeting the goals of the 1972-1975 Plan, we would urge that some rather severe targets for operational performance be set in the next plan, in particular for freight wagon utilization, locomotive utilization, and staff productivity. As the mission mentioned to you, the Bank will be unable to participate in an appraisal of the new Madrid-Barcelona High Speed Line Project. The Bank normally does not appraise specific railway construction projects, but only a railway's overall investment program with a view to financing a portion of it. Because of increasing calls for Bank involvement in other less developed member countries, we regret that we will not be able to appraise any further RENFE projects. However, should RENFE decide to proceed with the new line project, we would be most happy to review - 50 - ANNEX 2 Page 2 and offer comments on the project documents. Even though we will no longer send staff to discuss RENFE's situation in detail, we do ask that you continue to send us the annual "Memoria" and other reports dealing with new investment activities. We also hope you will be willing to receive occasional visits from Bank staff as they proceed to or from other countries as we believe that the progress made on many of your problems has direct applicability to some of the Bank's other railway borrowers. I am sure that all concerned have been impressed by RENFE's performance even during the current economic crisis. We feel that RENFE's management has the ability, with the help of the Spanish government, to bring the organization out of what you so aptly referred to as this "decidedly hostile" economic environment. We wish you well. Yours sincerely, D. C. Elliott Railways, Ports and Pipelines Division Europe, Middle East and North Africa Region Copy to Senor Jorge Kernando Secretario General Consejo Superior de Transportes Terrestres Madrid To be cleared with and cc: Mr, F, Povey - 51 - DRAFT LETTER TO CONSEJO SUPERIOR DE TRANSPORTES TERRESTRES ANNEX 3 Sr. Jorge Hernando Secretario General Consejo Superior de Transportes Terrestres Ministerio de Obras Publicas Nuevos Ministerios Madrid Spain Dear Sr. Hernando: We thank you for your letter of September 7 to Mr. Ditmeyer and for the courtesies which you and your staff extended to Messrs. Mignot and Ditmeyer during their mission last summer. Even though disbursements of the Third Railway Loan have been completed and regular supervision of the project terminated, we agree with you that it would be most worthwhile to maintain a continuing relationship between our organiz- ations. We would be most pleased to continue to receive periodic reports from the Consejo and RENFE, and, time permitting, to give you our comments on them. The problems facing RENFE and, indeed, the entire transport sector in Spain are presently quite severe, but we believe that both the Consejo and RENFE have the institutional capabilities to devise solutions to these problems although we, of course, recognize the political constraints to their implementation. Nevertheless, we urge the Consejo to continue to press for the abolition of the Canon de Coincidencia and the establishment of the new transport regulations which should end some of the present modal distortions. We also feel that for RENFE to continue to serve as a major provider of transport services in Spain, it will be necessary for the Government to take steps to re-establish and ensure the financial health of RENFE. In particular, this would mean the raising of tariffs to cover the increased costs of energy as well as the Government-mandated wage increases. RENFE will be able to raise the necessary capital for future investments only if it has the ability to bring its revenues up in line with its costs. We have found our relationship with the Consejo and RENFE to have been very constructive and rewarding, and we wish both organizations well in overcoming this period of economic difficulty. Yours sincerely, D. C. Elliott Chief, Railways, Ports and Pipelines Division Europe, Middle East and North Africa Region Copy to Excm. Senor Placido Alvarez Fidalgo El Presidente Red Nacional de los Ferrocariles Espanoles To be cleared with and cc: Mr. F. Povey - 52 - ANNEX 4 Page 1 Project Completion Report SPAIN - Loan 772-SP Third Railway Project OBJECTIVES OF THE 1972-1975 RENFE PLAN OBJECTIVE 1 - To achieve a quality level of 140 km/hr on the basic system and improve suburban services in the major cities. Realization: Proposed "quality level" may be said to have been reached. Talgo trains, electric trains, and new diesel trainsets are capable of 140 km/hr on the basic routes. Suburban services have been upgraded in Barcelona, Madrid, Bilbao, San Sebastian, Asturias, and Malaga. Comment: "140 km/hr" is a design specification and not a performance speci- fication. Competitive times, not speeds, make a service attractive. This objective should have been to achieve competitive times with other modes on the basic routes. The speed requirements for a particular line could then be determined accordingly. OBJECTIVE 2 - To increase RENFE's participation in the freight traffic market with a growth rate in excess of that of GNP. Realization: GNP grew a total of 23.1% for the period 1972-1975, and while RENFE's freight traffic grew 33% from 1972-1974, growth for the entire four- year period was 22.9%. OBJECTIVE 3 - To increase output by a cumulative average of 10.4% a year. Realization: RENFE believes this has been 95% achieved on the basis of the following accomplishments: a) Crossing guards eliminated at 1,192 grade crossings. b) Mechanized track maintenance equipment now capable of maintaining 3,000 km of track annually. c) 373 freight stations closed. d) Elimination of steam locomotives permitted the closing of eight depots and three central repair shops. OBJECTIVE 4 - To gradually improve staff working conditions and social plant. Realization: Wage increases have been granted at a rate exceeding increases in the cost of living. Direct earnings Cost-of-living increase 1972 11% 7.3% 1973 17% 14.2% 1974 15% 17.8% 1.975 25% 14.0% Total 87% 64,6% - 53 - ANNEX 4 Page 2 Over 2,800 housing units were built by RENFE or RENFE-sponsored cooperatives, 4,095 housing loan guarantees were granted, and seven commissaries and 10 workers' supermarkets have been opened. OBJECTIVE 5 - To introduce basic technological innovations for the railroad of the future. Realization: a) Air brakes have been installed (in lieu of vacuum brakes) on nine passenger train sets. b) Electric heating has been installed (in lieu of steam heating) on 49 passenger trainsets. c) Automatic train stop (ATS) and cab signaling equipment being installed on basic and supplementary routes; 6,000 signals now in place, and receivers installed on 500 locomotives. d) Tilting-body passenger trains now being tested, have potential to raise train speeds by 30%. (Note: This has rarely been achieved in actual practice. The usual result is some improvement in ride quality through reduction in lateral accelerations on curves.) e) Development of plans with Ministry of Public Works for improve- ments in railway access to cities. OBJECTIVE 6 - To introduce a flexible rate system adapted to cost trends, making it possible to respond to demand and to compete in the transportation market. Realization: This objective has not been fully met. Average tariff increases from 1971 to 1975 represented 39.2% for passengers and 33.1% for freight, against a cost increase in excess of 80%. The Government, however, blocked only one tariff increase and that was in 1974. RENFE did raise tariffs in August 1972 and June 1973 according to principles outlined in the Loan Agreement. However, after the recession began, RENFE was reluctant to seek further increases for fear of driving business away. OBJECTIVE 7 - To ensure that operating revenue covers not only business operating expenses, but also depreciation and financial costs. Realization: See comments regarding realization of Objective 6. OBJECTIVE 8 - To create a long-term strategy for RENFE and establish (in 1972) the Department of Strategic Objectives. Realization: The department was established and has successfully implemented a system of "management by objectives." OBJECTIVE 9 - To start exporting RENFE's know-how and cooperate with the railway industry in its export-market orientation. Realization: RENFE has established a consulting subsidiary called INECO, SA to carry out economic and engineering studies in both railway-and general transportation fields. - 54 - ANNEX 4 Page 3 OBJECTIVE 10 - To raise railroad infrastructure utilization by at least 10%. Realization: RENFE figures that they met 96.9% of this objective. Comment: RENFE, in this case, apparently calculated utilization on the ratio of track time utilized to track time available. Thus by running more trains, utilization is improved. This may be, but is not necessarily desirable. - 55 - SPAIN: Loan 772-SP ANNEX 5 Third Railway Project Page 1 ECONOMICS OF TRACK RENEWAL 1. The Performance Audit Report makes the following statements regarding track renewal: "The return of the different investment components suggests that probably too much was invested in track renewal and that the high standards at which the program was implemented might not be justified. In retrospect the construction delays might turn out to have been economically justified. The Bank does not seem to have pressed enough for an in-depth reappraisal of track renewal during the 1966 and 1970 revisions of the Program, parti- cularly on the issue of higher track standards which were to be used largely by high-speed passenger trains."I "...the low return of the track renewal program suggests that this investment should have been reappraised in more detail during the 1966 or 1970 revisions of the Program. This reappraisal would have allowed RENFE to make a better decision about the way in which the renewal program should have been continued, and about the provision of high speed passenger trains, the main users of the higher standard track."2/ 2. It is not possible to either support or refute such statements on the basis of information currently available at RENFE, and it is possible only to say that it is legitimate to question the standard to which a piece of railway track is to be maintained, renewed, or upgraded. (All three stages are mentioned here because they represent varying degrees of the same thing; maintenance generally refers to the improvement of track to a level no greater than that at the time it was constructed or last renewed; renewal and upgrading refer to higher levels of improvement.) Because of (a) the large number of components of the track structure itself (formation, ballast, sleepers, sleeper plates, fasteners, rail, joints); (b) the large number of varieties of these components (e.g., varying rail weights, profiles, and ateels; wooden or concrete sleepers; bolt, spike, or springclip fasteners; welded or bolted joints, etc.); (c) the elastic (i.e., not rigid) nature of the track structure; and (d) the large number of variables that affect the deterioration of track (axle-load, speed, curvature, gradient, cumulative tonnage, weather, amount of interim maintenance, drainage), it has not been possible for any rail- road, as yet, to build an accurate mathematical model with which to forecast the lifetime or deterioration rate of a piece of track or to establish the standard to which track should-be maintained, renewed or upgraded. 3. On the other hand, there is an extremely large body of empirical data that has been gathered over the years by the engineering departments of RENFE and other railways that is used as the basis for track maintenance. 1/ Performance Audit Report, p. 36 2/ Performance Audit Report, p. 39 -56 - ANNEX 5 Page 2 and upgrading decisions, The engineering departments usually accumulate this data in what they refer to as "Manuals of Standard Practice of Track Maintenance." It is on the basis of such a manual that RENFE's track upgrading decisions were made. Without new specific and detailed records for a reasonably long period regarding maintenance costs, traffic, and all the other track variables before and after upgrading, it is extremely difficult to refute the decisions of the railway engineers which were based on the "Manuals of Standard Practice". 4. The following Figure 1 describes the relationship between track quality (higher quality refers to a smaller deviation from a specific geometric standard) and amount of use (cumulative gross tonnage). Assuming that use is constant over time, the abscissa could also be used to represent time. Figure 1. Quality of Track b c d e Cumulative gross tonnage Time When track is built or renewed to high quality (a) it deteriorates at a very slow rate. Because at a high quality level there are few geometric anomalies in the track, there is little excitation of the vehicles and consequently the dynamic forces on the track are minimized. By the time the track has deterior- ated to (b), the geometric anomalies (variations in gauge, profile, alignment, and cross level) have built up to the extent that more severe vehicle excitations are taking place, and these in turn are resulting in increased dynamic forces which cause the rate of deterioration to increase. At track quality (c), the geometrics have deteriorated to the point that train speeds have to be restricted to keep the dynamic forces within safety limits. However, the forces on the vehicles and also on the track are still severe and track deterioration continues at a rapid rate. When the track has deteriorated to level (d), major restric- tions are placed on train speed, and axle loadings may be limited as well. As a result the forces on the track are reduced, and the rate of deterioration lessens as the track slowly deteriorates to the point (e) where it can no longer be used. - 57 - ANNEX 5 Page 3 5. Figure 2 shows the effect of two different upgrading policies. Figure 2. Quality of Track Qa a b bb2 Qc c2 dd d d2 Td T Td2 Time Under policy 1, when the track reaches quality level Qd' it is upgraded to quality level Qb. Because at quality level Qb the track is at a state where the deterioration rate is high, the track deteriorates rapidly again to Qd in the time Td1 - Td. Under policy 2, when the track reaches quality level Qd it is upgraded to quality level Qa, a level at which the deterioration rate is much less. Consequently, the time required for the track to deteriorate to Qd (Td2 - Td) is significantly longer than Tdl - Td* 6. It is difficult to show graphically the relationship between costs and improvements in the quality levels shown on the graph. If we say, for the purpose of illustration, that upgrading costs are linear with quality level, then it would be possible to say that for a 50% greater expenditure [(Qa - Qd) 1.5 (Qb - QdY] the track would last more than twice as long until it required renewal. Under this circumstance it would clearly be a sound economic decision to renew the track to quality level Qa* 7. Costs, however, are not linear with changes in quality. It probably costs about the same to upgrade from Qd to Qc, Qc to Qb, or Qb to Qa. That is because for a single level of upgrading little or no track material is required, only labor and/or machinery for surfacing and aligning the track. However, when the improvement is greater than one quality level, then it is usually necessary to replace some or most of the track components. It follows then that the cost of upgrading three quality levels is only slightly greater than upgrading two, since the principal difference would be working to tighter geometric standards. - 58 - ANNEX 5 Page 4 8. If a decision is made to make only single level quality improvements and not to replace any track components, the sound decision would be to catch the track at Qb and renew it to Qa, as shown in Figure 3. Figure 3. Quality of T r a c k a a Qb b1 Qc c2 Tb Tc Te2 Tb Time Track renewed from Qb to Qa will last time Tbl - Tb, which is significantly longer than the time Tc2 - Tc which is the time that track renewed from Qc to Qb would last before requiring single-level improvement. 9. The precise condition of RENFE's track before the renewal program took place is not known. However, the Appraisal Report implies that some track was at Qd, with speed and load restrictions being imposed for safety reasons. Likewise it is difficult to describe precisely the condition at present (because of the variables), but presumably it is Qa or Qb. It is, of course, possible to spend additional money on track that would simply "1gold-plate" it and not raise it above level Q . Spot checks by the mission, however, indicated that that was not done. - 59 - Figure 1 Assistants to the President Office of Planning and - Transport Economics b z Center for Staff (D_0 Training Legal Department Office of Organization Planning Purchasing Department Financial Department o MI (D Data Process2ing Department Works and Installations Department Material and Traction Department - Transportation Department Commercial Department Department Innovations Department ( Strategic Planning Department * m M,, 0m co 0 0 May 1976 *M&Tnbpy nf Rti-tom r'-~T,4- u IBRD 1242 OCTOBER 197 8°6°4° 2- 0° 2 eSntander Sonturce -Hendayi F R A N C E 0.9 r95 OVIEIDO O 44.5'0 3.39114. 3 333 32 2 5.51 9 42BILBAO 214 3.6 Barruelo Cidad Dosant Alsasua Villa(ranca del B 0 Mata- 0 82 Parnplona 2.702 2 7 5*5 58 56 Porque rid134 24 3.2 Conf la Tour • rbare 2 - 2. .. 24. 202 0 Puela de 5. 2" 7 45 - rq I - ,' 44 128Q3 5b J-d la ~4.7 0 14 6 Logrono Huesca 0 3 Ripoll bade 42° Vigo ateon Barbastro ,rona 7.5 uillar p, 06 0 8 1g 41 0.1 6 0.5 0.6 ' -42° 040.1 (/1. '911.2 32 02 T3 5 4 21 6 39-79 V a l d.1 16 0 8 A ra n d a S o r a C a s e . A .A 2 4 Vala ----____._01juyAR O A . K)Zamora 39 3 15.5 07 0.2 \ 18 14.1 3 Q i Medina del C 3 Coscuria e,3. 2.461 124 5.9 BARCELONA Salamnancao 5 12 Segv9 76 0.1 6 Tarragona 1.9 14 54 34.47 Fuentes tosa Onr 14 17' 2651 12,4 s 0.8 1 65Teruel 12 15 / ADRID 6Cuenca 12' 1 9 G .odC4° 24 Talavera 2. . ý8 . -.a e 4 * IPalazuelo 40* 4.01. -4 °2..4 2" 22 Toledo O 0. 4ia 9-< Valencia de A. 0. Caceres un, VALENCIA Badjo 2.1 SPA5IN h...h. 2Meridaa Ciudad Peal Gada RE F P W R 1 ~ 8 ~ ~ r,a.,ae, . -< ~RENFE NETWIORK B 2.6/02.7 -- -., Chr.:. .na OAlcoy TRAFFIC DENSITY IN MILLIONS 2.6 0.8 Almorchon 4.6 Ta3,5 J1 rz1 Zr*.5 45 OF GROSS TON-KILOMETERS 1972 0 de las C . 3.2 Los Salidos 0 1 Cerro del H. Murci .Y 100 inares-Baeza Torrevieja 3812 Cordoba 206 Almendco 15 4 Freight 3 6.2 Jce 4 0 21 artagena Escombreras 263 PassengerS 1 0 1SEVILLA 1 .,B 01 0.3 0. SEVLL 5.8 Capo Rea 2.2 2 .2Baza OAgul Huelva La Roda 11 14 5- - International Boundaries 314/ 6.7 -_. Granada 14 oba~i~ Iluife 1.5 Sanlucar 33 bo. Aiufe1 de B 0 gaAlerio 9 23 23 0 50 100 150 200 The boundaries shown on this map do not Kilometers imply endorsement or acceptance by the geciras 36° World sank and its af iates. 8° 6° 4° 2° 0° 2°  더