Updated Project Information Document (PID)

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Updated Project Information Document (PID) Report No: AB938 Project Name MOZAMBIQUE - Beira Railway Project Region Africa Regional Office Sector Railways (100%) Theme Other financial and private sector development (P); Other public sector governance(s) Project P082618 Borrower(s) GOVERNMENT OF MOZAMBIQUE Implementing Agency(ies) CFM Address: Caixa Poatal 2158 Praca dos Trabalhadores, Maputo, Mozambique Contact Person: Mr. Rui Fonseca Tel: 258 (1) 431706 Fax: 258 (1) 313364 Email: ruifonseca@cfmnet.co.mz Environment Category B (Partial Assessment) Date PID Prepared May 24, 2004 Auth Appr/Negs Date June 21, 2004 Bank Approval Date October 28, 2004 1. Country and Sector Background Mozambique has sustained a high economic growth rate since achieving peace in 1992, mainly due to transformation of a centrally planned state-controlled economy into a market-oriented one. As a result of peace, democracy, liberalization, and prudent monetary and fiscal policies, Mozambique s GDP growth rate has been well above the African average. Growth averaged 9% per annum from 1997 to 2002, and is projected at between 7% and 12% annually until 2005. Continued growth will require, among others, improvements in basic infrastructure and reduction in impediments to private sector growth. Mozambique is highly dependent upon regional trade and investment flows and regional developments can significantly influence the pace and sustainability of its own development. Mozambique has ratified the Southern Africa Development Community (SADC) trade protocol in 1999, which aims to establish a free trade area in southern Africa, both reflecting and giving greater momentum to regional integration. Effective functioning of the transport sector - roads, railways, airports, and seaports in particular, within the Maputo, Beira and Nampula corridors (which are part of the SADC spatial development initiative) is critical for maintaining this momentum and for managing the increased interdependence between Mozambique and its neighbors. However, the transport sector is constrained by: (i) high freight transport costs (for example, in the railway sector, they are almost twice the rates prevailing in efficiently run

railways around the world); (ii) unpredictability of railway operations (delays in wagon and locomotive allocations, improper handling and storage of goods, varying transit times, etc.); (iii) inability of public sector entities in the transport sector to generate enough surplus to keep their assets in a good condition; (iv) deteriorating condition of the rail and road infrastructure because of inadequate and irregular flow of funds for maintenance; (v) inadequate management of public enterprises due to bureaucratic culture, poor incentives structure, cumbersome rules and procedures and political influencing of management decisions; and (vi) inadequate safety consciousness, poor staff training, and inadequate enforcement of safety and environmental regulations, leading to a high rate of accidents, both on roads and railways. To address these issues, GOM is in the process of implementing wide ranging reforms in the transport sector. The reforms in the roads sub-sector include separating funding and planning functions from execution of works, establishing the Road Fund as an autonomous legal entity, and strengthening the capacity of agencies to undertake and monitor road works. In the railway and ports sub-sector, the reforms have focused on involving the private sector in their management and operation, thus laying the foundation for improved efficiency in these sub-sectors. However, the reforms have yet to impact the central region of Mozambique, where poor transport connection of the areas located along the Zambezi river to the port of Beira has adversely affected the growth and compromised regional trade and flow of investments. In the past, the main transport system for the central region in Mozambique was the Sena railway line, which carried coal, wood, cotton, fertilizer, cement, sugar, limestone and other agricultural products. The Sena line is about 600km and passes through the provinces of Sofala, Tete, Manica and Zambezi, with a total population of 4.75 million. If rehabilitated, the Sena line would have a significant impact on improving accessibility of this area, particularly the eastern part of the district of Gorongosa, northwestern part of the Cherigoma district, and southeastern part of Moatize. It would also improve access to the Port of Beira from Malawi. Since 1983, the line had to close and discontinue operations due to extensive damage during the internal conflict. In the absence of appropriate transport systems, poor inhabitants are forced to walk miles to reach markets, satisfy social obligations and, consequently, development of any kind of business, even agri-business is proving difficult. The rehabilitation of the Beira rail system is, therefore, considered critical and GOM is keen do so through the involvement of the private sector not only in rehabilitation, but also in operation and management of the system. Efficient operation of the Beira rail is expected to create economic activities through increased production of coal, wood, cotton and other agricultural products in the area and to increase the incomes of inhabitants through higher consumption and investment. GOM intends to concession the Beira Rail system as a Build-Operate-Transfer (BOT) scheme, with the concessionaire having the responsibility to rehabilitate the Beira rail system and then operate the same for a period of 25 years. The project is expected to require a high share of public funding as the region has a weak economic base which means that it will take time for the economic development of the region and for the build up of traffic. In the mean time, economic benefits are expected to be substantial and

justify rehabilitation of the line. The Government would like to support the initial investment required to rehabilitate and operate the system efficiently. The initial investments would be adequate to carry the traffic on-offer. However, plans are underway to concession the Moatize coalmines to the private sector (estimated to take 8-10 years), at which time the traffic is expected to grow rapidly. Consequently, the design of the Beira Railway concession makes adequate provisions for negotiation among the potential coalmine concessionaire, the rail concessionaire and the Government so as to agree on the standards and the terms and conditions necessary to satisfy the requirements of the additional traffic. Government Strategy for the rail sub-sector The Government has initiated a number of reforms in the past few years to improve operation and maintenance of the railway sub-sector, with a particular focus on: (a) large scale involvement of the private sector in the operation and management of all the ports and railways; (b) rationalization of the CFM staff including retrenchment of surplus staff. In 1996, CFM had close to 20,000 staff. After all the concessions have been operational and the necessary staff transferred, CFM will be left with about 500 staff. The social mitigation measures for the retrenched staff are being implemented satisfactorily; (c) comprehensive restructuring of CFM involving: (i) separation of strategic, corporate and regulatory functions from day-to-day commercial and operating functions; (ii) making the headquarters and the zonal units lean and thin; (iii) replacing traditional railway skills in the headquarters with specialized legal, financial, institutional and corporate functions; (iv) increasing accountability through well structured performance contracts between GoM and CFM; and (d) compliance with the environmental and safety standards as part of the concession agreement as well as strengthen safety and environment related regulation. 2. Objectives The main development objectives of the proposed Project are to: (i) make cost effective and efficient transport available for the freight and passenger traffic in the Zambezi Valley to accelerate economic growth in the sub-region; (ii) increase international traffic through the Beira Railway system; and (iii) improve the operational, managerial and financial sustainability of the Beira railway system. 3. Rationale for Bank s Involvement The Bank Group is ideally suited to help improve the investment climate. It can provide not only full-service policy advice, but also complementary instruments to support implementation. Through its long standing association with Mozambique, IDA has developed a deep knowledge of the country s transport sector and is well positioned to support the implementation of the government transport reform program in continuation

of its extensive involvement in the sector and partnership with other Development Partners. IDA is also supporting, or has supported in the past, similar restructuring, revitalization and privatization projects in neighboring countries of Malawi, Zimbabwe and Zambia and is in a position to help Mozambique as well as the neighboring countries reach a common understanding for the efficient management of the rail corridors in the region. As regards the railways transport sub-sector, IDA has by now accumulated substantial experience in designing successful concession agreements, ranging from the hightrafficked Latin American railways to the relatively lower-trafficked African railways. IDA is therefore in a position to provide independent financial and technical advisory services and add value related to: risk allocation between the conceding authority and the concessionaire; internalizing regulatory issues into the concession contracts; mitigation of negative environmental and safety impacts; minimizing emerging post-privatization issues through appropriate contract design; and dispute settlement. IDA is already supporting the on-going Railways and Ports Restructuring Project (RPRP) whose main development objective is to improve the operating efficiency of the three major railway and port systems of Mozambique, namely the Nacala, Beira and Maputo port and railway systems, through the involvement of the private sector in their rehabilitation, operation and management, and through staff retrenchment and rationalization in the CFM. The retrenchment of surplus staff and their social rehabilitation is proceeding well. A total of about 10,500 staff have been retrenched, and another 3,100 are in the process of being retrenched. After completion of the staff rationalization program, including retention of needed staff by concessionaires (approximately 5,000-5,500), CFM will be left with a total of about 500 staff, down from the original total of 19,200. Preparatory activities leading up to the concessioning of the Beira Railway System were supported by IDA under the RPRP and the proposed Beira Railway Project will support its implementation. 4. Description Project Description GOM intends to award a 25 year concession of the Beira Railway System to the private sector. The concessionaire will have the responsibility for: (a) rehabilitation, maintenance, and operation of the Sena line to the town of Tete in the northwestern region of the country, including spur lines to the Moatize coal mines and to the border with Malawi (totaling about 600 km) and (b) realignment, maintenance and operation of the Machipanda line all the way to the border with Zimbabwe (about 300 km). The Machipanda line has adequate traffic and requires relatively little investment to continue operating profitably. However, the Sena line requires extensive rehabilitation, and although the estimated economic benefits are substantial, the relatively slow growth of traffic does not make the line commercially viable without a high share of public sector financial support. The project will support rehabilitation of the Sena rail line to a

standard that will carry all of the traffic on-offer and more, including coal produced by the current deep-mining technology. The project consists of two components: Component 1. Improvement of the Beira Railway System. This component comprises rehabilitation, maintenance and operation of the Beira railway system under a concession agreement with the private sector. IDA funds will be used exclusively to finance part or all of the expenditures related to the rehabilitation of the Sena line and its spur lines, totaling 600 km, including the cost of environmental and social enhancement measures. Component 2. Institutional Strengthening. This component comprises technical assistance and consultant services to enhance the capacity of CFM to manage implementation of the project and its restructured functions, supervise the construction and rehabilitation works, conduct independent technical and financial audit, and assist CFM in preparation of its long term railway and ports development plans. The total project cost is $185.0 million, of which the cost for improving the Beira Railway system (infrastructure rehabilitation and procurement of locomotives and rolling stock) as estimated by the concessionaire is US$175.2 million (including VAT). Of this, the estimated cost for the rehabilitation of Sena line is US$106 million and realignment of the Machipanda line is US$10 million. The realignment of the Machipanda line as well as provision of locomotives and wagons for both the lines will be the sole responsibility of the concessionaire. However, for the rehabilitation of the Sena Line, the concessionaire is entitled to financial support as per the successful bid. The proposed Credit will support rehabilitation of the Sena railway line in accordance with the terms of the concession agreement. The estimated cost of institutional strengthening and capacity building is $9.8 million, of which IDA will finance about $9.0 million net of taxes. The total project cost is estimated at US$185.0 million, of which IDA will support US$115.0 million. 5. Financing Source (Total ( US$m)) BORROWER ($ ) IDA ($115.0) Total Project Cost: $185.00 6. Implementation The institutional and implementation arrangements are discussed below. The Concessionaire. The concessionaire would be responsible for the actual rehabilitation of the Sena line, the realignment of the Machipanda Line, and operation

and management of the Beira rail system in accordance with the terms of the concession agreement, which among others would clearly specify: (a) the network to be rehabilitated; (b) the technical standards to which the infrastructure is to be rehabilitated along with detailed specifications; (c) the technical standards to which the infrastructure is to be maintained; and (d) terms and conditions for operating freight and passenger services. CFM. CFM s role in the management of the Project would be limited to the one agreed in the concession agreement, viz., (a) monitoring the concessionaire s compliance with the terms of the concession agreements on behalf of the Government; and (b) maintaining an account of all fixed infrastructure and mobile assets concessioned or leased to the concessionaire. The following units within CFM would be actively involved in project implementation: Beira Brigade. For effective discharge of its role, CFM has established the Beira Brigade, whose main tasks would be: (a) making available to the concessionaire facilities to be provided by CFM under the concession agreement; (b) handing over of the concession area including the right of way, without encumbrances: (c) handing over of all designs, drawings, specifications, and other documents to the concessionaire; and (d) to interact with the concessionaire to resolve teething problems. The Brigade will operate with oversight from the CFM headquarters. The Beira Brigade will be responsible for sending all the basic information about delivery and completion of works to CFM headquarters, which will prepare appropriate invoices and arrange for payments as per the agreed procedures. The Finance Directorate of CFM Headquarters will deal with the Financial Management arrangements. Inspection Unit. CFM has also established an inspection unit to inspect sites and facilities to ensure compliance with safety and environmental regulations. Independent Supervision Engineer. CFM would engage an Independent Supervision Engineer (a firm) for the duration of the rehabilitation period to certify quality and quantity of completed works. The certification by the Independent Supervision Engineer will be the basis for the disbursement of funds. To ensure independence, the reports of the Supervision Engineer would be filed systematically and without being influenced by CFM or the Beira Brigade. Any difference of opinion by the Brigade or CFM would need to be put forth in writing and a final decision would also be formally recorded. Regulatory Body. Very little economic regulation is required for the rail and port sectors. Even so, GOM is considering setting up a regulatory body for the transport sector for effective economic, technical, safety and environmental regulation. GOM, based on the Consultants recommendations, is close to making a decision regarding the regulatory framework and once that is done, the consultants will develop details of the organization structure and procedures of working of the regulatory body. Technical assistance for establishing the regulatory body is being financed under the on-going RPRP.

Staff Retrenchment Unit. Staff retrenchment and social mitigation of the retrenched staff is being managed through a special staff retrenchment unit and the work regarding this is progressing well assisted by funding under the on-going RPRP. This unit will also manage the retrenchment of staff rendered surplus subsequent to the concessioning of the Beira Rail System. 7. Sustainability The long-term sustainability of the Beira rail system in Mozambique would be considerably enhanced under the Project because of: (a) the involvement of the private sector in the rehabilitation, operation, and management of the system, which will ensure improved management and establishment of an appropriate system of incentives and accountability; (b) a 25-year concession, which will allow the concessionaire to implement long-term strategies for improving performance; (c) addressing the implementation issues early in the project cycle and articulating in sufficient detail the obligations of both the concessionaire and the conceding authority as well as the consequences of non-performance on either side in the concession agreement so as to preempt any possible disputes and legal action; and (d) strengthening the institutional capacity of the Conceding Authority in project management, quality control, environmental management, safety regulation and monitoring and evaluation. Commercial viability of the concession is illustrated by the robust debt service cover ratio, and the high expected rate of return on equity (17%) and that should sustain the concessionaire s interest in the concession and consequently the continued efficient working of the Beira rail system. Furthermore, the Sena line will have a great impact on the districts of the central region (Sofala, Tete, Manica and Zambezi), which are directly served by this line. Excluding the population of Beira, about 1.26 million people living along this line will see their socio-economic development prospects greatly improved. In the long-term, the operation of the line would bolster investor confidence and interest to participate in the coal concessioning and other 8. Lessons learned from past operations in the country/sector Lesson 1: Very few Railway systems in Sub-Saharan Africa and elsewhere have proved financially sustainable under public management. To enable the railways to become financially viable and self-sustaining, the project is conditional upon the successful award of the Beira Railway system concession and signing of the concession agreement. Lesson 2: Massive investments in infrastructure, locomotives, rolling stock, and communication systems have generally been ineffective in improving reliability or efficiency because the investments were not always directed at removing the most critical constraints, viz., removal of constraints associated with public sector inefficiencies in operating complex transport infrastructure. The proposed project, therefore, links the financial support to the concessioning of the railway system to the participation of the private sector.

9. Environment Aspects (including any public consultation) The Sena line was operational until 1983. Under the proposed project, the line is only being rehabilitated and no additional line is being built. The rehabilitation work involves changing the rails and sleepers and establishing signaling and communication equipment. No major earthwork is being undertaken and there is no cutting of or filling of land. There were only two main environmental issues and both have been resolved. The first pertained to the use of wooden sleepers, which would have affected the forests. A decision has been taken to use only concrete sleepers except at a very few locations where non-standard sleepers need to be used. The second pertained to de-mining along the railway line, which has since been addressed. However, since the assessment was made a few years ago, the report was updated through a supplemental study. A study was conducted to formulate an Environmental Audit Management Plan, with a focus on: (i) establishing environmental base line conditions and examining the present institutional and legal framework; (ii) assessing the physical, biological and socio-cultural environment; (iii) formulating an Environmental Audit and Management Plan which encompasses environmental mitigation, monitoring and research, contingency plans, emergency response plans and health and safety plans; and (iv) evaluating the institutional issues relevant to establishing a well functioning rail operation from an environmental point of view and recommending improvements and institutional changes as needed. The study also reviewed the Mozambique Railways Act and addresses the environmental management obligations of the concessionaire. 10. List of factual technical documents: Beira Railway Concession Agreement 2003 Technical Proposals of short-listed firms Country Assistance Strategy, October 2003 Environmental Management Study, 2004 Beira Rail Project: Economic Analysis 2004 11. Contact Point: Task Manager Anil S. Bhandari The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-458-8943 Fax: 202-473-8326 12. For information on other project related documents contact: The InfoShop The World Bank

1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop