Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6959-YU

sTAFF APPRAISAL REPORT

YUGOSLAVIA

SEVENTH RAILWAY PROJECT

APRIL 26, 1989

Country Operations Department IVEurope, Middle East and North Africa Region

llds docment has a resilted distrbudtn and may be used by reie only ] the po b_muic ofthei officlm dudes lb contents may not othewise be diclosed wihodd Wankod

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CURRENCY EQUIVALENTS(As of December 31, 1988)

Currency Unit Yugoslav Dinar (Din)

US$1 * Din 5218Din 1 US$0.00019Din 1 million a US$191.6

WEIGHTS AND MEASURES

Metric System a British/US System

1 meter (m) = 3.281 feet (fc)1 kilometer (km) = 0.621 miles (mi)1 sq. kilometer (km2 ) 0.386 sq. miles (mi2)1 metric ton (m ton) = 0.984 long ton (1g. ton)1 hectare (ha) = 2.4711 acres (ac)

ABBREVIATIONS

BOAL - Basic Organization of Associated LaborCIF - Cost, Insurance and FreightCOE - Chamber of EconomyCOI - Community of InterestCRO - Council of Republican and Provincial Roads OrganizationCTC - Centralized Traffic ControlCYR - Community of Yugoslav RailwaysEC - European CommunityEIB - European Investment BankFARP - Federal Association of Republican and Provincial

Road OrganizationsFSTC - Federal Secretariat for Transport and CommunicationsGDP - Gross Domestic ProductGMP - Gross Material ProductGTKM - Gross Ton - KilometerICB - International Competitive BiddingNTKM - Net Ton - KilometerPKM. - Passenger - KilometerPlan - The 1986-90 Medium Term Development PlanPPI - Producer Price IndexRE - Railway EconomyRTE - Railway Transport EnterpriseRTO - Railway Transport OrganizationSDK - Social Accounting ServiceSFRY - Socialist Federal Republic of YugoslaviaSR - Socialist RepublicSS & TT - Signalling and TelecommunicationsTSM - Transport Sector MemorandumTU - Traffic Units (millions of NTKM + millions of PKM)TYH - Trans-Yugoslav Highway

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLI

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Loan and Pro-iect Summary

Borrowers: The Railway Transport Organizations (RTOs) Belgrade,Ljubljana, Novi Sad and Zagreb.

Guarantor: Socialist Federal Re?ublic of Yugoslavia.

Amount: A total of US$138 million equivalent as follows: BelVrade -US$59.0 million, Ljubljana - US$31.9 million, Novi Sad -US$14.6 million, and Zagreb - US$32.5 million.

Terms: Fifteen years maturity including a five-year grace period atthe Bank's standard variable interest rate.

Proiect Objectives:

The pro'posed project has as its principal objectives:

(a) supporting of a new momentum for reform within therailways;

(b) reducing operating costs and increasing operatingefficiency by phasing out low volume freight stations,and reducing the number of staff, and introducing orenlarging an information system for train, wagon andlocomotive control;

(c) assisting the Yugoslav railways to compete wor-effectively with other transport modes, particularly forinternational traffic where they are losing markcetshare, by improving the condition of the main trunk link;

(d) increasing locomotive availability through provision ofadequate supply of spare parts; and

(e) improving the Yugoslav railways' financial position inan environment of high inflation through timely tariffincreases, reduced operating costs and better investmentplanning.

Project Description:

The project would comp ise the investment program (1989-91)of four RTOs which operate about 85% of the main trunk

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

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line. The investment nrogram include track renewal,reconstruction of line sections, improvement of stations andjunctions, change of the electric system on a line section,modernization of signalling and telecommunication equipment,installation of an information system, provision oftraction and rolling stock, track maintenance equipment,locomotive spare parts, and technical assistance. Theinvestsent plans are sound; in particular, each majorinvestment item has an economic return greater than 122, iscovered by a satisfactory financing plan, and is within theimplementation capability of the concerned RTO. The totalcost of the project with contingencies is estimated atUS$907 million with a foreign exchange component of US$434million (48b). The Bank loans would cover the direct andindirect foreign exchange components of selected highpriority investments - mainly materials and equipment, andthe cost of technical assistance and training. The loanswould be made to the four RTOs as follows: Belgrade -US$59.0 million, Ljubljana - US$31.9 million, Novi Sad -US$14.6 million, and Zagreb - US$32.5 million.

Benefits and Risks:

The ain project benefits derive from permitting Yugoslavrailways to increase their operational efficiency,particularly on the main trunk line where capacityconstraints are developing. The track overhaul of sectionsof the main trunk and other key lines will increaseoperating speeds and reduce operating costs. Theconstruction of the Western Bypass and the modernization ofsignalling in the main station in Zagreb will overcome aserious capacity constraint in the Zagreb Junction. Theconstruction of the second phase of the Belgrade Junctionwill similarly rationalize the flow of freight and passengertrains at that junction, in addition to releasing a valuableparcel of land for other urban uses. The purchase of spareparts for locomotives will help increase locomotiveavailability, reducing the need for future locomotivepure.hases. The procurement of traction and modern rollingstock will help make the railways more competitive, andreduce the uneconomic diversion of bulk and other trafficsto road transport. In addition, the project is expected toresult in reductions in operating costs and institutionalimprovements. Most of the project involves the renewal ofexisting assets which have little environmental impact. Theconstruction of Belgrade Junction will release 11 hectaresof riverfront land for the construction of apartmentbuildings, parks, and other urban uses which aresatisfactory. The conctruction of the Western Bypass inZagreb will reduce congestion and noise in the city center;

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While Government and railways management are committedto reforming Yugoslav railways, implementation may provedifficult. In particular, there are three project riskswhich are significant. First, the Government/Committeesof Interest might delay railway tariff increases or failto provide counterpart funds or compensation in a periodof rapid inflation which would result in operatinglosses and a shortage of local funds for investments.Second, traffic demand might stagnate or decrease ratherthan slowly increase as forecast if the Yugoslav economydeteriorates due to lack of appropriate adjustmentpolicies. Third, operating costs may remain high ifrailways do not implement their action planssatisfactorily, in particular if they do not reducetheir staff by about 2% p.a. In spite of significantrisks, we feel it is reasonable to propose these loansbecause of the Government's commitment to economicreform as demonstrated by recent constitutional andordinary law changes, and Yugoslav railways preparationof and commitment to a "Business Plan" which is a defacto reform program for railways.

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Estimated Costs-'

Local Foreign Total............(US$ mill ion)

Completion of 81-85 Plans 30.10 18.76 48.86Track Overhaul 88.05 79.06 167.11Reconstruction of Lines,Stations & Junctions 137.64 95.35 232.99

Electrification 22.14 18.11 40.25Signalling andTelecommunications 14.14 28.52 42.66

Traction & Rolling Stock 92.00 46.46 138.45Locomotive Spare Parts 7.94 29.67 37.61Track Maintenance Equipment 4.96 19.27 24.23Integrated Transport 10.49 11.43 21.92Information System 20.97 56.15 77.13Miscellaneous 21.01 10.83 31.84Subtotal 449.45 413.61 863.06

Physical Contingencies.'Price Contingencies 23.30 20.16 43.46

Subtotal 472.75 433.77 906.52

Technical Assistance/Training Equipment 0.16 0.40 0.56

GRAND TOTAL 472.91 434.17 907.08

Financing Plan: US$ Million Percent

Internal Funds 442.4 49Government and 180.6 20

City GrantsProposed World Bank Loan 138.0 15Sixth Railway Loan (Loan 2336-YU) 7.0 1Other Foreign Loans 135.7 15Domestic Loans 3.4 -

Total 907.1 100

1/ Including taxes and duties, estimated at about US$165 million.2/ Physical contingencies are included in the above estimated costs.

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Estimated IBRD Disburaements:

IBRD Fiscal Year

FY90 FY91 FY92Annual 39.3 79.9 18.8Cumulative 39.3 119.2 138.0

Economic Rate of Return: 17 (overall)

Maps: IBRD 20806 and 20807.

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Table of Contents

I. THE TRANSPORT SECTOR

A. The Economy . . . . . ..*.. . . . . . . . .. . 1B. Transport System and Demand. .. ... .. . .... 1C. Transport Organization and Policy . . . . . . . . . . 4D. Previous Bank Projects .c ................ 7

II. THE RAILWAYS

A. General . . . . . . . . . . . . . . . . . . . . . 8B. Traffic . . . . . . . . . . . . *. . . . . . . . . 8C. Comummity of Yugoslav Railways . . . . . . . . . . . 10D. Organization . . . . . . . . . . . . . . . . . . . . 10E. Mnagement and Staff . . . . . . . . . . . . . . . . . 11F. Railway Property .e ... .................a... 11G. Integrated Transport . . . . . .0 . . . . . . . . I . 14H. Uneconomic Lines and Services. . . . . . . . . . . . . 14I. Operations . . . . .. . . a . .. .... . . .* .. . 15J. Tariffs and Compensation. . . . .. . . . .. . . .. . 16K. Accounts and Audits. . . . . . . . . . . . . . . . . . 17

III. THE PROJECT

A. Project Rationale. ........................ . 18B. Objectives . . . . . . . . . . . . . . . . . . . . .. 19C. Investment Plans . . . . . . . . ... . .. . . . . 19D. Project Description. . .. . . . . . . . . . .. . . . 20E. Cost Estimates . . . . . .. . . . . . . . . . . . . 22F. Lending Arrangements ..en ... .................... 24G. Implementation .i.o................... . 24H. Procurement .*... ........ .... 24I. Disbursements . . * . . . . . . . . . . . . . . . . . 26J. Environmental Impact .. ................. 26K. Action Plans and Monitoring Targets. . . . . . . . . . 27

This report has been prepared by Messrs. U. Marggraf (Railway Engineer),W.H. Hayden (Financial Analyst), and P. Parker (Economist) on the basis ofappraisal missions in June/July 1987 and March 1988. Ms. N. Muhoho assistedin the preparation of operational, investment and financial statistics andMs. H. Frost provided secretarial support.

Table of Contents (Contd.)

Page

IV. ECONOMIC EVALUATION

A. Traf fic Forecasts ................. 28B. Economic Appraisal .a.l.. . . . ................ . 29

V. FINANCIAL EVALUATION

A. Introduction . . . . . . . . . . . . . . 31B. Past Financial Performance . . . . . . . . . . . . 32C. Forecast Financial Performance . . . . . . . . . . . 35D. Financing Plans 1989-91. . . . . . . . . . . . . . . 40E. Project Risks. . . . . . . . . . . . . . . . . . . . 41

VI. RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . 42

ANNEXES

1. Project Action Plan . . . . . . . . . . . . . . . . ... 442. Transportation Projects Previously Financed by the Bank . 473. Tarifas and Compensation . . . . . . . . .. .. ... . 534. Details of Financial Evaluation . . . . . . . . . . . . . 565. Technical Assistance and Training, List of Subjects . . . 746. Key Features of Yugoslav Railways' Business Policy 75

SUPPORTING TABLES

Table 1: Inland Freight and Passenger Traffic, 1963-87 . . . 81Table 2: Transport Investments, 1961-87 . * . . . . . . . . 82Table 3: Actual and Forecast Traffic in Project RTOs,

1980-96 . . . . . . . . . . . . . . . . . . . . . 83Table 4(a,b): Selected Operating Statistics for 1984-88 . . . . . 84Table 5: Operational, Financial and Productivity

Assumptions for 1989-93 . . . . . . . . . . . . . 86Table 6(a,b): Operating Efficiency and Staff Productivity

for 1984-88 . . . . . . . 88Table 7: Comparison with Selected Other Railways . . . . . . 90Table 8(a,b): Traction and Rolling Stock - Yearly Averages

for 1984-88 . . . .. . . . . . . . . . . . . . . 91Table 9(a): Investment Plan, 1989-91, RTO Belgrade. . . . . . . 93Table 9(b): Investment Plan, 1989-91, RE Ljubljana. . . . . . . 93Table 9(c): Investment Plan, 1989-91, RTO Novi Sad. . . . . . . 95Table 9(d): Investment Plan, 1989-91, RTE Zagreb. . . . . . . . 97

Table of Contents (Contd.)

Paae

SUPPORTING TABLES continued

Table 10: Items on which the Loan will be Disbursed . . . . . 97Table 11: Eatimated Schedule of Disbursements . . . . . . . . 103Table 12: Staff in 1984-88 and Forecast for 1989-93 . . . . . 101Table 13: Productivity in 1984-88 and Targets for 1989-93 . . 102Table 14: Estimated Economic Rates of Return for Major

Investments . . . . . . . . . . . . . . . . . . . 103Table 15: Related Documents and Data Available

in the Project Fle . . . ........... 104

CRARTS

1. Organixation of RE Ljubljana. . . . ..... . .2. Organization of RE Ljubljana's Headquarters . . . . . .3. Procurement Schedule .. a...............4. Implementation Schedule ................

MAPS

1. IBRD 20807 - Yugoslavia - Transportation Infrastructure2. IBRD 20806 - Yugoslavia - Railway Infrastructure

I. THE TRANSPORT SECTOR

A. The Economy

1.01 During the 1960s and 19708 Yugoslavia's economy grew rapidly, withthe growth of Gross Domestic Product (GDP) averaging about 62 p.a. Thisperformance, however, was supported by large investments where insufficientattention was paid to quality or cost. Moreover, the economy's ability toadjust to external shocks was reduced by an excessively accommodating creditpolicy and by rigidities and distortions, including low mobility of capitaland labour, negative real interest rates, an increasingly overvaluedexchange rate and highly protected domestic industries. In 4addition, thegrowth of wages exceeded the growth of labour productivity i1i the late1970s. Yugoslavia initially absorbed the second oil shock throughadditional foreign borrowings. However, economic growth stagnated duringthe 1980s, unemployment increased to double digits, inflation accelerated to275% in 1988, and a debt crisis developed.

1.02 The Government is seeking to reduce and control inflation, regainthe high level of economic gro4th that it had achieved in the 1970s andcarve a place for itself on the economic map of Western Europe, with a viewto 1992 and beyond. In order to accomplish these objectives, the currentleadership believes that it is necespary to liberalize the economy and giveit a definite market-based orientation. The Government has alreadyimplemented difficult stabilization measures as the first step under aprogram of structural adjustment. The reform program will be extended underconstitutional changes on enterprise reform, foreign investments and socialplanning which were approved in January 1989. The program is supported byan IMF Standby Agreement which was approved in June 1988, and by a proposedSecond Structural Adjustment Loan (SALII) which is in an advanced state ofpreparation. The proposed Seventh Railway Project would complementstructural adjustment at the macroeconomic level by supporting a railwayreform progr.um directed at significantly reducing operating costs andattracting and retaining traffics for which railways have a comparativeadvantage.

B. Transport System and Demand

1.03 Geography has been a major factor in shaping Yugoslavia's transportsystem. The country is located at a strategic crossroad betweeneastern and western Europe, bounded by seven other countries and theAdriatic Sea. As a result, Yugoslavia's transport system provides access tothe sea for a number of central European countries, as well as connectionsfor international traffic between Western Europe, Greece and the MiddleEast. The main routes of communication have followed the easy paths withinYugoslavia, and have avoided the mountain barriers along the coast and inthe South. The main trunk railway route, as well as the Trans-YugoslavHighway, run northwest to southeast in the Sava and Danube valleys where

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most of the centers of population and economic activity are located. Asecond northeast-southwest corridor, which is important for internationaltraffic, links Austria and Hungary with Yugoslavia's ports and Italy, and isserved primarily by the railways. Yugoslavia's 600 km coastline isseparated from the interior by mountain ranges of considerable height. As aconsequence, the most important coastal cities and ports are sited in thevicinities of passes through which rail lines and roads have been built atconsiderable cost. Some of these rail links are operating at or nearcapacity, and will be improved under the proposed project.

1.04 Yugoslavia's transport system is extensive and diversified,comprising a railway, roads, river tranaport, ports and airports. Therailway system is described in Chapter 2. The road network comprises about130,000 km of roads, of which about 48,000 km are primary and regionalroads. Yugoslavia has concentrated un extending the paved road network inrecent years, increasing its length from 12,950 km in 1965 to about 67,000km in 1989. In recent years, both new construction and rehabilitation havesuffered from budgetary constraints in common with all sectors. Roadmaintenance, particularly pavement strengthening and simple bettermentworks, is becoming a more important issue as the road network ages, and willbe addressed under ongoing and proposed Highway Sector Projects.

1.05 The road vehicle fleet has grown rapidly over the last twenty yearsto about 3.3 million vehicles in 1987, excluding motorcycles .ndagricultural tractors. The fleet includes about 260,000 trucks and 29,000buses. About 40% of the trucking fleet are own-account vehicles, which aremainly operated by large enterprises. An additional 19% belong to some 300social sector transport enterprises, and 392 are small trucks belonging toindividual owner operators. Yugoslavia also has a small vehicle productionand assembly industry.

1.06 Yugoslavia has a fairly well developed network of about 2,200 bm ofinland waterways, which includes the river Danube between the Bulgarian andHungarian frontiers, the river Sava between Belgrade and Sisak, plus anetwork of supporting canals. River traffoi is seasonal due to low waterconditions and intermittent closures caused by ice. A fleet of about 300tugs and 600 barges carry goods by inland waterway, but require replacementor modernization to carry increased traffic.

1.07 Yugoslavia's most important ports are Rijeka and Koper in thenorth, and Ploce in the center of the coastline. The future growth of Rijekais constrained by the surrounding city, and possibly by insufficientcapacity on the railway lines and roads linking the port. Some improvementsto these rail lines will be carried out under the project. Yugoslavseaports handled 33.0 million tons of cargo in 1987, including 25.5 milliontons of export/import traffic. Ports handle about half of Yugoslavia'stotal export/import traffic. Only about one percent of Yugoslavia's inlandtraffic is containerized at present. It is likely that an increasingproportion of import/export traffic will travel by block train or roadrather than through the ports as containerization increases, either to andfrom destinations in western Europe or through northwestern European portsfor traffic to and from North America.

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1.08 Inland transport totalled about 239.2 billion traffic units (tonkilometers plus passenger kilometers) in 1987, as summarizedbelow and detailed in Table 1:

Table 1.1 Inland Freight and Passenger Traffic, 1965-1986

Year Rail Road Other Total

A. Freight (tkm billion)

1965 18.0 7.0 3.3 28.31975 21.6 28.7 5.6 55.91185 28.7 43.4 6.4 78.51'987 26.1 45.4 7.6 79.11988 25.4 n.a. n.a. n.a.

B. Passenger (pkm billion)

1965 12.1 17.0 0.6 29.61975 10.3 78.9 3.8 93.01985 12.0 134.0 6.3 152.31987 11.8 140.0 8.3 160.11988 11.5 n.a. n.a. n.a.

Total passenger traffic grew 11.11 p.a. from 1963 to 1980 due to rapideconomic growth and the expansion of the road network, and then slowed to2.6% p.a. from 1980 to 1987 due primarily to a slowdown in economic activity.Freight traffic similarly grew 6.9% p.a. from 1963 to 1980, slowing to 0.42p.a. from 1980 to 1987. Road transport has replaced railways as the dominantcarrier in recent years. Rail transport accounted for 33% of freight and 7%of passenger traffic in 1987, compared to 641 and 412 respectively in 1965.River transport accounted for nine percent of freight traffic in 1978,declining to about six percent in 1986 due to increasing road competition.

1.09 There are three types of trucking in Yugoslavia: social sector(self-managed) enterprises, own-account trucking, and private sectoroperators. The social sector specializes in long distance and internationaltraffic, carrya,g about one-half of total freight traffic. Own-account andprivate operators, until recently, handled mostly local transport, eachcarrying about one-quarter of total freight traffic. Social sector trucksare reported to average 46,000 vkm p.a. with 301 empty running, which is lowby international standards. Own-account and private trucks are reported toaverage an even lower 29,000 vkm p.a. with 33% empty running, which is partlyexplained by their specializing in local deliveries in small trucks.Trucking operations are partly regulated, but the regulations are beingliberalized in stages. There are no route licensing or entry regulations,and vehicle registration fees are not restrictive. Indicative tariffs arenow agreed among operators through the Chamber of Economy (COE), withcontract rate discounts of up to 202, and are usually followed. Until 1986,the private sector was generally restricted by Republic or Province law toone small truck per operator. Private operators may now form cooperatives

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and hire additional drivers in some Republics or Provinces. In Slovenia, forexample, an estimated 85% of private operators now belong to cooperatives.They are buying larger trucks, hauling larger loads over longer distances,increasing load factors, and beginning to compete more seriously with socialsector firms. A recently passed constitutional change (Law on Enterprises)is expected to further liberalize both private and social sector trucking,including permitting private sector and own-account firms to carryinternational traffic, and to allow owner-operators to hire additionaldrivers. The trucking industry is an ideal candidate for eventualprivatization due to the lack of economies of scale in its cost structure.Road transport issues are being further investigated through the preparationof a Study on Improving the Efficiency of Transport Markets (para. 1.22).

C. Transport Organization and Policy

1.10 Yugoslavia's transport sector is significantly influenced by thecountry's culture and form of social organization. Yugoslavia is afederation characterized by ethnic, cultural and economic diversity. Eachof the eight Republics and Autonomous Provinces has its own capital city andregional economy, which coupled with a policy of economic decentralizationtends to increase transport demand. The Yugoslav economy, including thetransport sector, is organized as a self-management syst%;m. Under thissystem, economic decision-making is achieved through a consensus ofmanagers, workers, and the social-political community, primarily throughintra- and inter-firm agreements on long-range cooperation (self-managementagreements, SMAs). These are enforced through a complex system of laws andsocial checks and balances. An additional factor is that calital and labormarkets are not yet well developed in Yugoslavia. In the past, this hasresulted in a "soft budget constraint", where firms did not have sufficientincentive to reduce costs, tended to maximize gross revenue per workerrather than profits, and did not invest efficiently. Partly as a result,transport costs are high in Yugoslavia, with the country generating about1.4 tkm/US$ of GNP, which is about three times the level of Western Europe,although it is only about two-thirds the leve. of Hungary or Poland. Hightransport costs appear to be due to the significant proportion of heavyindustry in Yugoslavia, the dispersion of economic activity on socialgrounds, transit traffic, and the need to improve the efficiency oftransport enterprises.

1.11 As embodied in the 1986-90 Medium Term Development Plan (the Plan),the Government's objectives for improving the transport sector include: (a)promoting the more rapid development of rail, maritime, and rivertransport;(b) competing more effectively in the international transportsystem; (c) increasing foreign exchange earnings from transit traffic; (d)adopting modern technology; and (e) optimizing the use of "social" resourcesand energy. The Plan anticipates that these steps will increase theefficiency of the transport system, reduce shipping costs, increase thequality of transport service, promote the development of the touristindustry, increase the competitiveness of Yugoslav goods in internationaltrade, increase transport safety, and provide transport capacity foremergencies. The Bank generally supports these objectives, with the furtherunderstanding that each transport mode should specialize in carrying thetraffic for which it is the least cost carrier, priority should be given tomaintaining existing infrastructure, and expenditure levels should reflect

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Yugoslavia's present financial constraints. The attainment of theseobjectives will largely depend on the government's ability and resolve toundertake reforms to eliminate the inefficiencies in the productive andtransport sectors (paras. 1.02 and 1.10).

1.12 The overall need in transport, in common with other sectors, is togradually increase its market orientation and increase competition in orderto reduce costs. The main issues affecting transport can be grouped underthe headings: (a) improving operational and organizational efficiency; (b)improving the utilization and selection of investments; (c) pricingtransport services under conditions of inflation; and (d) improvingintegration with the European transport system.

1.13 Efficiency Issues - Tranisport costs could be reduced significantlyif transport operations could be made more efficient. There are two aspectsto the issue: first, the need to improve the operational efficiency oftransport enterprises, and the need to better coordinate transportoperations among the Republics and Provinces. At the enterprise level, theprincipal need is to increase financial discipline through positive interestrates, cost reduction, a cost based pricing policy, accounting improvements,and the identification and closure of loss making operations. The issueparticularly affects revenue earning transport enterprises; road transportis less affected because most automobiles are privately owned, and becausetrucking is inherently more competitive and lacks economies (ordiseconomies) of scale. There are preliminary indications that transportoperators are beginning to respond to the revalued exchange rate, increasedinterest rates and other stabilization measures which have recently beenimplemented (para. 1.02). A major thrust of the proposed SAL II will be toengender a further "supply response" from Yugoslav enterprises.

1.14 The Yugoslav economy has been increasingly decentralized since the1960s, with most transport activities now organized at the Republics andProvinces, local, or enterprise level. This reduces the efficiency of theeight Yugoslav railways, where there is a need to coordinate operations atall levels among the Republics and Pro inces; ports, where there is atemptation for the Republics and Provinces to construct duplicatefacilities; and to a lesser extent roads, where there is a need tostreamline joint decision making processes. Decentralization also affectsinvestments, since decisions must be reached partly on the basis ofpolitical compromise among the Republics and Provinces. In order tofacilitate the development of a unified transportation system andplanning,the organizations responsible for roads are associated in a FederalAssociation of Republican and Provincial Roads (FARP), while thoseresponsible for railways are associated in the Community of YugoslavRailways (CYR, para. 2.05) their members, such as tariffs and joint planningactivities. Responsibility at the Federal level for transportation restswith Federal Secretariat for Transport and Comwrnications (FSTC), which isresponsible, inter alia, for preparing Federal laws governing transportation.

1.15 Investments - Total social sector investments in transport havevaried quite widely in the past due to the need to complete the basictransport system in the 1960s and 1970s, and Yugoslavia's relatively easyaccess to credit in the 1970s followed by a slowdown in economic activityand and a debt crisis in the 1980s:

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Table 1.2 Transport Sector Investments 1961-87 1(constant 1988 US$ billion equivalent)

Total InvestmentsTotal

Years Railvays Roads Other Transport Amount 2 Transport

1961-65 2.8 3.4 2.6 8.5 76.6 111966-70 1.5 1.5 0.6 3.5 31.1 111971-75 2.3 2.5 1.0 6.1 53.1 121976-80 2.9 2.6 3.9 9.0 118.9 81981-85 1.6 1.5 1.7 4.8 61.4 81986 0.34 0.29 0.40 1.02 12.38 81987 0.25 0.7 0.6 1.6 n.a. n.a

11 So ial sector investments, including major maintenance activities.

Source: Statistical Year Books of Yugoslavia (Table 110.4) and missionestimates.

1.16 Transport authorities have found it more difficult to carry outtheir core investment programs during the 1980s due to budgetaryconstraints. Railway investments, for example, were reduced by about 40Xafter 1980 compared to the level spent during the 1970s. These restrictionscome at a time when there was an increasing need to maintain andrehabilitate existing infrastructure for all transport modes. The maininvestment issue, however, is that enterprises are not encouraged to selecttheir investments wisely or use them efficiently due to Yugoslavia's "softbudget constraint" (para. 1.10).

1.17 The Bank has assisted the Government to respond ti investmentissues in two ways. First, the previous three railway projects and twohighway projects have been prepared as subsector investment loans. Theseprojects each financed a time-slice ox the railway or road investmentplansof participating Republics and Provinces, with the objective ofassuring that investments were well selected, appropriately timed, coveredby realistic financing plans, and were within the absorptive capacity of theresponsible authorities. Second, the proposed project would support theGovernment's economic reform program by assisting to finance a railwayinvestment program which is a reasonable balance between Lhe need tc,rehabilitate and maintain existing infrastructure, to improve the main trunkline in support of domestic industries and international traffic, and toconstrain public spending in a period of economic difficulty.

1.18 Pricing - Pricing transport services under conditions of highinflation has proved increasingly difficuit in recent years. A generalcommitment was included under SAL I (Ln. 2324-YU) and the Sixth RailwayProject (Ln. 2336-YU) providing for regular adjustments of railway tariffsby at least 62 p.a. in real terms, and the Government has increased tariffsin accordance with these commitments since 1984. However, the majorincreases were made late in the year, contributing to the result that th*operating deficit increased in recent years. A revised tariff covenant isincluded under the proposed project to help address this problem (para 2.26).

1.19 Similarly, the lag in adjusting road user revenues from the fueltax seriously affected the level of investments and of road maintenarce andpavement strengthening activity during whe 1980s. However, the Governmenthas recently increased fuel taxes and revised most of the allocation forroads to an ad valorem basis, which will go some way to resolve theproblem. Additional measures would be implemented under a proposed ThirdHighway Sector Project.

1.20 International Transport - The Yugoslav Government is consideringincreasing trade with other European countries as part of its effort toincrease its market orientation. At the same time, the European Community(EC) intends to unify its markets, including transport, by end-1992 in orderto increase the exchange of goods among its members and to competeeffectively with the large economies of North America and the Far East. Anadditional factor is that Yugoslavia is a transit country for EC members,with about three imes as many EC trucks using Yugoslav roads (measured inton-kilometers travelled) as Yugoslav truckers use EC roads. The ECcountries are in the process of debating and formulating their commontransport policy, and Yugoslavia needs to decide to what extent it shouldadopt similar policies with a view to facilitating trade and increasingtheir foreign exchange earnings from international transport. Inparticular, Yugoslavia needs to decide whether to increase its axle loadlimitation from 10 to 11.5 tons as the EC proposes; how to recover the costof road infrastructure used by foreign trucks; whether it is in Yugoslavia'sinterest to seek an increase in bilateral and cross-trade trucking permits;and whether Yugoslavia should adopt the same technical, financial, andsocial regulations for international truck transport as the EC. As far asincreasing Yugoslavia's market orientation, transport is a good sector toderegulate first because of the lack of economies of scale in trucking, andbecause you can take advantage of other countries experience with transportderegulation. International transport issues are fairly complex, and as afirst step the Bank is assisting the Government to address these questionsby preparing a study on Improving the Efficiency of Transport Markets (para.1.09).

D. Previous Bank Projiects

1.21 The Bank has made 24 loans for transport totalling US$1,417.1million equivalent since 1963 (Annex 2). These include seven loans for therailway subsector, thirteen loans to the highway subsector, one loan for thePort of Bar, and a multimodal loan for earthquake rehabilitation.

1.22 The principal accomplishments under past and ongoing railwayprojects are: (a) until about 1984 , improvement of the finances of therailways, principally through tariff increases and better selection ofinvestments; (b) supporting the establishment and strengthening of theCommunity of Yugoslav Railways (CYR); (c) the introduction of comprehensiveAction Plans as a means of contributing to the common understanding andresponsibility of the eight railway organizations; (d) sector investmentlending wherein the borrowers and the Bank agree on multi-year railwayinvestment plans and periodically review these plans; and (e) theintroduction of auditing procedures. The PCRs indicate that railwayprojects in recent years, with the exception of the Kosovo Railway Project,have generally been implemented with some delay, but without substantialcost overruns or other major problems. The ERR for the Kosovo RailwayProject is likely to be lower than anticipated due to low traffic growth.

1.23 The main emphasis in highway lending has been on improvements tokey links in the primary road network. The Completion Reports for theSeventh, Eighth and Ninth Highway Project indicated that the projectssubstantially achieved their objectives. The Completion Report for theTenth and Eleventh Highway Projects pointed out that these projects suffereddelays in implementation because of shortages of local funds due to thesevere recession which began at that time. The First and Second HighwaySector Projects are based on a comprehensive sector lending approach toseven RAPs, including a deeper involvement in the important area of roadmaintenance. Processing of both projects was delayed pending resolution ofthe road funding issue, but is now proceeding satisfactorily.

II. THE RAILWAYS

A. General

2.01 The railways in Yugoslavia are organised along the basic pattern ofthe economic system, with eight separate and independent Railway TransportOrganizations (RTOs), each serving a Republic or Province, each named afterits capital city, and together forming a railway network of 9,245 km. Thefour RTOs participating in the proposed project are Ljubljana, Zagreb, NoviSad and Belgrade, serving respectively the Republics/Provinces of Slovenia,Croatia, Vojvodina and Serbia. They operate about 852 of the main trunkline which runs through Yugoslavia from Jesenice on the Austrian border inthe Northwest through Belgrade to Gevgelija and Dimitrovgrad in theSoutheast. This line with short links to the main port, Rijeka, and toAustria via Maribor forms the backbone of rail transport in Yugoslavia,providing an international corridor between western Europe and Greece andMiddle East via Turkey, linking the Republics and Provinces, and carryingabout 802 of transit traffic or about half of the country's total railtraffic (Map IBRD 20806).

B. Traffic

2.02 Rail traffic totalled 25.4 billion tkm of freight plus 11.5 billionpkm of passenger traffic in 1988. Freight traffic grew 2.91 p.a. from 1975to 1985, but then fell 3.91 p.a. from 1985 to 1988 primarily due to theslowdown in industrial production caused by Yugoslavia's current economicdifficulties. Passenger traffic similarly grew 1.5S p.a. from 1975 to 1985,and then fell 1.42 p.a. from 1985 to 1988. Recent traffic trends are shownbelow, with additional details for the project RTOs given inTable 3.

_ 9 _

Table 2.1 Railwax Traffie. 1076-88

Growth Rate (M O.&.'1Egh 1°81 3Th6 31 JfiM 191! 11 197Ji-81 18IL-i

Freight TraFffi

Tonnage (000)DOmestic 53,t86 63,281 64,953 61,325 59,955 3.S -0.8International 20.54D 22J01 24.954 IMI X12I1 2.0 O-STotal 73,726 85,982 89.807 84,187 83,570 3.1 -0.4

Average Haul (km) 285 299 307 310 304 - -

Volume (ntk millions) 21.017 25,721 27,573 26.071 25,414 5.6 0.1

CO indtites (ntkm millions)

Coal 3,165 3.966 4.597 3,894 3,454 7.8 -1.9Petroleum and Oerivatives 1.708 1,196 1,325 1,436 1.455 -6.9 2.8Ores and Concentrates 2.S11 3,627 4.157 4.0S8 4,S2S 7.6 3.2Non-metalic minerals andProducts 747 803 91S 670 810 1.5 0.1

Metals and Products 2,399 2,638 2.885 2,937 2,670 1.9 0.2WoOd 1.261 1,394 1.395 1.335 1.424 2.0 -0.3Building materials 872 1,321 1,070 946 861 8.7 -5.9Cement 395 650 242 233 279 10.5 -11.4fertilizers S91 1.091 1,537 1.736 1.576 13.0 5.4Cereals 883 803 1,090 900 662 -1.9 2.8Other 6,259 7,977 8,15S 7,5S7 7,5SS S.0 -0.8Less than car-load 226 255 205 169 143 2.4 -7.9

Number (000)DOaestic 123,678 102,629 129,737 117.824 113.714 -3.7 1.5tnternational .. 811 2.277 1.995 1.907 1.998 4.6 -1.8Total 126,493 104,906 131,732 119.731 11S,712 -3.7 1.4

Average Haul (km) 79 100 94 9 99 -0.2

Volume (pke million) 9,941 10.510 12,399 11,827 11,454 1.1 1.2

2.03 About 552 of Yugoslav railways freight traffic are bulkcommodities. The most important cargo is coal, which amounted to 14.6million tons in 1988. Yugoslavia has large reserves of low grade brown coaland lignite which are located in several different regions and are usedprimarily to generate about 501 of Yugoslavia's power, as well as fordomestic heating. Coking coal is imported by six domestic steel refinerieswhich are all located inland. Yugoslav railways also transported about 4.4million tons of iron ore and non-ferrous metals in 1988. Some iron ore ismined domestically, and some imported through the ports of Ploce and Koperby the steel industry. Yugoslavia is also the largest producer ofnon-ferrous metals in Europe including lead, zinc, nickel, copper andbauxite, most of which is exported. Other major freight traffics includesteel and other metal products (6.7 million tons in 1988), petroleum (5.7million tons), wood (4.7 million tons), and fertilizers (4.3 million tons).The average length of haul of freight traffic has been gradually increasingto 304 km in 1988, as Yugoslav railways specialize more in long-distancetraffic. International traffic accounted for 34S of freight ton-kilometres

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in 1988, and is now growing due to increased international trade. One ofthe objectives of the project is to assist Yugoslav railways to compete moreeffectively for international traffic.

2.04 Yugoslav railways carried 115.7 million passengers in 1988. Theaverage length of haul was 99 km, representing a mixture of long-distancetraffic and commuter traffic. The future prospects for freight andpassenger traffic are assessed in Chapter 4.

C. Community of Yugoslav Railways (CYR)

2.05 Three-quarters of rail freight traffic in Yugoslavia travelsbetween RTOs, so that operations are highly interdependent. In 1978 aFederal law was enacted, establishing the CYR as a business association ofall eight RTOs whose principal objective is to ensure the development ofa unified railway system in Yugoslavia. CYR is responsible, inter alia, forestablishing uniform nationwide tariffs and timetables and joint investmentplans, joint utilization of facilities and ensuring safety on the railwaysystem. It is generally responsible for international aspects of railwayoperations including setting terms and conditions for transportation ofimported goods and goodu in international transit and for handling revenuesfrom, and debts owed to, foreign railways in respect of transportationactivities. Operation, maintenance and development of each railway remainswith the RTOs. At the end of 1987, CYR has taken the initiative inpreparing a Business Policy of Yugoslav Railways which was adopted by CYR'sAssembly on December 23, 1987 (para. 3.31 and Annex 6). Well-qualifiedprofessional staff represent the RTOs at federal and international levels.

2.06 For past Bank financed railway projects, CYR has played a veryuseful planning and coordinating function. It was responsible forcoordinating procurement, loan administration and project reporting.Recently CYR's role was enhanced through coordinating the RTOs' highpriority investments. Its role in the present project will be similar tothat assumed under previous projects. A state of the art seminar to improveskills in economic and financial analysis will be financed under theproject, which is intended to strengthen CYR's planning andcoordinatingfunction. The project also includes a study of railwaymarketing practices in other countries, leading to the possiblestrengthening of the marketing department in CYR in order to furthertransform a traditional railway system into a commercially oriented one.

D. Organization

2.07 Both RTO Belgrade, known as Radna Organizacija ZeleznickaTran 3rtna Organizacija Beograd (Belgrade Railway Transport WorkingOrgc 1. &,'ion), and RTO Novi Sad, known as Zeleznicka TransportnaOrganizacija Novi Sad (Novi Sad Railway Transport Organization), are WorkOrganizatiiAs (WO) whose members are Basic Organizations of Associated Labor(BOALs). Each BOAL is responsible for a different railway activity (e.g.transport, traffic, maintenance of traction and rolling stock, trackoverhaul, catering, etc.). RTE Zagreb, known as Slozene OrganizacijaUdruzenog Rada ZTP - Zeljeznicki Transport Zagreb (Zagreb Railway TransportComposite Organization of Associated Labour ZTP) and RE Ljubljana, known asSOZD Zeleznisko Gospodarstvo Ljubljana (SOZD Ljubljana Railway Economy) are

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both Composite Organizations of Associated Labour (COAL) whose members areWOs, most of which in turn are comprised of BOALs. These Woe are dividedinto two types: those which are regionalized and responsible for basicrailway activities in a given region of the Republic, and those whichprovide supporting services to the first group (e.g. engineering workshops,health, research, education, etc.). Each of the RTOs may contract foreignloans for purposes of carrying out the overall investment program agreed atthe COAL or WO level (as the case may be) for joint activities of theorganization's members.

2.08 The supreme decision-making body of each RTO is the Workers'Council (WC) which is composed of representatives selected by the workers ofthe constituent members of the RTO. Decisions of the WC are implemented bya Managing Board comprised of members selected by the WC and headed by apresident, or, in the case of Belgrade, are implemented by a single GeneralManager selected by the WC. The WC generally determines important mattersof policy and development. It approves the investment plan of theorganization as a whole.

E. Management and Staff

2.09 Management is ultimately responsible co the Workers' Councils,wbich may meet once or twice a month or more frequently where necessary.Maaagement and decision-making are complex processes with extensiveinteractions between management and Workers' Councils. Management hasalways been technically competent in traditional railway disciplines, buthas been weak in marketing. A more commercial approach needs to beadopted. Technical assistance under this project will address this matter(para. 3.15).

2.10 After several years of staff reductions, the four RTOs beganincreasing staff from 1982 onwards, which created a major problem becausetraffic fell substantially after 1984. As a reflection of growingunemployment, labour legislation was introduced stipulating the obligationto employ school leavers as trainees in numbers related to the existing workforce. Hoping for quick improvement of the economy and out of a sense ofobligation towards society at large, the RTOs kept hiring staff and retainedsurplus manpower and disabled workers in spite of a decline in traffic(Table 2.1). While the total staff in the four RTOs rose 5.5S from 86,548in 1984 to 91,336 in 1988, productivity decreased by 15.5% from 361,000traffic units per employee in 1984 to 305,000 traffic units per employee in1988 (Tables 12 and 13). A major change of the RTOs' staffing policies aswell as the introduction of solid manpower planning based on work studiesare essential for the railway's recovery. Agreement was obtained duringNegotiations, that each RTO will carry out a staff reduction programdesigned to achieve a reduction in its staff by 2% p.a. (RE Ljubljana: 1.51p.a.) from 1989 through 1993 based on actual staff on December 31, 1988.

F. Railway PropertyNetwork

2.11 At the end of 1988, the railway network in Yugoslavia comprised9,245 route-km (see Map IBRD 20806), 1001 standard gauge, of which 933 km or10.01 were double track and with 3,531 km or 38.21 of the network

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electrified. This percentage of electrification is slightly below those ofmajor western European railways (Table 6). The network of the four RTOs is:

of which electrified:km km

RTO Belgrade 1,894 927 or 491RE Ljubljana 1,228 518 or 422 'RTO Novi Sad 1,480 344 or 232RTE Zagreb 2,441 838 or 34% t'

7,043 2,627

1/ DC system, 3kV; the other RTOs operate on AC, 25kV2I of which 107 km are also DC - 3kV

2.12 The track of the four RTOs is mainly (about 562) 49 kg/m rails,partly with welded joints, laid on wooden sleepers and concrete sleepers,generally fastened witn K-system or elastic clips. About 2,690 km ofsecondary line have either 45 kg/m (161) or even 35 kg/m (211) rails. Theballast is of adequate quality stone and formation. About 491 of the fourRTO's network is suitable for axle loads of 18-20 tons per axle, about 231are of 16 tons per axle and 288 km (about 41) permit only 12-14 tons peraxle. Despite considerable progress in improving track conditions on mainlines-the four RTOs rehabilitated about 815 km of track during1983-86-speed restrictions are imposed on about 820 km of line sectionsbecause of poor track conditions which reduce line capacity andsignificantly increase the operation and maintenance costs.

2.13 In 1984, the Yugoslav railways adopted, in line with otherEuropean railways, a 22.5 ton per axle standard for the main trunk linesrequiring a narrower spacing of sleepers and heavier rails - 60 kg/m. Thenew standard will be applied with every track renewal. The railways expectto have the whole main trunk line upgraded by 1995.

Sisnallinm and Telecommunications

2.14 Most of Yugoslav railways' main trunk lines, carrying over 601 ofthe total gross ton kilometers, are electrified and have been equippedwith modern signalling and telecommunications. About 241 of the four RTO'snetwork is additionally equipped with automatic line block (ALB), and 91 is

9 erated with centralized traffic control (CTC). Many of the secondarylines are still equipped with old and obsolete mechanical signallingsystems which are difficult to maintain and restrict operationalefficiency. Replacement by modern systems, however, is not of highpriority.

Traction and Rolling Stock

2.15 The main type of traction is electric, accounting for about 681 ofthe four RTOs' locomotive hauled traffic (in gross ton-kms) with 304 DC and129 AC mainline locomotives. The RTOs own also 675 diesel locomotives

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including shunters, 95 electric and 129 diesel multiple units and 137 railbuses (Table 8). All steam engines which are mainly used as shunters andrail buses which are over 35 years old are planned to be withdrawn beforethe end of 1990.

2.16 The four RTOs own 2,033 passenger coaches with total capacity of124,300 seats (Table 8); 120 coaches are over 30 years old and reached theend of their economic life. They should be scrapped as soon as possible.

2.17 One of the main operational problems of Yugoslav railways in thelast 6-8 years has been that procurement of new freight wagons has beeninsufficient to keep up with the needs for replacemeut, modernization(competitive conditions require the increased use of specialized wagonesand traffic growth. As a result, the RTOs have been forced to hire foreignwagons to meet their operational needs and have been unable to carry alloffered traffic. The freight wagon fleet of the four RTOs at the beginningof 1989 comprised 38,028 wagons. About 8S of this fleet was procuredbefore 1950. The withdrawal of about 800 wagons within the planning periodwill allow the on-going modernization of the freight wagon fleet tocontinue. Under the project, this shortage will be alleviated by: (i)improving operational efficiency; (ii) installation of a computer-basedwagon control system, and (iii) procurement of 945 wagons (para. 3.11).

Workshop and Depots

2.18 The four RTOs inspect and maintain their traction stock in 5workshops and 19 depots. They are unnecessarily numerous for historicalreasons. A consultant's study carried out under the Fifth Railway Projectrecommended a concentration to fewer places in order to increaseefficiency. The concentration of locomotive major overhaul and partsremanufacture in a single location for electric and diesel locomotivesrespectively would result in a significant increase in locomotiveavailability through a program of equipment exchange, and cost savingsbrought about by reduction in spare parts inventory, common procurementofspare parts, and labour specialization. The consultants estimate that itshould be possible to save as many as 44 electric locomotives through asystem of industrial maintenance, assuming that spare parts are readilyavailable and the system is efficiently implemented. It should also bepossible to achieve similar savings in diesel locomotives through a similarsystem. Although some of the RTOs have been reluctant to implement areorganization, in February 1988, all eight RTOs signed an Agreement onImprovement of Yugoslav Railway Traction Stock, which provides for (a) thedivision of work between depots and workshops, (b) methods and proceduresof upgrading depots and overhaul workshops for modern maintenance, (c)regulations governing the relationship between the RTOs and the overhaulworkshops carrying out repairs for several RTOs, (d) a procedure for theprovision and utilization of major vehicle components to enableindustrialized maintenance by exchange of components, and (e) a procedurefor the provision and utilization of spare parts. The Agreement is a goodstep in the right direction of reorganizing locomotive major overhaulwithin three years. The Agreement provides also for the forming of acoordinating board for its implementation consisting of a delegate fromeach RT0 and CYR. The timely and effective functioning of this board iscrucial. Agreement was obtained at Negotiations that each RTO will carry

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out a program, satisfactory to the Bank, to improve its system oflocomotive maintenance and overhaul. The program will be carried out inline with the Agreement of February 1988.

G. Integrated Trans2ort

2.19 Yugoslavia is at an early stage in developing its integratedtransport system. The use of containers in waterborne commerce is growingrapidly worldwide, and internal transport costs can be reduced if thesecontainers move to or from their final inland origins or destinations. Onthe railways, around 4-5X of freight traffic is containerized on linesserving the port of Rijeka, as well as on the main trunk line north ofLjubljana where the Austrians have started a piggyback service. South ofLjubljana on the main trunk line, and elsewhere, very little traffic isunitized. About 4,000 meters of tunnels would have to be lowered betweenLjubljana and Zagreb to handle container wagons, but it is possible fortraffic to and from northern and northwestern Europe to avoid thisbottleneck without a substantial distance penalty by travelling viaMaribor; traffic to/from Italy, France and Spain would need to travel anadditional 100 km or so to transit via Maribor (see Map IBRD 20806).

2.20 The main constraint to expanding the use of containers and otherforms of integrated transport is the lack of experience of freightforwarders, industry, and the railways in organizing the uniformprocedures, documentation, and rate schedules which are necessary for a"door-to-door" transport service. In addition, there is a shortage ofcontainers in Yugoslavia, the railways and other modes lack containerhandling equipment, and there are few inland freight terminals. TheGovernment is interested in promoting the development of integratedtransport, and passed the "Social Compact on the Development of IntegratedTransport" in 1984. The Yugoslav Chamber of Economy has also preparedambitious proposals for investing in a network of freight centers. TheBank recommended carrying out feasibility studies for one or two freightcenters before undertaking investments, and these studies are currentlyunder preparation. The project would include about $22 million forcontainer handling equipment and related investments to assist the RTOs toincrease their container and piggyback traffic.

H. Uneconomic Lines and Services

2.21 Yugoslav railways provide for historical and social reasons anumber of services which are now uneconomic primarily due to changes intraffic patterns. These include branch lines, stations, and passengertrains with uneconomically low traffic volumes. Once established, thereis social and political resistence to discontinuing these services.Yugoslav railways have made efforts over the years to close lines andstations and discontinue passenger trains. For example, the four RTO'sunder the project closed 1,135 km of uneconomic lines between 1965 and1985. They closed an additional 354 km to public service, but continue togive these lines minimum maintenance. The RTOs use the operation of lowtraffic lines as a bargaining device in their discussions with theRepublics/Provinces and COIs concerning compensation and capitalcontributions. For example, RTO Novi Sad decided to rehabilitate two lowvolume lines only after the users contributed to the cost of

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rehabilitation. Forty-eight percent of Yugoslavia's railway lines nowcarry only 192 of traffic, and the railways propose to close additionallines which prove to be uneconom.ic in accordance with a methodology whichis acceptable. The project RTOs have also discontinued various passengerservices. For example, RE Ljubljana recently cancelled four passengertrains when local autborities failed to agree to provide sufficientcompensation. However CYR, in its new Business Policy, recognizes thatmore needs to be done (paras. 3.01 and 3.31). In particular, Yugoslavrailways have 970 stations which load or unload about 150 million tons offreight each year. One-third of these stations handle less than onewagonload per day which is uneconomic. CYR proposes that a phased programbe undertaken, in cooperation with local trucking enterprises, to close anumber of these stations. Closing uneconomic freight stations has thepotential to reduce operating costs to a significant degree. The projectRTOs agreed at Negotiations to close 168 freight services and stationsbetween 1989 and 1993.

I. Operations

2.22 The operating performance of the four RTOs deteriotated graduallyafter 1984 and sharply in 1987 in all areas related to freight traffic,while passenger traffic performances improved significantly up to 1986 butshowed mixed results in 1987, and again a deterioration in 1988 (Tables 4,6 and 8). Despite performance and productivity ratios that are reasonablecompared to other railways (Table 7), decisive actions are needed toimprove the RTOs' efficiency. The major areas of concern are freightoperations and availability of traction and rolling stock. Freight trafficis handled at far too many stations, as discussed (para. 2.21). Lowavailability of electric and diesel locomotives has become a major problemreducing the capacity and profitability of the Yugoslav railway system as awhole. Availability of traction and rolling stock (except freight wagons)declined since 1984 to unsatisfactory levels in 1987 but, improved slightlyin 1988 (Table 8). The main reasons for the decline were: (a) shortage offoreign exchange for spare parts; (b) an inefficient system of stockcontrol; (c) an aging fleet; (d) a relatively high degree of utilization;and (e) inefficient workshop organization. Spare parts financed under theSixth Railway Project are expected to improve the availability ratestemporarily. Although the Bank does not normally finance recurrentexpenditures such as spare parts, the supply of foreign spare parts hasbecome such a problem that Bank financing is recommended on the basis thatthe RTOs have undertaken and appear able to secure sufficient foreignexchange to contribute 50S of the funds needed for procurement (para.3.12). At the same time, the RTOs have to reorganize their workshop andmaintenance organization (para. 2.18). In addition, the RTOs shouldintroduce a computer-based monitoring system for spare parts management toimprove the utilization of scarce funds and to assure that spare parts arepurchased in a timely manner. During Negotiations the RTOs each agreed tointroduce a system which is satisfactory to the Bank, by November 30, 1990.

2.23 RE Ljubljana has installed, and RTE Zagreb is in the process ofinstalling, a computer-based train, wagon, and locomotive control system,which will substantially improve the utilization and productivity oftraction and rolling stock and of train staff, and will reduce the

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quantities of wagons and locomotives to be procured in medium term. RTOsBelgrade and Novi Sad intend to install the system under the proposedproject. 1.' Provisions are made in their respective Investment Plans(Tables 9a and 9c).

J. Tariffs and Compensatiou

2.24 Railway tariffs for freight and passenger traffic are adjusteduniformly throughout Yugoslavia and are based on the type of traffic anddistance. Prior to 1988 tariff proposals were prepared by CYR andsubmitted to the Federal Government (Institute for Prices) for review andapproval. In August 1988, the Government approved guidelines forcalculating tariff adjustments every quarter, based on "common elements"(Annex 3). The scheme basically provided for rail tariffs to be increasedto the level of road tariffi in six quarterly adjustments and to bemaintained at that level thereafter. Compensation was to be paid to meetany deficit between rail costs and the revenue generated by the newtariffs. Tariff adjustments for the last two quarters of 1988 were made inline with the guidelines but the Government suspended application of theJanuary 1, 1989 adjustment. Later a lower increase was approved. Revisedguidelines for tariff adjustments based on "common criteria" are now beingdeveloped. During the past ten years passenger tariffs have not beenincreased in line with inflation with the result that passenger tariffshave fallen in real terms by about 50 during this period. Duringnegotiations agreement was reached with the Government and the RTOs thatthe passenger unit price level relative to the freight unit price levelwould not decrease in future. The Government and the RTOs also indicatedthat endeavors would be made to improve the ratio over time.

2.25 Rail tariff and compensation policies in Yugoslavia have changedsignificantly since the 1970s. Operating deficits in the early 1970s weresmall. From the mid-70s, rail costs rose rapidly partly as a result ofhigher oil prices and inflation and partly as a result of wage/labourpolicies that had objectives other than railway efficiency and viability.In an attempt to constrain general inflation, the Federal authorities didnot permit rail tariffs to be increased in line with higher costs.Compensation payments to cover deficits were made by the Communities ofInterest (COI) in each Republic/Province.

2.26 In 1983 under the Sixth Railway Project (Ln. 2336-YU), theYugoslav authorities undertook to implement measures designed to achievethe gradual eliminaticn of compensation payments and replace them withrevenue from tariffs. Tariffs were to be increased each year in line withthe increase in the Producer Price Index (PPI) in Yugoslavia plus anincrease in real terms of 62. As a result, compensation fell from 2.5% oftotal revenue in 1983 to 21% in 1986 (Annex 3). Acceleration of inflationsince 1986, however, reversed this trend and compensation payments to CYRincreased to 242 of revenue in 1987, representing about 282 of averagerevenue of the four RTOs covered by this project. The compensation paymentto Ljubljana represented about 371 of total revenue in 1988 and 29S of

1/ RTO Belgrade's investments will also cover the remaining RTOs Pristina,Sarajevo, Skopje and Titograd.

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revenue for the four RTOs. In spite c. compensation payments, three of thefour RTOs participating in this project incurred substantial net deficitsthat year. Under the Sixth Railway Project agreement was reached for E. 6Sper annum real tariff increase through 1990. With this tariff increase itwas anticipated that compensation would be eliminated, but in view of thecurrent economic difficulties, reduced traffic levels and slower thananticipated growth in productivity, this target will not be achieved. TheGovernment is concerned that further real tariff increases after 1990 mightplace the railways in a non-competitive position vis a vis other Europeanrailways, which are heavily subsidized, and local road transport services.This ie particularly a problem in Yugoslavia in view of the current stateof railway infrastructure and rolling stock. During the past four years,tariffs were adjusted in line with inflation plus the 62 real increase.Due to the high level of inflation, however, and the implementation of themajor adjustment in tariffs towards the end of the year, the RTOs' incomefell short of requirements. To address these problems and to ensure thatthe RTOs improve their financial performance, agreement was reached duringnegotiation that the RTOs will: (a) increase domestic tariffs each yearfrom October 1, 1989 onwards by the increase in the PPI plus 62 in realterms at the beginning of 1990; and (b) implement the inflation increase byadjusting tariffs four times per year on the first day of each quarter inaccordance with a formula satisfactory to the Bank; and (c) increasetariffs on January 1, 1990, by a further 6S in real terms. On April 1,1989, a tariff increase of 762 was implemented which brought tariffs inline with the Sixth Railway Loan requirements plus estimated inflation tothat date.

K. Accounts and Audits

2.27 Railway accounts are kept separately by each RTO on a uniformGovernment prescribed commercial basis. The accounts are kept to areasonable standard with extensive use of computers. As a result of theBank's requirements, cash flow analysis has come to play an important rolein the RTO's accounting processes. Fixed assets are subject to an annualrevaluation, based on replacement costs, using coefficients obtained frompriced indices of the Federal Institute of Statistics. Book values offixed assets are thus maintained at realistic levels and depreciationcharges play a proper role in generating funds to meet current replacementcosts of fixed assets.

2.28 A study to formulate a uniform costing system for the RTOs wascarried out by Yugoslav consultants and completed in 1979, but a consensusby all RTOs on this complex and critical matter was not reached until1982. A contract was signed in May 1982 between CYR and the consultants tointroduce and test the system at RTO Belgrade to be followed, ifsatisfactory, by implementation at the other RTOs. The system has beentested and the results analyzed. In summary, most RTOs feel that theproposed system would add little to the results obtainable by using thepresent three-digit account0ng code with a further five for origin anddestination of costs. The application of the proposed system would requirestaff of higher ability and salary levels than the present accounting staffand would not aid significantly in the management decision-making process.The Bank believes it should not press for implementation of a system whichis not acceptsvle to the Borrower and whose value has not beendemonstrated.

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2.29 The annual accounts of each RTO are audited by the SocialAccounting Service (SDK) in accordance with generally accepted auditingstandards. In recent years there has been delays of about four months inthe submission of audit reports due to a shortage of staff in the SpecialUnit of SDK which undertakes the audits. SDK are holding discussions withthe appropriate Government departments tn resolve this shortage. In itsreports on the 1987 annual accounts of RTO's Novi Sad and Zagreb, SDK hadserious reservations and as a result did not certify the accounts. Thereservations cover inter alia failure of RTOs to confirm debit and creditbalances with debtors and creditors as required by Yugos.av law,non-recognition of foreign exchange losses, incorrect revaluation of fixedassets and inconsistent treatment of interest on loans. A substantial partof these reservations cover recently issued accounting rules which ineffect have introduced a system of current cost accounting in Yugoslavia tomake the annual accounts more realistic during the current high inflation(para. 5.01). As RTOs accounting staff did not fully comprehend the newregulations, there were numerous cases on noncompliance. In addition, dueto the adverse effects of the new reguLations on the RTO's profits, therewas a natural tendency to misinterpret the rules. Because of the delays inproducing the accounts and audit reports for 1987, it was decided to issuethe audit reports with SDK's reservations without waiting for furtherdiscussions between the parties to resolve the issues. Most of theproblems have since been resolved and the necessary adjustments have beenmade in the 1988 accounts. Adjustments were also made in the appraisalreport's financial tables for 1987. SDK audit report for the 1988 accountswill also cover the 1987 accounts in accordance with their usual practice.Receipt of the SDK certified audit reports satisfactory to the Bank fromeach of the four RTOs for 1988 will be a condition of effectiveness of thatloan. Prior to 1988, the auditors had reservations in their reportscovering the lack of certification of commonly generated revenue allocatedby CYR to RTOs. To resolve this problem, CYR agreed during appraisal tohave SDK audit its accounts annually to the extent necessary to satisfy SDKas to the accuracy of revenue allocated to RTOs. This audit was undertakenon the 1987 accounts and agreement for future audits was confirme"d duringnegotiations.

III. THE PROJECT

A. Proiect Rationale

3.01 In an environment of the economy's declining performance, thefundamental problem of the railways' decreasing competitiveness becameundeniably evident. The Yugoslav railways are the least economic costcarrier for bulk commodities, low value goods travelling over longdistances, and much inter-city passenger traffic. There is thus a longterm role for the railways in Yugoslavia. The Federal andRepublican/Provincial Governments support this role in the 1986-90 MediumTerm Development Plan. After many years of inertia, the railways'management appearvi to have realized that the recent stagnation of railfreight traffic is not a temporary phenomenon. At the end of 1987, CYR hastaken the initiative in preparing and beginning to implement a reformprogram which addresses most oi the railways' interrelated problems (para.3.31). These reforms are incorporated in a Business Policy which issummarized in Annex 6. The key features of the Business Policy are:

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(a) creation of freight routes with guaranteed time schedules;(b) forming of more direct freight trains;(c) increase of wagon load and shortening of turnaround time;(d) provision of 22.5 ton axle load on international routes;(e) increase in travel speeds for passenger and freight trains;(f) reduction of number of stations;(g) termination of public transportation on uneconomic lines or

receiving adequate compensation;(h) implementation of the agreement to reorganize locomotive

major overhaul; andti) use of tariffs as a marketing tool.

3.02 The overall rationale for the project is to support this newmomentum for reform within the railways.

B. Obiectives

3.03 The Bank's participatios 5n financing the project is directed at:{i) rationalizing the participating RTO's Investment Plans; (ii) movingtowards an appropriate pricing policy; and (iii) improving operationalefficiency, and more specifically: (a) assisting the Government's policy inovercoming key conscraints on the main trunk line through Yugoslavia whichprovides an international corridor; (b) fostering the integration of therailway system; and (c) strengthening the four participating PTOs so as toenable them to compete effectively in the transport market.

3.04 To achieve these broad objectives, the project seeks to:

(a) rationalize the 1988-90 Investment Plans;(b) continue the railways pricing policy initiated under SAL I

and the Sixth Railway Project aimed at improving financialviability and independence;

(c) reduce operating costs by closing low volume freightstations;

(d) increase labour productivity independently from trafficfluctuation by reducing the number of staff;

(e) provide an adequate supply of spare parts in order toincrease locomotive availability;

(f) ease critical railway capacity constraints on the maintrunk line vital for the movement of key bulk commoditiesand transit traffic for international trade; and

(g) raise the level of operational performance, staffproductivity and quality of service by continuing corporateplanning, the use of Action and Operational Plans, andintroducing an Information System for Locomotive, Train andWagon Control.

C. Investment Plans

3.05 The RTOs prepared 5-year Investment Plans designed to achieve thebroad objectives outlined in para. 3.03, which consist only of highpriority items and which are all economically justified. The project hasbeen based on investments originally planned for 1988-90, but is extendedto 1991 to reflect a more realistic implementation period (para. 3.21) and

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is now acceptable; in particular each major investmen. item has an economicreturn greater than 12X, is covered by a satisfactory Financing Plan, andis within the implementation capability of the concerned RTO. Assuranceswere obtained at negotiations that, each RTO will: (a) implement itsProject Investment Plan with due diligence and efficiency and in accordancewith appropriate economic, financial, engineering and railway practices;(b) prepare and furnish to the Bank not later than November 15 of each yearfrom 1989 to 1991 updated Investment and F'nancing Plans, taking intoaccount traffic results and trends; (c) carry out during the followingyear such Investment Plan as shall have been agreed between the Bank andthe RTO; (d) consult with the Bank before introducing any increase of 5% ormore of a given year's planned investments and ensure that no such increaseshall be made in its Investment Plan unless its economic and financialjustification shall have been demonstrated to the Bank's satisfaction.This would mean that each major investment exceeding US$3 millionequivalent would have to have an internal economic rate of return of 12% ormore and a first year return of 101 or more, and an internal financial rateof return of 10% or more, estimated in accordance with a methodology whichis satisfactory to the Bank, is covered by a satisfactory Financing Plan,and is within the implementation capability of the concerned RTO.

D. Project Description

3.06 The major project components are:

Track Overhaul

3.07 Poor track conditions have significantly reduced the efficiency ofrailway operations through reduced line capacity and major increases inoperation and maintenance costs (para. 2.12). About 19% of the totalproject expenditure is for about 651 km of track overhaul. Bank financingwill cover the overhaul of various sections of the main trunk linetotalling 357 km. Worn-out track--mostly about 20 years old (in some casesabout 40 years old) and subject to severe speed restrictions--will berenewed witlh 'ew UIC 60 rails on the main trunk line (para. 2.13), type 49kg/meter raiLs on other main lines and used rails on the remainder toincrease the permissible axle load to 22.5 tons on the trunk line and 20tons on the remainder with speeds to 120 km/h. The use of UIC 60 rails onthe main trunk line from Austria to Greece will allow higher speeds of upto 160 km/h for passenger trains but its main benefit will be in reducinghigh track maintenance cost, due mainly to heavy freight traffic. Withoutthe proposed track renewals, the poor track conditions would deterioratefurther and restrict the daily number of trains.

Line Sections and Stations

3.08 About 272 of project expenditures are provided for reconstructionwo:ks. Major expenditures will be on renewal and extension of tracks andpoints, construction of underpasses to platforms and equipping stationswith modern signalling and telecommunications systems and line sectionswith automatic block systems. Bank participation will cover works on(a) various line sections between Jesenice and Dobova, which also includetrack doubling between Podnart and Lesce (10.5 km), Jesenice and SlovenskiJavornik (2.7 km) and Ljubljana and Vizmarje (3.9 km); (b) theconstruction of a 11.3 km new bypass line west of Zagreb for freighttrains; and (c) completion of the second of three stages of the mainBelgrade Junction.

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Electrification

3.09 The change of the electric system on the section SrpskeMoravica-Rijeka - about a third of the line Zagreb-Rijeka - from 3kV DC to25kV AC is the only major investment into electrification and it accountsfor about 4.71 of the total project cost.

Signalling and Telecommunications

3.10 New installations of signalling and telecommunications forexisting lines account for 51 of the project total. Obsolete mechanicalsignalling systems will be replaced on about 200 km of lines by modernequipment, including devices for automatic train stopping. The equipmentwill increase safety and improve line capacity. Radio dispatcher systemsprovide better and faster communication between signal boxes and linelocomotives as well as shunting locomotives in bigger stations andmarshalling yards. They provide for more flexibility in trait operationsand increase significantly efficiency of shunting. Bank participation willcover modernization of signalling and telecommunication of the Zagreb mainstation.

Traction and Rolling Stock

3.11 Traction and rolling stock needs are based on Operational Planswhich take irco account forecast traffic, the scrapping of old and obsoletestock, and r,lso planned increases in operational efficiency through ActionPlans (par-. 3.31 and Annex 1). The planned acquisitions represent 16% ofthe project cost total and include 5 electric motor trains, 945 freightwagons, 96 passenger coaches, and rehabilitation of older locomotives,wagons and coaches.

Locomotive Spare Parts

3.12 Low locomotive availability constitutes a critical bottleneck ofthe RTOs' operations (para. 2.22). In order to alleviate the chronicshortage of foreign spare parts just over 41 of the project cost areproposed for the financing of locomotive spare parts. Important, however,is that sufficient foreign exchange is being made available to the railwaysby the Yugoslav authorities.

Track Maintenance Equipment

3.13 The RTOs need continuously to replace the short-lived trackmaintenance equipment in order to maintain existing track overhaulcapabilities and capacities. Less than 32 of the project expenditure isfor tamping machines, gantry cranes for track laying, ballast regulators,railcars and smaller equipment.

Information System

3.14 A computer-based train, wagon, and locomotive control system hasbeen installed in two RTOs (para. 2.23). It is of high priority that thesystem cover the whole Yugoslav railways as soon as possible in order togain the benefit of country-wide information. About 92 of project

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expenditure are provided for equipmuent, software and the upgrading of thetelecommunications, which will not only be for the RTOs Belgrade and NoviSad but also for the remaining RTOs Pristina, Sarajevo, Skopje and Titograd.

Technical Assistance and Training

3.15 The project would provide for about 70 man-months of foreign andlocal consulting services designed to assist technically competentmanagement of the RTOs and CYR in further transforming a traditionalrailway system into a commercially oriented, technically advanced, andefficiently operated one. A list of studies which has been discussed atappraisal is given in Annex 5. They address mainly: (i) studying railwaymarketing in other countries; (ii) a study of methods to improve transittraffic on Yugoslav railways; and (iii) a seminar on the preparation ofeconomic and financial documents. Outline of Terms of Reference preparedby CYR were discussed at Negotiations and will be finalized shortly.

E. Cost Estimates

3.16 Project cost estimates were made in constant December 1988Yugoslav Dinars because of the very high inflation in Yugoslavia and theuncertainty by which degree the inflation will decrease during the projectperiod. The estimates are shown in Table 9 and summarized below:

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Table 3.1 1989-91 Proiect Cost Estimates and Bank Participation

Foreignas 2 Bank

Local Foreign Total of Total Loan(US$ million equivalent) (USWi )

Completion of 81-85 Plans 30.10 18.76 48.86 38 -Track Overhaul 88.05 79.06 167.11 47 32.7Reconstruction of Lines,Stations & Junctions 137.64 95.35 232.99 41 15.5

Electrification 22.14 18.11 40.25 45 -Signalling andTelecommunications 14.14 28.52 42.66 67 8.3

Traction & Rolling Stock 92.00 46.46 138.45 34 -Locomotive Spare Parts 7.94 29.67 37.61 79 12.1Track Maintenance Equipment 4.96 19.27 24.23 80 9.1Integrated Transport 10.49 11.43 21.92 52 -Information System 20.97 56.15 77.13 73 38.0Miscellaneous 21.01 10.83 31.84 34 -Subtotal 449.45 413.61 863.06 48 115.7

Physical Contingencies1'Price Contingenciesa' 23.30 20.16 43.46 46 21.7

Subtotal 472.75 433.77 906.52 48 137.4

Technical Assistance/Training Equipment 0.16 0.40 0.56 71 0.6

GRAND TOTAL 472.91 434.17 907.08 48 138.0

11 Physical contingencies of 10% have been included for all items except fortraction and rolling stock, spare parts and miscellaneous.

2/ Price contingencies, representing only international inflation, have beenestimated at 32 p.a. in 1989-90 and 4b in 1991.

3.17 The Investment Plans have been prepared by the RTOs in consultation withcompetent local consultants based on recent cost experien:te with similar works,acquisition of traction and rolling stock, and on quantity estimates fromsubstantially completed detailed engineering and unit prices at December 1985.They were updated to an estimated price level at December 1988. A 10% physicalcontingency has been added to the cost estimates of all items except for tractionand rolling stock, spare parts, and miscellaneous. Price contingencies, have been -estimated assuming annual price increases of 32 each year for 1989-90 and 4% for1991. The estimates include import duties and local taxes of about 18% oraboutUS$165 million. Consultancy services and assistance in training programs areestimated at US$560,000.

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3.18 The total project cost (including contingencies) is estimated to beabout US$907 million with a foreign exchange component of US$434 million (Table3.1). The proposed Bank loans aggregating US$138.0 million will be allocated tospecific items in the project (Table 10) with a total cost of US$612 million and aforaign exchange component of US$324 million. The loans would cover 321 of thetotal foreign exchange cost of the project and 151 of the total project cost.

F. Lending Arrangements

3.19 The Bank would make four loans, one to each RTO. Each loan, to beguaranteed by the Federal Government, has a 15-year maturity including five yearsof grace. A Loan Agreement would be concluded with each RTO. CYR woulu be aparty to each of these Agreements, as it will have certain project execution andcoordination responsibilities (para. 2.06). The amounts of the four loans aresummrized below:

US$ millions

RTO Belgrade 59.0RE Ljubljana 31.9RTO Novi Sad 14.6RTE Zagreb 32.5

TOTAL 138.0

G. Implementation

3.20 Each RTO will be responsible for executing its part of the projectwith CYR acting as a coordinating agency for procurement, technicalassistance and staff training, the annual revitions of Investment,Financing, Action and Operational Plans and for all communications andreporting with the Bank.

3.21 An implementation schedule is shown in Chart 4. This schedule wasdiscussed and confirmed during Negotiations. The project completion datewould be June 30, 1992 for each RTO. The estimated implementation time isbased on experience with the Fifth and the Sixth Railway Projects. Theloan closing date would be December 31, 1992 to permit disbursement ofremaining loan proceeds for eligible expenditures incurred under thenexisting contracts.

H. Procurement

3.22 Materials and equipment totalling US$137.4 million, intended to befinanced by the Bank would be grouped in appropriate bidding packages andprocured by International Competitive Bidding (ICB) in accordance with theBank's Guidelines, on .he basis of a list of materials and equipmentproposed by the RTOs and and finalized at Negotiations (Table 10).Financing of consultanw's services and training (para. 3.15) would beprovided under the project, with selection procedures for consultantservices following Bank Guidelines. The packages and the consultant'sservices, all estimated over US$50,000, would be subject to the Bank'sprior review and approval. An estimated schedule of procurement is shownin Chart 3.

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3.23 In bid evaluation, Yugoslav manufacturers would be allowed apreferential margin of 15% of the CIF cost of competing imports, or theapplicable customs duties, whichever is lower.

3.24 The table below provide3 a summary of the type of procurementwhich would apply to goods and works and services included under theproject. Reserved procurement is recognized for traction and rollingstock, estimated to cost US$145 million. The Bank is satisfied that thiswill not significantly affect the satisfactory execution of the project interms of cost, quality, and completion time. The above amount of reservedprocurement has been taken into account in the determination of the size ofthe proposed Bank loan.

Table 3.2 Procurement Method

Proiect Elements L' ICB LCB Other Total0***0*#*#*40..US$ million...................

completion 81-85 Plans - - 51.3a' 51.3Track Overhaul 38.9 - 136.61' 175.5

(38.9) - - (38.9)Reconstruction Lines Stations 26 - 218.71' 244.7

(18.4) - - (18.4)Electrification - 42.31' 42.3SS and TT 15 - 29.8 44.8

(10) - - (10)Traction and Rolling Stock - - 145.41' 145.4Locomotive Spare Parts 20 - 19.51' 39.5

(13.3) - - (13.3)Track Maintenance Equipment 11 14.5 25.5

(11) (11)Integrated Transport - - 23.01' 23.0Information System 45.8 - 35.23' 81.0

(45.8) - - (45.8)Miscellaneous - 33.54' 33.5Technical Assistance and - - 0.56k' 0.56

Training - - (0.56) (0.56)TOTAL 156.7 - 750.4 907.1

(137.4) - (0.56) (138.0)

1/ Costs include estimated contingencies.2/ Following Republican/Provincial procurement procedures.3/ Reserved procurement of which US$34 million will be procured through

direct negotiations.4/ Direct negotiations.5/ Employment of consultants.

Note: Figures in parentheses are proposed for Bank financing.

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I. Disbursements

3.25 Disbursements would be made for goods and technical assistance.For imported goods, disbursements would be made on the basis of 1001 offoreign expenditures, and with respect to bids won by local manufacturersunder ICB, disbursements would be made on the basis of 1002 of theex-factory costs. Disbursements for technical assistance and trainingwould be on the basis of 1001 of total expenditures. However, because eachtechnical assistance contract will be financed pro rata by all four RTOs,the disbursement percentage for each will be as follows: Belgrade 42.78X,Ljubljana 23.101, Novi Sad 10.552, Zagreb 23.571. Withdrawals would bemade against full documentation except for reimbursement requests whichwould be submitted on the basis of Statements of Expenditure for contractsrelating to goods and services and for training expenditures valued at lessthan US$200,000.

3.26 At Negotiations, discussions were held with the four participatingRTOs on establishing Special Accounts for each of the four Borrowers, butno final decision has been made by them. It was agreed that each RTO wouldhave the possibility of opening such an account with an authorizedallocation representing four months' estimated needs.

3.27 The Community of Yugoslav Railways (CYR) will be responsible forpreparation and presentation to the Bank on behalf of each RTO ofdisbursement requests and requests for replenishment of the SpecialAccounts. This was confirmed during Negotiations.

3.28 A schedule of estimated disbursements has been developed from theimplementation schedule (Chart 4) and is shown in Table 11. It assumesthat the loan would be effective by October 31, 1989, the project becompleted by June 30, 1992, and the loan be closed on December 31, 1992(para. 3.21). The estimated disbursement period of two years reflects theselection of items to be financed by the Bank suitable for quickdisbursements. Retroactive financing of up to US$13.8 million in theaggregate would be permitted for payments made after April 1, 1989, tocover high priority works which are planned to commence at such time.

J. Environmental Impact

3.29 Most of the proposed investments included in the project involvethe replacement or modernization of existing assets which will notmaterially affect the environment. The following beneficial environmentaleffects are expected from other project investments:

(a) Belgrade Junction - Second Stage - The project will releaseabout 11 hectares of urban riverfront land, presently usedas railway line, for other urban uses. The city plans touse the land primarily for constructing apartmentbuildings, office buildings, and parks which is consideredreasonable. The project is also expected to divert somepassenger traffic from road to rail, reducing trafficcongestion, air pollution and noise in Belgrade.

(b) Zagreb - Western Bypass - The project would divert freighttraffic from the center of Zagreb to the new Western Bypass

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line outside the city, reducing delays to road traffic andpedestrians at level crossings in the city center, and alsoreducing noise levels. Construction would require about15.6 hectares of land outside of the city center, part ofwhich is agricultural land, and the demolition of seven lowvalue structures. The city of Zagreb is making this landavailable for the project. The project includ s measuresto reduce noise on the new alignment. The environmentalbenefit of removing freight traffic from the :ity centerfar exceeds any adverse environmental impact fromconstruction of the new Western Bypass line.

K. Action Plans and Monitoring Taraets

3.30 Comprehensive Action Plans were established by CYR and each RTOunder the Fifth and Sixth Railway Projects. They are an importantinstrument for reaching a common understanding by all concerned onobjectives and responsibilities, and on measures and time required fortheir achievement. Their overall objectives are to reduce cost, improvethe quality of service and improve the market position. They addressorganization, planning, investments, marketing, productivity, finance,government support and staff training. As part of their Action Plans, theRTOs have prepared Operational Plans to improve the utilization of theirtraction and rolling stock and to serve as a basis for procurement, renewaland scrapping of traction and rolling stock.

3.31 In recent years, the growing economic difficulties resulting inloss of traffic, rising costs for the railways and growing deficits due tovery high inflation and lagging-behind of tariff increases, posed majorproblems for the railways which were not sufficiently addressed in theRTOs' Action Plans. Therefore, CYR has taken the initiative in preparing aBusiness Policy of Yugoslav Railways which was adopted by CYR's Assembly onDecember 23, 1987. This policy sets the framework for the RTOs for actionin a more specific way. The Managing Board of CYR will monitor itsimplementation and submit a report to the Assembly of CYR at the end ofeach fiscal year. The key features of the Business Policy are provided inAnnex 6. Remarkable is that the policy is directed at improvingoperational efficiency, greater orientation to the market, and providingbetter quality of services in a more decisive way than previous ActionPlans of the RTOs. As noted above (paras. 2.26, 3.05) a number of measuresare being taken to achieve the objectives of the Business Policy. Inaddition to measures to keep tariffs in line with inflation (para. 2.26)and to implement a sound investment plan (para. 3.05) the RTOs havedeveloped a Project Action Plan (Annex 1) which:

(a) specifies urgent actions to be carried out by the RTOs inorder to reverse the deterioration of the railways'competitiveness in the transport sector;

(b) establishes a few but important and monitorable targets tobe achieved annually.

Agreement was reached at Negotiations: (a) on the content of the ProjectAction Plan; (b) that the RTOs will implement the Project Action Plan and

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will take all actions necessary to achieve these annual operational targets;and (c) that during 1990-91, not later than May 31 of each year, CYR willfurnish to the Bank a detailed report about the implementation and progress ofactions and achievement of targets agreed in the Project Action Plan and anyproposed revision to the Action Plan, introduction of which will be subject toBank agreement.

3.32 The Operational Plans for Traction and Rolling Stock should be updatedevery year taking into account actual traffic developments and achievements inimproving operational efficiency. The results should serve as a basis toreview and revise future procurement of traction and rolling stock. Agreementwas reached at Negotiations, that each RTO will revise its Operational Plan forTraction and Rolling Stock each year during 1989-93, and furnish them to theBank not later than November 15 of that year. The revisions will be based on9-month actuals and estimates for the fourth quarter.

IV. ECONOMIC EVALUATION

A. Traffic Forecasts

4.01 It is particularly difficult to forecast future railway trafficbecause of uncertainty about the timing of Yugoslavia's economic recoveryand probable changes in the structure of the economy and trade. From 1963to 1985, the growth of railway and other inland traffic were highlycorrelated with the growth of GDP, with rail freight traffic growing Ptabout 1.6 times, and rail passenger traffic at about 1.1 times, the rate ofgrowth of GDP. "' From 1985 to 1988 the pattern changed. Rail freighttraffic fell 11.51 and rail passenger traffic 4.22, whereas GNP grew byabout 2.3% during the same period (Table 1.1).

4.02 Yugoslavia is a transport intensive country, generating about threetimes the volume of both freight and passenger transport relative to GDP asWestern European countries (para. 1.10). In the past, Yugoslavia followedan inward oriented development strategy. This resulted in the excessiveexpansion of intermediate input industries such as iron, steel, and

1/ For 1963-85 railway traffic:

Log Rail Freight Traffic (tkm) = 0.552 log GDP(.004)

Log Rail Passenger Traffic (pkm) = 0.589 log GDP-0.08 log population(.022) (.012) squared.

For 1963-85 total inland traffic:

Log Freight Traffic (tkm) = -1.654 + 1.1 log GDP + 0.2 log population(2.2) (0.08) (0.4)

Log Passenger Traffic (pkm) - -1.665 + 1.6 log GDP + 0.8 log population(3.5) (0.12) (0.7)

The r' was greater than 0.99 for all four equations. Figures inparentheses are standard deviations.

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chemicals, as well as extractive industries such as coal and iron ore. For

example, 42% of Yugoslavia's GDP was generated by the industrial sector in

1986, which is 10-15% more than typical countries with market based

economies at a similar stage of development. High transport demand is also

due to the relatively low physical concentration of population and economic

activity which results from Yugoslavia's Republican structure, the policy of

locating heavy industry in the less developed regions, and the lack of

incentives for reducing transport costs inherent in the self-management

system. For example, only 4.8% of Yugoslavia's population is located in its

capital city, compared to an average of 12.7% for the 20 countries closest

to Yugoslavia in per capita income.

4.03 The Government is embarking on a reform program to increase the

market orientation of the economy, including specializing more in activities

for which Yugoslavia has a comparative advantage, and increasing

international trade. If this program is successful, it is likely that

transport demand will decline in the long run relative to GDP, until it is

more in line with other Western European countries. This decline will

affect railways more than other transport modes because extractive and heavy

industries are the railways' primary customers. However, the relative

decline in the demand for railway services would be partly offset by an

increase in the rate of growth of GDP and increased international traffic,

for which Yugoslav railways has a comparative advantage. Overall, railway

freight traffic is expected to grow at less than the rate of growth of GDP

during the period of restructuring.

4.04 The Government's reform program is expected to yield a GDP growth

of around 2% p.a. from 1988 to 1992 and 3.5. p.a. from 1992 to 1997 provided

it is successfully implemented and sufficient funds are made available for

required investments. In addition, of course, the timing and extent of

industrial restructuring is uncertain. As a combined result, freight

traffic in the four project RTOs is forecast to grow at an average 0.5% p.a.

during 1989-91 and 1.7% p.a. during 1992-96. Passenger traffic is forecast

to grow at rates averaging 0.51 p.a. during 1989-91 and 2.2% p.a. during

1992-96 (Table 3).

B. Economic Appraisal

(a) The Planning Process and Sector Perspective

4.05 The investment plans of the four project RTOs are the result of an

iterative process involving the definition of sector objectives at the

Federal and Republican/Provincial level, economic and financial analyses of

individual investment proposals, and discussions between the railway

agencies (RTOs and CYR), Republican/Provincial authorities, professional

institutes which have prepared the feasibility studies, and Bank staff. Due

to the successful institution building efforts in railway planning initiated

under previous Bank projects, the RTOs and CYR now prepare technical and

economic feasibility studies and operational plans for all investment

proposals, usually with the assistance of transport planning institutes.

These studies are a necessary prerequisite for including projects in the

Republican/Provincial and Federal Investment Plans.

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4.06 The Government emphasizes the role of railways in the 1986-90Medium Term Development Plan in order to increase the efficiency of thetransport system (para. 1.11). Yugoslav railways have a comparativeadvantage for bulk commodities, long distance freight traffic, and formedium distance passenger traffic. However, if railways do not investsufficient funds, the system will deteriorate further resulting in theuneconomic diversion of these traffics to road transport. The Governmentintends to invest around 5.5% of its funds in railways during 1986-90,compared to 2.42 in 1981-84, 3.2% in 1976-80, and 4.3% in 1971-76 (Table2). Railway investments were underfunded during the past with the averageage of railway assets increasing from 22 years in 1967 to 27 years in 1987,contributing to a decline in railways' efficiency.

4.07 There have been numerous innovations in railways in recent yearssuch as more fuel efficient locomotives, improved signalling systems,integrated transport, specialized wagons, computer information systems,marketing systems, etc. which also require that funds be invested in orderto reduce future operating costs and attract traffic for which railways havea comparative advantage. Yugoslav railways will also need to provideadditional capacity to accommodate future traffic growth. This isparticularly true on the main trunk line, where several critical sectionsare presently operating at capacity.

4.08 Finally, the marginal economic rates of return for railwayinvestments are similar to those for road investments. In particular, theeconomic rates of return for evaluated investments under the project rangefrom 131 to 252, with the lowest returns being for track overhaul (13-191)(see below). The economic rates of return for the Second Highway SectorProject, which also finances a time slice of the 1986-90 Medium TermDevelopment Plan of four Republics/Provinces, range from 151 to 611. Thelowest returns are for construction of sections of the Trans-YugoslavHighway (151). Thls implies that the relative economic priority of the railand road investment programs are similar. The investment plan of the fourRTOs under the project is therefore considered to be reasonable.

(b) Proiect Assessment

4.09 The main project benefits derive from permitting Yugoslav railwaysto perform its role in the transport market and to increase its operationalefficiency. The track overhaul of sections of the main trunk and other keylines will increase operating speeds and reduce operating costs. Theconstruction of the Western Bypass and the modernization of signalling inthe main station in Zagreb will overcome a serious capacity constraint inthe Zagreb Junction. The construction of the second phase of the BelgradeJunction will similarly rationalize the flow of freight and passenger trainsat that junction, in addition to releasing a valuable parcel of land forother urban uses. The purchase of spare parts for locomotives will helpincrease locomotive availability, reducing the need for future locomotivepurchases. The procurement of traction and modern rolling stock will helpmake the railways more competitive, and reduce the uneconomic diversion ofbulk and other traffics to road transport. The acquisition of computersystems is expected to reduce operating costs, as has already occurred inother railway systems.

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4.10 Of total project expenditures, about 6% is for ongoing investmentsstarted under previous Bank projects for which the economic viability hasbeen previously established. A further 842 is supported by new feasibilitystudies, which have been reviewed it. detail by Bank staff. The remaining10% include minor workshop improvements, technical studies and designs, andnumerous small investments which were not practical to evaluate separately.These investments were reviewed by Bank staff from a technical point of viewand are considered reasonable.

4.1' The major investment items subject to detailed appraisal, togetherwith their estimated economic rates of return, are listed in Table 14. Therates of return calculated by the RTOs and their Institutes were adjusted toreflect the traffic forecasts discussed above, a shadow exchange rate of1.25 times the official exchange rate at end-1985 price levels, and otherfactors which are described in the project file. The rates of return forthe evaluated items range from 132 to 251. Assuming that the economicreturn for other investment items is at least 121, the economic return forthe project is estimated to be at least 171. The economic return for Bankfinanced items is estimated to be 181. The first year return for allevaluated items is expected to be greater than 101.

(c) Sensitivity Analysis

4.12 A sensitivity analysis of individual investments, involving anincrease in costs by 10% and a simultaneous decrease in benefits by 102,indicates that their economic return would not fall below 10%. The trafficforecasts are conservative and the risk that they will not be achieved isconsidered to be relatively low. Considering the major categories ofprojects in the Investment Plans, a large part is for procurement oftraction and rolling stock, for which the economic return is estimated on aunit basis. The actual procurement of traction and rolling stock isadjusted annually, so there is little risk that the economic return would belower should traffic growth fall below expectations. As project costs werecomputed on the basis of the recent experience of the RTOs and as thetraffic projections used are conservative, it is not considered likely thatthe estimated economic returns will fall outside the range indicated.Moreover, in view of the rolling annual plan mechanism followed by theYugoslav railways, there is flexibility in adjusting projects on an ongoingbasis to changes in traffic levels or other conditions. Given the generallyhigh rate of return obtained for individual project items, and in view ofthe considerable experience of Yugoslav railways in implementing similarprojects, the proposed investments are considered to be free fromsignificant economic risk.

V. FINANCIAL EVALUATION

A. Introduction

5.01 During the last six years inflation has accelerated in Yugoslavia,rising from an annual rate of about 25% in 1982 to 2701 in 1988. To ensurethat the annual financial accounts more accurately reflect the enterprises'real operating results and financial position, the Government has issued a

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number of changes in the accounting regulations. These new regulations havein effect replaced the historical accounting system of Yugoslavia with amodified current cost accounting system. Fixed assets and inventories arerevalued regularly to reflect inflation in accordance with an indexpublished by the Government. Depreciation charges and material costs arecalculated in accordance with these revised values. Foreign loans areautomatically revalued in line with the devaluation of the Dinar.Indexation of local loans did not commence until May 1988 and so the pastinflationary gains on these loans are not recognized in the accounts. Inaddition, the gains or losses on net liquid assets are not recognised. Theeffect of all these regulations is to set more stringent accountingrequirements for enterprises during a period of high inflation compared tothose normally required under historical accounting procedures.

5.02 The medium-term financial objective for the RTOs agreed under theSixth Railway Project in 1983 was the elimination of compensation paymentsand the establishment of financial autonomy by 1990. This objective was tobe achieved through a combination of real tariff increases, improvedproductivity and increased traffic.

B. Past Financial Performance

5.03 The actual Income Accounts, Cash Flow and Balance Sheets for RTOsBelgrade, Ljubljana, Novi Sad, and Zagreb for the six years 1983 - 1988 areshown in detail in Annex 4. A summary of the Income Accounts is in Table5.1.

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tablt 5.1 Sum1y of Actual Ii Accom ts m196*198(Din Billions)

CONIDATED ROS........ .........................-

1953 1964 1968 1966 1967 1968lm m o

ACUA ACUAL ACAL ACTUAL ACUAL CWL

... ........ ......... ........ ...... ......... ...... ......... ......

tarfff Reu 56.1 99.4 179.8 321.4 424.5 1,013.8

COpemtion 23.0 29.7 57.5 129.3 245.8 423.3

Opeatin Reven 79.1 129.1 23.3 450.6 870.3 1.437.1

met Operating RnM 5.3 12.8 19.7 39.7 (44.6) (23.5)

Nat "Splug (icit) 1.5 5.1 7.4 8.4 (90.6) 59.)Ratio.

C0paO tian as a Proportionof operating Revenue 5 29.0 Z3.0 24.0 29.0 28.0 29.0

Oprating Ratio

(tnctuding co_mntion) X 93.0 90.0 92.0 91.0 105.0 102.0

Operating Ratio

(Exctudfng coqimstin) X 132.0 117.0 121.0 128.0 147.0 14.0

ITO BELGRADC

195 1984 1965 19U6 1987 1988

ACTtlRL ACTtAL ACUAL ACTtUA ACTtIL ACTUAL

,.................. ........ ...... ......... ...... ......... ........

Tariff 20Verae 14.5 25.5 4.7 83.1 168.1 267.8

Comeation 6.1 7.0 15.5 29.2 54.1 82.0

Opeating Revem 20.6 32.5 60.2 112.3 232.2 349.8

Net Operating Reve 1.2 2.9 6.3 9.2 (17.3) (46.6)

Net Surplus (Deticeit) 0.2 0.9 2.3 0.6 (26.4) (5.7)

Ratios

compensation as a Proportion

of Opeating Revee % 30.0 22.0 26.0 26.0 24.0 23.0

Opeating Ratio

(Intluding compnation) X 94.0 91.0 90.0 92.0 108.0 113.0

Operating Ratio

(Exctuding ompestion) X 134.0 116.0 121.0 124.0 142.0 148.0

RTO LJUBLJANA.............

1983 1984 1985 1966 1987 1988

ACTUAL ACTUAL ACTUAL ACTUAL ACTAL ACTUAL...... ...... . . ...... ...... . .. ...... ........ .................. ...

Trwiff Revenue 12.8 22.7 42.9 78.8 154.9 260.0

Compensation 5.3 7.8 16.6 46.8 115.1 153.5

Operating Revenue. 18.1 30.5 59.5 125.6 270.0 413.5

Net operatirng Rvenuo 2.0 3.6 7.5 16.9 18.4 34.7

Net Surplus (Oeaficet) 0.4 1.0 2.8 5.5 0.5 24.1

Ratios

compensation as a Proportionof operating Revenue X 29.4 25.6 27.9 37.2 42.6 37.1

operating Ratio(including compensation) X 89.0 88.0 87.0 87.0 93.0 92.0

Operating RatiotExcluding copmensation) X 126.0 118.0 121.0 138.0 162.0 14.0

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Table 5.1 Summary of Actual Income Accounts - 1983-1988 (cont.)(Din Billions)

ITO IWWI sD............

1983 194 198 1988ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL......... ............... ......... ..... ...... ...... ......... ........

Tariff Reven 7.1 13.3 26.4 47.2 94.0 145.3Carpnation 3.0 3.8 6.5 16.7 22.9 35.1Opeting Reveu 10.1 17.1 32.8 63.9 116.9 180.4Net Operating Retnue 0.3 1.2 1.3 3.8 (2.7) (11.2)lIt urplus (DeOaf t) 0.1 0.6 0.2 (0.2) (10.7) (1S.1)

Ratios

Connation as a Proportionof Operating Rvewu 30 22 20 26 20 19

Operating Ratio(Including compemation) X 97 93 96 94 102 106

Operating Ratio(Excluding copeation) X 138 120 119 12? 12? 132

RtO ZAU

1963 1984 1985 1986 1987 1988ACTUAL ACTtAL ACTUAL ACTUAL ACTUAL ACTtAL

Tariff Raevom 21. 38.0 65.9 112.3 207.5 340.?Compensation 8.6 11.1 18.9 36.6 53.7 152.7Operating RevIb 30.3 49.1 84.8 148.9 261.2 493.4Met Operating Revee 1.9 5.1 4.6 9.8 (43.0) (0.4)met Srplus (Deffeeit) 0.8 2.6 2.1 2.5 (54.0) (13.0)

Ratics

Comensation as a Proportionof Operating Rovenu 28.0 23.0 22.0 25.0 21.0 31.0

Operating Ratio(Including copention) X 94.0 90.0 95.0 93.0 116.0 100.0

Oprating Ratio(Exeluding compeation) X 131.0 116.0 122.0 124.0 147.0 145.0

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The financial performance of the railways has been adversely affected by afall in traffic levels and the high level of inflation. Traffic units fell byabout 11% during the three years 1986-88. Tariffs were increased in line withinflation plus the 61 per annum as required under the Sixth Railway Loan up toApril 1, 1988. These adjustments, however, have lagged behind in theirimpact, as the increases were made about twice a year with the major part ofthe increase coming late in the year. Partly as a result, the operatingratios excluding compensation, which had fallen in 1984, increased in 1985through 1988. The resulting shortfall in RTOs' revenue was made up in partthrough increased compensation payments from the Republican/ProvincialGovernments. Comparative operating ratios excluding compensation togetherwith the targets agreed under the Sixth Railway Project for RTOs Belgrade andNovi Sad are shown below:

Table 5.2: Operating Expenditures as a Percentage ofTariff Revenues (Operating Revenues)

1983 1984 1985 1986 1987 1988Actual Target Actual Target Actual Target Actual Actual Actual

RTO Belgrade 134 120 116 115 121 110 124 142 148RE Ljubljana 126 - 118 - 121 - 138 162 146RTO Novi Sad 138 113 120 108 119 101 127 127 132RTE Zagreb 131 - 116 - 122 - 124 147 145YR System 128 - 114 - 116 - 117 142 -Total

The targets have not been met, except for the 1984 RTO Belgrade target, andthe ratios for all RTOs. except Novi Sad, have substantially deterioratedbetween 1983 and 1988.

5.04 Revenue from tariffs per traffic unit in constant terms remainedstatic during the five years 1984-88. This compares to the 282 real increaserequired under the Sixth Railway Project. To meet part of the shortfall inrevenue, average compensation payments increased by about 362 in constantterms per traffic unit during the 1984-88 period. The compensation payments,however, were unevenly distributed with RE Ljubljana receiving about 70% realincrease in 1988 compared to 1984 while Novi Sad received 202 less in realterms. The overall result was a deficit of about Din 57.0 billion in 1988 or4% of operating expenses. The deficit is in December 31, 1987 price levels.

5.05 Total operating expenses per traffic unit in constant terms increasedby about 201 during 1984-87. Expenditure increased in real terms under eachcost category with the exception of "Fuel and Power" which decreased by about20% reflecting the world wide decrease in energy prices. "Salaries and Wages"represent about 281 of working expenses which is very low for a Europeanrailway. These labor charges together with depreciation charges increasedmarginally in real terms. The major increases were for "Material and OtherExpens-e" which increased in real terms by about 20%. Charges associated withthe implementation of the new accounting procedures, such as charging materialfrom inventories at current cost, and writing-off of obsolete inventories

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represent a substantial part of this cost increase, but real increases inmaterial and contract maintenance costs were also a factor. We areencouraging the RTOs to review critically their contracts with third partiesto control these costs. Progress on this matter will be reviewed duringsupervision. The level of interest in real terms remained constant except forRTO Novi Sad where it increased fivefold, and partly reflected an increase inborrowing.

5.06 Since 1984, rail traffic volume has been falling due to thedeterioration of the economy and very severe winters in 1984 and 1985. Thisreduced traffic pattern coupled with a real increase in operating costs and aless than projected increase in revenues in real terms has resulted in adeterioration of the RTOs' financial position since 1983 instead of theimprovements projected under the Sixth Railway Project. To address thisproblem agreement was reached with the RTOs at Negotiations to reduce stafflevels, increase productivity and equipment utilization over time (para.3.31). In addition, agreement was reached during Negotiations that tariffswill be adjusted quarterly to yield additional annual revenue from localtraffic in line with inflation and will further be increased by 6% in realterms at the beginning of 1990 (para. 2.26).

C. Forecast Financial Performance

5.07 The forecast Income Accounts, Cash Flow and Balance Sheets for theseven years 1989-95 are in Annex 4. A summary of the forecast Income Accountsis shown in Table 5.3. With a major economic reform program presentlyunderway, it is difficult to predict the level of inflation within areasonable degree of accuracy during the next few years. The forecasts havetherefore been prepared in constant end December 1987 Dinars and converted toUS dollars at the December 31, 1987 exchange rate of Din 1,279 to the USdollar. This is a satisfactory bases for projections under current conditionsin Yugoslavia (para. 5.13). A real positive interest rate of 5% per annum wasassumed for both local and foreign loans. Further details on the financialassumptions are in Annex 4.

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Tetle 5.3 Ssry Of ForCaSt Income Awuts *959-1995(Din Billions)

camausAi aTOmt.................

1989 19 1991 1992 1993 1994 1995

Ftl2CAST FORECAU T FORECAUT FORCAT f"EWCAST FORECAST fORECAST........ ........ . .. ........ ........ . .. ........ ........ . .. ........ ...... ........... ........... ....

Tariff Revenu 1,133.6 1,370.7 1,37.2 1,399.2 1,41.7 1,444.7 1,468.0

Compensation 434.0 222.r 182.0 166.0 t6.0 53.0 17.0

Operating Revenuo 1,567.6 1,593.4 1,559.2 1,5S67.2 1,487.7 1,497.7 1,465.0

Net Operating Roo 81.3 120.2 92.1 105.9 36.2 53.0 46.7

fet Surplus (Detficeit) 36.9 76.1 46.5 60.1 (9.2) 6.4 (2.1)

Ratios

Cetpsentian aS a Proportionof Cpeting Revenus X 28.0 14.0 12.0 11.0 4.0 4.0 1.0

Operating Ratio(Including couponsation) X 95.0 92.0 94.0 93.0 98.0 96.0 97.0

opSatitgS Ratio

(Excluding coqensmtien) B 131.0 107.0 107.0 104.0 102.0 100.0 98.0

1969 1990 1991 1992 1993 199 1995

FORECASt FORECAST FORCAT FORECST FORECAST FORECAST FORECAST............. ........ ........ . .. ........ ........ . .. ........ ................ ........... ...........

Tariff Rwvua 299.4 562.7 363.9 369.9 376.2 382.9 389.7

ca_nsattan 109.3 55.0 47.0 32.0 20.9 17.0 15.0

opating Re*w 08.7 417.7 410.9 401.9 396.2 399.9 404.7

Net oprating Renue 0.4 15.6 10.0 1.8 (2.1) 1.1 5.7

Net Surpus (Oaf eit) (11.8) 3.4 (3.0) (11.7) (15.3) (12.2) (7.7)

Caoupstion as a Propertionof Opeating Revn B 2.0 13.0 11.0 8.0 5.0 4.0 4.0

Operatin Ratio

(including c mnsaticn) B 100.0 96.0 9.0 100.0 101.0 100.0 9M.0

Opering3 Ratio(Eetudi1n cawsation) B 136.0 111.0 110.0 108.0 106.0 104.0 102.0

ITO LJUJALA

1969 1990 1991 1992 199 1994 1995

FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST.... . ...... ...... ...... ...... ........ ........

Tariff Rm 292.1 3,7.6 359.1 363.9 368.8 373.7 378.8

Compensation 124.7 65.0 71.0 92.0 10.0 0.0 0.0

Operating Ruem 416.6 422.6 430.1 455.9 378.8 373.7 378.8

let Opeating Revew S4.8 62.8 70.8 96.1 19.2 14.4 19.4

Net Surplus (Deficeit) 43.3 S1.4 59.3 85.2 8.1 1.3 4.6

Ratios

Copensation as a Proportionof Operating Revom B 29.9 1S.4 16.5 20.2 2.6 0.0 0.0

Operating Ratio(Including compensation) B 8T.0 85.0 84.0 79.0 95.0 96.0 95.0

Otp tuding Ratio

(Excluding compensain S 124.0 101.0 100.0 99.0 96.0 96.0 95.0

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RTO NCVI SoD............

1989 1990 1991 1992 1993 1994 1995FORECA8T FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST........ ........ . .. ........ ........ . ... ........ ........ . ... ........ ............ ....... ................

Tariff Rove"u 158.8 186.9 187.6 191.0 194.4 19?.9 201.4

Cmnmpestion 52.0 22.7 22.0 16.0 11.0 6.0 2.0

Operating Rsvesen 210.8 209.6 209.6 207.0 205.4 203.9 203.4Not Operating Revenm 6.1 5.7 6.8 6.8 8.1 7.6 7.6

Not Surplus (Deficeit) 1.0 0.4 1.1 0.7 1.7 1.3 1.6

Ratios

Copensation as a Proportionof Operating Rovemms X 25.0 11.0 10.0 8.0 S.0 3.0 1.0

operating Ratio

(Including compensation) X 97.0 97.0 97.0 97.0 96.0 96.0 96.0Operating Ratio(Excluding comnpation) X 129.0 109.0 108.0 105.0 102.0 99.0 97.0

RTO ZAGREB..........

1989 1990 1991 1992 1993 1994 199f

FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST FORECAST,........ ........ ........ . .. ........ ........ . .. ........ ................ ........... ...........

Tariff Revenue 383.2 463.5 4(A.5 474.4 482.5 490.2 498.2Cosensation 148.0 80.0 42.0 28.0 25.0 30.0 0.0

Operating Reveume 531.2 543.5 508.5 502.4 507.5 520.2 498.2Not Operating Revenue 20.0 36.1 4.4 1.3 11.1 29.8 13.9

Not Surplus (Def iceit) 4.4 UD.9 (10.8) (14.0) (3.8) 16.0 (0.6)Ratios

Campeosation as a Proportionof Operating Rowwues X 28.0 15.0 8.0 6.0 5.0 6.0 0.0

operating Ratio

(Including cospensation) X 96.0 93.0 99.0 100.0 98.0 94.0 97.0

Operating Ratio(Excluding compensation) S 133.0 109.0 108.0 106.0 103.0 100.0 97.0

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5.08 Due to inadequate tariff increases and delays in making theseadjustments during the first half of the year, the RTOs' poor financialperformance is projected to continue during 1989 with the average operatingratio excluding compensation falling from 1442 in 1988 to 1311 in 1989. OnApril 1, 1989, the average domestic tariff level was increased by 762 whichbrings the tariff in line with the requirements under the Sixth RailwayProject including estimated inflation to March 31, 1989. To improve thefinancial performance of the RTOs and to relieve the Communities of Interest(COIs) of the burden of paying compensation as soon as possible, theGovernment and the RTOs have indicated their intention to use their bestefforts to commence implementing the inflationary tariff adjustment outlinedin paragraph 2.26 on July 1, 1989. The financial projections are based onimplementing the revised tariff adjustment on this date.

5.09 With an adjustment in tariffs in line with inflation plus a 62 realincrease, a substantial improvement in the operating ratios excludingcompensation, is forecast for 1990 with the average operating ratio fallingfrom 1311 in 1989 to 1071 in 1990. The ratios range from a high of 1112 forRTO Belgrade to a low of 1011 for RE Ljubljana. The major part of thisimprovement is due to the indexation of tariffs during the year in line withinflation. The operating ratios excluding compensation are projected togradually decrease over the next three years to an average ratio of 104% in1992. The projected operating ratios are listed in Annex 4 bAd will bemonitored during supervision to evaluate progress in achieving financialobjectives. The operating ratios are forecast to continue falling after this,reaching an average of about 981 in 1995 with a range of 1021 for RTO Belgradeto 951 for RE Ljubljana. This improvement is due to an increase inproductivity combined with an increase in traffic. During Negotiations,agreement was reached that the RTOs would maintain for each fiscal year after1990 a ratio of total operating expenses to total operating revenue of nothigher than 981 for RE Ljubljana and 1101 for RTOs Belgrade, Novi Sad andZagreb. In calculating this ratio, specific subsidies based on agreementswith Republican/Provincial/City Governments to compensate RTOs for providingsocial services (such as passenger discounts to students and pensioners),subsidies for urban commuter services and for operation of low density lineson behalf of local communities shall be treated as revenue. The Governmentand RTOs have indicated they intend to make best efforts to reduce the levelof subsidies after 1990 through all appropriate measures including increasedproductivity and service levels and increased adjustments in tariffs asjustified by competitive conditions.

5.10 With a high level of net internal cash generation (para. 5.12), nomajor changes in the RTOs' debt equity ratios are forecast. The highest levelof 39:61 is forecast in 1993 for RTO Novi Sad but this is expected to dropgradually to 36:64 by 1995. On the other hand, the debt equity ratio for RTOBelgrade is projected to increase from 21:79 in 1989 rise to 25:75 in 1995.The maximum levels reached by RE Ljubljana and RTE Zagreb are 30:70 and 26:74respectively. All these debt equity ratios are satisfactory for railwaycompanies. The RTOs' debt service coverage levels are shown in Annex 4.Except for RTO Belgrade, which has a projected debt service coverage of 1.6 in1994, all the other RTOs' debt service coverage are in excess of 2.0 which isvery satisfactory. To ensure that the RTOs do not incur debt to an extentwhere it might materially affect their ability to carry out their obligations

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under the project, a maximum debt service ratio of 1.4 for borrowing otherthan for project investment was agreed during Negotiations. In calculatingthis ratio the real interest rate should be used instead of the usual nominalinterest rate. With the projected high debt service coverage and low debtequity ratios, RTOs Ljubljana, Novi Sad and Zagreb would be able to borrowadditional funds to expand their investment program should traffic increase bymore than the conservative levels assumed in this report.

5.11 While the projected financial performance of RTO Belgrade issatisfactory, it falls below the level of the other three RTOs in all areas.A comparison of RTO Belgrade with RE Ljubljana shows differences in trafficpattern, operating expenses and revenue. Passenger traffic units representabout 35% of RTO Belgrade's traffic as compared to 281 for RE Ljubljana.Passenger revenue, however, represents 13X of total revenue of RTO Belgradecompared to 121 for RE Ljubljana. Working expenses in real terms per trafficunit for RTO Belgrade are only about 70% of RE Ljubljana's expenses. Whilethese figures do not pinpoint the basic reason for the differences inprofitability, it is felt that RTO's Belgrade lower profitability isassociated with its higher proportion of passenger traffic particularlysuburban traffic.

D. Financing Plans 1989-91

5.12. A summary of the Financing Plans for the four RTOs is shown in Table5.4. The projected Operating Income before Depreciation of the four RTOs forthe three years 1989-91 is Din 1,123.1 billion (US$878 million). About 331 ofthese funds is required to meet debt service payments. The Net Internal CashGeneration of Din 686.3 billion represents 52% of the total financingrequirements and ranges from 46% in the case of RTO Belgrade to 571 for RTEZagreb. This level of net internal cash generation is satisfactory. Grantsfrom Republican/Provincial/City Governments provide Din 280.1 billion or 211of requirements. Part of these grants are paid to the RTOs as a contributiontowards the cost of works requested by the donor. An example of this is theBelgrade Junction which will make available to the City urban land forhousing. The balance of the grants is provided as a contribution towards theRTOs' infrastructure costs. The proposed IBRD Loan of US$138 million togetherwith US$7 million from the existing Bank Loan (Sixth Railway Project, Loan2336-YU) will provide 141 (Din 185.9 billion) of the funds or about 361 of theestimated foreign exchange costs of the project of US$401 million. Otherforeign currency loans from the European Investment Bank (EIB, US$80 million),Eurofima (the European rolling stock financing cooperative, US$44 million ),the Soviet Union and suppliers credits will provide US$136 million (Din 173.2billion), equivalent to 131 of requirements or 34% of the foreign exehangecosts. The Govertnment and CYR, with Bank assistance, have completednegotiations with EIB and Eurofima for their respective loans. The balance offoreign exchange costs of US$120 million (301) must be met from local funds.This amount is in line with the estimated indirect foreign exchange cost ofabout US$128 million. The summary of the Financing Plans totalling Din1,331.1 billion will cover the project costs of Din 1,071.3 billion (801), anincrease in working capital of Din 159.7 billion (121) and other investmentsnot included in the project of bin 100 billion (81) to be undertaken by RTEZagreb. This covers future investments mainly in track renewals and tractionand rolling stock which have not been fully identified at present. Financingplans for each RTO have been drawn up with the COI and Republican or

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Provincial Government and approved by appropriate authorities (RTOs andWorkers' Councils). Republican/Provincial Governments' funds have beensecured through 1990. Failure to mobilize the additional requiredRepublican/Provincial and City funds and EIB and Eurofima loans (which are notimmediately required) by an agreed schedule would give rise to Bank remedies.

Table 5.4: Summary of Prolect Financing Plans 1989-91

Din Billion US$ Million 2

Operating Income before Depreciation 1,123.1 878.1 85Less Debt Service 436.8 341.5 33Internal Cash Generation 686.3 536.6 52Grants 280.1 219.0 21Proposed IBRD Loan 177.0 138.0 13IBRD Railway VI Loan 8.9 7.0 1Other Foreign Loans 173.2 135.7 13Local Loans 5.6 4.4 -

1,331.1 1,040.7 100

Project Investment 1,071.3 837.6 80Other Investment 100.0 78.2 8Increase in Net Working Capital 159.7 124.9 12

1,331.0 1,040.7 100Z93R=== 5

5.13 The Financing Plans are based on 1987 constant Dinars which forms asatisfactory basis for planning to ensure that the RTOs can secure adequatefunds to meet future investment i:- uirements under the present highinflationary conditions. Provision has been made to ensure that currentrevenues will increase in line (para. 2.26). Cash operating expenses shouldincrease in line with inflation and as Yugoslav law requires that fixedassets be revalued annually, depreciation should also increase in line withinflation. Interest and repayments on loans denominated in foreign currencyare assumed to vary automatically wit:h inflation. As domestic loans will beindexed, the principal will increase automatically with inflation. Theindexation of local loans eliminates the cash flow problem associated withvery high nominal interest rates in conjunction with very high levels ofinflation which in the past have transformed long-term loan into short-termloans.

E. Proiect Risks

5.14 While Government and railways management are committed to reformingYugoslav railways, implementation may prove difficult. In particular, thereare three project risks which are significant. First, theGovernment/Communities of Interest might delay railway tariff increases orfail to provide counterpart funds or compensation in a period of rapid

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inflation, which would result in operating losses and a shortage of localfunds for investments. Second, traffic demand might stagnate or decreaserather than slowly increase as forecast if the Yugoslav economy deterioratesdue to lack of appropriate adjustment policies. Third, operating costs mayremain high if railways do not implement their action plans satisfactorily,in particular if they do not reduce their staff by about 22 p.a. In spiteof significant risks, we feel it is reasonable to propose these loansbecause of the Government's commitment to economic reform as demonstrated bythe recent constitutional and ordinary law changes, and Yugoslav railways'preparation of and commitment to a "Business Plan" which is a de factoreform program for railways.

VI. RECOMMENDATIONS

6.01 During Negotiations, agreement was reached on the followingprincipal matters:

(a) the RTOs will reduce their staff by 2% p.a. (1.52 p.a. inthe case of Ljubljana) from 1989 through 1993 based on thenumber of actual staff as of December 31, 1988 (para. 2.10);

(b) the RTOs will close 168 freight services and stations (para.2.21);

(c) the RTOs will introduce a computer-based monitoring systemfor spare parts management (para. 2.22);

(d) passenger unit price level relative to freight unit pricelevel will not decrease (para. 2.24);

(e) CYR and the RTOs will (i) increase tariffs each year fromOctober, 1989 by the increase in Producer Price Index;(ii) implement this inflation increase by adjusting tariffsfour times per year on the first day of each quarter, and(iii) further increase tariffs by 67 in real terms in 1990(para. 2.26);

(f) CYR will have its accounts audited annually by independentauditors to the extent necessary to satisfy the auditors ofthe accuracy of amounts commonly generated and allocated byCYR to RTOs (para. 2.29);

(g) the RTOs will implement their Investment Plans for theproject and will prepare and furnish to the Bank annuallyfrom 1989 through 1991 updated Investment Plans andFinancing Plans which shall be carried 3ut as agreed betweenthe Bank and the RTOs. The RTOs will consult with the Bank,before introducing any increase of 52 or more of a givenyear's planned investments (paras. 3.05);

(h) CYR will be responsible for processing disbursement requestson behalf of each RTO under the proposed project(para. 3.27);

(i) the RTOs will implement the Project Action Plan and willtake all action necessary to achieve their annualoperational targets (para. 3.31);

(j) the RTOs will revise their Operational Plans for Tractionand Rolling Stock each year from 1989 through 1991 (para.3.32);

- 43 -

(k) the RTOs will achieve an annual average operating ratio ofnot greater than 982 for Ljubljana and 110% for Belgrade,Novi Sad and Zagreb from 1991 onwards. In calculating thisratio, specific subsidies based on agreements withRepublican/Provincial/City Governments to compensate RTOsfor providing social services (such as passenger discountsto students and pensioners), subsidies for urban commuterservices and for the operation of low density lines onbehalf of local communities shall be treated as revenue(para. 5.09); and

(1) the RTOs will not incur debt except for the Project beyond adebt service ratio of 1.4 without consulting the Bank(para. 5.10).

6.02 Receipt of certified audit reports, satisfactory to the Bank, fromeach of the four RTOs for 1988 would be a condition of effectiveness of thatRTO's loan agreement (para. 2.29).

6.03 Based on the above agreements, the project is suitable for fourBank loans aggregating US$138 million for a period of 15 years includingfive years of grace.

Mn EX I

YUOLAVIA

STAFF APPRAXSAL ,RtPRI

SEET RAILWAY PUECT

Proiect Action Plan

Obiectives Activiit Action to be Taken Resocsibil

1. Improve Investment Preparation of Plans to be reviewed. RTOs; 1989-91. Annually duringPlanning/Financial well-balanced period October-November.Performance investment plans.

Increase railway Implementation of Asseably of Yugoslavtariffs in line quarterly tariff railways. Federalwith inflation and increases. Govenment. Effectiveby 6% in l990 over quarterly.Producer PriceIndex.

2. Improve Planning. Introduce a Implement the CYR. TOs November 30.Organization and computer-based system. 990.Management. central monitoring

system for spare o-parts.

Reorganize major Implement agreement CYR. RTOsoverhaul of of February 1988.locomotives.

3. Improve operational Achieve greater Reduce staff by 2Z RTOf 1989-93.and financial efficiency and p.a. (Targets: seeefficiency. use of resources. table I to this annex)

Close freight stations RTOs, 1989-93(targets: see table Ito this annex).

R7TOs Operational RTOs, 1989-91.Plans to be uWpdated Annually during periodannually and reviewed October-November.with Bank on the basisof achieved actuals.

Achteve operational RTOs, 1989-93targets (Table I tothis Annex)

Table 1Page 1 of 2

XSLAVIA

STAFF APPRAISAL RKPIRT

SEVTH RAILWAY PROJECT

Action Plan Taroets

RTO Belgrade RE Ljubljanam~~~ ma ma ma ~~~~ma im im im imOerational Tareets

Number of staff at year-end"/ 27058 26517 25986 25466 249S7 15917 1S678 15442 15210 14982

Productivity of labouw (traffic; 283 290 298 310 324 349 356 363 374 386units (thousand) /employee)I

Number of freight stations to be 14 24 34 44 52 6 14 20 26 35 sclosed (cumulative)

Availability of electric loco- 75 80 82 82 82 8S 86 86 86 86motives (X)

Availability of diesel loco- 72 76 78 80 80 83 84 84 84 85motives (M)

Availability of electric motor 70 75 80 80 80 83 83 83 83 83trains CS)

Availability of diesel motor 20 20 - - - 82 83 83 83 84trains (t)

Availability of passenger 77 80 82 82 82 84 84 84 84 8Scoaches (%)

Availability of freight wagons (X) 92 94 94 94 94 93 93 93 93 93

1J/ Staff in basic organi2ations only.V/ Sum of net ton-kIs and passenger-kcs.

Table 1Page 2 of 2

YUGOLAVIA

STAFF APPRAISAL REPORT

SEVENTT RAILWAY PROJECT

Action Plan Taroets

RTO Novi Sad RTE Zagreb

Operational Taraets

Number of staff at year-end'/ 12826 12569 12318 12072 11831 33230 32566 31915 31277 30652

Productivity of labour (traffic 287 295 302 315 329 331 339 348 361 375units (thousand)2//employee)"

Number of fre1ght stations to be 8 11 14 16 20 17 41 61 61 61closed (cumulative)

Availability of electric loco- 81 82 82 83 83 87 88 89 90 90motives (I)

Availability of diesel loco- 70 71 72 73 75 78 78 79 81 83motives (%)

Availability of electric motor 71 71 72 73 75 82 82 e3 83 83trains (M)

Availability of diesel motor - - - 90 90 50 83 83 83 a3trains (O

Availability of passenger 81 82 82 83 83 80 83 84 84 85coaches (X)

Availability of freight wagons (X) 92 92 93 93 93 95 95 95 95 95

1/ Staff in basic organizations only.21 Sum of net ton-kms and passenger-kIs.

- 47 -

ANNEX 2Page 1 of 6

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Transportation Proiects Previously Financed by the Bank

Previous Prolects

1. The Bank has lent US$1,417.1 million to the transport sector todate, including US$491.2 million for seven railway projects, US$818.4million for thirteen highway projects, US$424 million for the Bar PortProject, and US$65.1 million for earthquake rehabilitation assistance forrestoring damaged roads, railways and a port is Montenegro. In addition,the Bank has loaned US$108 million for two pipeline projects.

Railways

2. The First Railway Loan was made in 1963 (Loan 316-YU, US$35million) to finance the conversion of the 195 km Sarajevo-Ploce line tostandard gauge, with electric traction and modern signalling andteleconmunications. The project was substantially completed and put intooperation in 1970, with a delay of four years.

3. The Second Railway Loan (Loan 395-YU, US$70 million) was made in1964 to help finance the modernization of 1,509 km of main lines traversingYugoslavia from the Austrian and Italian borders to the Greek border. Itincludes electrification, signalling, telecommunications, and theimprovement of six key marshalling yards. This project ran into majordifficulties because after the 1965 political and economic reforms therailways' internal funds fell substantially below expectations, and alsobecause of deficiencies in project planning and preparation which resultedin an underestimate of quantities and of time needed for completion of suchan extensive project. With hindsight, this was too ambitious a project inrelation to the railways' resources. The Bank loan was fully disbursed in1972. The project was refinanced from the fourth railway loan and wascompleted in 1981 at a total cost of about US$410 million, over twice theoriginal cost estimate.

4. The Third Railway Loan made in 1968 (Loan 531-YU, US$50 million)helped to finance construction of 370 km of the Belgrade-Bar line, withelectrification, signalling and telecommunications for the entire 475-kmline. This was a project of great technical complexity involving theconstruction of over 300 tunnels and several major bridges. The civilworks were satisfactorily constructed by local contractors. Completion wasoriginally scheduled for 1973, but geotechnical and other constructiondifficulties delayed the opening of the line till 1976, and the project wascompleted in 1978. Technical problems and inflation aggravated by delaysraised the cost of the project into US$422 million.

- 48 -

ANNEX 2Page 2 of 6

5. Because of problems on the second project, the Bank, in agreementwith the Yugoslav authorities, undertook a comprehensive study of therailways with the assistance of consultants. This prepared the ground forthe Fourth Railway Project (Loan 1026-YU, US$93 million), agreed in 1974,under which the Bank's loan was allocated to the completion of the 1964Modernization Program and to "Related Investments" needed to maximize itsbenefits, all to be completed by the end of 1976. However, in contrastwith earlier projects which consisted only of investments to which the Bankloan had been allocated, the fourth project was defined as the totality ofthe railways' investments in 1974-76, whose cost was estimated at US$1,138million. The Bank loan thus amounted to about 121 of the cost of theproject. Agreement was reached on measures to help overcome the railways'financial problems, principally through tariff increases. An importantfeature of the project was the preparation of comprehensive Action Planswhich, given Yugoslavia's decentralized system, were designed to contributeto a cobmon understanding of objectives and responsibility by allconcerned. Only about two-thirds of project investments were executedunder the project; however, they were reasonably balanced to maximizesystem effects, and the remainder were included in the 1976-80 InvestmentPlan. Execution of Bank-financed "Related Investments" was substantiallybetter (about three quarters). Except for the section from Skopje toGevgelia on the greek border, the electrification of the main linetraversing Yugoslavia was completed under the 1964 Modernization Program.Works were completed satisfactorily and the loan was closed in 1981.

7. The Fifth Railway Loan (Loan 1534-YU, US$100 million) was made in1978. The project consists of a three-year (1978-80) portion of the eightrailways' investment plans. Its principal objective was to further improvethe efficiency and the competitive position of the railways though 1,285 kmof track overhaul or reconstruction, 93 km of route conversion from singleto double track, electrification of 314 km, equipping of 53 km with modernsignalling, installation of automatic block on 434 km, technical assistanceand staff training. Ninety percent of the project was completed onschedule, and the economic return was re-estimated to be 181 against 152estimated at appraisal. Tariff covenants were not fully complied with dueto unexpected inflation, but this situation improved under the SixthRailway Project. CYR was successfully strengthened under the project.

8. The Kosovo Railways Project (Loan 1977-YU, US$34 million) was madein 1981. The Project includes reconstrucion of the Kosovo Junction,signalling and telecommunications improvements, procurement of rollingstock, and training and technical assistance to improve management andfreight operations. The project is expected to be completed two yearsbehind schedule irt early 1987, due primarily to managerial inefficienciesincluding procurement delays. The economic return is expected to be lowerthan estimated at appraisal, but still greater than 101, due to a shortfallin traffic. US$2.9 million in project funds were cancelled due toappreciation of the US dollar. The project was closed in December 1986.

- 49 -

ANNEX 2Page 3 of 6

9. The Sixth Railway Project (Loan 2336-YU, US$110 million) was madein 1983. The project consists of a four year time slice (1983-86) of fourRTOs investment plans, including the overhaul of 545 km of track,sOgnalling and telecommuinications on about 320 km of line, electrificationof the Bosanski-Novi Knin line, spare parts for locomotives, and technicalassistance and training. Project effectiveness was delayed by one year dueto delays in increasing tariffs, but the project is now proceeding onschedule and within the cost estimate. The RTOs have complied with thetariff covenant since effectiveness, leading to a reduction on compensationpayments by the Republics/Provinces. The project is expected to becompleted in 1988.

Highway Proiects

10. The First Hlighway Project (Loan 344-YU), US$35 million) in 1963financed the completion of the coastal section of the Adriatic Highway(422 km) and parts of the Belgrade-Nis road (174 km). The Second HighwayProject (Loan 485-YU, US$10 million), financed in 1967, was for theimprovement of 367 km of roads connecting the Zagreb-Belgrade highway viaSarajevo and Tuzla with the Adriatic highway. Both projects were completedwithin the original cost estimates and agreed time schedules. The ThirdHighway Project (Loan 608-YU, US$30 million), financed in 1969, comprisedabout 120 km of roads in Croatia, Macedonia and Slovenia, and was completedin August 1974 with a 20-month delay, primarily due to delays in completingan access road. This project had an 82 cost overrun because of inflationand foreign exchange adjustments. The Fourth Highway Project (Loan 678-YU,US$40 million) was financed in 1970 for the construction of about 220 km ofroads in Bosnia Herzegovina, Kosovo, Montenegro, Serbia and Vojvodina.Because of expropriation prob.ems in the section of Bosnia-Herzegovina, theproject was completed in December 1975 with an 18-month delay. There was a122 cost overrun due to inflation and foreign exchange adjustments. TheFifth Highway Project (Loan 751-YU, US$35 million) became effective 8months late in 1973 due to Government administrative delays. The projectcomprised 153 km of roads in Kosovo, Macedonia and Slovenia, procurement ofUS$1.7 million worth of engineering equipment, consultant's services and astaff training component to improve highway planning and projectpreparation. The engineering equipment has been delivered and theconsultant's services were completed satisfactorily. The staff trainingcomponent was delayed because of difficulties encountered in securingtraining of candidates in the head office of foreign consultants and inforeign institutes and because of language problems (insufficientcandidates proficient in English). Consequently, a restricted program wasadopted. Because of the delay in training, the project was completed bythe end of 1977, involving a delay of about 15 months. This project had an8% cost overrun because of the combined effect of inflation and foreignadjustments.

11. The loan for the Sixth Highway Project (Loan 990-YU,US$30 million) was made in 1974. The project financed six road sections inBosnia-Herzegovina totalling 150 km, the training of transportation

- 50 -

ANNEX 2Page 4 of 6

economists and road engineers, and US$1.1 million worth of engineering andlaboratory equipment. The loan for the Seventh Highway Project(Loan 1143-YU, US$40 million) was made in 1975. The project comprisedabout 90 km of road construction in Slovenia, Serbia and Montenegro, andUS$0.1 million worth of technical assistance to improve preparation ofhighway feasibility studies and to provide a related training program. Theproject was completed by the end of 1979. The Eighth Highway Project(Loan 1377-YU, US$56 million) was made in 1977. The project comprisedabout 130 km of roads in Serbia, Bosnia-Rerzegovina, Macedonia and Kosovo,studies by consultants of road user charges and rail costs and technicalassistance for the preparation of a highway master plan for Kosovo. Theroad works were completed and the loan closed in 1981. Both the Seventhand Eighth Highway Projects focused on improving section of theTrans-Yugoslav Highway (TYH), which was to become the primary objective oflater projects, while at the same time promoting regional development byimproving selected regional roads in lesser-developed areas. The NinthHighway Project (Loan 1535-YU, US$80 million) was made in 1978. Theproject comprised construction of four highly congested sections of TYR inSlovenia, Croatia and Serbia, totalling about 86 km, and the procurement ofequipment for maintenance and for monitoring loadings of vehicles using theprimary highway network, including TYR. All road works were completed byJanuary 1982 and the final delivery of highway maintenance equipment andweighing scales was made in December 1982.

12. The loan for the Tenth Highway Project (Loan 1678-YU,US$148 million) was made in April 1979 and became effective inAugust 1979. It comprised the first phase (a three-year tranche frommid-1979 to mid-1982) of the 1979-85 highway sector programs of fiveparticipating Republics and Provinces. Although progress was variableamong the borrowers, most construction contracts suffered delays of one totwo years due to a shortage of local funds. Construction was essentiallycompleted by mid-1984, but tae loan closing date was postponed toJune 30, 1985, to allow for completion of the training component andprocurement of equipment. The project also included an updating of theRoad User Charges Study, financed under the Eighth Highway Proje.t.The loan for the Eleventh Highway project (Loan 1819-YU, US$125 million)was made in April 1980 and became effective ln August 1980. It comprisesconstruction of six sections of the Trans-Yugoslav Highway (TYH) withcontrolled access facility in four Republics and Provinces, totalling about164 km, and the procurement of highway maintenance and road monitoringequipment, technical assistance, a highway safety program and thepreparation of a Toll Study. Although execution was delayed by up to twoyears because of the shortage of local funds, most construction items werecompleted by the revised loan closing date of June 30, 1985. The tenth andEleventh Highway Projects were both implemented during a period of economicdifficulty and budgetary reductions. Because of the severe shortage oflocal funds, both the Tenth and Eleventh Highway Projects were includedunder the Bank's Special Action Program in mid-1983. The investment plans

- 51 -

ANNEX 2Page 5 of 6

were revised, and the projects were then implemented as planned, albeitwith a two year delay. Re-estimated economic returns for both projectswere satisfactory. Several institutional improvements were incorporated inthe project including the creation of FARP, the carrying out of a road usercharges study, and training.

13. The Hiehway Sector Project (Loan 2715-YU, US$121.5 million) wasmade in 1986. The project finances a time slice of the roadinvestment/maintenance program of four Republics with the emphasis onremoval of bottlenecks, rehabilitation, and completion of the basicnetwork. The project emphasizes investment planning, a systematic approachto road maintenance operations, sound financial planning under conditionsof budgetary constraint, and strengthening of the new coordinating body forroads (FARP). Project preparation was delayed due to slowness in reachingagreement on the Republics to be included in the project and thecomposition of investment plans, and delays in adjusting road usercharges. Following negotiations, project signature was delayed about sixmonths due to Government delays in providing bank guarantees to theborrowers. Following substantial inereases in road user charges in 1986,the project was signed in February 1987.

14. The Second Hishway Sector Proiect (Loan 2878-YU, US$68 million)was approved by the Board on October 13, 1987, but is not yet signed due tothe delays of one Republic in guaranteeing the loan. The project financesa time slice of the investment/maintenance programme of the fourRepublics/Provinces not covered under the First Highway Sector Project, sothat nationwide coverage is provided between the two projects. The projectalso emphasizes investment planning, a systematic approach to roadmaintenance operations, sound financial planning under conditions ofbudgetary constraint, and strengthening the role of FARP.

Port of Bar Proiect

15. The loan (Loan 1060-YU, US$44 million) was made in 1974 to financeport development and related railway facilities. All works have beencompleted and the loan was closed in 1981 and US$1.6 million was cancelledfrom the Bank loan. The PCR indicated that despite the delays in thedevelopment of traffic following the 1979 earthquake, the projectrepresents a significant contribution to the economic development ofsouthern and eastern Yugoslavia. However, the port is somewhatover-designed for present traffic levels and as a result the economicreturr is marginal.

Earthquake Rehabilitation (Transport Facilities)

16. The Montenegro Rehabilitation Project for Earthquake Damage, Roads(Loan 1759-YU, US$21 million) was made in 1979. The project wassatisfactorily completed on schedule at the end of 1982. The Montenegro

- 52 -

ANNEX 2Page 6 of 6

Rehabilitation Project for Earthquake Damage, Ports (Loan 1768-YU, US$50million) was made in 1979, and the final equipment deliveries were made in1984. US$19.9 million were cancelled from the loan due to appreciation ofthe US dollar. The NMbtenegro Rehabilitation Project for EarthquakeDamage, Railways (Loan 1769-YU, US$14 million) was also made in 1979. Itcomprised repair and restoration of railway facilities damaged by theearthquake and the expansion of railway yards at Bar and Titograd. Projectcompletion was delayed due to the fact that much more time than anticipatedhas been necessary for design and geological works, while the need for workunder traffic has also hampered progress. The project was completed by theend of 1984, and a remaining balance of US$0.04 million was cancelled.

- 53 -

ANNEX 3Page 1 of 2

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Tariffs and ComDensation

1. Prior to 1988 railway tariffs were approved by the FederalGovernmment on the recommendation of the Federal Institute for Prices.Decisions were made on the basis of macroeconomic and social judgments andnot solely on factual information about the costs of providing services.The Federal Committee for Transport and Communications and the Community ofYugoslav Railways (CYR) played an important advisory role in preparing theSocial Compacts or agreements which set railway prices. These administeredprices adjusted standard rail tariffs to serve a number of purposes,e.g. (i) by lowering rates to aid certain regions, industries or classes oftravellers; (ii) converting actual kilometer distances into "commercialkilometers" for charging purposes in order to give more average revenue perton-km or passenger-km to the smaller, less efficient RTOs and to reflecttheir different cost and traffic conditions; (iii) reducing rates onexports that have a high local labour, materials and technology content andto encourage transit traffic (forms of export subsidy).

2. The RTOs were compensated for revenues foregone as a result ofsuch pricing decisions and provided with funds to meet part of theirinfrastructure maintenance and renewal costs by a self-determined levy onthe incomes of those who were members of the Community of Interest (COI).The so-called compensation payments formed a contracted obligation and wereforecasted for three to five years ahead, subject to annual review in thelight of cost and traffic experience. The rate of levy adopted varied fromRepublic to Republic. In Slovenia, for example, it was 3.62 of incomel'on 'small' railway user enterprises and 1.5S on 'big' railway userenterprises--this may not necessarily has been a subsidy because ofdifferences in the costs involved in providing service. In Croatia, bycontrast, there was a multitude of rates ranging from around 0.62 to 5.8%on the industrial and other economic activites in the Republic, includingthe RTO itself as well as other transport modes since they may also userail transport as part of their activities. In Serbia the Community ofInterest was abolished in 1986 and compensation payments are now made fromthe Republican budget.

1/ The income statements of the RTOs and other enterprises in Yugoslaviaare constructed in ways that differ from those in non-Socialistsocieties.

- 54 -ANNEX 3Page 2 of 2

3. The compensation payments were an effort to devise a formula thatwill serve three purposes. First, to avoid protracted annual disputesbetween the railways, users and Government authorities about the level ofsubsidy to be paid-as happens in some countries-by having a simple,agreed formula. Second, to facilitate financial planning by the railwaysand COI members by giving railway management some degree of certainty aboutfuture income and the members about future commitments. And, third, toinduce some sense of efficiency and service to the public in railwaymangement. In return for the compensation subsidy, the railways areexpected to meet agreed productivity and service level standards(e.g. on-time running of trains or the numbers of wagons available daily)and if these are not achieved or traffic is below expected, compensation isreduced.

4. In 1988, a review of the railway tariff adjustment method wasundertaken and recomuendations were made to adjust tariffs on the basis of'common elements". The three "common elements" used were (i) average CYRexpenditure increases based on uniform standards; (ii) relationship ofrail tariffs with world tariffs; and (iii).relationship of rail tariffswith tariffs of other Yugoslav tiansport modes. The tariff level whichresulted from this study's recommendation would have involved an increasein passenger tariffs of about 2402 and freight tariffs of 1501. As such ahigh increase was not economically viable, it was decided to increase railtariff to the level of road tariffs over a period of 18-months. Tocompensate the RTOs for the difference between the revenue generated bythis tariff and the revenue generated by the "common elements" tariff itwas decided to pay compensation. This compensation to be financed aspreviously by the levy in the COI. To adjust rail tariffs to the level ofroad tariff involved a real increase of 602 and 971 respectively inpassenger and freight tariffs over a period of eighteen months.

5. The revised "common elements" tariff adjustment method wasapproved by the Government in August 1988 and was used to calculate thesecond and third quarters tariff adjustments for 1988. However, theproposed tariff adju.ted for the January 1989 quarter was substantiallyreduced by the Government. A new study group was established and isdeveloping a modified system based on "common criteria". The tariffadjustment implemented on April 1, 1989 of 761 was in line with the Bank'srequirement under the Sixth Railway Project.

6. Under the previous loan, it was agreed that tariffs should beincreased in real terms by 6% per annum with a view to eliminatingcompensation. Due to the high level of inflation and the delays inadjusting tariffs, the initial progress in reducing the percentagescompensation was lost and compensation increased again in 1987. Details ofthe actual and projected compensation are shown in Table 1.

- 55 -

9TMW 09991L NMIT80rn NAIUMY PROJCT

Coapmaatioo Payumtot ag a Percntale of Total Revne

(Dimir Billion - 193 and Projectons in 199 Siare)

RTO 1713 199 199 1985 199 199 199 1969 1990 1991 1992

98.9139 Coamustion 4.1 7.0 15.5 29.2 54.1 92.0 109.3 55.0 47.0 32.0TotUI Revenu 20.4 32.5 60.2 112.3 222.2 349.9 401.7 417.7 410.9 401.9

2 301 2,'c 241 241 24 231 27 13 I12 a2LJUBJM Cnapmeutioo 5.3 7.9 14.4 44.9 115.1 153.5 124.7 45.0 71.0 92.0

Total Reven 19.0 30.5 59.5 125.6 270.0 413.5 414.9 422.4 430.1 455.92 29 242 29 37 431 371 302 152 172 201

m0l 9so Coapeneation 3.0 3.9 4.5 14.7 22.9 35.1 52.0 22.7 22.0 14.0Total kevnu 10.1 17.1 32.9 63.9 114.9 190. 210.9 209 .4 209.6 207.

I 30 222 20 241 M0 192 251 11% 102 a2

2*A31 C8meto .4 11.1 19.9 34.4 53.7 152.7 149.0 90.0 42.0 29,0total Revenue30.3 49. 94.8 149.9 241.2 493. 531.2 343.5 509.5 502.4

2 29 231 22 252 212 312 282 152 92 42

Total of Compnaution 23.0 29.7 57.5 129.3 245.9 423.3 434.0 22.7 182.0 149.0Total Reveue 79.0 129.2 237.3 450.7 870.3 1437.1 1547.5 1593.4 1559. 15647.I 29 23 242 29 29 29 292 142 122 112Total M~ Coapsution 25.4 32.9 42.2 121.3 256.5 - -

Revenue 99~~~~~.8 164.5 302.1 409.5 1072.82 ~~~~~~~~~252 M0 212 212 242

- 56 -

ANNEX 4Page 1 of 3

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Details of Financial Evaluation

Main Ass_ptions

General

1. Inflation in Yugoslavia has been accelerating during the past fiveyears reaching a level of 274S in 1988. With a reform program presently underpreparation it is difficult to predict the level of inflation to a reasonabledegree of accuracy during the next few years. To overcome this problem it wasdecided to use the Dinar price level of December 31, 1987 as a constant in thepreparation of financial forecasts. Dinars are converted to US dollars basedon the exchangS"rate of Din 1,279 - US$1.00 ruling at close of business onDecember 31, 1987. The Income Statement for 1988 was converted to December31, 1987 price levels quarter by quarter using a separate inflation level foreach quarter.

Traffic Forecasts

2. The freight and passenger forecasts discussed in Chapter IV and shownin detail in Table 13 were used.

Tariffs

3. The tariffs used in the forecasts were in accordance with the tariffrequirement outlined in paragraph 2.26. A reduction of 182 was made in the1989 revenue to allow for delays in implementing the tariff increase thatyear. The full inflationary tariff adjustment will be in force from 1990onwards.

Compensation

4. Compensation from Republican/Provincial Governments for loss ofrevenue due to subsidized services was originally projected by the RTO. Theamounts estimated for 1989 were increased to cover the 18% fall in revenue dueto delays in implementing tariff increases that year. The originalcompensation estimate for later years were adjusted as necessary to maintainthe RTO's cash at a reasonable level.

- 57 -

ANNEX 4Page 2 of 3

OperatingJt Eenses

5. These expenses were forecast to be marginally reduced each year toallow for the effects of the RTOs' programs to increase productivity. Fueland power costs were increased in line with the projected future growth intraffic.

Depr6ciation

6. The following weighted average depreciation rates, reflecting theasset composition of the RTOs, were used:

Belgrade 3.81Ljubljana 4.252Novi Sad 4.02Zagreb 4.41

In calculating the depreciation charge, a deduction of 32 per annum compoundedwas made from gross fixed assets to allow for obsolete and retired asset. Thesubstantial increase in depreciation charges in 1989 for some RTOs resultedfrom the application of increased group depreciation rates that year comparedwith 1988.

Interest

7. A real interest rate of 52 per annum was charged on local and foreignloans.

Monitoring Tarsets

Operating Ratios

8. Forecast operating ratios excluding compensation payments are asfollows:

ACUTAL FORECAST

RTO 1986 1987 1988 1989 1990 1991 1992 1993

Operating Ratios:Belgrade 124 142 148 136 111 110 108 106Ljubljana 138 162 146 124 101 100 99 98Novi Sad 127 127 132 129 109 108 105 102Zagreb 124 147 145 133 110 108 106 103

9. These operating ratios L' forecast will be used as monitoringtargets to evaluate progress.

1/ Operating expenditure x 100 m Operating ratioOperating revenue

- 58 -

ANNEX 4Page 3 of 3

Debt Service Coverage

10. The projected debt service coverage ratio are as follows:

RTO 1988 1989 1990 1991 1992 1993

Belgrade 0.3 1.9 2.7 2.5 2.1 1.8Ljubljana 2.2 2.1 2.3 2.5 3.4 3.0Novi Sad 0.5 2.9 2.5 2.6 2.7 3.92agreb 5.4 3.0 3.4 3.0 3.1 2.8

These ratios assume that all loans are revalued to allow for inflation and areal interest rate of 5% per annum.

Financial Statements

11. Tables 1 to 15 of this Annex shows the consolidated and individualIncome Accounts, Cash Flow, Balance Sheets and Forecasts for each RTO for theyears 1983 to 1995.

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- 74 -

ANNEX 5

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Technical Assistance and Trainint

List of Subiects

1. Studying in other countries the practice of railway marketing inthe field leading to the production of an implementation study directed atestablishing a marketing department in CYR;

2. Study to identify, evaluate and recommend measures to improvetransit traffic on Yugoslav railways; and

3. Seminar to improve the skills in economic and financial analysis.

75 -

ANNEX 6Page 1 of 6

YUGOSLAVIA

PROPOSED SEVENTH RAILWAY PROJECT

Key Features of Yutoslav Railways' Business Policy

Obiectives Strategy Proposed Actions

1. Improve operations New operations. Create a network ofand increase degree passenger intercityof safety. trains.

Provide "special green"freight routes withguarantees for contractedschedule.

Improve existing Shorten stay of interna-operations. tional passenger trains on

YR network.

Form direct freighttrains as many aspossible.

Supervision of Improve control and imple-operational safety. ment all obligations of

the law on the Basics ofSafety in Railway Trans-portation.

Remove shortcomings. Take specific actions toin transport orga- - improve discipline andnisations and work respownsibility;maintenance of - improve the level offacilities professional training;

- improve work conditions.

Determine specific plansand actions to resolve theproblem of traffic safetyon:- level crossings;- places exposed to land-slides caused by weatherand floods.

-76 -ANNEX 6Page 2 of 6

Key Features of Yugoslav Railways' Business Policy

Ob9-jtives Stratesy Prooosed Actions

2. Improve marketing. Gradually prepare Use more rationallyconditions for passenger transportoperations to be based facilities during daytime,on marketing. week and summer through:

- tariffs;- ranking of trains;- prices;- special allowances.

Achieve better utilizationof international passengertrains through:- price policy and specialallowances;

- fewer stops;- continuation of studying;of the train'sefficiency.

Sign contracts for"factory-trains" on runsup to 50 km with specialprice per worker andguarantees for departureand arrival times.

Provide incentives to usethe railways for trans-porting goods through:- tariff policy;- more adequate prices ofdirect routes;

- contracting transpor-tation times;

- regular payment of re-imbursements to foreignand domestic freight andother organizations.

Decrease or eliminatefreight on lines wherepossible.

77 -ANMEX 6Page 3 of 6

Key Features of Yugoslav Railways' Business Policy

Obiectives Strategy Proposed Actions

3. Improve quality of Intensify planning of Increase commercialtransport services. operations. speeds of pasengtr and

freight trains.

Decrease number of stops,primarily of internationaltrains followed bybusiness, express andfast trains.

Increase static anddynamic load of wagons.

Decrease turnaround timeof freight wagons.

Decrease damages andthefts.

Create better Establish criteria forconditions of stations and passengerfor operations. trains for:

- services available;- appearance;- cleanliness.

Establish criteria for theuse of restaurant,sleeping and couchettecars.

4. Improve use of Priority to be given Designing the moderni-infrastructure to main trunk line zation to be coordinatedand traction and Jesenice (Sezana) - by CYR.rolling stock. Gevgelija (Dimitrovgrad).

CYR to participate in theproduction of a timeschedule for implementationof the modernization and inthe actual implementation.

Increase capacities. Provide 22.5 ton axle loadon international routes and18 t on all other routes.

-78 -ANNEX 6Page 4 of 6

Kev Features of Yugoslav Railways' Business Policy

Objectives Strategy Proposed Actions

Continue with the intro-duction of modern SS andTT equipment.

Reduce capacities. Initiate:- closing of uneconomiclines;

- terminating public trans-portation on uneonomiclines; or

- receive compensation.

Conduct research:- to reduce the number ofstations;

- to reduce the number ofofficial places instations.

Withdraw steam locomotivesas fast as possible.

Improve facilities. Instali a unified infor-'-mation system with priori-ties for the subsystems:- operation of freightwaggons and trains;

- operation of passengercoaches and trains;

- operation of locomotives;- sales services irn regularfreight traffic;

- sales of seats andberths.

Continue equipping loco-motives, DMUs and EMUs, andthe main lines with:- auto stop equipment;- radio dispatcher

equipment.

- 79 - ANNEX 6Page 5 of 6

Rey Features of Yugosiav Railways' Business Policy

Obiectives Strategy Proposed Actions

Optimize use oflocomotives.

Form longer trains.

Prepare intensively freightwagons for internationaltraffic for speeds of100 km/h and 22.5 ton axleload.

Set up long term programfor:- improving the existinglocomotives;

- developing better andmore modern locomotives.

Rationalize, specialize anddiversify maintenance andservicing operations.

Implement the Agreement onImprovement of Maintenanceof JZ traction stock.

5. Improve financial Reduce growth rate All BOALs to elaborateviability. of operating cost. saving measures to slowdown

growth rate of operatingcosts.

Seek funds from socio- Submit official proposalpolitical communities regarding -ermanentfor investments and resolving infrastructureuneconomic operations. cost financing.

Prepare specific proposalsfor financing and providingof special resources forthe:- modernization of the maintrunk line;

- 80 - 6

Page 6 of 6

Yey Features of Yugoslav Railways' Business Policy

Objectives Strategy Proposed Actions

- construction of the JZ-MAVborder station nearSubotica.

Systematically studyuneconomic lines:- to determine the profita-bility;

- to suggest amounts ofcompensation;

- to investigate terminationof operations.

Produce studies todetermine:- a system and the amountsof reimbursements whichthe RTOs need to pay forusing railway infra-structure and the amountof costs which can beincluded in prices ofservices;

- a system and the amountsof compensation foroperating uneconomiclines;

- a system and policy oftariffs based on theabove.

CYR to attempt that Federalauthorities find solutionsfor making up great exchangerate differences and cefaultinterest payment occurre:- on convention liabilitieatowards foreign railways;

- unsettled liabilities ofthe Federal authorities.

- 81 -

ENDILMA~~~~~~~tbl

STAFFAMASL tn5rtH itAL MMST

Inland Friinht and Paaeng=r TrafFte- 191-57

A. Frveuht tttbn billiena lp ad Inland

DuNc ^1 Publ1ca am Accunt a SubtatLl P1ilim Walarwarays ate Li 19

1963 17.3 2.0 2.8 4.8 - 2.6 0.0026 24.701964 18.3 2.4 3.4 5.8 - 3.1 0.0031 27.201965 18.0 3.0 4.0 7.0 - 3.3 0.0037 28.301966 17.8 3.6 4.8 8.4 - 3.8 0.0040 29.701967 16.4 4.0 S.7 9.7 - 3.9 0.0049 30.001968 16.4 4.8 6.7 ll.S - 4.3 0.0062 32.201969 17.7 5.6 8.0 13.6 - 3.4 0.0084 34.701970 19.3 6.7 9.8 16.2 - 4.4 0.0100 39.901971 19.7 8.7 11.1 19.8 0.02 4.2 0.0120 43.721972 19.2 9.7 12.2 21.9 0.10 4.6 0.0110 4S.801973 20.4 10.2 13.3 23.7 0.09 4.9 0.0120 49.091974 23.1 8.8 14.9 23.7 0.11 8.8 0.0140 52.411978 21.6 12.3 16.4 28.7 0.11 S.S 0.0330 88.911976 21.0 13.1 18.1 31.2 0.13 5.6 0.060 57.931977 22.2 14.7 19.9 34.6 0.14 5.8 0.0720 62.741978 23.4 16.9 21.9 38.8 0.16 8.9 0.0540 68.261979 26.0 17.7 24.2 41.9 0.16 8.7 0.0920 73.761980 28.0 19.0 28.2 44.2 2.20 8.0 0.0610 76.401981 26.0 19.7 24.9 44.6 2.30 4.2 0.0780 77.101982 26.2 19.3 23.7 43.0 2.30 4.2 0.0840 7S.701983 27.9 18.8 23.3 42.1 2.80 4.1 0.0850 76.601964 28.7 19.9 23.5 43.4 2.60 4.3 0.0940 79.00198S 28.7 21.2 22.2 43.4 2 S0 3.9 0.0930 78.801986 27.6 22.3 22.8 48.1 3.07 4.6 0.1110 80.48198? 26.1 22.4 23.0 45.4 3.26 4.2 0.1120 79.07

8. Paaaenger din. b1lltnniRoad

SunInter tnland

liar WaIl grimn UrbAn 12 Ca Li Suaal Watarwaza Uir I9 low

1963 10.1 3.7 3.1 4.5 11.3 0.020 0.27 21.691964 11.7 4.8 3.4 S.7 13.9 0.010 0.37 25.981965 12.1 5.7 3.7 7.6 17.0 0.010 0.48 29.59196o 12.2 8.0 3.5 7.9 19.4 0.010 0.54 32.181967 10.8 9.6 3.4 11.1 24.1 0.00S 0.83 36.441968 10.3 10.1 3.7 13.7 27.S 0.009 0.62 38.431969 10.S 12.S 3.9 17.6 34.0 0.010 0.89 4S.401970 10.9 14.1 4.1 22.8 40.7 0.010 1.30 52.911971 10.6 15.8 4.5 22.7 42.7 0.008 2.00 60.311972 10.6 17.4 5.8 27.4 S4.8 0.010 2.50 67.611973 10.6 20.0 S.9 35.6 61.S 0.010 3.20 75.311974 10.4 22.0 6.1 41.7 69.8 0.010 3.40 83.61197S 10.3 24.8 6.4 48.0 78.9 0.020 3.80 93.021976 9.9 26.0 6.8 64.1 86.9 0.008 3.80 100.6119" l.S 28.0 7.2 60.1 98.3 0.020 3.90 109.721978 10.4 28.7 8.1 66.6 103.4 0.020 4.70 118.521979 10.1 29.2 8.5 70.6 108.3 0.030 S.20 123.631980 10.4 29.6 9.4 76.1 11S.1 0.0*0 s.10 130.621981 10.5 30.3 9.9 80.2 120.4 0.020 8.10 136.021982 11.3 28.9 11.2 84.8 124.6 0.030 4.90 140.831963 11.6 31.2 11.7 86.6 129.5 0.040 4.90 146.041964 11.7 33.S 12.1 89.8 135.4 0.030 S.80 182.631985 12.0 31.5 12.4 90.1 134.0 0.020 6.30 152.321986 12.4 31.4 11.3 93.7 136.4 0.001 7.01 188.811987 11.8 31.7 13.8 94.S 140.0 0.001 8.34 160.14

a 1979-85 figures estimoted from diesel fuel consumption statistics (Statistical Yearbook. Table 121 4)(Y a -0.6 # 0.05 x. where Y a total road transport (tkm billions) and x a diesel fuel consumption(thousands Oa tons); r2 ' 0.99).

LI Estimated from bus-kilometer statistics assuming 2S passengers per bus (Statistical Yearbook. Table121-37). Includes tra _ys and trolley buses.

LI tstimated from vehicle registration statistics assuming 12.SOI0 vehicle km/year and 2.S persons/hehicle(Statistical Yearbook. Table 121-32). This is consistent with an estimate based on 8 liters ofgasoline consumption per 100 vehicle kilometers.

Li Includes intelnational transport.

Source: Statistical Yearbooks of Yugoslavia (Tables 12-8 and 121-9) and mi5sion estimates.Date: January 26. 1989.

YUGOSLAVIA ,table 2

STAFF APRAISAL REPORT

SEVNTh RAILWAY PROJECT

Tramwaztr+IngUtments, 1961-87(PawhntS in 1984 US nMillion equivalent)

Total------- --------- Transport----- ---------- Public Transport tilway's

Roadc Urban Pipe- Ports & tntegrated Sector as a S of as a S of

Year kUmalavs Znfrastructur Vehc1les L1 Xja1 Iramsurt 3tiza &MxaN TransoLrt shinEInz TIQtal IZw . Total Tra..ert

if9t1-a Plan1961 579 731 72 803 - - 74 312 18 1,787 12,441 14.4 3r.4

1962 s09 638 91 729 77 - 91 221 90 1,717 13.868 12.3 29.6

1963 427 671 105 776 79 - 54 302 59 1,697 18.279 9.s 2S.2

1964 780 1.000 129 1.129 86 - 49 350 125 2.519 20,609 12.2 30.1

1965 4S 2M ISO 4tA _1f _ _2 _n 121 _5 1Z078 JASI 12A. MA

Total 2.730 3,300 S56 3.856 272 - 288 1,306 345 8.77 74.006 11.9 31.0

I*lLb-RElao1966 261 147 183 330 22 - 13 109 41 776 5,234 14.8 33.6

1967 236 174 225 399 14 - 10 S$ 34 751 4,789 1S.? 31.4

1968 281 266 265 531 20 - 7 42 28 909 5,788 15.7 30.9

1969 320 331 324 655 2S - 6 3S 25 1066 6,318 16.9 30.0

1970 _2_ Sll .92 ase _2 -A 22 8,L 1.222 7.20 1Ai jIl

Total 1.418 1.429 1,389 2.818 106 - 44 283 156 4.825 30.049 16.1 29.0

123-n ZLl2n1971 4S6 386 438 824 41 - 6 108 40 1.475 8.145 18.1 30.9 c

1972 41S 372 S04 876 31 - 19 117 28 1,486 8,079 18.4 27.9 r4

1973 478 468 591 1.0S9 36 - 8 119 25 1.725 8,974 19.2 27.71974 423 539 642 1,181 57 - 13 1S1 39 1,848 11,S23 16.2 22.7

197S SIB 650 7.49 1.399 Al - II 122 _9 2J22 14_531 15. IL

Total 2,290 2.41S 2.924 S.339 209 - 59 674 211 8,782 51,252 17.1 26.1

1976-80 Pia1976 418 338 826 1.164 56 166 9 206 76 2.09S 16.713 12.S 20.0

1977 617 440 912 1,3S2 60 281 14 150 114 2.588 20,241 12.8 20.0

1978 596 520 1,008 1,528 89 344 32 168 106 2.863 25,212 11.4 20.8

1979 667 721 1,072 1,793 122 409 27 140 138 3.296 28.3V7 11.6 20.2

1950 si1 t11 1.40 1.651 12_ 22S _21 121 _1 211216 24,166 tt l.

Total 2.809 2.S30 4.958 7.488 451 1.525 103 785 519 13.678 114.709 11.9 20.S

1981-8s Pia1981 408 388 1,209 1.S97 111 185 16 121 S3 2.491 18,796 13.3 16.4

1982 299 302 1.192 1.494 68 148 14 127 88 2,238 14,991 14.9 13.4

1983 232 19S 1.207 1.402 S3 201 6 97 57 2.049 9,428 21.7 11.3

1984 239 173 1,253 1.426 40 18 S 77 52 1.857 8,074 23.0 12.9

1985 212 II 1.249 1.162 81 Ii I 52 la 22027 L.Ol 2L1 1Ll

Total 1,462 1.441 6,110 7.5S1 335 S6B 4S 464 306 10.731 59.388 18.1 13.6

1986-90 Plan1986 340 290 1,289 1.579 63 24 9 S0 78 2.143 11.540 18.6 1S.9

1987 (est.) 250 700 1,324 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

LI Estimated depreciation based on traffic statistics (Table 1) assuming (a) USS0.052/truck km. 5 tonsttruck: (b) US$0.085/bus km. 2S persons/bus:

and (c) US$0.018/car km. 2.5 persons/car.MgU: Includes public seator investments plus estimated total expenditures on road vehicles. Excludes other private sector itlve5tients which amounted

to about 8U of Public sector investments in 1984. Government statistics should be interpreted with caution as they aWpear to contain some anomolies.

Sourc : Statistical Yearbooks of Yugoslavia plus mission estimates of road vehicle purchases.

. * ,- . * . $ ~~~~~~~~~~~~~~~~~~~~~~. I

VUGMAVWA Td" 3

ActLet ad ufc..t Traffic In . ProJet _. 1_.6

~n n .. n. .. n.... ... . .... m.. . ._. ._.

_---X-- -**- *------*-*----------*- -------- 4_ ---

I'O Wll U 191 U9 19 51ilB 19B 1990 19w1 199" " 19a " 199S 196 1S 198118 191 199

(lb or on bttlas) Pa .)

A. FrsaIt Traffic

twol W5.1 S.71 S.541 S.21 5,1061 5,0K S,112 S.W 5,210 SjG5 S.452 S,561 5.2 26 -4.2 US 2Z0

LJhbil 3,.51 4.39 4,0* 3.95 4,017 4.0 407 40 4131 4,1 4.29 4. 4. 2.2 -22 05 1.3

1t1 SW 2,94 3,8 2,08 2.7 2,56 27 21 2.58 2,743 2,8 42, 2, 2,9 0. -5. 0.5 2.2

ZW* 7,1 8.,4 1.099 T6A8 7,211 T7 . 75 7,43? . 7.97 7,8 7.98.r 28a .0S 1S 6

PI.jgct Total 19.45 21,71 239 19,6% 18.86 *,o 1,91 1.28 19.90 19. 3. 2D3= 25.98 2.3 47 0.5 1.7

L. P u Traffic....... . ........

biwacbA.214 2.98 2,1% 2,711 263 2.I ,664 2.9 2,74 2,619 2,99 3,0" 2.8 US O .6

LJIa 1,46 1IA8 IAN8 1.95 1.92 1,560 1,58 1S7S IA0 1,6I9 1,92 1,705 1.79 3.0 -2A4 U 2L0

Iw SW *5 1.098 1,11 1,0i6 1.95 1,064 Im 1.15 1,102 1,129 1.151 1,1r 12' 2. -1.9 Us 2.5

3.619 406 4.0 3,900 3.S7 3.86 3,6S 3.85 3,913 4.052 4.13 4.216 4,0 2.3 -1.9 S 2L0

pmrojet total 8.28 9.417 9.8 9.272 9, 9.131 9J1 s 9,2z 940 9A1 9,86 10.85 10300 2.A -1.3 U 2L2

C. Total Trffc Its

0o k To7.37 8.39 8.W7 7.W2 7A,6w 7,n7 7.71 71 7.5 8.164 83 8.98 8,716LJUlia SAW SA.O S3. SAM21 5.569 S5W S.0 5.63 5,75 SAO S,910 S999 6.98

1WASW 3.9= 4.146 4.060 3.8&0 3.S 3.72 3.740 3.M59 3.W15 3.99 4.05 4.115 4.39logro 11.1 12, 1 2,86 % 119B 8 11806l 1116 111 11=215 11.410 11,608 1810 12015 1ys

Plroust TOW V709 31,.2 30.3W 5.85 230898 3159 311,300 3.A41 5.919 2953 30,C1 3D0.5 31,.9

man OW ad traffic f*t e an artiffcida US1 affe of 5S18 bilta dlewd tOYI blifz pU

rn- W

SW: L R II EW

MrnftW p t - 8ft*ist for MM-

b10 UE LIaMWa1 191 1$ 1S 1im 13 519 1w No

1. LaG& of Lim Itdt

bia-h totdl is 10 155 UPS US 10 m US4 i S U0mM. tradc Is 12 133 1 S1 1 312 32 3 m2 312E(cbiffm In gm SW w sw SW 518 S4B SU SU S1

11. Tnaffic

OD S 2MM 311Y5 31801 M0M1 2*:7 231 0 25114 7 ?PrnsmWrisallt is 2a35N M 21% 211 a2155 14 Wg ti 15S 12Awrqs iaw In 94.2 &S 8.9 WA S.6 3LS ST.2 3A S9.1 0.0F-& rat-ti Moo M 54 MM0 2513 230 2 l 2WR a3 2MU2 mYfrIlt wt-tm-to ilt ni g#5 5761 541 Stl6 S51 4299 42 4001 31 4017Ak,q JL I. 22W0 3.1 2A3.9 2n.8 A.1 1L 1760 1n. 15 15.oTrafic wdts, tod Uoi 8aw1 am9 7W w 79 SW 5959 on s569Papr Voss torli mil uti 3619 36 3U Wi 421 Us 23 2119 210 21W3

WIo Wms to dl ti 111 Y I; W0s W SC 1 1W 2 M151 02Totat gol t6is olt 1t 1w we 1W 1211 15 115 U 1010 am a

Trffic Dflshy

Pan-l per r-k 000 1D lm 15 1s 1 In 129 1W I= 129 124Frlt n*-twtMi per raa34G 000 3112 301 M 215 30 351 34% 336 SW 3WI

TIiwim, P am aa Om Is 12 1W 1315g 1M3 t0 I6 o1r 119 W I2Trabr*, fret COO Is 1 t0 Ul2 1M1 92 gm 129 115 Ws gm 9012Tuak0wt tta 000 Is 21017 6tO 80 2 3150 2 231 284

V Traffic lWltps a p +.t-t Is

Tubl 40)

STW NWUAL WI.. _. ^_............ _

Slctmi qxratwr Statlatics for 1911-8S

am S RE

1. L*utU of LIM Ildt............... ................_

Rm*a-bt ha 1463 148 W4( 1a4 1a4 21 3641 2441 2141 2D.bL tr* h97 97 9v s r 23 2s3 243 43 23Eltriffd ha 0 8 3 3 3 8 a 81 51 834

11. Traffic

Pm.ws VW0 162 t5 16 U104 41 65 4911 4942 4S90p.ssww.4o mit ful 1211 I= t lO K N1117 106 13OS 0 4 3?ArW JAm ha W3.8 61a 62. 63A638 .2 823 8SA4 5.68 8U.7frW4* not-tam MM0 2VS W MM 5 4561 445 42? 41 31Frsloit nut-taw-Ha 1 idtS f32aS 30S 2 V7A 256 am7 099 Om 5 21Awrg. h4 ha 115.2 1.1 111.4 112.1 111.8 1A 15SA 191 190.0 15.STrafe widts, total V .i1 4290 416 40 30 312 1# WV 11 "1m 1M118P_ag~r ~ t s it Om 72? 14 150 tI 11 MO 6 495 am 6)19FMordumtv;rh sit had t l 590 SW S6 30 513 1W 15777 155 Q 143 1sTotl t t g7l 1W61 7214 7O 43 3 2zs 22 112M ITriffc Dsitr

Pins-ha per rftinsh m? s m 710 6do 1 "6A W4 1 1FMSI* re-tm-ha per raft-ha 000 235 ZW6 3 tW 1W 569 3m 3154 235

Traln-I, 0us~ers 000 hatWiG000009 1010W IWI 1" 213 21m0 m 21511 amT trai-, f0t 000 h sW 5641 .- 0 5469 1SW M Sla3 5199 14W MgTrslm , tt 000h 161 im ilt 1510 1VW 3M 316 391 37 311S

VJ Yuaft tft-l P1pm nt-tmnhi

6 66 ot la Ina o ou ttt n *

U *I1

-adgm la IK 9 as la Mt on on or mmA4M

66 66 66 rO rA £% ,< ,o ra ni wPi sp5~Se S7 S7 S7 S SI S 0S 5 5 A

9, 9, 1Y 19 19 81 9, UP 9P as x C l l -Otr.......................

" W~VPD 5 59 , 9 2t 09, OW CO CO a 0 a IS 9AC

i .

Mt1 MC oC Mt Ott 0 C 0 aI Su 444 £9 ao a a £9 0 C C U U

OK (a a a an e 0 0 MP ON A)11 PM

....................

WI WI WI 00~~~91 WIGP CP CO L O

051 am1 am 099 099 CR OR ot o OR MA Ua

*e 15 3 15 3 OP OP1 81 I 2£ X IwlaR SR R a a OR GoCU UP CSt atliPo p

96 05 S Ss aseGS a a 91 gm CM UIW

so l e 10 le a a co et St %Ao

aK le 99 99 a9 0P £9 a 919 I at 3 .4 up*j

...............

2 P I ~ ~ ~ ~ ~ ~~~~~~~~~~~64wMPS

96 M6 e6 00 Ms ss Ms gm Zs oilPn w

S .1S

amOs Os OK I ae A a m OA" -go go ec so ac a a a a 6 Alim

18 | al* al W u | 1t ^~~~~~~~~~~~~~~~~~~~~~~~~; ; t ; ........ .. o

.~. .... ... .... ... .... ... .... ... .... ... .... ... .... ........ ........ .... ..... ...

....................................................................

.......... ~~~~~~~~~~~~~~......

........... n~~~~..............

-98 -

-87-

T*IeS

..... .......... ...........W1A

.......................

"Wo, bwm W faw "l" r W

4o$@A Pbw3Ie .t1t _tlAM Main *XFt55h............................................................

me ~i ^2m z

Itz St ~~~~1911 19iD 1.18 1.1 1.91 1.59 1WO U99 UPe tFmL~~~ht gU.~~~ft~~m 2.3 2.38~M WA4 Om 4 2.82.0 2.0 201 201 2

~~~~~~~~~~~.... .... .... .... .... .... .... .... .... .... .... .... ....

..........

.. ............

ft_f -0 t8D NO I0 10 5.91 I.5 10 0 .90 9S 10reI1 t 450 20 2m L4 La 450O 240 450 501 Lo

...............

_t S.................

I*ufUty I 2 81 a a a U U 8 go 91T laus t3450 3s 0 UO5 so 30 400 400 U400 40 0

Train ldt 115 19 115 11a 115 10 100 300 100 10...............

liity X 8 1 a 73 a i a8 19 10 g_fm WNW o so 5 90 350 43 43 43 45 4A

Trin ha t 10 ISO 0 I0 190 IS0 90 l so0 0 90

..................

friEt SI

...... ...........

*kdI* fty I 10 7 i2 a n 8 78 19 81 a

Ptwf -t 3 36 30 0 8 22 0 9 D

...............

Fe (am W* as as ao a as a ao n as asTm Inf t d90 0 90 910 900 gm 0 9D0 900 Mi

Elcic intr Trlig.....................

AMtowity 2 71 71 n S 73 a 82 42 8a a aftfW 0 510 10 SG5W 10 450 450 450 450 450 U

Owfas w aww

kdlt4uty 2 0 ~~ ~~~~~ ~~ ~~~0 go9 91 so U U a a0 0 0 400 40044 £2 45 5 3bit.

...............

A*---lity a a as a a a de a 2 ao

Pimnu cod (Casic)...........................

hUsli*ty II $1 U U a so a 81 Si aP*eiw kf 15 a 30 40 40 450 450 450 450cm ogmtl@t 3bd 2 MA. MA. 524 9. 52. 44 43 43 4Q 41poweinPrgt I 9.2 522 S 5.3 9? 2. g.S s0 .s 54.2 542

Ft.Ieit 1~..............

1m_ltity 93 is 93 93 9' 93 9LUUmlsu of wadly 12.? 12. 12.7 12. 129 ¶.4 124 12A4 12A 12A4

it. Rlimer*-''''-'-' 'tIAD1 2.1 2.0 320 1. . .3 23 22 . .

5sffPr~.cth1ty 300'MD 'Pi 315 39 31 39 348 381 375

ill. f U~

qwttqBbtI@ 1U9 30 119 90 U12 15S 10 18 105 fit. cl loO

TdAs6w

ua mu --* - -w-*

q4iatb 8ff bleW ad Staff Praitmty fr _SMU

110 blush U LJIMjawla m W " m m W r U<Z

1- kw4 r e Eff W ia

.' h w SOB SiB 3) 57 5f62 61 3Y gm se gm4reIkVdt 310 310 is 31 31? 33 35 360 33 315

0P1umw - 4as 47r 4VA 511 4 2n 2ts 7 a a-Ftreait hrt 36 236 3 219 212 199 Xs 190 62 162

Electric irte traim 45 no 41 4w9 is 41 5 42 5s 4Wielt traibo t Wt 471 550 so d am 3s s ze 8 310

bfit bAm bIt 3 3A8 35 34 540 1S is 13 t 112 114

PamSwEhe per p-,nupy tralnm (&ArNenmb of piAas per tran 2/ Wtrdln 1.4A a81.9 212A ts.r 161.1 17.0 13. MA a13S 152

P-m N pr SW 001 iWsnt 45.2 45.7 49.4 4. 64 41A 423 42L 4" NA

.g. -W per cac t fleet DO bWoui 121 21614 31m 36 319 15 23s 5m so 2ag0

AhW lutth of bhA of Wp . trais ka 9.2 WlS 2.9 WA A 33 2S.2 50A SW.1 NA

Grow tat per fml&t trr winS too 937 1 0.7 .2 WA5.1 89.1 v"3 .2 7.1 in.

bt twin p f eI traitm(mw lmp pro tran tam 1.A WS 5S43 5310 518.34 41s 2. A645.? 4139 MA

Nat to- per helit ,m In fleat 3/ US OO d ILS 555 5.MS3 SW 544.? 511A 43.8441A 441.A 43A

at toirn pe a ttyd of fleot Um tt 15.0 14.3 1LS t.2.9 a2S 1L2 1.5 1. 1U 1A

m ep tld per t frhld ui tow 3. 31t .9 25. 5.0 23 2t.7 LT 25.0 253 5.

Akw lwoU of hA of frilht tim in 23L.0 MM.1 .9 28 2.1 1V81.0" 1A 5 1L9 15.0

Tnmnad tSi of fholwt w" 33 3.0 3.30 336 3.21 2.81 2.79 2.61 2 23S

11. Staff Padtmty... _...............

Staff at ad of 8VW 4/ urn. 2am 1vs 271 VN1 10 11146 17 GM3 1saB 191Staff o w vw 4V ro. as2 a1 z m vWam2we t t1 ? 1 we mm

Staff per toAs-ha us 139 14.1 143 14.3 14.6 122 1. 12.3 1 1U 3.tratf ic Wits pr SoqoA 5/ US 3C1 313 307 31 239 35 Mi 3 360 312

V/ Uutfrg U ttl es EutI, ard rat mItf,u of aodn tbimw l wrinu am libd/ 1nluft amm traLw ad raiW tl b

31 Iltsldwtw erlwst tin.

mEe11PM -kI -a

qmsE~ffkcav 6 aaff Prtvt a181

t. qiMeEffse

....................

.... t........................................... ..............

Electric liPaaMw 5 s lw

hFrsl~U. ... .. .. ... 2..4 .2. 4B .. 4.

Electric tommott u. 4tO 43 42 45 5% 0 z 4

:D1Tmib::mras -b 0 0 0 0 0 47 461 4W 45 45til bm ubvd 3S VS 3E2 42t 00 ZM g u 2t 2s 33

UAW of p_w pr trol' 2/ gtrln 180.7 es. a.8 91.1 I% W..2 1.2 5.1 1W2 1.?

Puaswow per sa OS mOWst 61.9 SB2 1. 52 5. 3.0 5.7 51.? S. 5s1

P bla per caa in ftott 000 10 15 35M 8 3191 341 3119 Ms mm 3mm

Akw krplbofI d wof,straltu km 6J 61.8 62A 6.6 6.8 5.2 .3 A .6 M.8

Gran tI per fm.§ trawin In 91.0 =31 5A 9WU 03.7 IW.9 M. 13i02 50.03 932

Not tui per fh traifrin(&Anp tadi pr tai* ta 53 5.O9 SZJ S A A 5.24 W 53V DZ.9 5.4 1.5

Not 5mb per holW um In oflt 3/ 000 MIMe 5130 48. 4U.0 4525 415.9 6130 6.0 571A 56.? W5.S

Not ter per ecIty of fleat S ~k 1n4A 13L7 13.5 1.7 11.2 1.0 13.9 19 123 1.7

lArl Wb pa tou freldit m tw o.0 S23.2 3.' 2U aS 23. 8 6 27.53 1. 9.0

uame twi of bof ho fret eV taim In 11S2 t2.2 111A 12.1 111.8 190.4 195A4 ?91 190.0 155

Ttwmaa tim of holdit wp dsa 2. A0 2.3 2.3 2.3 23 2.3 2.3 231 2.?S

It. Staff Pratlmty...................

Sts ft ad of Vw 4/ a. 139 t3e5 t15 am1 3154 3173 3519 390 MMStaff a per VW 4/ .1 13fB am18 m3m% 13SW 30 BNO 30 335f 34S

Staff pxerao- ms 9.0 8L8 9.0 9.0 &9 132 13. t3.7 13.?t #.0Trfft it per 5te5/ USD 37 m 3 s 2 V 2? & la 31 36 32S

.............. ............................................. __

U mItrM taimeltha, du.tire ad rt 'atiu of ai2/ tadIr atr tra d el3/ Itdr asa,s4/ Stystaff f 111 s pity n lhw trsmS/ balm q naur of sff per .

MW *

dms :r

UWt tes1w1s 110 BAt)i K LJP*juU WA $id W m b bhat 0 miy ty tld 1aaW a& UW. "WV

1. WA tin t h 9.n 1W 1 10 2w41 5, 2 M 1 1W V^

2 IVh da S1ftd W In 3.54 W so B M 3. 0 1w .91 2 5.15 30 3* o"f

. 1 _w-tm dtt n ",W1 2. 1,A 10 Im 4 ?,2 790 1,.72 ",= P 51,11 6I M^ 4Z)W

4. Frn p b Oftib '0 1.30 1.3 1? 75 161 1M ?5 1^ Z.i 2,i a 1.39 tie

S. at fan k , lUm ,719 S.?% 4,3 3,e 1 .5 1.5 7 5 21,1W W,97 1=0,M W 3.OP MAN43

6 M t-pIof td . '0MD 3,05 3.06 34A 2. 3.4 2.115 30 2kW9 1,12 44 in W

, WON IN S10 83 W.2 61.8 123 46.153 47.7 lU 51.7 47.6 47 4Cu

9. A gIrq toga 36.7 3 ZLIl 1"0 112.1 15BA U. 1".6 W.9 .9 0.9 51D.9 WA 214

10. staff (ewwwo mud 12M= A.7 15.31 1%=0 3.54 d.71 12.04 M,=5 211. 30 N78 MAN3 W,96 NIA

11. mde f btsstwfpflA 12 Q1 U .1 W . 8.8 13 11.7 4.9 17.5 131 US 6.0 9 9*

IL u wffdto u pr * m I= 0m 13 UB W 3 a U 3a W5 Wr M 21? 3k

SsbrUn b0IL1da~o Utbl UIC) - tr_l1u bUe wtistlcst, 15 61lm

a

Tvutimn ard isUAum $to&- Vwty A,ram . far 106-6

IM- 3i LJJMj

Electric LGMttwsU

In 4 iau1t tt ns. V 13 13 130 m 13 99 99 g9 99 99

k.IlmlItv I 1 do 75 a0 as a1 a at 0 a

In Cmtfwm1 FtOS Mem. Vl III 12 131 130 1V0 13 IN 13 16 13

kellowtity II46 f 66 6 40 Ja 18 e1 3 a1 a

-~~~~~~~~~~~~~~~~~ ---- - - -P *.w- E~~~~~~~~lectric -t 1 aliwt *t

inaIalt.eu.I/ 16 5 14 16 6 2 a W, M 3akAllIulta1o t"t % 10 62 60 19 15 7 St3 33

s.tia Cq2ecity So"t 516 45s 481 ~15 811 6912 I12 I91 691 OPt

Olas Now TrFla r m3 5 23 I 4 1 4 I*blCll.ttauLFIut re./ 6 6 6 6e 69 12 do K1 01 8

Awl W~~~~II1ty sea 40 35 40 ZS20 198 l 81 19 Sm

811"1 moas l b hss

In d FV 41 3 M 3 11 12 141 134 1435 1S

*AwItl11ty X 59 56 1A 60 05 9' 69A 116 IIS 7 I

Wom b*dty mst F 504 443 4V 4 181 15 7 1 17 ZS 3A 13

Ft{ret Uwe

In qxratlet Ft et m. V g m6 gm M m 36 a n am

Ait1ty 2X 74 70 7 i5 15 7 81 is is sI

tIn4l tle1ty of r sma 35. 460 4. 44.5 43.2 19.7 1S. 19. M6 1M

Fre iz,t x 4 70 e 5 9 71s7

In lStu1 losSm V 4 4219 S 9116 UPS 95196 1771 lm USt 8791 0536

hm11dUIty 2 X V. t 71 75 It 81 3 83 9;

hwqI~ ~ tyd taAn 40.9 41.6 42. 43.1 43.7 42. 43.0 43. 43.5 45LfIsu :lty of fla 'O tam 3. C9.9 409.9 401.4 41.2 560 22. 3E.2 USA= 50.3

1/ At year endApr-89

~~N WUW N ~ ~ ~ TA*

Tredcti wd blti ic*5W - Yewry kArsM fw ar 11

UlEctfic 1am1wmhJ

in quatlmllet non g. 1 36 36 40 40 44 15 113 113 10 1inkadmliMty %76 is 80 so go as A1 a as a

In Viwatuf a st Fleeme. U A1 5 94 94 21 21 291 306 306htmlMlty % B 61 66 5s 69 77 72 72 74 is

In #m*1.utlFtet aug.1V 5 5 7 10 10 31 32 as ashtmllIty %71 66 18 4 69 68 1 61 do 80ematlsu ewlty mou 147 141 2S 2NO 2300

iedt *V Trin"

Inqwatla.tlFtent nm.1 0 0 0 0 0 36 3? 41 3? 39kllmtlly 6 0 0 0 0 0 88 19 10 61 315matlrgvmlty soft 0 0 0 0 0

btit aim.in qurtiauIFIuat nus. V dB M6 6 66 66 51 51 9 46 4hmlImuty % iLl1 61.6 61.2 61.8 do di 42 75 15 75Sutirs G*Bc1tY so a" 811s m1u 118 6118

-~~~~~~~~~~~~~~~~~~~~~~ -m

tn qmttamut tat wsV In *42 in2 15 817 a a a"a.llIlty 6 8 80 at 80 81 In 1 19 76 7a

*ArqP batlig eClBtY euoaadi 5.A 57.9 18.6 47.1 41.1 592 42.1 a2. 614A 6.0$soft au ty OmOeso" 7.A 9.2 9.5 9.5 t9 49 3 51 51A 5S1

In cuwatIau( nlt Vm If M1 6173 613 616 1I4 1415 1V01 14AW U*AsliMilty go se 91 1 18 14 18 94 Is aAMWqsMCq.cty 3mA ~ 5.2 M.6 1.5 3.? W. 043 44.0 44A6 44.5 44.6

A NC 0 *wfty o Ft* 0 tam mi2 Z 219.2 2M8. .5 621. m.5 658 du 618.0

1/ At year end

Apr-89 . _ _. ._

A;~~~~~~1 plump* 1 au

430:e Omez D%U9 P

r~~~~~~~~sox m go=Xo sm s P

WLwt t woz WE s f f t m _nowm Pmo

..... .*o .. ^ ...... ... ...... jm*

SI D I IN 'A

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S I '......*.**@v**.......... .......... ****;6rAm

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l ¢s -

- r m - -SL ffi L IS '90 56 9Si 2 m |SJ W jw c

...... ...... ..... ...... ...... ~ ~..........

9121 IFL NI 01&~~SM IrIZI 461 ZXa wW Z"¶

WAs. 90,s6 Wmt £s E B t m. igm waLr WI21 WK6 NSl I3UDNWFINI pol4

,: ha FFS if U LSmum laInol

.... ...... ..... ..... ..... ~I......

52 1S-9I 6Li 99*B O 11akw Po=...... ....... ...... ....... ..... .. ...... .... ..

VI{tZ fw 515 33 WL g'nt

........ ........ ....... ..... ....... ..... ...... .....

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iii- iii" ;wi, tii - s "A' 'i

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- 97 -Table 10Page I of 3

YUCGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Items on which the Loan will be Disbursed

Loan Disburse-RTO Line Allocation ment

(UStm.) 2

TRACK MATERIALS

Belgrade Jajinci-Mala Krsna (57 km) 8.00Subtotal 8.00

Physical contingencies 0.40Price contingencies 0.80

Subtotal- 9.20 100

Ljubljana Doboj-Jesenice (79 km) 8.40Ljubljana-P4vka (28 km) 4.30

SubtotaL 12.70Physical contingencies 1.27Price contingencies 1.34

Subtotal 15.31 100

Zagreb Tovarnik-Dobova (80 km) 11.94Physical contingencies 1.19Price contingencies 1.26

Subtotal 14.39 100

Track Materials - Subtotal 32.64Physical contingencies 2.86Price contingencies 3.41

Track Materials - TOTAL 38.91

SIGNALLING AND TELECOMMUNICATIONS

Zagreb Equipment for fixed installationsZagreb Main Passenger Station 8.30

Physical contingencies 0.83Price contingencies 0.87

Subtotal 10.00 100

Table 10-98 - Page 2 of 3

Loan Disburse-RTO Line Allocation ment

(us$M.)

RECONSTRUCTION OF LINES AND STATIONS

Belgrade Equipment for fixed installationsBelgrade Junction, second stage 5.21

Physical contingencies 0.26Price contingencies 0.53

Subtotal 6.00 iOO

Ljubljana Equipment for fixed installationsDobova-Jesenice 10.30

Physical contingencies 1.03Price contingencies 1.08

Subtotal 12.41 100

ZagrebReconstruction Materials - Subtotal 15.51

Physical contingencies 1.29Price contingencies 1.62

Reconstruction Materials - TOTAL 18.41

TRACK MAINTENANCE EQUIPMENT

Liubljana Machines and equipment fortrack maintenance 2.49Physical contingencies 0.25Price contingencies 0.26

Subtotal 3.00 100

Zagreb Machines and equipment fortrack maintenance 6.63Physical contingencies 0.66Price contingencies 0.71

Subtotal 8.00 100

Machines and equipment - Subtotal 9.12Physical contingencies 0.91Price contingencies 0.97

Machines and equipment - TOTAL 11.00

Table 10Page 3 of 3

Loan Dlsburse-RTO Line Allocation ment

(US$M)

SPARE PAMTS

Belgrade Spare parts for locomotives 9.40Price contingencies 0.90

Subtotal 10.30 100

Ljubljana Spare parts for locomotives 0.92Price contingencies 0.08

Subtotal 1.00 100

Novi Sad Spare parts for locomotivesand SS + TT 1.82Price contingencies 0.18

Subtotal 2.00 100

Spare parts - Subtotal 12.14Price contingencies 1.16

Spare parts - Total 13.30

INFORMATION SYSTEM

Belgrade Equipment and software 27.6CPhysical contingencies 2.76Price contingencies 2.92

Subtotal 33.28 100

Novi Sad Equipment and software 10.37Physical contingencies 1.04Price contingencies 1.09

Subtotal 12.50 100

Equipment and software - Subtotal 37.97Physical contingencies 3.80Price contingencies 4.01Equipment and software - Total 45.78

All four TECHNICAL ASSISTANCE ANDRTOs STAFF TRAINING 0.56 100

TOTAL - excluding contingencies 116.25Physical contingencies 9.70Price contingencies 12.05

G R A N D T 0 T A L 138.00

Source: RTOs

- 100-

Table II

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Estimated Schedule of Disbursement(USS million)

IBRD Fiscal Year RTO RE RTO RTEand guarters Belgrade Liubliana Novi Sad Zagreb

Quarterly

i990I September 1989 0.0 0.0 0.0 0.0II December 1989 0.0 0.0 0.0 0.0CUI March 1990 3.1 4.6 1.2 4.8IV June 1990 6.7 6.9 3.4 8.6

91991I September 1990 6.6 7.8 3.4 8.6II December 1990 4.4 6.6 0.5 3.0III March 1991 11.6 1.0 2.5 6.9IV June 1991 12.5 2.0 2.0 0.5

1992I September 1991 7.7 1.5 1.1 0.1II December 1991 6.4 1.5 0.5 0.0

All RTOs All RTOs DisbursementTotal- Total ProfileQuartetly Cumulative 2

1990I September 1989 0.0 0.0 0.0II December 1989 0.0 0.0 0.0III March 1990 13.7 13.7 9.9IV June 1990 25.6 39.3 28.5

1991I September 1990 26.4 65.7 47.6II December 1990 14.5 80.2 58.1III March 1991 22.0 102.2 74.1.IV June 1991 17.0 119.2 86.4

1992I Sep.ember 1991 10.4 129.6 93.9II December 1991 8.4 138.0 100.0

Source: Mission estimates, April 1989

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-103 - TABLE 14

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Estimated Economic Rates of Return for Maior Investments

EstimatedProposed Investment Economic Return

RTO BelgradeBelgrade Junction - Phase 2 * 24

Capital OverhaulResnik-Velika Plana (68 km) * 16Jajinci-Mala Krsna (57 km) * 19

RE LiublianaModernisation

Jesenice-Ljubljana-Dobova andSevnica-Trebenje-Ljubljana 14

Capital OverhaulDobova-Jesenice (79 km) 17Postojna-Logatec (28 km) 13

Reconstruction of Sezana andDivaca Stations 25

RTO Novi SadCapital Overhaul of Batajnica-Tovarnik(RH track, 97 km) 19

RTE ZagrebCapital Overhaul of Tovarnik-DobovaLine (169.6 km) * 16SS + TT - Zagreb Station * 13Western Bypass Line (14.1 kim) * 19

Capital OverhaulZagreb-Rijeka (73 km) 14Sunja-Bosanski Novi andPerkovic-Split (44.3 km) 14

Traction and Rolling Stock (4 RTOs) 23

All Evaluated Investments (weighted average) 21

All Bank financed Investments (weighted average) 18

*Bank financed investmentSource: Feasibility Studies plus mission estimates.

- 104 -

Table 15Page 1 of 2

YUGOSLAVIA

STAFF APPRAISAL REPORT

SEVENTH RAILWAY PROJECT

Related Documents and Data Available on Proiect File

1. Feasibility Study on Construction of the Railway Line Tuzla-Zvornik andLoanica-Valjevo and Modernization of the Lines Doboj-Tuzla andZvornik-Loznica (2).

2. World Bank Railway Loan VII Feasibility Study - General Guidelines andelements common for all projects) (2).

3. Modernization of Podlugovi-Droskovac Line

4. Supplement to the Study on Modernization of the Lire Bosanski Novi-KninI. Modernization of Signalling-Safety InstallationsII. Procurement of Mechanization Required for Maintenance of

Fixed Installations

5. Modernization of SS and TT Installations in the Junction Bosanski NOVI.

6. Construction of the Railway Line Tusla (ZIVINICE)-Svornik FeasibilityStudy.

7. Modernization of S and T Installations in the Station Zagreb CS.

8. Extension of Capacities of the Main Line Jesenice-Ljubljana-Dobova (2).

9. Feasibility Study for the Western Railway Bypass Line ZagrebMarshalling Yards Remetinec-Jankomir-Podsused.

10. Feasibility Study for the Construction of the Second Track on theBelgrade-Nis railway line Stalac-Trupale Section (2).

11. Overhaul of R.T.E. Zagreb Railway Lines in the Period 1986-1990.

12. Study of Necessary Acquisition of Goods Wagons for RTO Sarajevo Duringthe Period 1984 Thru 1987.

13. Feasibility Study of Reconstruction and extension of zhe VinkovciRailroad Junction.

14. Introduction of Central Traffic Control on Tovarnik-Dobova Line.

15. Study of the Requirements for Engine Machines in the Period up to 1990.

16. Construction of the Second Track Doboj-Sarajevo-Blazuj Stage II-Zenica(Jelina)-Podlugovi.

17. World Bank Railway Loan VII Feasibility Study - General.

- 105 -

Table 15Page 2 of 2

18. Thi Feasibility Study of Capital Overhaul of Batajnica-Tovarnik Line.The Right-Hand Track.

19. Feasibility Study for General Overhaul on the Mladenovac-Velika Planasection of the Belgrade-Nis railway line.

20. Overhaul of the RC Ljubljana Line 1986-1990 - feasibility study - (2).

21. Feasibility Study for General Overhaul on the Jajinc.-Mali Pozarevacsection of the Belgrade-Nis railway line (2).

22. STudy on Economic and Financial Feasibility of Completio of the Secondstate of Dnstruction of the belgrade Railway Junction.

23. Feasibility Study for the Investments in Construction of Second Trackof Trabanovci-Skopje Line/Section Miladinovci-Ilinden, 10 km.

24. Feasiblity Study for General Overhaul on the Resnik-Mladenovac sectibnof the Belgrade-Nis railway line (2).

25. Feasibility Study for Construction of the Western By-passPodaused-Jankomir-Remetinec Marshalling Yard, RTE Zagreb.

Investment Plans:26. Investment Plan and Financing Plans 1986-90, RTO Novi Sad.27. Investment Plan and Financing Plans 1986-90, RE Ljubljana.28. Investment Plan and Financing Plans 1986-90, RTE Zagreb.29. Action Plan 1986-90, RE Ljubljana.30. Action Plan 1986-90, RTE Zagreb.

Operational Plans:31. Operational Plan for Diesel and Electro-Engine Trains, RE Ljubljana.32. Operational Plan for Freight Wagons, RE Ljubljana.33. Operational Plan for Diesel and Electric Locomotives, RE Ljubljana.34. Operational Plan for Passenger Coaches, RE Ljubljana.35. Operational Plan for Capital Overhaul, RE Ljubljana.36. Operational Plan for Traction and Rolling Stock, RTE Zagreb.37. Operational Plan for Traction and Rolling Stock, RTO Novi Sad.

Justification Papers:38. Justification Paper for Procurement of Track Maintenance Machines, RTO

Novi Sad.39. Justification Paper for Reconstruction of Visac Station, RTO Novi Sad.40. Justification Paper for Reconstruction of Pancevo Station, RTO Novi Sad.

Information Papers:41. Information Paper on Modernization of Railway Lines of RE Ljubljana, SS

and TT Equipment and Traction and Rolling Stock.42. Information Paper of CTC Installation on Tovarnik-Dobova line, RTE

Zagreb.43. Information Paper on Management Information Systems, RTE Zagreb.44. Specifications for Batajnica-Tovarnik Line, RTO Novi Sad.

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