Document of The World Bank Report No. 15988-MOR STAFF APPRAISAL REPORT KINGDOM OF MOROCCO Railway Restructuring Project November 26, 1996 Private Sector Development, Finance and Infrastructure Operations Division Maghreb and Iran Department Middle East and North Africa Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Document of
The World Bank
Report No. 15988-MOR
STAFF APPRAISAL REPORT
KINGDOM OF MOROCCO
Railway Restructuring Project
November 26, 1996
Private Sector Development, Finance and Infrastructure Operations DivisionMaghreb and Iran DepartmentMiddle East and North Africa Region
1 meter (m) = 3.28 feet (ft)I square meter (m 2 ) = 10.76 sq. ft
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
B billionCIIPEP Comite interministerielpermanent des entreprises publiques
(Interministerial Committee of Public Enterprises)GOM Government of MoroccoM millionMED Ministry of Economic DevelopmentMT Ministry of TransportOCP Office cherifien des phosphates (National Company of Phosphates)ONCF Office national des chemins defer (National Railway Company)ONT Office national des transports (National Transport Office)PSO Public Service ObligationSOE Statement of Expenditure
Vice President: Kemal Dervi§Director: Daniel RitchieDivision Chief: Amir Al-KhafajiTask Manager: Henri Beenhakker
KINGDOM OF MOROCCORAILWAY RESTRUCTURING PROJECT
STAFF APPRAISAL REPORT
Table of Contents
LOAN AND PROJECT SUMMARY ............................. i
1. INTRODUCTION... 1
CouNRY BACKGROUND ............................. 1BANK SECTOR ROLE AND STRATEGY. 2
2. SECTORAL BACKGROUND. . . 3
THE TRANSPORT SECTOR .................... 3TH E RAILWAY SUBSECTOR .................... 3RAILWAY STRATEGY AND RESTRUCTURING PROCESS. . .. . . . .. . . . 4
EVALUATIONMETHODOLOGY .. 10ECONOMIC EVALUATION AND SENSITIVITY ANALYSIS .10PROJECT RISKS.11
S. FINANCIAL EVALUATION.... 1 1
ACCOUNTING SYSTEMS AND STANDARDS .11PAST AND CURRENr FINANCIAL PERFORMANCE .12FURIRE FIlNANCIALPERFORMANCE . 13
6. AGREEMENTS AND RECOMMENDATIONS .................................... ... 15
TablesTable 3.1 Project Cost Estimates and Financing. 7Table 3.2 Procurement Arrangements for the Bank-Financed Items. 8Table 3.3 Allocation of Loan Proceeds. 9Table 5.1 ONCF: Projection of Sumnmary Financial Statements (1996-2003) .15AnnexesAnnex 1 ONCF Organizational ChartAnnex 2 Performance Indicators for Selected RailwaysAnnex 3 ONCF Main Statistics - 1980 - 1995Annex 4 ONCF Motive Power and Rolling StockAnnex 5 Outline of Studies and Consulting ServicesAnnex 6 Projected Activity IndicatorsAnnex 7 Key Perfornance IndicatorsAnnex 8 Project Implementation ScheduleAnnex 9 Estimated Loan Disbursement ScheduleAnnex 10 Economic EvaluationAnnex 11 Financial EvaluationAnnex 12 Financial Sensitivity AnalysisAnnex 13 Policy LetterAnnex 14 Selected Documents and Data Available in the Project FileMAP IMRD 28080
i
KINGDOM OF MOROCCORAILWAY RESTRUCTURING PROJECT
Loan and Project Summary
Borrower: ONCF (Moroccan National Railway Company)
Guarantor: Kingdom of Morocco
Beneficiary: Not applicable
Poverty: Not applicable
Loan Amount: ESP 5,443 million + US$42.5 million (US$85.0 million equivalent)
Terms: 20 years, including a five-year grace period, 50% standard interestrate for LIBOR-based Spanish Peseta single currency loan (SCL),and 50% standard interest rate for LIBOR-based US Dollar SCL.
Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days aftersigning, less any waiver.
Financing Plan:Local Foreign Total
=----- US$ million-------World Bank 46 39 85African Development Bank 69 21 90European Investment Bank 61 42 103Government and others 197 139 336TOTAL 373 241 614
Economic Rate of Return: ERRs per subproject range from 19% to 54%. ERR is about 22%for the overall project.
Environmental Rating: B
Staff Appraisal Report: Report No. 15988 MOR
Map: IBRD 28080
Project Identification No.: 43725
iiL Project Cost Estimates
(ISS million)Poject component Loca Foreign Custom Total
(direct) Duties
A. World Bank _IRD)Studies and coulting services (1) 0 2 2Computer equipment 0 1 1Acquisition of rail and tumouts - 21 1 21Track renewal FP9/Oujda (2) 34 10 1 45Track renewal Rabat/Sidi Kacemn (2) 8 2 0 10Track renewal Casablanca/Maffakkech (2) 1 1 3 0 15Base cost (end 1995) 53 38 2 93Physical contbqencIes 5 4 0 9Price contingendes 7 3 O 11TOTAL PROJECT COSTS (A) 66 45 3 113
B. African Development Bank (AfDB)Realignment, track renewal, and platform doubling section Sidi 64 18 1 183Kacem/Mekn&s (2)Base coas (end 1995) 64 18 1 83Phycal contingencIes 6 2 0 8Price contingencies 11 2 0 13TOTAL PROJECT COSTS (B) 81 21 1 103European Investment Bank (EIB)Renewal and reinforcement of electric traction facilities 14 18 7 40(e sy, ubstions)Doubling and track renewal Kenitra/Sidi Slimane (3) 43 25 2 70Bae cots (end 1995) 57 43 10 110Physal contgenci 5 4 1 10Price conftfgencies 9 4 I 14TOTAL PROJECT COSTS (C) 71 51 12j 134D. OtherRolling sdock rebilitation 8 12 3 22Acquisition of 7 electric locomotives - 35 1 36Acquition of 100 wagons 4.79 2.66 0.93 8.38Other wagons 3 8 0 11Containers 0 1 1 2Modenization of signaling and telecommunications facilities 13 31 4 48Tools 19 12 1 32Bue costs (end 1995) 44 98 9 151Physia contingencIes 1 3 0 SPrice contagencies 4 6 1 11TOTAL PROJECT COSTS (D) 49 108 10 167GRAND TOTAL BASE COSTS END 1995 (A+B+C+D) 218 197 22 437TOTAL CONTINGENCIES (A+B+C+D) 49 28 3 80Phys conthigencies 18 12 2 32Price contIngencies 31 15 2 48TOTAL (A+B+C+D) 267 224 26 517MIscelaneous (4) 76 17 4 97GRAND TOTAL 343 241 30 614(1) Outside investment program(2) Including cost of control of works(3) Including realignment, track renewal, and station remodeling(4)Outstanding operations from the 1988 - 1994 plan and miscellaneous
IL FINANCING (USS million)LOCAL FOREIGN TOTAL
World Bank 46 39 85African Development Bank 69 21 90European Investnent Bank 61 42 103Governmnt and others 197 139 336TOTAL 373 241 614
IL ESTIMATED DISBURSEMENTS ([JSS million equivalent)
IBRD Fiscal YeuM FY98 FY99 FYOO FYO1 FY02 FY03
Annual 7.5 17.2 17.2 17.2 17.2 8.7
Cumulative 7.5 24.7 41.9 59.1 76.3 85.0
KINGDOM OF MOROCCORAILWAY RESTRUCTURING PROJECT
STAFF APPRAISAL REPORT
1. INTRODUCTION
1.1 A policy environment conducive to private sector development has largely been put inplace in Morocco. Since the mid 1980s, growth of private sector exports, particularly in thetextile and agricultural industries, has been significant. The Moroccan transport sector plays a keyrole in encouraging exports, reducing the cost of imports, and enhancing prospects for growth intourism. Ongoing Bank-financed projects therefore focus on improving port and road transportpolicies. The Government and the Moroccan National Railway Company (Office national deschemins de fer, ONCF) first expressed an interest in Bank assistance in 1990. However, theBank's position was that in order to prepare a railway loan two conditions had to be satisfied; i.e.,establishment of a Performance Contract between the Government and ONCF, and completion ofdiscussions on rail tariffs for phosphate transport. Both of these conditions have now beensatisfied.
1.2 A railway loan makes sense only if it bolsters a fully commercial operation of railwayactivities by transforming ONCF into a joint stock company. In the long run, this would enablethe Government to significantly reduce support to the railway subsector. To achieve this goal,ONCF's financial viability and fixed infrastructure (in need of rehabilitation and maintenance,which have been delayed due to lack of funds) have to be improved. The proposed singlecurrency loan to ONCF with a Spanish Peseta loan tranche in an amount of ESP 5,443 million(M) and a US Dollar tranche in an amount of US$42.5 M (US$85.0 M equivalent) would financeurgently needed infrastructure rehabilitation, as well as consulting services for the transformation,including studies to be carried out.
COuNTRY BACKGROUND
1.3 The Kingdom of Morocco occupies an area of about 459,000 km2 (without the WesternSahara), characterized by a great diversity of landscapes, from a 3,500 km long and flat coastlinebordering the Atlantic Ocean and the Mediterranean Sea to the Atlas mountains stretching acrossthe country from the southwest to the northeast. Its population of about 26 M is concentrated inthe northern region and is growing at about 2.3 percent annually. Morocco is the world's largestexporter of raw phosphate and byproducts, which generate heavy rail traffic from mining zones inthe center and south of the country to the ports of Casablanca, Safi, and Jorf Lasfar.
1.4 Over the past decade Morocco has instituted enduring reforms designed to achievemacroeconomic adjustment and stabilization. Today, significant progress can be seen. Budgetand current account deficits and debt stock and service ratios have been reduced and inflation hasbeen kept to single digits. Wide-reaching and comprehensive reforms have gradually movedMorocco away from a predominantly administered economy toward one that is more marketdriven and outward oriented.
1.5 Yet, Morocco's annual growth rate, which averaged 3 to 4 percent a year during the lastdecade, fell well below expectations and was too low to absorb the country's growing labor force.
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Private investment and domestic saving rates remain modest; labor productivity is not increasing;international competitiveness has not radically improved; and unemployment is 16 percent. Thesituation has been further exacerbated by the drought of 1995. In view of these macroeconomicproblems, ONCF's management will have to proceed skillfully with a reduction in its workforce,which is desirable to improve its financial viability.
BANK SECTOR ROLE AND STRATEGY
1.6 Since 1969 the Bank has provided loans totaling US$549 M equivalent to the MoroccanGovernment for the construction, improvement, and rehabilitation of main roads under fivehighway projects, of secondary and tertiary roads under the most recent project, of feeder roadsunder ten agricultural projects; and for rehabilitation and modernization of port facilities undertwo port projects. The highway and roads projects were designed to encourage investments withhigh returns to the economy, particularly maintenance and rehabilitation; to help build up thestaffing and organization of the agencies responsible for road construction and maintenance; andfor transport organization. The feeder roads projects have met specific needs as part ofagricultural packages, and were designed as transport and agriculture-integrated investments.Bank involvement in financing these roads has encouraged the ministries of Agriculture andAgrarian Reform and of Public Works to cooperate more closely and consistently to determineappropriate design standards, and to arrange for the maintenance of these low-volume roads.
1.7 The audit reports for the five Bank-financed highway projects, designed to improve trafficconditions, highway maintenance, and transport planning, outline their successful implementationwith rates of return above appraisal estimates despite cost overruns. Loan covenants weregenerally adhered to, but progress sought on transport planning did not fully materialize, in partbecause of split responsibilities between the ministries of Transport and Public Works. The mostrecently completed highway project sought efficiency improvements in the transport marketthrough deregulation of the trucking industry. This deregulation incurred delays; only by the endof December 1995 did the Government complete a draft law.
1.8 The first Bank-financed port project, designed to maintain infrastructure in the ports ofCasablanca and Mohammedia and now completed, served to establish a good dialogue in thesubsector and helped to set the stage for a more comprehensive FY91 Port Sector Project. Thelatter project finances facilities for container and Ro-Ro handling in the ports of Casablanca andTangiers, and the construction of a coal terminal in the port of Jorf Lasfar. During preparation, aPerformance Contract was drawn up that included revision of the infrastructure fee paid to theGovernment by the Office de developpement et d'equipement des ports.
1.9 The proposed project is consistent with our strategy to reform public enterprises inMorocco. It is a response to the Moroccan Government's request for Bank assistance for therestructuring process, designed to achieve financial viability of railway operations by 2001, and torationalize and reduce Government financial support to the railway sector.
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2. SECTORAL BACKGROUND
THE TRANSPORT SECTOR
2.1 The fairly complex transport system comprises about 60,000 kms of roads, a 1,907 km-long railway network, 1 I commercial ports, and 20 airports, half of which are at internationaltraffic standards. The road network is concentrated in the most populated areas north of the Atlasmountains and provides for satisfactory coverage of transport needs across the nation. Thepriority is to provide rural areas with better road access, as part of an effective poverty alleviationapproach under the 7-year, 10,000-km rural road construction program launched in 1995. Forrailways to meet the challenge of deregulated and hence more competitive roads, infrastructurewill have to be rehabilitated and equipment modernized. The port subsector was strengthenedfollowing construction of major facilities in Agadir, Jorf Lasfar, and Nador, although Casablancaremains the main center of activity. Driven by cargo unitization and investments in specializedequipment, port productivity doubled during the last ten years. Finally, a large program of airportexpansion was carried out in the early 1990s at a time when traffic was abating, which led toovercapacity.
2.2 Roads are the prevalent mode of transportation and have further expanded their marketshare in recent years. Of total traffic, rail represents about 15 percent for freight (phosphatetransport excluded) and 5 percent for passengers. The insufficient autonomy of ONCF is in sharpcontrast to the increased freedom enjoyed by road transporters in a liberalized market that, fortrucking, will be legalized upon enactment of the new transport law called for under theSecondary, Tertiary and Rural Roads Project; this legislation will be presented to Parliament in1996. Needed organizational changes and transformation of ONCF into a joint stock companywill enhance ONCF's efficiency, autonomy, and market orientation.
2.3 For interurban public transport of passengers, the Ministry of Transport (MT) and theMinistry of Economic Development (MED) review road and rail tariffs, which are then formallyapproved by the MT. Since freight tariffs have been increasingly market based in recent years,notwithstanding existing price regulations, the new pricing freedom should not produce drasticchanges, even for the railways, provided that contracts are negotiated with major shippers withingiven limits and that flexible pricing remains in effect for passenger services.
THE RAILWAY SUBSECTOR
2.4 ONCF, a public corporation established by the Dahir 1-63-225 of August 6, 1963,manages and operates rail activities under regulations (cahier des charges) approved by a RoyalDecree of April 25, 1967. ONCF is under the control of the Minister of Transport, and isadmninistered by a Board of Directors chaired by the Minister and comprising eight representativesfrom various ministries. ONCF's General Manager is appointed by Dahir. Managementprocedures applicable to public corporations are cumbersome and bureaucratic (e.g., prior reviewof expenses by a financial controller, mandatory use of public procurement procedures). Annex 1describes ONCF's organization, while annexes 2 and 3 show that its technical and financialperformance declined from 1988 to 1994. Since mid-1994 a new management team has designedand begun to successfully implement a recovery program.
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2.5 ONCF's network (see attached Map IBRD 28080), entirely standard gauge, is 1,907 kmlong (of which 271 kms are double track); 1,003 kms are electrified. The pattern of the networkis satisfactory; most of the major towns and ports, and the mining and industrial areas areconnected. Traffic density is high (3.7 M traffic units per route km). Rolling stock and motivepower availability are satisfactory but partly antiquated (80 percent of the rolling stock is morethan 20 years old; see Annex 4).
2.6 Phosphate rock from the mines of the Office cherifien des phosphates (OCP) istransported by rail to the ports of Casablanca, Safi, and Jorf Lasfar and to the fertilizer plants inSafi and JorfLasfar. In 1994, traffic reached 19 M tons, or 3.400 M ton-km (tkm), for a revenueof DH 720 M. Contractual relations between ONCF and OCP have been satisfactory since newrates were applied in 1994. General rail freight consists mainly of grain, cement and buildingmaterials, petroleum products, fertilizers, and sugar. Traffic has remained stagnant since 1990(about 4.5 M tons in 1995 or 1,000 M tkm, for a revenue of DH 352 M). For intercity passengertransport, ONCF offers three classes of service: a shuttle service between Casablanca, Rabat andKenitra; air-conditioned fast trains between the main cities; and 'brdinary" trains. The quality ofservice (speed, punctuality, comfort, and cleanliness of trains) is generally excellent on shuttle andair-conditioned trains; it is average on ordinary trains. After having doubled from 1981 to 1991,passenger traffic volume declined from 1992 to 1994; the decline affected ordinary trains, whileshuttle and air-conditioned services continued to grow. In 1994, traffic reached 10 M passengers,or 1,900 M passenger-km (pkm), for a revenue of DH 390 M.
2.7 ONCF has a permanent staff of about 14,000. Management is competent and fullycommitted to a successful restructuring. Training programs are adequate. Staff productivity, atabout 450,000 traffic units per year per employee in 1994, is not far from European standards(Annex 2). The ratio of staff costs to traffic revenue (52 percent in 1994), while much better thanin most European railways, is still too high to ensure a sustainable financial situation for ONCF.ONCF staff enjoy their own pension system, more favorable than the common system applied toprivate enterprises, with pension benefits paid directly by ONCF; this system places a majorburden on ONCF finances.
RAILWAY STRATEGY AND RESTRUCTURING PROCESS
2.8 The Government of Morocco and ONCF recognize the need for the railway to adapt tothe more competitive environment of the transport market, to improve its financial performance,and to reduce and rationalize the transfer of state financial resources to the railway subsector.Various measures have already been implemented since 1994, including: (a) the signature inNovember 1994 of an agreement between GOM and ONCF defining the modalities of therestructuring of ONCF debt and of the financial support from the state to ONCF for 1994-1998;(b) simplification of the organization chart of ONCF to make it more responsive to customers andto increase the responsibility and accountability of managers; (c) cancellation of a number ofunprofitable passenger services; (d) redeployment of part of the staff from headquarters toproductive units; (e) revision of phosphate base tariff, and (f) definition of an investment programfor the period 1994-98.
2.9 In order to transform ONCF into a commercially oriented, market-driven, financiallysustainable enterprise, GOM intends to: (a) transform ONCF into a joint stock company (societe
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anonyme) according to a given time table; (b) attract private capital; (c) adopt a new set ofregulations (cahier des charges) for the societe anonyme, which, among other things, will draw aline between commercial services that will be operated in a fully deregulated environment andought to pay their way, and services performed at the Government's request under a PublicService Obligation (PSO) scheme that would warrant financial compensation for deficit incurred;(d) by the end of the project life (June 30, 2002), reduce Government financial support to therailway subsector to compensation for the PSO; and (e) reform the railway pension system torelieve ONCF of a burden that soon will become financially unsustainable. ONCF will make aneffort to reduce costs, develop marketing capabilities, and streamline staff. The main measureshave been spelled out in a 1996-2000 Performance Contract between ONCF and GOM. TheGovernment has committed itself in a policy letter pertaining to the development of the railwaysubsector to: (a) prepare a plan for the transformation of ONCF taking into consideration adetailed review of ONCF's pension system, including its actuarial and financial evaluation, and astatement of all assets and liabilities to be transferred; (b) submit to the Bank for its review andapproval an action plan defining dated restructuring measures to be applied to the pension systemand to be implemented before the transformation of ONCF into a joint stock company; and(c) take all actions necessary to ensure that a draft law implementing the transformation of ONCFinto a joint stock company, is approved by the Government not later than December 31, 1999.Both the policy letter and the Performance Contract have been signed and executed.
3. THE PROJECT
PROJECT OBJECTIVES
3.1 The main objective of the project is to support the preparation and implementation of arestructuring program that would lead to an efficient, commercially oriented railway operation.The principal items of the restructuring program are presented in paragraph 2.9 above. Theproject will also contribute to financing the railway's rehabilitation and modernization program.
PROJECT DESCRIPTION
3.2 The main components of the project are:
(a) a program of investment for the rehabilitation and modernization of railinfrastructure and equipment. The program concentrates on the renewal orrehabilitation of track and of electric traction facilities (catenary, substations) onselected sections of the network and the improvement of signaling andtelecommunication systems. Investment in rolling stock is limited to theacquisition of seven electric locomotives, the acquisition of 100 specializedwagons, and the rehabilitation of part of the passenger coach fleet;
(b) studies and consulting services to prepare and implement the restructuringprogram (legal services for the preparation of legal texts); prepare and implementthe reform of the railway pension system; support the improvement of railwaymanagement systems (Annex 5); and
(c) a program of acquisition of computer equipment needed for the implementation ofnew management systems.
The aforementioned rehabilitation and modernization is expected to result in improved efficiency.Projected activity indicators are presented in Annex 6. During negotiations, agreement wasreached with ONCF on the key performance indicators, given in Annex 7, which were establishedto monitor progress.
COST ESTIMATES
3.3 The total project cost (including contingencies, taxes, and duties) is estimated to be aboutUS$614 M equivalent, with a foreign component of US$241 M, or 31 percent of the total projectcost. Cost estimates were prepared on the basis of quantity estimates from ONCF engineeringstudies, from recently completed similar works for infrastructure (for unit prices), and/or frominternational sources (for equipment and materials). A detailed analysis has been made todetermine the foreign and local costs (Table 3.1). All base costs are expressed in end-1995 prices.Physical contingencies (10 percent) have been included to cover possible increases in quantitiesfor infrastructure works, and price contingencies have been applied to base costs following theBank's present forecasts of domestic and international inflation.
FINANCING PLAN
3.4 As shown in Table 3.1, the project would be financed by proposed loans from the Bank(US$85.0 M equivalent), the African Development Bank (US$90.0 M equivalent), and theEuropean Investment Bank (US$103.0 M). The balance (US$336.0 M) would be financed byONCF's internal cash generation, GOM, bilateral assistance, and commercial banks.
European Investment Bank (EIB)Renewal and reinforcement of electric traction facilities 14 18 7 40(catenary, substations)Doubling and track renewal Kenitra/Sidi Slimane (3) 43 25 2 70Base coats (end 1995) 57 43 10 110Pyskial contingencie 5 4 1 10Price contingendes 9 4 1 14TOTAL PROJECF COSTS (C) 71 51 12 134D. OthersRolling stock rehabilitation 8 12 3 22Acquisition of 7 electric locomotives - 35 1 36Acquisition of 100 wagons 4.79 2.66 0.93 8.38Other wagons 3 8 0 11Containers 0 1 1 2Modemization of signaling and teleconmmunications facilities 13 31 4 48Tools 19 12 1 32Base cost (end 1995) 44 98 9 151Physial contingencies 1 3 0 5Price contingeacks 4 6 1 11TOTAL PROJECT COSTS (D) 49 108 10 167GRAND TOTAL BASE COSTS END 1995 (A+B+C+D) 218 197 22 437TOTAL CONTINGENCIES (A+B+C+D) 49 28 3 80Physical tiencies 18 12 2 32Price contingences 31 15 2 48TOTAL (A+B+C+D) 267 224 26 517Mlscelaeous (4) 76 17 4 97GRAND TOTAL 343 241 30 614(1) Outside investment program(2) Including cost of control of works(3) Including realignment, track renewal, and station remodeling(4)Outstanding operations from the 1988 - 1994 plan and miscellaneous
FINANCING (US$ MILLION)LOCAL FOREIGN TOTAL
World Bank 46 39 85Afnican Development Bank 69 211 90European Investment Bank 61 42 103Govenmnent and others 197 139 336TOTAL 373 241 614
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PROJECT IMPLEMENTATION
3.5 The Comiti interministiriel pernanent des entreprises publiques (CIPEP) will approveall aspects dealing with transforming ONCF into a joint stock company. The project will beexecuted by ONCF. The loan agreement will provide for the transfer to the joint stock companythat will replace ONCF of all ONCF's obligations to the Bank, including those obligations relatedto the execution of the project. A high-level officer from ONCF will be appointed by the GeneralManager as the Bank interlocutor for all current matters related to the project; this officer willalso liaise with other cofinanciers. A mid-term review of progress achieved in implementing theproject will be carried out not later than February 15, 1999. The project implementation schedule(Annex 8) shows a completion date of June 30, 2002. The closing date would be December 31,2002, to permit disbursement of the remaining loan proceeds for eligible expenditures under then-existing contracts. ONCF will provide the Bank with: (a) semiannual progress reports to monitorproject implementation (commencing on September 30, 1997); and (b) an implementationcompletion report within six months following the closing date of the loan.
PROCUREMENT
3.6 Procurement arrangements for the Bank-financed project elements, their estimated costs,and proposed methods of procurement are summarized in Table 3.2. Procurement of all Bank-financed items will be made on the basis of the Bank's guidelines and standard bidding documentsfor the procurement of goods and works. Standard Bank contract forms will be used.
3.7 Acquisition of rail and turnouts for track renewal and acquisition of computer equipmentwill be done through International Competitive Bidding. Procurement of infrastructure works(track rehabilitation, improvement, and renewal, including earth works and structures), in singlelots, will be done through International Competitive Bidding after bidders have been pre-qualified.Control of works and goods will be done by technical departments of ONCF with the support ofspecialized consultants and laboratories. Publication of invitations to bid for the acquisition of railand turnouts, and publication of prequalification notice for track renewal works were conditionsof Board presentation which have been satisfied. All bidding documents and contracts estimatedto cost the equivalent of US$500,000 (US$50,000 for individual consultants and US$100,000consulting firms) or more will be subject to prior review and approval by the Bank. Othercontracts will be subject to post review.
Table 3.2: Procurement Arrangements for the Bank-Financed Items(US$ M equivalent, physical and vrice contingencies and all taxes included)
Acquisition of rail and tunrouts (23.0) (23.0)1.0 1.0
C_ _ _ _ __eq ipment (1.0) (1.0)86.0 86.0
wnfiasuuch" works (59.0) 2.0 (59.0)2.0 2.0
Studin and conuting servie (2.0) (2.0)
111.0 2.0 113.0TOTAL (83.0) (2.0) (85.0)
Figurs betwen () indicate the amounts financed by the Bank. ' International Competitive Bidding. Not Bank financed.
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DISBURSEMENTS
3.8 The allocation of Loan proceeds of Table 3.3 and the loan's disbursement schedule ofAnnex 9, which are in line with the Bank's profile, are based on a realistic estimate of the timerequired to implement the track rehabilitation and renewal component and the studies providedfor under the proposed loan. Disbursements for contracts for: (a) goods and works valued belowUS$500,000 equivalent; and (b) services of individual consultants valued below US$50,000equivalent and studies and services of consulting firms valued below US$100,000 equivalent, willbe made against Statements of Expenditures (SOEs). The supporting documents will be held bythe Borrower for review by Bank supervision missions and auditors. Withdrawal applications forcontracts above these thresholds will be fully documented.
Table 3.3: Allocations of Loan Proceeds(US$ million equivalent)
Loan Amount Disburamnent
1. Consulting services 2.0 100%
2. Rail and urnouts 21.0 100%A FE; 100% LEX; 70% LE
3. Comuter equipment 1.0 100% FE; 100% LEX; 70% LE
4. Track renewal works 49.0 100% FE; 70% LE
Unatlocated (contingencies) 12.0
Total 85.0
3.9 To facilitate the timely implementation of the project, the Borrower will establish a SpecialAccount at a financial institution on terms and conditions acceptable to the Bank. The authorizedallocation will be US$3.0 M equivalent (DH 25.5 M). The Special Account will be replenished ona monthly basis, or whenever one third of the amount has been withdrawn, whichever occursearlier. Monthly bank statements detailing the transactions in the Special Account, which havebeen reconciled by the Borrower, will accompany all replenishment applications. The minimumthreshold for direct payment will be equivalent to at least 20 percent of funds in deposit in theSpecial Account.
3.10 ONCF financial statements have been regularly audited by major international firms since1986. The recent report for 1993, 1994, and 1995 contains a few reservations related to thepension system but does not question the basic soundness of accounting systems in place. Duringnegotiations, agreement has been reached with ONCF that its financial statements, accountspertaining to the Bank-financed portion, special account, and statements of expenditures will beaudited annually by independent auditors acceptable to the Bank, and that the audit reports befurnished to the Bank within six months of the close of each fiscal year.
PROJECT SUPERVISION
3.11 Two supervision missions per year during the approximate five years of implementationwill suffice to supervise all activities. The missions will be staffed by a railway specialist, aneconomist, and a financial analyst and last about three weeks (including a week at headquarters).At an average cost of US$2,100 per staff week and an average cost of US$8,000 for travel and
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lodging per staff member, and taking into account that an average of two projects will besupervised during each mission, the total cost for supervision (36 staff member missions) amountsto US$380,000.
ENVIRONMENTAL ASPECTS
3.12 The project is classified as Category B. Rehabilitation works to be done under the projectwill only have positive effects on the environment. A review of the environmental aspects of railworkshop operations will be conducted as part of the project, and methods of industrial wastedisposal will be introduced if required.
4. ECONOMIC EVALUATION
4.1 This section describes the economic evaluation of the project's components (ONCF's1996-2000 Investment Program). These components are: (a) track renewal and realignment;(b) track doubling between Kenitra and Sidi Kacem; (c) replacement of seven locomotives; and(d) acquisition of 100 freight wagons. Details of the economic evaluation are given in Annex 10.
EVALUATION METHODOLOGY
4.2 The economic justification of the above-mentioned components has been determined byestimating the economic costs and benefits related to expected passenger and commodity railtraffic during the next 20 years. The project focuses on core lines and the traffic forecast reflectsthe growth potential assessed for each one. Annual growth rates between 1995 and 2000 arewithin a 3-5 percent range for passenger-kms and a 1.5-4.5 percent range for ton-kms. After2000, traffic growth is uniformly taken at 3 percent per year for passenger-kms and eastboundton-kms and at 2 percent for westbound ton-kms. All costs are expressed in end 1995 prices andare estimated net of taxes and duties. Where applicable, the economic returns are based on acomparison of economic costs of rail transport with those of road transport. These costs areexpressed as long-run marginal costs and, in addition to operating costs, consist of rehabilitationand maintenance for road transport and track renewal and of rehabilitation for rail transport.
ECONOMIC EVALUATION AND SENSITIVTY ANALYSIS
4.3 The main benefits stemming from track renewal in ONCF's investment program arereduced track maintenance costs, reduced train operating costs through higher operating speeds,and reduced number of derailments. There are also benefits associated with capacity effects dueto increased speeds; these benefits are quantified at one-half of the transport cost savingscompared with road transport, since this additional traffic is essentially an induced traffic.Estimated ERs on the Bank-financed track renewal program range from 19 to 25 percent.
4.4 Rail traffic between Rabat and Meknes is heavier than anywhere else in Morocco. Theexisting track is double between Rabat and Kenitra, and single between Kenitra and Meknes. The
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doubling of the track between Kenitra and Sidi Kacem, a distance of 80 kin, which includes somealignment rectification between Rabat and Kenitra, is the only new construction component inONCFs investment program. High passenger load factors and major traffic peaks during thesummer months and holiday seasons justify this investment. Its ER is 28 percent, based on:(a) passenger and freight transport savings which otherwise would divert to the more costly roadtransport; and (b) savings in passenger time and train operating costs due to increased operatingspeeds. Transfer of traffic to road transport would occur when the line's capacity is reached. Thesensitivity analysis assumes that no additional traffic will be generated by the investment, a ratherpessimistic view that results in an ER of 16 percent.
4.5 The ER of the seven new locomotives in ONCF's investment program is 27 percent. Thebenefits consist of reduced cost of maintenance and improved availability of the new locomotives.The availability of ONCF's old locomotives to be replaced by the new ones is 23 percent; a newlocomotive has an availability of 95 percent. A sensitivity analysis has not been carried out sincethe estimated ER, although high, is conservative, due to the fact that benefits related to a reducednumber of accidents with the new locomotives have been ignored.
4.6 The 100 new freight wagons in ONCF's investment program are needed for the railtransport of coal which has recently increased. It is estimated that without these wagons 40percent of the coal transport would be diverted to the road, which entails a higher cost oftransport. Based on a comparison of transport costs by rail and by road, the ER is estimated to be54 percent.
PROJECT RISKS
4.7 The project would not pose specific technical risks. Most risks involve the Government'swillingness to enforce the stipulations of the Performance Contract and railway subsector policyletter. However, the settlement of the long-overdue tariff dispute with OCP, and recent changesand progress made in the management of ONCF, prove the Government's commitment to thesustainability of efficient rail services. Technical assistance and training under the project wouldreinforce the Government's and ONCF's commitment to the needed reforms by identifying andenforcing necessary actions.
5. FINANCIAL EVALUATION
ACCOUNTING SYSTEMS AND STANDARDS
5.1 ONCF maintains a satisfactory management accounting system. Good quality and timelyfinancial data are now generated in line with the standard Moroccan chart of accounts. Financialdata processing systems, which ensure the reliability and integrity of accounting information, wereupgraded in the early 1990s and their organization and staffing are satisfactory. In accordancewith current regulations, fixed assets are recorded at their historical value with the consequencethat their shown value is only one-third of the replacement value. Nevertheless, ONCF keeps anoff-balance sheet evaluation that does reflect replacement costs, thereby mitigating the issue.
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Monthly indicators cross-referencing operational statistics, revenues, and costing data areroutinely published and provide useful insight on performance of the railways.
PAST AND CURRENT FINANCIAL PERFORMANCE
5.2 ONCF's net -loss soared from DH 202 M in 1990 to an average of DH 740 M during1992-1994. Increased competition from road transporters prompted ONCF to freeze its tariffafter 1991 to stop erosion of its commercial base. As a result, the operating revenues stagnated ina DH 1.3-1.4 billion (B) range during 1991-1993. In contrast, operating costs rose at a rateslightly above inflation, from DH 1.45 B in 1990 to DH 1.75 B in 1994. Despite a 10 percentreduction in traffic, the payroll continued to expand, from 13,700 to 14,500 staff over the period,bringing the ratio of staff costs to revenues from about 35 percent in 1990 to over 52 percent in1994. The Government maintained its capital subsidy at an annual average of DH 250 M, low incomparison to the DH 800 M allocated before 1987. Faced with substantial investmentconstraints for track rehabilitation and equipment renewal amounting to DH 750 M per year,ONCF could no longer sustain its operations, even with the 7 percent increase of its tariffapproved on August 22, 1994.
5.3 A protocol was signed with GOM in November 1994, following a thorough review of therailway's finances and operations by CIPEP. The phosphate rock tariff was raised by 26 percent,retroactive to January 1, 1994. The capital contribution by Government was raised to DH 700 Mper year during 1995-1998. Most important, some DH 3.3 B of tax and debt servicing arrearswere converted into Government equity. For its part, ONCF undertook to improve itsperformance and to adopt cost containment measures. The FY94 net loss was still a high DH 744M due to changes in accounting, forcing ONCF to create provisions for risks that overshadowedthe real improvement in operating accounts. The current ratio drastically improved from 0.4 inFY93 to 1.45 in FY94.
5.4 The financial condition of the railways improved quite significantly in FY95. Greatercommercial aggressiveness enabled the railroad to regain some traffic back from road transport(e.g., coal). A systematic effort was made to cut costs, including not replacing staff leavingservice (e.g., those retiring, resigning, or being fired), not using temporary workers, a salaryfreeze, curtailment of in-kind benefits to staff, and streamlining of stores management. Forpassengers, a number of loss-making services were abandoned, stations were closed, and effortswere made to improve train occupancy rates, which are still low at about 30 percent. Overall, thepassenger services supply was reduced by 25 percent but traffic fell by only 1 percent. The netloss of DH 609 M was still high, but the net operating loss narrowed down to DH 43 M,compared to DH 305 M a year before. This solid performance has been all the more remarkablesince ONCF faced a one-month general strike in May 1994. The current ratio has improved to1.9 following payment and rescheduling of short-term debts (e.g., to the Office national del 'electricite).
5.5 There is no pension fund. Retirees are paid their rights directly from the yearly staff andemployer's contributions plus a variable amount paid by ONCF to match the deficit. Since thenumber of retirees increases by about 200 annually, the total cost to ONCF of financing thepension scheme has been growing steadily, to about DH 130 M in FY95, which is double what it
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was in FY88. It already exceeds 20 percent of direct labor costs. With the prospect of staffdownsizing, the issue is bound to worsen unless a new system is set up. Should they berecognized in the balance sheet, the accrued rights of the active staff, according to the audit reportissued in 1996, could represent liabilities in the range of DH 5-10 B.
5.6 The 1994 protocol requested ONCF to streamline stores keeping. In FY94, the storeswere valued at DH 825 M, equivalent to two years of consumption, which is very high. Thisamount included DH 120 M of stores older than five years. Loose management, publicprocurement constraints leading to larger quantities being ordered at lesser frequency, and toomany works carried out by force account have contributed to this unhealthy situation.
FUTURE FINANCIAL PERFORMANCE
5.7 Future cash generation hinges heavily on the level of activity that ONCF will be able tomaintain. Detailed assumptions on traffic growth are given in Annex 11. The projectionconservatively assumes a 2.5 percent growth in passenger-kms and 1 percent growth in ton-kmsfor freight and phosphate traffic from 1997 onward, following the 1996 recovery that mostlycomes as a correction for the one-month strike experienced in 1994. The traffic creation inducedby the project is expected to materialize in 2001 and 2002, adding some 4 percent each year to thetraffic. Overall, the average annual growth for the combined traffic would be slightly above2 percent during the period and the operating revenue would grow from DH 1.6 B in 1996 toDH 2.3 B in 2003, assuming that annual tariff hikes recoup two-thirds of inflation starting in1997.
5.8 Labor costs must be brought back to around 30 percent of operating revenues if ONCF isto overcome stiffer road competition. The projection thus assumes a reduction of personnel from13,800 in 1995 to 10,000 in 2000 and moderation in pay increases throughout projectimplementation after the 7 percent general raise scheduled for 1997. The future activity level willhave an impact on the evolution of future expenditures related to operations and maintenance,but, taking into account fixed costs, productivity increases, improved capacity utilization, anddecreased reliance on in-house services (close to DH 50 M of works that are internally producedat present would be contracted out by 2003), these expenditures are expected to grow in constantdirham at an annual pace of only 1.5 percent, and, in current dirham, from DH 594 M in 1996 toDH 816 M in 2003.
5.9 Investments planned for 1996-2000 amount to DH 5.2 B, much of which will fall in thelast three years. The gross cash flow (DH 264 M in 1996) would not allow ONCF to contributeits own resources to the project's financing plan, given the ongoing debt servicing requirements(about DH 550 M in 1996). The DH 700 M subsidy (para. 5.3) is therefore essential to enableONCF to finance its share of the investment together with the deficit of its pension system.Planned borrowings amount to close to DH 3 B during 1996-2000. From 2001 onward, the newjoint stock company will be able to generate enough cash to self-finance part of its investmentprogram.
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5.10 Table 5.1 presents a summary of the 1996-2003 financial statements, which are based onthe detailed financial evaluation of Annex 11. According to the forecast, ONCF should eventuallybecome financially sustainable. The net loss would be gradually reduced to around DH 331 M in2000. As ONCF becomes a joint stock company, the lump-sum subsidy would be removed.Instead, the Government would pay compensation for PSO for an estimated total of DH 110 M in2001, rising to DH 125 M in 2003. The net loss would further decline to about DH 150 M in2003. Furthermore, the Government would cover the pension deficit incurred by the newcompany. The related capital contribution would rise from DH 205 M in 2001 to DH 226 M in2003. Should it be treated as an operating subsidy, ONCF would indeed earn a pre-tax income ofDH 25 M in 2001, rising to DH 80 M in 2003.
5.11 The balance sheet was already strong in 1995 and will remain that way throughout theprojection period in the base case scenario. Stores management would be streamlined withinthree years: from 1998 onward, the stores would represent no more than 300 days ofconsumption. Extended resort to foreign-denominated debt financing would marginally raise thedebt-to-equity ratio from 23:77 percent in 1995 to 26:74 in 2003. The DH 700 M subsidy to bereceived until 2000 would provide for safe debt servicing despite debt service coverage ratiosbelow 1 until that date, and the capital contribution to balancing the pension scheme that wouldapply thereafter would indirectly bring the debt service ratio to 1.7 in 2001, 1.35 in 2002, and1.46 in 2003. The minor arrears problems that still existed in 1995 will be resolved by 1997,according to the projection, which relies on strict financial discipline by ONCF regarding paymentof its bills.
5.12 A sensitivity analysis has been carried out to verify the impact of risks on key financialparameters. Lower traffic growth, failure to reduce the labor force to 10,000 by 2000, anddepreciation of the dirham have been identified as major risks. Materialization of each of thoserisks would jeopardize the future financial viability of the railway company. More drastic actionsthan those considered under the current financial recovery plan would then have to be taken.Closely monitoring compliance with financial covenants will be essential so that corrective actioncan be triggered in earnest when defaults occur. The mid-term review will be of particularimportance to adjust the strategy if need be to ensure that project objectives are still being met.Detailed results of the sensitivity analysis are given in Annex 12.
5.13 During negotiations, agreements were reached on the following: (a) a working ratio lowerthan 0.8 from 1997 to 2000, and 0.75 thereafter; (b) a current ratio no lower than 1.5 from 1998onward; (c) a debt-to-equity ratio lower than 35:65; and (d) a labor-cost-to-operating-revenueratio lower than 0.41 in 1997, 0.39 in 1998, 0.37 in 1999, 0.36 in 2000, and 0.31 thereafter.
The govenunent contribution to equity matching the pension deficit is included starting 2001.
6. AGREEMENTS AND RECOMMENDATIONS
6.1 During negotiations, agreements have been reached with ONCF on the following:
(a) the performance indicators given in Annex 7 (para. 3.2);
(b) its financial statements, accounts pertaining to the Bank-financed portion, SpecialAccount, and Statements of Expenditures will be audited annually by independentauditors acceptable to the Bank; and the audit reports be furnished to the Bankwithin six months of the close of each fiscal year (para. 3.10); and
(c) the financial ratios given in para. 5.13 will be maintained.
6.2 The Government has committed itself in the policy letter to: (a) prepare a plan for thetransfornation of ONCF, taking into consideration a detailed review of ONCF's pension system,including its actuarial and financial evaluation, and a statement of all assets and liabilities to betransferred; (b) submit to the Bank for its review and approval an action plan defining datedrestructuring measures to the said pension system to be implemented before the transformation ofONCF into a joint stock company; and (c) take all actions necessary to ensure that a draft law,
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implementing the transformation of ONCF into a joint stock company, is approved by theGovernment not later than December 31, 1999 (para. 2.9).
6.3 The following conditions of Board presentation have been satisfied:
(a) GOM provides the Bank with a signed policy letter (Annex 13) describing, interalia, its intentions to: (i) transform ONCF into a joint stock company (societeanonyme) according to a given time table; (ii) attract private capital in theoperation of rail transport services in a subsequent phase; (iii) adopt a new set ofregulations (cahier des charges) for the societe anonyme, which, among otherthings, will draw a line between commercial services that will be operated in a fullyderegulated environment and ought to pay their way, and services performed at theGovernment's request under a PSO scheme that would warrant financialcompensation for deficit incurred; (iv) by the end of the project life (December 31,2002), reduce Government financial support to the railway subsector tocompensation for the PSO and funding of the deficit of the pension system; and(v) reform the railway pension system to free ONCF from its financially unbearableburden (para. 2.9);
(b) GOM provides the Bank with a copy of the executed 1996-2000 PerformanceContract between GOM and ONCF (para. 2.9); and
(c) ONCF publishes the invitation to bid for the acquisition of rail and turnoutstogether with the prequalification notice for track renewal works (para. 3.7).
6.4 With the above assurances and conditions, the project would be suitable for a Bank loanof ESP 5,443 M and US$42.5 M (US$85.0 M equivalent) to ONCF, with the guarantee of GOM,for a 20-year term including a five-year grace period.
ONCF Organizational Chart
Chairman oAtheBoard of Directors
General Manager.
General Secretary AdvisorsInspection Generaland Audit
................ 1 ............... 1 ............... -- ------ 1------Operations Motive Power and ' Infrastructure Administration
Rolling stock................. 1 ............... I . -.... ...'Marketing & Sales., Transport Track Signaling, Telecom Buildings Human Finance Supplies InformationL__________ .__________ .____________j .Electric Traction Resources Technology
z
PERFORMANCE INDICATORS FOR SELECTED RAILWAYS
PERFORMANCE INDICATORS Morocco Tunisia [ France Spain [ Cameroon | United StatesFOR SELECTED RAILWAYS 1988 1994m ,:: 1992 1992 1992 1992 Class I Antrak 1992
...... **.*...*.*.*.*".*.* .. _ _ _ _ ~~~~~~1992_________________________________________ ....................... 6~~~~~~~~~~~~~~~~~~~~~~ it,z R M L W A: ~ ~ ~ ~ ~ .:.....
Total Shunting Diesel Locomotives/Total Locomotives diesel de manoeuvre 108
ZM BN-ACEC 1984 f 1416 | 81995 8 6
Total Electric Multiple Units/Total Rames automoices electriaues 1 14
of (USA) 1984 $1 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
ANNEX 4Page 2 of 2
. *.... *...... ~ ...... . r n A tn...
Type Number Total payload (t)Type Effect if Capacite totale
Service wagons/Wagons de service 849 25009Total wagon fleet/Total parc wagons 9 064 405 579
Type Number Number of seatsType Effectif Nombre de sieges
First class coaches!/Voitures de lere classe 61 3 414First-second class coaches! Voitures mixtes lere-2eme classe 8 576Second class coaches!/Voitures de 2eme classe 480 43 072EMU coaches!/Voitures des rames automotrices 42 3 794Sleeping coaches/Voitures couchettes et' lits 31 1 356Total coaches/Total parc voitures voyageurs 622 52 212
ANNEX 5
OUTLINE OF STUDIES AND CONSULTING SERVICES
Studies and consulting services to be financed under the project are the following:
* Legal consulting services
Objectives: (a) transformation of ONCF into a joint stock company incorporated undercommercial law; and (b) reform of railway pension system.
Contents: preparation of draft legislation to be submitted to Parliament, preparation ofregulatory texts.
Estimated costs: US$250,000 equivalent.
* Improvement of railway management systems
Objectives: Improvement in staff management, assets management, freight trafficmanagement, maintenance management, etc.
Contents: acquisition by ONCF of modem software, training of users.
I. This annex describes the economic evaluation of: (a) the doubling of the Kenitra-SidiKacem rail link; and (b) the acquisition of locomotives. The economic evaluation of othercomponents is based on the same methodology, and is available in the project file (in French).
General Approach
2. The economic evaluation of the proposed railway project is linked to economic sectorwork carried out in Morocco through: (a) the Bank's strategy to reform public enterprises;(b) observations about rail/road competitiveness; and (c) the railway company's strategic role forthe transportation of phosphates. The principle environmental risk is the proper disposal of usedoil in the locomotive repair shop, for which an action plan has been prepared. Otherwise, theproposed project will have a positive impact on the environment since it reduces pollution on theroads. Fiscal analysis and cost recovery are dealt with in detail in Annexes 11 and 12. Since thechange in ONCF's management about two years ago, the institutional risk has been minimized;the new management has reduced costs of operation by 20 percent in 1995 and terminatedpassenger services where demand was low.
Doubling of Kenitra-Sidi Kacem Rail Link
3. The economic evaluation of this link includes costs of some alignment rectificationbetween Rabat and Kenitra since traffic on the Rabat-Kenitra link and that on the Kenitra-SidiKacem link are interdependent. The alternatives considered are:
(a) no doubling of the Kenitra-Sidi Kacem rail link;
(b) doubling of the Kenitra-Sidi Kacem rail link; and
(c) doubling of the Kenitra-Sidi Kacem rail link plus the platform for the doubling ofthe Sidi Kacem-Meknes link (stage construction).
4. Alternatives (b) and (c) have an ERR of 28.33 percent and 18.40 percent, respectively.Table I shows the costs of investment during 1997-2000 and benefits related to diverted traffic(from road), generated traffic, time savings, higher operating speeds, savings in costs ofmaintenance, and salvage values.
5. Traffic between Kenitra and Sidi Kacem is assumed to be constant until 2001 due tocapacity constraints; in 2001 and thereafter, passenger and eastbound goods traffic are expectedto grow at 3 percent, while westbound goods traffic is expected to grow at 2.5 percent per year.In 2001, generated traffic is assumed to be as follows:
Diverted traffic is based on the difference between weekly forecasts of passenger and goodstraffic and their saturation level without the doubling of the Kenitra-Sidi Kacem link.
6. Average per km costs in dirhams by road and rail are assumed to be:
Passengers Goods
Road 0.6610 1.0927Rail 0.3372 0.4335
7. In addition, the average value of passenger time is assumed to be DH 4.88 per hour. Theeconomic analysis is based on a 20-year period starting in 2001 (the year of opening the doubleline); salvage values have been calculated by assuming straight line depreciation and the followingexpected lives:
Infrastructure 75 yearsTrack 30 yearsCatenary 40 yearsSignalling and telecomm. facilities 25 yearsEquipment of electric sub-stations 25 yearsConstruction of electric sub-stations 75 yearsStations 75 yearsLevel Crossings & Structures 75 years.
8. Sensitivity analyses include the determination of the ERRs of the doubling of the Kenitra-Sidi Kacem rail link for the following scenarios:
- Value of passenger time ignored ERR = 27.4 percent
- With half of forecast generated traffic ERR = 22.6 percent
- Without generated traffic and annualgrowth in passenger and goods trafficis 1.5 percent (starting in 2001) ERR = 10.0 percent
With an opportunity cost of capital of 10 percent, the NPV amounts to DHI,090 million. Anincrease in costs of investment of about 275 percent or a decrease in benefits of about 75 percentwould result in a NPV = 0 (Tables 2 and 3).
Acquisition of Locomotives
9. The benefits consists of (a) the difference in maintenance costs of the old and newlocomotives; (b) improved reliability of the new locomotives; and (c) improved availability of thenew locomotives (Table 4). The reliability is expressed in the number of breakdowns per100,000 km and amounts to 8.64 for old locomotives and 1.51 for new ones. The average costs
ANNEX 10Page 3 of 7
per breakdown is DH 7,600. The availability of old and new locomotives amounts to 23 percentand 95 percent, respectively. The average cost of non-availability of a locomotive is DH 8,437per day.
10. The economic analysis is based on a 20-year period and an expected life of 30 years forthe locomotives. The salvage value has been calculated by assuming a straight line depreciation.
11. The ERR of the seven locomotives is 26.7 percent. Sensitivity analyses include thedetermination of the ERRs for the following scenarios:
Not taking into account the benefitrelated to improved reliability ERR = 26.0 percent
Not taking into account the benefitrelated to improved availability ERR = 20.2 percent.
With an opportunity cost of capital of 10 percent, the NPV amounts to DH218 million.Switching values are of the same order of magnitude as those given in para. 8 above.
Table 1: Costs and Benefits of the Doubling of the Kenitrg - Sidi Kacemn Line ('000 DH)
(a) Rail services are consolidated under two major business lines:- passengers and parcels;- freight with another subdivision: phosphate, general cargo, and the port
shuttle for chemicals (called "other revenue").The model considers each of these four segments separately. The currentprojection assumes passenger and freight traffic growth of 11 and 5 percentrespectively in 1996 that mostly accounts for the one-month strike in 1995.Phosphate traffic was not affected by the strike and will likely fall by about1 percent in 1996 compared to the previous year. For later years, traffic growth isassumed at an annual rate of 2.5 percent for passengers, 1 percent for phosphate,and 1 percent for other freight. The projection further accounts for loss ofpetroleum traffic in 1997 (a 3-percent reduction of freight traffic) and for trafficcreation directly linked to the project (addition of about 4 percent to the trendpassenger and freight traffic in 2001 and 2002). The tariffs are kept unchangeduntil 1997: they are then assumed to be raised each year by a percentageequivalent to two thirds of the inflation rate.
(b) After creation of the joint-stock company, Government is expected to paycompensation starting 2000 for the deficit incurred by ONCF in providing servicesat its request. The initial compensation is estimated at DH 110 M, growing toDIH 125 M by 2003 (the compensation is mostly for passenger services; aboutDH 20 M corresponds to low tariffs granted to chemical traffic).
(c) Miscellaneous revenues, of fluctuating nature in the past and of minor magnitude,are estimated at a constant DH 10 M.
(d) Investments by force account ("Travaux faits par 1'entreprise pour elle-meme",or TFEE) are not treated as operating revenue, contrary to ONCF's practice.Instead, they are deducted from working expenses. These investments have beenestimated by ONCF and mostly include materials and equipment.
2. Operating expenses
(a) The evolution of labor costs depends on the compensation policy and on staffing.The 7 percent increase scheduled in 1997 has been taken into account. Staffdownsizing from about 13,800 in 1995 to 10,000 in 2001 is the main factor in theevolution of labor costs. The saving in 1996 value is calculated as the number ofredundant staff times the average salary (some DH 42,000 per year) times 1.12 to
ANNEX 11Page 2 of 7
account for fringe benefits paid by the employer. The calculated amounts are thenconverted to current value by using the cost of living adjustment factor(1.5 percent p.a.) and the average merit increase (2 percent p.a.). The savingcomes to a total of slightly more than DH 200 M by 2003.
(b) For fuel and energy costs, related consumptions in 1995 are first apportioned tothe traffic. They are projected taking into account the growth prospects of eachtraffic and the elasticity of fuel consumption to traffic growth (0.8 for passengertrains, 1 for phosphate trains, and 0.9 for other freight trains) to account forexpected productivity increases. Inflation factors are then added (4 percent in1996, 3.5 percent in 1997 and 3 percent thereafter).
(c) Supplies cover materials needed for operation and maintenance, plus investmentsdone by force account. The former is derived from an estimate of variable andfixed operating costs in 1995 reduced by its labor component and train crew costs(combined share of 40 percent). The residual value is then projected based on thesame principle as the one used for fuel (traffic growth and elasticity of suppliesconsumption to traffic of 0.6 for passenger traffic, 0.9 for phosphate traffic and 0.8for other freight traffic). The amounts are then updated for inflation of 4.5 percentin 1996, 3.5 percent in 1997 and 1998, and 3 percent thereafter. The projectionfurther assumes that about 15 percent of works done by force account will becontracted out between 1996 and 2003 which will have an impact on the supplieslevel (they will be reduced by some DH 30 M by 2003). The supplies needed forTFEE investments are calculated as 35 percent of the investment values given byONCF.
(d) For services purchased, the calculation also starts from the projection of variableand fixed operating costs and assumes a higher share of contracted out services(from 33 percent of costs in 1996 to 40 percent in 2001). The value of in-houseservices is multiplied by a 1.4 coefficient when they are taken over by outsideproviders (they will charge for overheads, capital costs and the benefit margin).The services purchased are estimated in current dirham using the same inflationrates applied to supplies.
(e) Depreciation is based on 50 years for infrastructure, 35 years for rolling stock and15 years for other fixed assets.
3. Borrowings. The model features four sources. Except for outstanding loans (see (a)hereafter) and the Bank loan, the assumptions on terms and conditions are rough estimates.
(a) The debt already contracted at the end of 1995: ONCF provided the correspondingdebt servicing schedule.
(b) Credits totaling DH 600 M (bilateral assistance and buyers' credits) would bedisbursed during 1996-2000. Some of these credits are concessional with a longperiod of grace and others are export credits. The projection assumes repayment
ANNEX 11Page 3 of 7
of half those credits starting 1997 with twelve maturities and payment of interest at8 percent.
(c) Multilateral agencies (essentially the World Bank, the European Investment Bankand the African Development Bank) would lend a total of close to DH 2.4 billionduring 1997-2000 (5 years of grace, 15 maturities, and 7.25 percent interest).
(d) Unidentified banks would finance up to DH 700 M or about a third of investmentsundertaken between 2001 and 2003 (1 year of grace, 15 maturities and 8 percentinterest).
(e) All the debt contracted from 1997 onward would be denominated in foreigncurrency.
No foreign exchange loss was accounted for in the base case scenario as local and foreigninflation rates are close enough not to warrant a parity change.
4. Investments. Total investments are estimated at DH 5.2 billion during 1996-2000. Whenincurred, expenses are first recorded under "work-in-progress", from which they are transferredto the relevant fixed assets after lags that vary according to nature of the works. Fixed assets areanalyzed under four categories: infrastructure, construction and tracks, rolling stock, equipmentand tools.
5. Inventories. The stores' inventories are reduced to DH 650 M in 1996 and DH 500 M in1997, after which they represent 300 days of supplies.
ANNEX 11Page 4 of 7
FINANCIAL EVALUATION
Detailed Financial Tables
Income udatminent: rtctual (1992-95) and forecast (1996-2002) (in dirham nlillon)
1992 1993 1994 1995 1996 1991 1998 1999 2000 2001 2002 2003aclual actual actual actual projected projected projected projected projectcd projected projcckcd projected
1. As evidenced by fifteen years of financial strains that led to the 1994 financialrestructuring, the expected financial recovery follows a narrow path and could bejeopardized, were such potential risks to materialize. Three key parameters are prone tosuch risks: traffic growth, labor costs containment and exchange rates.
(a) Traffic growth. Adequate cash generation hinges on rising traffic andcontinued competitiveness of the railway tariff. As for the latter, the assumed tariff policy(stability until 1997, then yearly revision to partly recoup inflation) is designed to minirnizerisks. Traffic growth is more uncertain, as deregulation of road transport will fosterutilization of larger trucks and economies of scale, as well as development of bus servicesthat will also be helped by extension of the motorway network. ONCF may prove unableto engineer reversal of the negative trend that prevailed during 1987-1994 (minus 1.1 and2.8 percent per year respectively for passenger and general cargo traffic). The simulationenvisages an adverse scenario by which passenger traffic would stagnate from 1997onward, and freight traffic other than phosphate would decrease by 2 percent annuallyfrom that same year.
(b) Labor costs containment. As an important share of working expenses (about60 percent in 1995), labor costs must be reduced for the financial recovery plan tosucceed. The new management determination to downsize the labor force could beundermined by the unions whose strength shows no sign of abating. The simulationconsiders a case where it would be impossible to reduce staff below 12,500 (compared to14,000 on average in 1995).
(c) Evolution of exchange rates. Depreciation of the local currency has beenone of many factors that contributed to ONCF insolvency in the relatively recent past.Based on projected local and international inflation rates, the future depreciation of thedirham should be of limited magnitude (should exchange rates strictly follow thepurchasing power parity rules, the dirham would depreciate by a mere 1.5 percent annuallyover 1996-1998, then 1.3 percent annually thereafter). The base case scenario assumes nodepreciation of the dirham. However, failure to improve the macroeconomic frameworkwould weaken the dirham, with adverse consequences to ONCF's ability to service itsdebt which would be entirely contracted in foreign currency. The simulation includes anadverse scenario corresponding to depreciation of the dirham at an annual rate of3.5 percent (in 2003, the dirham would have lost about 30 percent of its value against theUS dollar).
2. The table below summarizes the results of all simulations including one whichcombines the adverse traffic and staffing cases plus a 2 percent annual depreciation ratefor the dirham.
ANNEX 12Page 2 of 2
Sensitivity of Financial Results to Main Risk Factors(in DH million for income and cash gosition)
Financial indicators 1997 1999 2012Base case
-net income (loss) -240 -240 -1i0 -146-cash in bank/hand 373 623 890 296-working ratio 0.78 0.75 0.72 0.72-debt service ratiol 0.66 0.82 1.69 1.46-currentratio 2.19 2.58 3.70 2.15
A- Lower traffic- net income (loss) -267 -296 -272 -277- cash in bank/hand 336 509 626 -194-working ratio 0.80 0.77 0.75 0.71-debt service ratio 0.61 0.72 1.49 1.23-current ratio 2.12 2.35 3.10 1.12
B- Higher staffing- net income (loss) -260 -321 -332 -310- cash in bank/hand 353 473 473 -442-working ratio 0.80 0.80 0.80 0.79-debt service ratio 0.62 0.67 1.36 1.18-current ratio 2.15 2.31 2.76 0.76
C- Depreciation of DH- net income (loss) -313 -379 -344 -300- cash in bank/hand 338 504 652 -204-working ratio 0.78 0.75 0.72 0.72-debt service ratio 0.63 0.75 1.46 1.17-currentratio 2.11 2.33 3.09 1.15
D- Combined A-B-C-- net income (loss) -329 -456 -514 -523- cash in bank/hand 296 293 79 -1202-working ratio 0.81 0.82 0.83 0.U3-debt service ratio 0.56 0.54 1.08 0.85.-current ratio 2.04 1.93 1.79 -0.86
3. The sensitivity analysis confirms that the financial recovery remains vulnerable toadverse factors that would not allow implementation of the strategy. The impact of lowertraffic and of a depreciated dirham would be less severe than failure to reduce staffinglevel, and would still result in cash shortages of about DH 200 M in 2003 without muchpossibility of resorting to increase borrowings since the debt service coverage ratio wouldalready be below safe levels (around 1.2 in 2003). The combination of adverse factorswould bring ONCF to bankruptcy shortly after 2001.
4. In view of these results, it will be essential to monitor closely the evolution offinancial parameters and ensure full compliance with key targets covenanted in the Loanagreement. The mid-term review will be of great importance since it provides anopportunity to revise the strategy if need be to make sure that financial targets will be met,notwithstanding adverse changes in the business environment. Corrective measures rangefrom abandonment of loss-making services to more drastic staffing reductions to below10,000.
I The Government capital contribution to balance the ONCF pension system has been taken into accountfrom 2001 onward.
ANNEX 13Page 1 of 9
NON-OFFICIAL ENGLISH TRANSLATIONOF TBE STRATEGY LETTER
KINGDOM OF MOROCCO
September 25, 1996
Mr. James WolfensohnPresident, The World Bank1818 H Street, N.W.Washington, DC 20433United States of America
Subject: Railway Restructuring ProjectLetter of Subsector Strategy
Dear Mr. President:
I. Introduction
I . Improvement of the conumercial, technical and financial performance of rail transport is acentral concern of the policy on increasing the competitiveness of the Moroccan economy andrehabilitation of the public finances pursued by the Government.
II. Diagnosis of the Present Situation of the Railways
2. The present structure of the rail system, which serves most of the major populationcenters, the main ports and the mining centers, is satisfactory from an overall standpoint.However, the system needs to be modernized and made more efficient: the infrastructure hasbecome partially run down and a part of the system is at the limit of its capacity. As regards theinstitutional aspect, the Office National des Chemins de Fer (National Railways Company,hereinafter 'ONCF), which has the legal status of an industrial and commercial public institution('E.P.I.C.'), is subject--due to the legislation applicable to it (see Appendix 1 hereto)--tomanagement procedures that are often cumbersome and restrictive. ONCF has not posted a profil.since 1980 and its self-financing capacity has been markedly negative since 1991. Moreover, and.no less disturbing, it must be noted that if no steps are taken to reform the retirement-findingmechanisms, the ONCF staff pension scheme will become an increasingly heavy burden on theenterprise's future financial equilibrium. For some time now, this subsector has only beerLmaintained in financial balance by means of significant transfers from the Government. However,,
ANNEX 13Page 2 of 9
since mid-1994, ONCF's management has been implementing an important program of reforms ofthe enterprise's internal management, the main components of which are listed in Appendix 2.
Im. Main Objectives of the Rail Transport Policy
3. The medium-term rail transport policy that the Government proposes to implement has asits main objectives: (i) sharpening the competitiveness of rail transport, which falls within thegeneral context of Morocco's transport policy, namely, upgrading the quality and reducing thecost of the services provided to clients, fostering healthy competition between transport modesand enterprises, and assuring coverage by clients of the operating costs of transport services andof the cost of infrastructure maintenance and renewal; and (ii) reduction and rationalization of theGovernment's financial transfers to the subsector.
A. Modernization of the Rail System
4. Modernization of the rail system will be pursued through the implementation of aninvestment plan defined in the Performance Contract for the period 1996-2000 (hereinafter'S3overnment-ONCF Performance Contract') concluded between the Government and ONCF onSeptember 6, 1996, and which assigns priority to infrastructure renewal and modernization.
B. Revision of the Financial Relations between the Government and the RailTransport Enterprise
5. Regarding the financial transfers by the Government to the subsector, as of the year 2001the Government proposes to limit these to: (i) compensation for public-service obligationsexplicitly imposed by the Government (either for operation of special services, or in the form oftariff reductions for certain categories of clients, or else for maintaining certain lines or facilities inservice for specific needs); and (ii) financing of the construction of new infrastructure, ifspecifically asked by the Government.
C. Reorganization of the Institutional Framework: Stage I: Formation of a LimitedLiability Company and Reorganization of the Government's System of FinancialControl
6. The degree of autonomy of ONCF currently contrasts with the increased freedom enjoyedby road hauliers in a deregulated market. The institutional framework of its activity will bethoroughly restructured so as to give ONCF complete autonomy of operation and to encourage itto adopt a resolutely commercial approach. The Government is convinced that reform of itscontrol over ONCF and ONCF's conversion into a joint stock company will increase andstrengthen ONCF's efficiency, autonomy, competitiveness and market-oriented approach. Inorder to ensure that the rail transport enterprise will have the desired freedom of operation, theGovernment will: (i) give ONCF the legal status of a joint stock company; (ii) reform thefinancial control rules applicable to it; and (iii) redefine the regulatory framework for railwayactivity. The conversion of ONCF into a joint stock company will be consistent with the new lawon joint stock companies which aims at making control of company management more effective.The new law sets up a more appropriate legal framework.
ANNEX 13Page 3 of 9
7. The legislation in respect of conversion of ONCF into a joint stock company will includeprovisions to streamline Government financial control by eliminating a priori control and replacingit by a posteriori oversight and repealing, as regards the new rail transport enterprise, all currentlegislative and regulatory provisions governing Government financial control, including the DahirNo. 1-59-271 of April 14, 1960 as amended.
8. As of September 1, 1996, the Government has already begun the internal conversionprocess in ONCF. This process has to include, among other things, preparation of an inventory ofall components of ONCF's assets and liabilities, identifying those that will be transferred to thenew company and those that will be assumed or paid off by the Government, noting in each casethe current value of each item concerned. This will be a diagnostic study of the legal systemgoverning ONCF's property and obligations that will define, among other things, the alienable andinalienable rights and obligations. This first stage will be concluded with submission, no later thanJune 30, 1998, of the preparatory dossier for restructuring to the Preparatory Comnmittee of thePermanent Interministerial Committee on Public Enterprises (CIPEP). During this initial period,the Government will determine which elements of ONCF's present assets and liabilities will betransferred to the joint stock company. This will make it possible to eliminate from the initialbalance sheet those elements that could compromise the financial viability of the new rail transportcompany and to ensure that appropriate action is taken in light of the restructuring dossier topermit preparation in good time of the text of the law repealing the law instituting ONCF and togovern the company that will take ONCF's place. Subsequently, the Government will take thenecessary steps to ensure that said draft law will be adopted by the Government no later thanDecember 31, 1999.
9. The new regulatory framework for rail transport activity will be defined by a new set ofspecifications that will be based on standard models submitted by the Bank and concerning whichthe Government has given its agreement in principle (Appendix 3).
D. Reorganization of the ONCf Staff Pension System
10. The pension service for ONCF's permanent staff is managed by an internal fund which iscurrently operating at a very considerable deficit. It is expected that the ONCF subsidy needed tocover this financial deficit would rise from DH 100 million in 1996 to over DH 460 million by2015. The equilibrium rate of the ONCF pension system will move from 42 percent of the wagebill in 1996 to nearly 80 percent in 2007 and almost 110 percent by 2015. A reliable andpermanent solution has to be found for financing this deficit. A specific study of the ONCFsystem will be made in accordance with the conditions set out in Appendix 4.
11. ONCF's financing requirement up to the year 2000 is covered under the terms andconditions of the Government-ONCF Performance Contract for the period 1996-2000. Prior tothe formation of the joint stock company, mechanisms for funding the pension fund's deficit willhave to be put in place by the Government. It must be emphasized that conversion of ONCF intoa joint stock company cannot be considered without an adequate solution of the pension question.
ANNEX 13Page 4 of 9
E. Reorganization of the Institutional Framework: Stage II: Development of thePrivate Sector
12. Following the conversion of ONCF into a joint stock company, the Government will,based on future options, initiate a study to analyze and develop in depth the most appropriateapproach for ensuring, in the medium term, the active participation of the private sector in railtransport activity:
13. This study will also establish a plan of action and a schedule for implementing the optionor options ultimately adopted by the Government. The terms of reference for this study will firstbe drafted in conjunction with the Bank. The report resulting from the study will also bediscussed with the Bank.
Please accept, Mr. President, the expression of our highest consideration.
FOR THE KINGDOM OF MOROCCO
Essaid AmeskaneMIinister of Transport
ANNEX 13Page 5 of 9
Appendix 1
LEGAL FRAMEWORK WITHIN WHICH ONCF CURRENTLY OPERATES
ONCF, established by Dahir No. 1-63-225 of August 6, 1963, as amended by Dahir No.1-70-18 of July 25, 1970, has the legal status of an 'E.P.I.C." (Etablissement Public a CaractereIndustrel et Commercial, Industrial and Commercial Public Institution) and therefore possessescivil personality and financial autonomy. A set of Specifications approved by Royal Decree No.23-67 of April 25, 1967 defines the conditions under which ONCF will manage and operate therail system.
In virtue of its E.P.I.C. status, ONCF is subject to Government financial control under theprovisions of Dahir No. 1-59-271 of April 14, 1960, as amended by Dahir No. 1-61-402 of June30, 1962, organizing the Government's financial control over the offices, public establishmentsand concession-holding companies, and other companies and organizations, benefiting fromfinancial assistance from the Government or public authorities or agencies.
ANNEX 13Page 6 of 9
Appendix 2
MAIN RECOVERY MEASURES TAKEN BY ONCF SINCE MID-1994
Cost reduction measures:
No recourse to temporary labor (about 5,000 at beginning of 1994);
No replacement of retirees;
* Rationalization of costs in respect of permanent staff;
Elimination of staff benefits in kind (official cars, telephone, water and electricityexpenses, etc.);
Strict control of travel expenses and overtime;
Implementation of new infrastructure and equipment maintenance methods;
Reduction of level of stocks and rationalization of their management;
Rationalization of overhead expenses.
Application of these measures reduced operating costs by about 20 percent in 1995 comparedwith 1994.
Rationalization of rail services:
Reorganization of passenger services, with elimination of very lightly used services(resulting in roughly a 25 percent reduction in total passenger services, entailing a declineof no more than around 1 percent in revenue) and adjustment of train make-up on thebasis of demand;
* Elimination of 30 percent of passenger train stops;
Closing of certain stations no longer used for traffic purposes.
Commercial actions:
Signature of an addendum to the contract with the Office Cherifien des Phosphates(OCP) for phosphate hauling with adjustment of the base tariffs;
Seven percent increase in base freight and passenger tariffs in August 1994;
ANNEX 13Page 7 of 9
Introduction of a new commercial strategy aimed primarily at alignment of the passengerand freight transport plans to demand, and adjustment of tariffs in accordance with costsand competition.
Financial restructuring:
Signature of a financial protocol with the Government for the period 1994/98(capitalization of a part of the debt due, annual capital contribution of DH 700 million asof 1995);
Improvement of cash management (payment of suppliers).
Organization and management systems:
* Implementation as of August 1995 of a new organization that will promote greatereconomic and financial efficiency and reduce operating costs.
Investment program:
* Reexamination and reduction by about 40 percent of the previous medium-terminvestment program, assigning priority to infrastructure and equipment rehabilitation.
Transfer of activities to the private sector:
Implementation of hotel divestiture policy;
Sale to the private sector of two hotels of the Transatlantique chain (Essaouira, Meknes)owned by ONCF and closing of the Terminus Hotel in Oujda and of the Transatlantique inCasablanca;
Publication of a call for bids for sale to the private sector of ONCF's railroad tiesmanufacturing works in Casablanca;
Publication of a call for bids for privatization of the food and beverage services in stationsand passenger trains;
Publication of a call for bids for sale to the private sector of the ballast pits operated byONCF or its branches;
* Preparation of a dossier for possible operation on a concession basis of the newTaourirt/Nador line.
ANNEX 13Page 8 of 9
Appendix 3
SPECIMEN DOCUMENTS FOR THE REFORMOF THE RAILWAY INSTITUTIONAL FRAMEWORK
"Cahier des charges de la Socete de Chemins de Fer (Version 3-11 Mai 1995)"
"Convention pour I 'Exploitation d 'une Desserte Ferroviaire Voyageurs ta titred'Obligation de Service Public (Version 1-5 Janvier 1996) ".
ANNEX 13Page 9 of 9
Appendix 4
THE PENSION SYSTEM
1. The ONCF Pension Fund is an internal fund that manages the pension service forpermanent staff. It operates in accordance with the rules broadly applied in the civil pensionsystems managed by the CMR (Caisse marocaine de retraite, the national retirement fund). It isbased on an assessment system without any technical provisions to guarantee the acquired rightsof both retirees and those still in employment.
2. The income generated by the Fund already falls far short of requirements. Owing todeterioration of the demographic ratio and a considerable increase in pension amounts payable in1990, the balancing subsidy paid by ONCF on top of employee contributions is already very high.It is expected to amount to DH 100 million in 1996 and to exceed DH 460 million by 2015. Theoverall equilibrium rate is equal to 42 percent of the wage bill (7 percent employee contribution,14 percent employer contribution, and 21 percent subsidy) and would reach 80 percent in 2007and 110 percent in 2015. The cost of pensions is going to rise very sharply in the near future dueto the quickening pace of early retirements.
3. The high cost of pensions is the result of the existing very generous arrangements. Theserules set the normal retirement age at 55 years (50 years for drivers, as compared with 60 yearsfor pension schemes managed by the CMR), offer proportional early retirement after 21 yearsservice, an annual contribution rate of 2.5 percent, a high reference wage, wage-based indexing,and supplementary allowances and reversion of pension rights for family members. Theseprovisions are very costly and would be hard to retain with a capitalization system. (They wouldrequire an annual contribution rate of almost 50 percent with a real financial yield of 0 percent.)However, they are quite unaffordable for an assessment-based pension system.
4. Funding of ONCF pensions without any change in the current rules represents a hugechallenge for the Moroccan authorities. A permanent and reliable solution will therefore have tobe found. The repercussions on the pension systems of other public establishments and on theGovernment budget would be examined in the context of a global study that the Government is infact planning to launch.
5. In the intermediate future, a specific study of the ONCF pension system will be made incoordination with the possible study referred to in Paragraph 4. An actuarial and financial studywill be made of the ONCF system covering the period up to the year 2025, and will review itsmanagement and funding. This study should be started in the context of the preparation of thedossier referred to in Paragraph 10 of this letter. The intention would be for it to be completedbefore December 31, 1997, and its recommendations should be specified in a plan of actiondefining the steps to be taken to restructure the ONCF pension system that will be implementedupon the formation of the limited liability company that would take the place of ONCF. This planof action will be prepared and submitted to IBRD, for its opinion, prior to October 31, 1998.
ANNEX 14
SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE
ONCF
Etudes de rentabilite financiere: Axe Rabat - Sidi Kacem
Etudes de rentabilite financiere: Axe Sidi Kacem - Fes
Etudes de rentabilite financiere Axe Fes - Oujda
Etudes de rentabilite financiere Axe Casablanca - Marrakech
Etudes de rentabilite financiere: Acquisition de 7 locomotives electriques
Etudes de rentabilite financiere: Acquisition de 100 wagons
Etude de rentabilite financiere du programme d'investissement (Mai 1996)
Etudes de rentabilite economique: Axe Rabat - Sidi Kacem
Etudes de rentabilite economique: Axe Sidi Kacem - Fes
Etudes de rentabilite economique: Axe Fes - Oujda
Etudes de rentabilite economique: Axe Casablanca - Marrakech
Etudes de rentabilit6 economique: Acquisition de 7 locomotives 6lectriques
Etudes de rentabilite econonique - Hypothese du scenario: Acquisition de 7 locomotives6lectriques - sans le gain sur la fiabilite
- sans le gain lie a la disponibilite
Etudes de rentabilite economique: Acquisition de 100 wagons divers
Etudes de rentabilite conomique: Etudes de sensibilite
SYSTRA SOFRETU-SOFERAIL
"Etude des perspectives d'avenir du systeme de retraite des agents ONCF". February1996. Jean-Pierre ODDOU
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