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Implementation Completion Report (ICR) Review - Zambia Railways Restructuring Project


  
1. Project Data:   
ICR Review Date Posted:
02/13/2006   
PROJ ID:
P003227
Appraisal
Actual
Project Name:
Zambia Railways Restructuring Project
Project Costs(US $M)
 31.00  31.99
Country:
Zambia
Loan/Credit (US $M)
 27.00  28.99
Sector, Major Sect.:
Central government administration, Other social services, Railways,
Law and justice and public administration; Health and other social services; Transportation
Cofinancing (US $M)
   
L/C Number:
C3433      
   
Board Approval (FY)
  01
Partners involved
 
Closing Date
06/30/2004 06/30/2005
         
Evaluator: Panel Reviewer: Division Manager: Division:  
Peter Nigel Freeman
Roy Gilbert Alain A. Barbu IEGSG

2. Project Objectives and Components:

a. Objectives
To enable Zambia Railways (ZRL) through restructuring and privatization to:

  1. Increase operating efficiency;
  2. Reduce the cost of operations; and
  3. Make freight services and tariffs competitive and increase the railway's share of local, international and transit freight traffic.

b. Components (or Key Conditions in the case of Adjustment Loans):

  • Assistance with railway concessioning; primarily transaction advisory services. (Original US$ 1.1 million; actual US$ 1.3 million)
  • Staff rationalization; retrenchment costs. (Original US$ 19.5 million; actual US$ 21.1 million)
  • Assets rehabilitation; overhaul of five locomotives, wagon wheel discs and track strengthening. (Original US$ 7.2 million; actual US$ 5.8 million)
  • Environmental mitigation; pollution control equipment, cleaning-up contaminated sites, environmental management plan. (Original US$ 0.3 million; actual US$ 0.3 million)
  • Restructuring; training, office refurbishing, procurement of hardware, software and office equipment. (Original US$ 0.5 million; actual US$ 0.6 million)
  • Regulatory and legal framework; assessment of regulatory framework and drafting of legislation. (Original US$ 0.8 million; actual US$ 0.9 million)
  • Ministry of Communications and Transport (MCT) strengthening; training, software, computer networking. (Original 0.5 million; actual US$ 0.7 million)
  • Social mitigation; counseling, training. (Original US$ 1.1 million; actual US$ 1.3 million).

  • c. Comments on Project Cost, Financing, Borrower Contribution, and Dates
    An amendment was approved in September, 2002 to add a civil works component to the project. The aim was to improve living conditions in retrenched staff resettlement areas, through improving accessibility by the upgrading of feeder roads and by improving the reliability and quality of the water supply by drilling boreholes in areas where former railway staff were provided with plots of land for farming purposes. About US$ 1.0 million of the credit was canceled, which was a gain due to the exchange rate fluctuations between Special Drawing Rights and US dollars. The project closed 18 months later than planned due to delays in achieving the actual concessioning of the railway. This delay was caused by lengthy deliberations between the Government of the Republic of Zambia (GOZ) appointed negotiating team and the preferred bidder, complicated by representations to GOZ by the second placed bidder.


    3. Relevance of Objectives & Design:

    The development objectives were formulated to be consistent with the Bank's Country Assistance Strategy and the Transport Policy defined by GOZ. The project design process was sound with intensive interactions between the Zambian Privatization Agency, the ZRL, GOZ, staff unions, major customers and other major stakeholders. A Policy and Human Resource Development Trust Fund grant of Yen 55.5 million was used to finance a study to provide a clear framework for involving the private sector and the Swedish International Development and Cooperation Agency provided parallel assistance to prevent further deterioration of the railways during the period leading up the concessioning. In April 2002 a Quality Enhancement Review (QER) of the project was undertaken and concluded that the process of engagement was satisfactory and that there was strong leadership in the project. The QER also made useful recommendations regarding the concession design, social mitigation measures, and investment proposals. Performance indicators covering volume of freight carried, income tax paid and cash flow were included in the PAD, but more thought should have been given to the design of this aspect.

    4. Achievement of Objectives (Efficacy) :


    Increased operating efficiency (Substantially achieved).

    Despite opposition by some stakeholders and a challenge from the second placed bidder, the concessioning took place on December 3, 2003. All concession fee obligations were met and US$ 3.7 million was transferred to GOZ as well as US$ 1.3 million in corporate taxes. However, there is a dispute concerning the extent of the fee obligations, which are said to favor the concessionaire; this is now under review by a committee commissioned by GOZ in December, 2005. An environmental mitigation program was carried out and draft railway legislation has been drawn up and a Government Inspector of Railways appointed. There was some asset rehabilitation under the credit, including 4 locomotives overhauled, 1,980 wagon wheels purchased, 255 defective wagons repaired, 22 km of track re-laid, while other track sections were strengthened. Since then the concessionaire has rehabilitated 266 km of track (with another 450 km in progress), 8 remanufactured engines have been ordered, 80 wagons a month are being rehabilitated and 298 refurbished passenger coaches have been procured from South Africa. The ICR notes that this level of investment is adequate and this may well be the case, but there is nothing to measure progress against. Presumably, in line with standard business practice, there must have been a condition assessment of the entire system and an investment program drawn up. However, no mention of this is made in the ICR.

    Reduce the cost of operations (Substantially achieved)

    The labor force was downsized from 3,300 to 800 staff by the concessioning date. While this must have resulted in a big increase in labor productivity, this is not backed-up by an appropriate performance indicator. The average haul length increased by 25% and freight traffic overall by 20% based on net ton kilometers. ZRL was restructured and downsized to 25 staff appropriate to manage the railway concession. The FIRR at appraisal was 38.1% and at completion 41.6%; so far there is no reason why this figure cannot be met. It assumes a variable cost reflecting adequate maintenance, but is based on traffic projections, but only time will tell to what extent these projections will be correct.

    Make freight services and tariffs competitive and increase the railway's share of local, international and transit freight traffic. (Modestly achieved).

    All the above improvements will make the services and tariffs more competitive and potentially could increase the railway's share of freight traffic. However, there is little indication at this stage as to how much freight traffic will be captured in the medium term or whether the share of road freight traffic will be seriously eroded, given that there is a world-wide swing from rail to road for non-bulk traffic. The ICR did not provide information on comparative road rail tariffs and market share.

    5. Efficiency:

    At appraisal the ERR was estimated at 28.1%, while at completion the ERR was calculated to be 33.0%. This was based on traffic increasing at the rate of 10% per year for the first five years and then at a rate of 2% per year thereafter. It was also based on the staff reduction achieved from 3,300 to 800 staff. The expected increase in traffic volumes may be a reasonable projection, but the impact of the delay before the concession became operational and the elasticity of demand for rail versus road freight do not appear to have been factored in.
    6. M&E Design, Implementation, & Utilization:

    While there are sufficient output indicators charting the (slow) progress of the activities involved in the concessioning, outcome freight indicators are limited to progress with net ton kilometers for long distance operations, which admittedly have improved. The information on taxes and concession fees paid is satisfactory, however. There are no indicators to measure market share or labor productivity. Under output indicators the social mitigation measures completed are well-documented showing the extent of asset rehabilitation. However, no targets have been set against which to measure the progress with such asset rehabilitation, although there is an admission in the ICR text that the backlog is significant after years of neglect. On balance much more effort could have been given to M&E.
    7. Other (Safeguards, Fiduciary, Unintended Impacts--Positive & Negative):

    The project profile with staff retrenchment and social mitigation details was sent to the Bank's top management in accordance with the Operational Manual (BP12.00) on March 5, 1996 for approval and advice. No safeguards were violated and the social mitigation measures appear to have been handled well; for example 80% of retrenched people who received training in small business have actually established small businesses, and those going into farming have received training and other benefits such as boreholes and access roads.

    8. Ratings:
    ICR
    ICR Review
    Reason for Disagreement/Comments
    Outcome: 
    SatisfactorySatisfactory
    Institutional Dev.: 
    SubstantialSubstantial
    Sustainability: 
    LikelyNon-evaluableThe predictions for future traffic growth and impact on market share need to be carefully re-assessed after two years.
    Bank Perf.: 
    SatisfactorySatisfactory
    Borrower Perf.: 
    SatisfactorySatisfactory
    Quality of ICR: 
    Satisfactory

    NOTES:
    - When insufficient information is provided by the Bank for IEG to arrive at a clear rating, IEG will downgrade the relevant ratings as warranted beginning July 1, 2006.
    - ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness.

    9. Lessons:

    1. Concession bid processes should be designed to avoid protracted negotiations with the winning bidder after the award by holding intensive discussions with pre-qualified bidders to reach up-front consensus on the concession agreement before the bidding process takes place.
    2. A process of thorough communication with government and key stakeholders especially during preparation is imperative for a successful railway concession design.
    3. Sound social mitigation measures can successfully ameliorate the adverse impact of retrenchment in concessioning projects.
    4. To measure future progress of the projections in a concession project a sound M&E framework should be established.

    10. Assessment Recommended?  Yes

              Why?  This project is important in the African context and the sustainability of the reforms need to be assessed, not less than two years after project closure. The proposed assessment should focus particularly on the cost efficiency and competitiveness aspects and should note the outcome of the review committee of parliament on the fee obligation issue.

    11. Comments on Quality of ICR:

    The ICR is well-presented and describes the process followed quite clearly. It could, however, have been more critical of the lack of indicators to measure future progress. The weak M&E framework, acknowledged in the ICR, was a weakness in the project design.

    (ES-Rev4B-Dec/05)
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