Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 6022-A

STAFF APPRAISAL REPORT

NALAWI

NORTHERN TRANSPORT CORRIDOR PROJECT

January 27, 1988

Southern Africa DepartmentInfrastructure Operations Division

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CURRENCY EQUIVALENTS

Currency Units Malawi Kwacha (MK) and TambalaUS$1.00 - MK 2.3MK 1.00 a 100 Taibalas

WEIGHTS AND MEASURES

1 foot (ft) - 0.305 meters (m)1 mile (mi) - 1.609 kilometers (km)1 square mile (ml2) = 2.590 square kilometers (km2)1 ton (t) - 0.907 metric tons (m ton)

GLOSSARY OF ABBREVIATIONS

AfDB - Airican Development BankAfDF - African Development FundDRIMP - District Roads Improvement and Maintenance ProgramEDF - European Development FundEPDD = Economic Planning and Development Department

(Office of the President and Cabinet)ERR = Economic Rate of ReturnFRR = Financial Rate of ReturnKfW = Kreditanstalt fur WiederaufbauLS = Lake Service (Malawi Railways)MCC - Malawi Cargo CenterMR = Malawi RailwaysMRHC = Malawi Railways Holding CompanyMTC - Ministry of Transport and CommunicationsMWS = Ministry of Works and SuppliesNTC = Northern Transport CorridorODA - Overseas Development Administration (UK)OPC - Office of the President and CabinetPCR = Project Completion ReportPPAR - Project Performance and Audit ReportRSA = Republic of South AfricaSADCC = Southern African Development Coordination ConferenceTANZAM - Tanzania-Zambia HighwayTAZARA - Tanzania-Zambia Railway AuthorityTEU = Twenty Foot Equivalent Unit (Containers)THA = Tanzania Harbours AuthorityTPU = Transport Planning UnitUSAID - United States Agency for International DevelopmentVOC - Vehicle Operating-Costsvpd = Vehicles per day

Government of Malawi

Fiscal Year

April 1 - March 31

]FOR Off CWAL USE ONLYHAIAWI

Northern Transogrt Corridor Proiect

Staff Asraisal Report

Table of Contents

Credit and Project Summary ....... (i)-(ii)

I. The Transport Sector -...... 1

A. Transport and the General Economy. ..... . 1B. The Transport System - 2C. Transport Policy and Coordination 6D. Previous Bank Group Involvement in the Sector. 8E. Rationale for Bank Group Involvement. 10

II. Transport Routes Between Malawi and Indian Ocean Ports ... 11

A. Existing Transport Routes .................... 11B. Transport Costs on Alternative Routes . ....... 12C. Commodity Flows on Alternative Routes . ... 14D. Need for Improvement of NTC ... 15............... 15E. Future of the Alternative Routes through Mozambique and

south Afrioa .*.... ....... *..... 16

III The Project 8........ 18

A. Objectives ....................... iB. Project Scope ............... .... ..... ...... 18C. Detailed Project Description ............ 200. Financing , ..... ooe .... . 26E. Implementation and Procurement ........ *.............. 28F. Disbursements ..... ., ....... *........ 30G. Accounting, Auditing and Reporting Requirements ...... 32H. Environmental Impact .. ............. 32I. Resettlement of Squatters ............. *.. 32

IV. Financial Evaluation . 34

A. MR ...... *4.o..... ....... s .... 34B. LS ................... .... 36

V. Economic Evaluation ....... 52

A. Evaluation of Project Overall .................... 32B. NTC Traffic Forecast . ... .... .* .. ......... .... 53C. Economic Analysis ............................. 53D. Sensitivity analysis .............. ............. 63E. Risks ... .. ................... so ....... ... 64

VI. Agreements Reached and Recommendations .. * ......... 65

This document has a stice ditbuton and may be usd by rcipints ony i the perfomfanceof thir okcal duties Its contns may no oterwie be Sdbckosd without Wodd anBk au'fmftbon.

ANNEXES

1. Transport-Related Bank Group Projects in Halawi2. LS: Assumptions Used in Financial Projections2. Chart 1 1.s Estimated 1985186 Traffic and Traffic Pattern2. Table 1 LS: Historic Financial Performance2. Table 2 LSt Projected Financial Performance Without Project2. Table 3 1St Projected Financial Performance With Project2. Table 4 LS: Forcast Cash Flow With Project3a. MCCs: Breakeven Analysis3b. MCCss Operating Costs3c. MCCs: Projected Financial Performance3d. MCCss Projected Fuel Handling Costs3e. MRHC: Projected Financial Performance4. Related Documents and Data Available in Project File5. Economic Analysis: Benefit/Cost Tables for Particular Components of

NTC Project

Charts

1. Target Project Implementation Schedule

%aRs

IBRD 19421 - Northern Transport Corridor Project - International TransportRoutes

IBRD 19422 - Northern Transport Corridor Project - Project Components

This report is based on the findings of a Bank mission which visited Malawiin October 1985, comprising Messrs. Motoo Konishi (Economist and missionleader), Kek Chung (Port Operations Specialist), Yusupha Crookes (FinancialAnalyst), Preben Jensen (Higbway Engineer) and Kenneth Clare (Economist(consultant)). Mesdames. Marie-Martha Jerome and Bernadette De Souzaassisted in processing this report.

MALAWI

NORTHERN TRANSPORT CORRIDOR PROJECT

CREDIT AND PROJECT SUMHNRY

Borrowers Republic of Malawi

Executina Asencv: Ministry of Transport and Comunuications, Ministryof Works and Supplies, and malwi Railways

Amounts SDR 11.1 million (3$13.4 million equivalent)

Termas Standard IDA Terms

Proiect Descriptions The main objective of the project is to provide ashorter and cost effective route to the sea forMalawian Imports and exports by Improving theNorthern Transport Corridor (NTC) leading fromsouthern Malawi to the port of Dar es Salaam. Theproject would also facilitate the expansion ofregional trade, principally between Malawi andTanzania and help develop Malawi's northernregion. The project includes improvement and.ehabilitation of roads in Malawi and Tanzania;construction of dry-cargo and fuel storagetransshipment facilities in Dar es Salaam andMbeya in Tanzaniat provision of fuel tank wagonsand tank containers to be used by TAZARA railway;improvement of shipping services on Lake Malawi;construction of a border post and weighing stationon the Malawi-Tansania border; and relatedconsultancies and technical assistance. Theproject would benefit the entire population ofMalwi through lower prices on a wide variety ofImported products and through increased exportsbrought about by more competitive export prices.

Risks: Possible risks includes (i) transit delays due topossible procedural or other disagreements betweenthe two countries; and (ii) reduction in trafficvolume on NTC due to earlier than anticipatedopening of traditional routes to the sea. Therisk of transit delays has been minimized througha bilateral transit agreement between the twocountries, covering transit procedures (signed onAugust 15, 1987). In terms of the impact ofearlier opening of the traditional routes, NTCwill continue to remain cost competitive andeconomically viablo for import and export trafficfor the northern and central regions of Malawi.

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Estimated Cost: Local Foreltn TotalUS$ Milion

Road Construction- 7.1 32.9 40.0Malawi Cargo Center - 16.6 16.6Fuel Handling Facilities - 7.3 7.3Fel Tank Containers & Wagons - 1.5 1.5Improvement of Shipping Services

on Lake Malawi 2.7 11.3 14.0Border Post and Weigh Bridges 0.3 0.3 0.6Consulting Services and Technical

Assistance 1.5 7.4 8.9Training - 0.3 0.3

Total Base Costs 11.6 77.6 89.2

Physical Contingencies (102) 1.2 7.6 8.8'Price Contingencies (25Z) 6.0 5.8 11.8

Total Costs 18.8 91.0 109.8

(of which taxes) (1.5) _ (1.5)Total cost net of taxes 17.3 91.0 108.3

Financina Plan:

IDA 2.8 10.6 13.4EDF 6.0 14.0 20.0KfW 3.3 15.6 18.9ODA 0.4 18.9 19.3USAID 3.2 14.8 18.0Goverrment of the Netherlands 0.2 17.1 17.3Government of Malawi 2.9 - 2.9

Total 18.8 91.0 109.8"mom u.

Estimated Disbursement of IDA Credits

IDA FY: 88 89 90 91 92 93 94

Annual 1.6 1.7 3.1 3.2 2.4 1.3 0.1Cumulative 1.6 3.3 6.4 9.6 12.0 13.3 13.4

Economic Rate of Return: 162

Financial Rate of Returns 122 (Malawi Cargo Center)102 (Lake Service)

Staff Appraisal Revort: Report No. 6022-NAI, dated January 27, 1988.

IBRD No. 19421, 19422.

NUALA

Northern Transiort Corridor Proiect

Staff Ab2raisal Rboort

I, The TranaMort Sector

A. Transport and the General Economy

1.01 Males" is a landlocked nation dependent on a number of neighboringcountries f.or access to the sea. Historically, this access has been mainlythrough Mosambique but transport difficulttes in recent years (para. 2.02)have caused Malawi to divert traffic to the much longer and more costlyroutes through other countries of the region. This problem has focussedattention on improving access through a more economical northern transportcorridor (NTC), through Tanzania, with consequent substantial savings intransport cost to Malawi.

1.02 Malawi is a long, narrow country with a land area of about 94,30O)km2 and a lake area of 24,200 km2 (see Map IBRD 19422). The lake on theeastern side of the country, some 600 km long, is important as a means oftransport and has considerable potential for further transport use. A majorescarpment runs th* length of Malawi, separating the lake plain from theplateau to the west; altitudes range from 60 m above sea level in thesouthern Shire Valley to over 2,500 a in the northern plateau. Rainfallaverages between 750 mm and 1,600 mu and Is relatively heavy in the plateauareas.

1.03 Economic development of Nalawi, which has a rapidly growing (2.9Xp.a.) population of 7.15 million, was heavily concentrated, prior to 1970,in the southern part of the country where nearly three-fourths of thepopulation lives. In 1971, the Government announced In a Statement ofDevelopment Policies that high priority vould be given to achieving morebalanceb regional development. To this end, it moved the administrativecapital from Zomba in the south to Lilongwe In the Central Region, and hasundertaken several agricultural projects in the northern half of thecountry, including major projects near Lilongwe, Salima and Karonga andsmaller projects around Kasungu and Mi4mba. The road network Is also beingupgraded in the Central and Northern regions, and further developmwnt inthese areas Is underway and planned. Since almost 90S of the populationlives in rural areas, and agriculture contributes over 90X of Malawi'sexports, rural development is a primary economic and social objective.Notwithstanding the greater regional balance that has been achieved,Blantyre in the Southern Region remains the leading commercial center ofMalawi.

1.04 Gross domestic product increased in real terms at the rate of 6.0%per year over the period 1975-80. In 1980 and 1981 Malawi met with seriousdifficulties due to world economic condition and GDP contracted by 61 overthose two years. Since 1982, recovery has been underway, with growthaveraging 3.21 through 1985. Per capita GNP was an estimated US$170 in1985, and Malawi is classified by the United Nations as one of the leastdeveloped countries of the world.

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B. The Transport System

1.05 The transport system Includes an Infrastructure of about 13,300 kmof roads, 678 km of railway lines, 4 lake harbors and a number of lakelanding points, and 4 commercial airports. In addition, the system includesabout 29,000 road vehicles, 51 locomotives, 906 railway freight wagons andpassenger coaches, 11 lake vessels and a variety of commercial aircraft.The principal features of this system ares a main road network of about2,900 km concentrated-in the south but including an important link to thenorth; the railway which lies entirely in the southern half of the country;lake transport serving mainly as a north-south link; and air transporthandling principally domestic and regional passenger traffic. Road haulagedominates internal transport. The railway, until recent yearst, carriedsubstantial amounts of export-import traffic between various Malawi pointsand two Hosambique border transfer stations; this traffic has voaished,however, because of closure of the Mosambique rail lines linked to theMalawi railway. As a result of this disruption, Malawi's external tradesince mid-1985 has moved on other routes, particularly through Zambia,Zimbabwe and the Republic of South Africa (RSA) (IBRD Map 19421).

Highway and Road Transport

1.06 The 13,300 km classified road network consists of 2,520 km ofpaved roads (192) and 390 km of engineered gravel roads (32); the rest areearth roads and tracks. In addition, there are about 2,000 km of as yetunclassified feeder and crop extraction roads constructed to minimum all-weather standard under agricultural development projects and an undeterminedlength of additional unclassified earth roads and tracks in forestryplantations and reserves and in national parks. Road density is about 141km per 1,000 sq km or 2 km per 1,000 inhabitants which is above average forEast African tountries. The coverage is adequate for the country's presentneeds, but road standards and conditions are not satisfactory. Althoughsome improvements have been made, principally by upgrading roads to pavedqtandard (712 increase in kilometers during 1975-84), low standard roadspitvail, resulting in high transport costs. About 852 of tho paved andimproved roads are located in the southern half of the country, reflectingthe general pattern of regional imbalance in population and economicactivity.

1.07 The principal cities sad towns are connected by main roads andabout three-fourths of these roads are paved. During recent years,construction of paved roads has concentrated on the 1,100 km north-southspine road, the most important road in Malawi, running from Bangula In thedeep south via Blantyre and Lilongwe to Karonga in the far north. The onlyremaining unpaved section is that between Champhoyo and Mbowe (50 km) whichis scheduled for completion by 1989 based on financing from the AfriceanDevelopment Bank (LfDB). Government is also undertaking rehabilitation ofother roads under the Bank's Fifth Highway Project (Loan 2363/Credits 1423and SF-6-MAI). Further road rehabilitation is included in the presentproject with work specified for the Balaka-Salima road, an important linkbetween the Blantyre area and the principal lake port of Chipoka.

1.08 The completion of the north-south spine road, which has been thecenterpiece of the Government's paved roads program, will mark a beginning

of a new strategy of expanding its paved roads network. The new paved roadsconstruction program for 1988189 being considered by the Governmentindicates the strategy will be to upgrade roads which run parallel to thenorth-south spine road and also to begin constructing east-west linkscutting across the country. The basic trade movement continues to be north-south, with relatively riinor east-west traffic movement much of whichconnects with the splne road or moves to Nchinji or Nwansa, the main outletsto Zambis and Mosambique. Each new construction project will need to beevaluated on its own-merit, but given the expected completion of the north-south spine road, new policy direction as well as a standard method ofprioritizing various investments will need to be developed. The Associationis assisting the Government in this regard through the preparation of aproposed First Infrastructure Project. Apart from the new constructionprogram, the Government will also continue its paved and unpaved roadsrehabilitation program with a view to eliminating the backlog ofrehabilitation works required on its network. Periodic and routinemaintenance programs are executed in a systematic and timely manner, and thequality of the work is good.

1.09 The road vehicle fleet in 1984, excluding motorcycles, totalled28,568 or 4 vehl-les per 1,000 inhabitants, above average for East Africa.The fleet includes 10,673 goods vehicles, 14,431 passenger cars, 1,067 busesand 2,397 other vehicles. More than two-thirds of the goods vehicles haveless than a 3-ton carrying capacity. Only 32 of the goods vehicles, mainlyowned by companies involved in international movement of freight, have morethan a 10-ton capacity and truck-trailer combinations are common on the mainroutes. The great majority of trucks are owned by various private (75percent of fleet) and public agencies (18 percent of fleet) for transport oftheir own goods. Among transport companies hiring out their trucks, about470 companies operate an aggregate fleet of some 1,400 trucks of 3-ton ormore capacity. More than 602 of these trucks are owned by small operators,and 341 by 9 large operators with over 30 vehicles each. The average sizeof the for-hiro fleet operated by small companies is 3 vehicles with anaverage capacity of 7 tons, compared to 9 tons operated by large companies.In addition to domestic truck operators there are a considerable number offoreign operators transporting freight between centers within Malawiparticularly Blantyre and Lilongwe, on the one hand and foreign points suchas Lusaka, Harare, Durban and Dar es Salaam, on the other hand.

Railways

1.10 The main railway line extends from the southern border northwardthrough Blantyr- to Lake Malawi and then westward through Lilongwe to theZambian border. At the soutiarn border this line is linked to theMozambique rail line serving the port of Beira. An extension of the Malawirailway to the eastern border is connected to the Mozambique rail lineserving the port of Nacala. Rehabilitation of the southern part of theMalawi railway has been underway during the last several years with 8ritishaid and is expected to be completed in 1988. The 1979 extension westwardfrom Salima to the Zambian border (210 km), financed by a grant from theCanadian Government, will soon be furthor extonded to Chipata in Zambia(about 25 km). Linking Malawi railway with the Zambian railway system wouldrequire a costly construction of 390 km of track and such a project isunlikely in the foreseeable future.

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1.11 The railway's rolling stock, which in 1984 comprised 51locomotives, 752 freight wagons and 79 tank wagons, handled a highproportion of MC -St's exports and imports until recent years; this Includednearly all of Malawi's Imports of o4troleum products. Traffic carried onthe railway In 1984 amounted to sbout 586 thousand tons of freight or about121 million ton-km. Ralilway freight traffic in 1984 was only half the levelof 1980. This sharp traffic decline Is explained largely by the drop inexports and imports handled by Malawi Railways (MR) between points in Malawiand the Mozambique border as performance on the Mo2ambique rail linesdeteriorated. In contrast to freight traffic trends, the number ofpassengers carried on the railway increased to 1.6 million in 1984, thehighest level ever attained. Until 1982, railway operations earned a modestsurplus but incurred sizeable losses in the years 1983-1986, due mainly tothe closure of Mozambique lines leading to ports of Beira and Nacala.

Lake Transport

1.12 Relatively little has been done thus far to realize the largepotential of Lake Malawi as a means of transport. Freight and passtngertransport on Lake Malawi is provided by a division of MR, Lake Service (LS).The system includes not only a fleet of vessels but also a complex of 21ports and landing points. Chipoka port is the only one served by therailway; the ports of Chilumba, Nkhata Bay and Monkey Bay are served by mainroads. Construction of a new jetty at Dwangwa was begun in 1984, primarilyfor sugar shipments. The lake vessel fleet consists of 3 passenger/cargoships, 3 cargo ships, 1 fuel tanker, 1 container pontoon, 1 oil pontoon, 4barges and 5 tugs; among these, the vessel with the largest cargo-carryingcapacity is the 600 ton container pontoon. For ship repair, LS has amaintenance facility at Monkey Bay which includes a slipway, floating drydock and pontoon jetty.

1.13 Freight traffic on the lake, as shown in Table 1.1, has fluctuatedwidely in recent years but reached 39,100 tons or 13.1 million ton-km in1984. In the same year, 188,400 passengers were transported by LS, a 42%increase over the 1977 level. Freight revenues have historically exceededfreight operating costs but passenger service has shown heavy losses overthe years because of extremely low passenger fareL.

Table 1.1 LS Traffic. 1977-1984('000 tons)

1977 1978 1979 1980 1981 1982 1983 1984

Freighttons (000) 40 34 35 31 29 37 28 39ton-km (000,000) 14 12 12 11 10 13 9 13

Passengers (000) 132 111 105 105 133 *70 198 188

1.14 The composition of freight traffic on the lake has varied widelyfrom year to year but during the past few years the principal commoditieshave been fertilizer, fuel and maize which together have accounted for

three4-ourths of the tonnag. Cement snd ri,a are other notable trafficitems. Fuel and fertilizer move northward from Cnipoka principally toNkhata Bay and Chilamba while maixe and rice are trassported in the opposite4irection. Traffic Imbalances are significant between the two principallake ports with heavier southbound than northbound traffic. Fuel istransported in bulk while dry cargo is shipped largely as breakbulk. Acontainer service was Initiated in 1985 for NTC traffic.

1.15 Lake vessels are operated at speeds of 6 to 11 knots and since thedistance between Chipoka and Chilumba Is about 400 km, it would takeapproximately 30 hours sailing time for a cargo vessel to make a one-waytrip. However, under present operations the vessels usually make calls atIntermediate ports thus incroasing the total time for a trip between themajor ports. Vessels are available for service about 330 days per year andship maintenance, mainly done at Monkey Bay, requires 35 days per year.Port operations as well as vessel operations are the responsibility of LS.Fteight service is reasonably reliable and the rates for such services,Including transshipment charges in the ports, are significantly lower thanrates for competitive road transport services (pars. 5.28).

Air Transport

1.16 Within Malawi, air transport accounts for far less passenger orfreight traffic than road, rail or lake transport but it nonetheless makes asignificant contribution to the economy, particularly in passenger movementwhere travel time savings are important. Of the four azports withscheduled services, Lilongwe handled the greater amount of traffic, followedby Blantyre, Msuzu and Karonga. Lilongwe airport, completed in 1983, iscapable of handling long-range wide-body aircraft. In 1984, Lilongweairport accounted for 62Z of the 339,218 total passengers handled at allMalawi airports while Blantyre airport handled only 33Z of the total. AirMalawi, a Government-owned airline, provides some of the internationalservices and all scheduled domestic services. Several foreign airlines alsoprovide international services, and one local company and Air Malawi furnishunscheduled domestic services.

1.17 Air Malawi's total passengers carried in 1984 of 127,541 was 392higher than the 1978 level. Air freight increased more rapidly thanpassenger traffic in this perlod because of the disruption of Malawi'straditional transport routes through Mozambiqute rail lines and ports anddifficulties encountered in using alternative road and rail ro-xtes. Despitethese traffic increases, however, Air Malawi has shown heavy losses duringrecent years, with the exceptions of 1981 and 1982.

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Tablo 1.2 AIr Malawi Performance 1978-1984('000)

1978 1979 1980 1981 1982 1983 1984

Passenter Passengors 91.6 91.7 94.3 106.6 130.1 96.9 127.5Pass-Km 68,743 57,910 57,520 68,830 95,796 59,533 77,866

Freitht tons 1.4 1.1 1.2 1.4 1.6 1.1 2.3ton-km 1,349 829 1,058 1,248 1,008 723 1,067

Net Operating Income(MK) (2,757) (3,754) (1,647) 1,313 545 (3,885) (2,413)

C. TransDort Policy and Coordination

2.18 Nalawi's transport policy has had three broad alms (a) toImprove the administrative, social and economic integration of the countryby linking Its three regions with reliable all-weather connections; (b) tosupport rural development by improving access to rural are-s; and (c) toprovide efficient links with external transport routes to Indian Oceanseaports for exports and Imports. Substantial progress has been made towardthe first two of these objectives. In the case of (c), however, greatdifficulties have been experienced because of serious disruptions in trafficflow on Nozambique rail lines (see para. 2.02), problems beyond the controlof the Malawi Government.

1.19 To cope with the transport crisis that arose In 1982-83, theGovernment In 1983 formed the contingency planning unit in the Ministry ofTransport and Comunuications to monitor international transport of Malawi'sexternal trade and to take appropriate steps to expedite the movement ofsuch goods. A specialist, financed by UNDP and the Bank's Fifth HighwayProject, also made recomendations for achieving, over the longer term,lmproved means of transport; one of these recommendations was that the NTCroute be developed. Two other actions taken by the Government aimed atalleviating the transit problem werei (1) engagement of consultants toundertake a transport system study of the Blantyre-Dar es Salaam Corridor;this was completed in July 1985 under financing by the Bank's Fifth HighwayProject; and (2) engagement of consultants to undertake detailed engineeringof the Raronga-Ibanda road link of NTC under EDF financing. MalawiGovernment officials have worked closely with officials of transitcountries, transport companies, shippers and Importers In a continuingprogram to expedite, on a current basis, the movement of Nalawi's transittraffic and to Improve, over the longer term, vital access routes. Thesuccess of the Government's efforts are reflected in the speed with whichthe disruptive shortages of key Imports were reduced; the success inlowering transport costs on the southern route to Durban (South Africa); andthe effectiveness of a monitoring and enforcement mechanism In maximizingthe load factors (i.e. ensuring return loads) on trucks moving goods in andout of the country. Additionally, the Governmnt has been successful inpreparing the Investments necessary in developing NTC to the Port of Dar esSalaam with the full cooperation of the Tanxanian Government (pars. 2. 10).

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1.20 Goveroment's overall sector priorities art given in lts Statementof Development Policies, 1971-1980', and are specified in more detail in a3-year rolling public sector Investment program which is revised annuallyduring budget preparation. The program for the fiscal years 1986-1988, asshown in Table 1.3, indicates that transport in this period will represent19S to 302 of total Investments and that road investments Will constituteabout three-fourths of the total investments in the sector.

Table 1,3 Public Investment Proiram inThe Transpott Sector 1986-1988

(MK millions)

Financial year 1985186 1986187 1987188

Roads 37.2 38.0 32.6Railways and Lake 3.3 4.8 7.4Aviation 2.2 0.9 0.0General 6.1 6-5 5.2

Total transport 48.8 50.2 45.2

Investment in all Sectors 161.9 22240 232.1

' of Total InvestmentRepresented by Transport 30 23 19

Source: Halawi Ministrt of Finance Public Sector Investment Prosram. 1985

Actual public investments in the transport sector, shown In Table 1.4, havorecently been relatively low as indicated by the figures for the fiscalyears 1983184 and 1984/85 compared with data for either earlier years or theprogram for 1986-1988. This represents a reasonable shift of investmentfunds to productive sectors of the economy. The amounts Invested in roadshave risen modestly and have been more stable than those for othersubsectors.

Table 1.4 Public Investment in the Transport Sector. 1979-1984(MK million)

Financial year: 1979/80 1980/81 1981/82 1982/83 1983/84 1984185

Roads 25.6 17.4 20.0 28.1 26.2 noa.Railways and Lake 17.1 11.5 14.9 3.3 2.1 n.a.Aviation 16.3 11t3 31.7 16.3 5.3 n.a.

Total transport 59.0 41.2 66.6 47.7 33.6 37.8

Investment in all Sectors 113.5 127.9 174.9 124.2 139.6 146.0

S of Total InvestmentRepresented by Transport 52 32 38 38 24 26

Source: Economic Recovery: Resource and Policy Needs. July 1985

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1.21 Coordination of transport investment plans is the responsibilityof the Transport Planning Unit (TPU) of the Economic Planning andDevelopment Department (EPDD) of the Office of the President and Cabinet(OPC), which reviews proposals put forth by the Ministry of Works andSupplies (MWS) for roads and by the Ministry of Transport and Communications(MTC) for other modes. The transport planning and coordination capabilityhas been strengthened by technical assistance financed under the Fourth(Credit 1099-MAI) and Fifth Highway projects. The credit agreement underthe proposed project contains a covenant requiring that, the Government willconsult with the Association prior to undertaking any new investments in itstransport sector (pars. 6.01(a)).

D. Previous Bank Group Involvement in the Sector

1.22 The Bank Group has been involved in Malavi's transport sectorsince 1966 when Credit S-2-MAI was approved to help finance detailedengineering of the Zomba-Lilongwe road (290 km). This was followed by theFirst Highway Project (Credit 112-MAI, 1968, US$11.5 million) comprising thereccnstruction and bituminous paving of that road, the refinancing of CreditS-2-MAI, and a conrultants' study of road transport licensing regulationsand road-rail coordination. A Project Performance Audit Report (PPAR) ofthe project (No. 946, December 15, 1975) concluded that all of the project'sobjectives were achieved. Construction costs were within appraisalestimates, although the road was completed about one year behind schedule.l/Traffic was greater than projected at appraisal, and the rate of return wasconservatively reevaluated at 13S, compared with the appraisal estimate of122. The consultant's study recomiaended deregulating road transport,raising axle load limits to 9 tons, improving trassport statistics, andrelating rail tariffs more closely to economic factors, all of which havebeen Implemented, although there Is scope for further refinement of railtariffs. The study expressed misgivings about planned rail projects, butGovernment did not share IDA's reservations and proceeded with theseInvestments. Both the consultants' study and the PPAR agreed that thecountry mignt soon have an oversupply of transport services in the Blantyre-Lilongwe-Zambian border corridor. The major recommendations of the PPARcalled for closer project supervision by IDA staff and rectifying thenegleet of lower class roads--although the PPAR did not question thecomposition of the First Highway Project, noting that the "Zomba-Lilongweroad ... is undoubtedly the most important highway in Malawi.' Both of therecommendations made In the PPAR were addressed under the Second, Third,Fourth and Fifth Highway Projects and in the agricultural projects financedby the Bank Group.

1.23 The Second Highway Project (Credit 523-HAI, 1974, US$10.0 million)originally comprised construction of the Lilongwe-Kasungu road (113 km) anda pilot scheme for the improvement and maintenance of district roads servingrural development in the Kasungu District. Both components have beencompleted; the construction in March 1978, a few months behind schedule, andthe pilot scheme in September 1978. Substantial cost savings were made onthe construction component which were used to finance completion of the

11 The first contractor selected for the Zomba-Lilongwe road sectionperformed unsatisfactorily and had to be replaced, leading to the delayIn completion.

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pilot scheme in the Kasungu district and extension of the scheme to threeother districts, following the recommendations of a consultants' study whichevaluated the results of the pilot program. The four districts made up thefirst phase of a District Roads Improvement and Maintenance Program (DRIMP)planned to cover all of Malawil's 24 di;tricts in three phases. This firstphase was completed in September 1981. According to the Project CompletionReport (PCR), the economic rate of return was estimated at 23 percentcompared with 14 percent at appraisal. Both the PCR and PPAR of the project(PPAR No. Sec M84-617, July 6, 1984) found that it was successfullyimplemented.

1.24 The Third Highway Project (Credit 758-MAI, 1977, US$10.5 million)comprised construction of the Kasungu-Janda road (85 km) and a feasibilitystudy and detailed engineering of the Jenda-Mzuzu road. The roadconstruction was completed in October 1980, a few months behind schedule,and the detailed engineering in September 1980. The PCR concluded that thequality of the physical components was satisfactory, but due to the generaldeterioration in Malawi's economy in recent years, the economic rate ofreturn was then (1984) estimated at 8 percent compared with 14 percent atappraisal. However, with the increased traffic generated by linking Malawito the TANZAM corridor, the traffic flows and rate of return are expected toImprove significantly.

1.25 The Fourth Highway Project (Credit 1099-MAI, 1981, SDR 25.9million or about US$33.0 million equivalent) comprised construction of theJenda-Luwawa Turnoff road (32 km), the Mbowe-Mausu-Ekwendeni road (32 km)and spot improvements on the Luwawa Turnoff-Hbowe road (about 100 km), thesecond phase of DRIMP extending the scheme to 10 additional districts, acomprehensive study of Malawi's road maintenance needs, provision of minorroad maintenance equipment, construction of a new training facility for roadpersonnel, technical assistance in transport planning for TPU in EPDD andoverseas training of two of TPU's transport economists. This project wascompleted in 1985. The PCR, completed in March 1987, concluded that theobjectives of the project were largely achieved and the project wassuccessfully implemented.

1.26 The Fifth Highway Project (Credit 1423, November 1983,SDR 12.4 million or US$13.1 million equivalent, and IDA Special Fumd CreditSF-6-MAI of SDR 13.1 million or US$13.8 million equivalent and Loan 2363-MAI, of US$18.0 million equivalent) comprised the third phase of DRIMP,implementation of a four-year maintenance and rehabiliiition program for themain and secondary road networks, construction of a two-lane bituminous-paved road between Luwawa Turnoff and Champhoyo, provision of weighbridgesand vehicles for axle load control, provision of equipment for an MWStraining center and consultant services. Implementation of the project iswell underway and proceeding satisfactorily.

1.27 Finally, transport components have been included in IDA projectsin other sectors (Annex 1). Credit S-17-MAI, 1974, provided US$2.0 millionfor planning and engineering of infrastructure for the proposed Viphyatimber exploitation scheme. In addition, agricultural projects in the LowerShire Valley (Credits 114, 363 and 823-MAI) and the Lilongwe area (Credits113, 244 and 550-MAI) and the more widespread National Rural DevelopmentProject (Credits 857-MAI) have included improvement and construction ofabout 4,000 km of feeder and crop extraction roads, while the Karonga Rural

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Development Project oleo included port improvements at Chilumba and Chipokaon Lake Malawi as moll as procurement of a self-propelled barge for the lakeservice.

1.28 The Bank Group's involvement in the transport sector has beenlargely in the highway subsector although its projects have includedsignificant technical assistance and studios concerned with tho entitesector. Through a series of highway projects the Bank Group has made asubstantial contribution to the strenygthening of local institutions,particularly in NWS, MTC, and EPDD; these efforts have enhancedinstitutional capabilities for effective highway administration andtransport policy formulation. The strategy for highway development followedby MWS over the past several years has been aimed mainly at (i) constructionof a basic road network with particular focus on development of a mainnorth-south road; (ii) improvement and maintenance of district roads; and(iiI) strengthening of maintenance of the main and secondary road system.The Bank's highway projects, from the First through the Fifth, accomplishedmuch with regard to items (i) and (li) and the Fifth Highway Project is alsocontributing significantly to the realization of objective (iii). Theproposed project will contribute primarily to aims (i) and (iii) and inaddition will assist in the development of the lake transport subsector.

E. Rationale for Bank Group Involvement

1.29 Although the proposed project Is justified technically,financially and economically, giving a high rate of return, theAssociation's involvement is mainly justified on: (i) the contribution theproject makes In improving the macro-economic condition of Malawi throughimproving the term of trade of Malawian goods, reducing foreign exchangeoutlay on the transport cost of Importlexport goods, and assisting inkeeping down the domestic cost increases through reducing the cost ofimported materials; (ii) promoting institutional development by improvingthe capacity of the Government and the private sector to manage and operatea new transport corridor; and (iii) contributing to the Government'ssectoral policy objective of promoting greater economic integration of thecountry through development of the northern region (least developed regionin the country) as a major origin and destination for Malawi's importlexporttraffic. Perhaps more important is the contribution the Association hasmLide In developing the concept of NTC as an alternative access to the IndianOcean, as well as coordinating donor participation and assisting theGovernment in preparing a financial package for the project. TheAssociation has assisted the Government from the initial conceptual stage2lthrough the formulation of terms of reference and financing the consultantstudy on NTC, as well as provided continuous analysis of project featuresand participated in numerous discussions and exchanges of ideas on NTC withthe Government. As a consequence, the Association has been requested by theGovernment, as well as by the donors interested in the project, to assistthe Government in managing the final preparations of the project and itsimplementation. The Association's catalytic role in managing andimplementing the project is crucial not only in terms of successfulimplementation of the project but also to ensure maximum Impact of fundsbeing provided by other donors.

21 World Bank 'Transport Bottlenecks In Nalawi's Access to the IndianOcean,' Report No. 5316-MAI, October 31, 1984.

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II. Tressport Routes Between Malawi and Indian Ocean Ports

A. Existing Transport Routes

2.01 The several alternative routes available to Malawi for handlingIts external trade to and from Indian Ocean ports vary greatly in length andreliability (IBRD Map 19421). Table 2.1 summari2es these routes and alsoincludes the two rail lines to Mozambique ports; although these latterroutes are closed as a result of disturbances in Mozambique, they provide animportant reference for comparison with alternatives. Recent trafficdiversion from the Mozambique routes to those serving the distant port of.Durban has not only Increased transport distances dramatically but also hasincreased the number of countries transited and has required the use ofrelatively costly road transport for a part of the through movement.

Table 2.1 Transiort Routes from Blantyre for Malawi's External Trade

Port Key Points Countries LengthServed Mode(s) En Route trasited (km)

Beira Rail MOZ 640Nacala Rail NOZ 815

Durban Rail/Road Tete, Harare MOZ,ZIH,RSA 2,667Durban RaillRoad Lusaka, Harare ZAM,ZIM,RSA 3,467Durban Rail/Road Lusaka, Harare ZAM,ZIM,RSA 3,609Durban Rail/Road Lusaka, Gabarone ZAM,BOT,RSA 3,806Durban Road Lusaka, Harare ZAM,ZDM,RSA 3,500

Dar es Salaam Rail/Road Mbeya TAN 1,770Dar es Salaam Road Hbeya TAN 1,789Dar es Salaam Road Lusaka, Nbeya ZAM,TAN 3,030Dar es Salaam Rail/Road Lusaka, Nbeya ZAM,TAN 3,100

Source: GITEC, Consultants "Transport System Study of the Blantyre - Dar-es-Salaam Corridor", July 1985.

2.02 Until recent years, the rail lines to Beira and Nacala handledover 902 of Malawi's external trade, reflecting the clear advantages ofshort distance, all-rail movement and one-country transit. In the late1970's, frequent interruptions in service developed as a result of equipmentbreakdowns and line failures, partly because of inability to repairequipment and track and partly as a result of repeated attacks by armedbandits. By December 1983, the line to Beira was closed and in July 1985the line to Nacals was closed. The condition of these facilities is nowsuch that even if security were assured, some years would be required tobring them back to their former capacity. Continuing security problem inthe areas transited by these lines make it mpracticable to rehabilitatethem in the foreseeable future. The Harare-BeIra rail line is still inoperation, secured by the Zimbabwean army, but since Zimbabwe traffic haspreference, no Malawi traffic is moving over this line.

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2.03 There are a number of alternative routes for Malawi trafficbetween Malawi and Durban, and over 90Q of the country's external trademoved over these southern routes since 1985. The comparatively short roadroute through the Tete area of Mozambique is presently unsafe because ofactivities by armed bands but is used to a limited extent with armed truckconvoys. All of the other routes to Durban require road transport betweenthe Malawi-Zambia border and Lusaka, and the overall distances range from3,467 to 3,806 km. The length of the principal all-road route is similar tothat of the best roadirail combination route. The choice of specific routefor a particular shipment depends on many considerations such as rates,delivery time, capacity constraints, customs procedures and the like. Alarge number of international truck operators are available to providetransport services on this corridor for the entire route or for some segmentof a combination road-rail route.

2.04 Routes between Halawi and Dar es Salaam represent other optionsfor the movement of Malawi's external trade. Among them are circuitous all-road and road/rail routes via Lusaka. While somewhat shorter than those viaLusaka and Harare to Durban, they are nonetheless more than 3,000 km inlength. Less use has been made of these routes to Dar es Salaam than thoseto Durban because of the greater amount of transport related services on thelatter and greater reliability of transport in the southern corridor.Seeking to shorten the distance to ocean ports, MWS opened a gravel road oflimited capacity in October 1984 between Karonga in Malawi and Ibanda inTanzania, which provided the first significant direct link between theMalawi and Tansania road systems and thus reduced the road link betweenBlantyre and Dar es Salasm to 1,789 km. Moreover, the TAZARA railway cansubstitute advantageously for road transport over about half of thisdistance, that is, between Hbeya and Dar es Salaam. While someinternational traffic moves on the corridor, there are certain physical andinstitutional limitations that cause many Malawian shippers and importers tocontinue using the much longer but more reliable southern routes.

2.05 Among the limitations of NTC is the poor quality of the Karonga-Ibanda gravel road, in part single lane, on which there are Bailey bridgesover two rivers near the international border. Another problem is the lackof efficient transshipment facilities at the Nbeya railway station. Also,there is a need to establish an inland cargo center outside the ort of Dares Salaan to expedite movement of Malawi's transit traffic. Witnin Malawi,lake transport has the potential for carrying substantial exportlimporttraffic at substantially lower cost than road transport but this wouldrequire additional vessel capacity and port handling facilities. Thesevarious requirements will be met by the project.

B. Transport Costs on Alternative Routes

2.06 Comparative transport costs constitute a fundamental considerationin evaluating transport routes. The historic routes to Beira and Nacala, asshown in Table 2.2, reflect the lowest transport cost, among the routesrepresented. Since the Mozambique routes are closed, however, theappropriate comparison in terms of costs is between the southern andnorthern transport corridors. It is evident that NTC representssubstantially lower transport costs than the route to Durban. For importantexport items such as tobacco, tea and sugar, the costs on NTC are half to

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two-thirds of the costs on the southern route. For fertilizer and generalcargo imports, NTC costs are about two thirds those on the southerntransport corridor and the cost advantage for petroleum products is evengreater.

Table 2.2 Transport Costs, by Transport RoutesBetween Blantyre and Ocean Ports

(HK per ton)

Route to Route toDurban Dar es Salaam Route to

Via Lusaka via Karonga BeiraCommodity and Harare and Mbeya or Nacala

Tobacco in container 310 235 90Tea in container 270 210 85Sugar in bags 225 155 60Fertilizer in bags 220 130 35General Cargo in container 275 185 100Diesel 440 200 45Petrol 520 210 75

Source: GITEC, Consultants "Transport System Study of the Blantyre-Dar esSalaam Corridor," July 1985.

2.07 One of the concerns which arose during the preparation of theproject was the capacity of the Dar es Salaam Port and TAZARA to handle theadditional traffic generated by thrwighput of Malawian cargo. In regard tothe capacity of the Dar es Salaam port to handle the transit traffic offalavi, the on-going Bank financed Tanzania Port rehabilitation project(Credit 1536-TA) will increase the effoctive port capacity from 2.2 milliontons currently to 2.4 million in 1988 and 3.2 million tons in 1992 (at 1983berth occupanc rate). Given the forecasted traffic throughput of thecurrent users,_ addition of Halawi traffic (81 of total forecasted portthroughput) will not add significantly to the borth side congestion.Addition of Malawi traffic, however, would materially contribute to thecongestion of the storage area of the port, particularly in the containerstacking area. Significant increase of containerized traffic (802 increasebetween 1988 and 1992) is forecasted for the port of Dar es Salaam. Thecreation of a Malawi Cargo Center (MCC) at Dar es Salaam under this projectwill avoid this potential problem by providing an inland cargo storage andtransshipment facility, dedicated to handle Malawian cargo (see para. 3.07).In regard to the capacity of TAZARA to handle the forecasted Malawiantransit traffic, there are sufficient numbers of general covered wagons andcontainer flats to carry the traffic at normal availability levels. Interms of its locomotive fleet, TAZARA will have enough capacity to carry theMalswian traffic after completing the on-going locomotive rehabilitationprogram. The main concern is whether a satisfactory availability oflocomotives and wagons can be achieved. One of the requirements for NTCtraffic to develop is the confidence of the shippers that a prompt andregular service between Mbeya and Dar es Salaam will be provided by TAZARA.

31 Tanzania, Zambia, Zaire, Burundi and Rwanda.

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A solution which has been devised to circumvent this potential problem is alocomotive and wagon leasing contract to be agreed upon between MCC andTAZARA. This possibility was discussed bet*ewn HR and TAZARA. TAZARA(under a bilateral agreement (para. 2.10)) has a8reed to provide a scheduledshuttle service between Mbeya and Dar es Salasm, dedicated to Malawi transittraffic. Additionally, there is a general shortage of fuel tank wagons onTAZARA and these will need to be procured to transport Malawi fuel.

C. Commodity Flows on Alternative Routes

2.08 The predominance of Mozambique routes in the flow of Malawi'sexportlimport traffic prior to 1983 is shown in Table 2.3. In 1976, therail line to Beira handled two-thirds of the total traffic flow and the lineto Nacala nearly all of the remainder. Traffic on both these routesdeclined sharply in later years; in 1984 only 152 of the traffic movedthrough the Mozambique ports. By mid-1985, none of Malawi's importlexporttraffic was handled through these ports as increasing interruption theMozambique rail lines led to closure. In 1984, nearly two-thirds of theexternal traffic moved over the Mchinji-Lusaka road. Most of the trafficover the Mwanza-Tete-Harare road was transported in convoys with securitypersonnel providing protection. In the first 9 months of 1985, some 15,000tons of traffic moved over NTC which was stimulated by the opening in late1984 of the gravel road link between Karonga and Ibanda.

Table 2.3 Commodity Flows. By Transport Route('000 tons)

1976 1980 1981 1982 1983 1984 1985 11

Malawi-Beira (rail)Imports 322 313 260 193 23 10 21 0Exports 142 198 195 113 19 12 71 0

Malawi-Nacala (rail)Imports 143 147 125 109 129 50 31Exports 53 87 74 56 88 35 7/

Mchinii-Lusaka (road)Imports 8 12 36 42 248 245 189Exports 6 18 11 34 146 198 122

Mwanza-Tete-Harare (rail/road)Imports 7 20 81 73 38 76 160Exports 6 12 12 18 46 70 138

NTC (roadlrail)Imports NA NA NA NA NA 1 7Exports NA NA NA NA NA 1 8

TotalImports 480 493 502 417 437 382 356Exports 208 315 293 222 300 316 268

Note: These tonnages include small amounts of regional trade.11 January through September.21 This traffic moved between Malawi and the Tete area of Mozambique via

Beira.3/ Insignificant.Sources GITEC Consultants 'Transport Systems Study of the Blantyte-Dar esSalaam Corridor," Jul; 1985.

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D. Need for Improvement of NTC

2.09 The transport of Malavi's external trade largely by southernroutes at costs greatly in excess of those on historical routes throughMozambique has had a significant negative impact on Mslawi's exportearnings, import prices, balance of payments and other economic indicators.The total lose to the economy in 1984 was at least US$50 million, or 201 ofthe value of all exports, taking into account direct and indirect costsincluding excess transport costs, procurement of replacement supplies, portstorage charges, interest on tied-up capital and loss and deterioration ofgoods. Prospects for reestablishing the historical pattern of transittraffic through Mozambique in the foreseeable future are not encouraging andtherefore Malawi needs to develop the best possible alternative means ofhandling this traffic. Improvement of NTC represents a significantopportunity to lower transport costs for Malawi's exportlimport trade. Theprincipal deficiencies of NTC are lack of a paved road between Karonga andIbanda, poor surface on some sections of the Ibanda-Uyole road, inadequatetransshipment facilities at the Mbeya rail terminal, inefficient facilitiesin Dar-es-Salaam for transshipment of Malawi cargo between the port andTAZARA railway, limitations in ship and port facilities on Lake Halawi andthe poor condition of a road link on the route between Blantyre and theprincipal lake port of Chipoka. The project is designed to overcome thesevarious deficiencies.

2.10 Apart from the physical improvements required on NTC, the twoGovernments and their related agencies (TAZARA, Tanzania Harbours Authority(THA) and MR) had to agree on the procedures and regulations governing thetransit of Halawian cargo through Tanzania and the operation of varioustransport facilities to be installed on NTC. A bilateral commission, madeup of high level Nalawian and Tanzanian goverrment representatives, hasfinalized a detailed bilateral agreement governing NTC. It includesagreement on documentation and procedures governing the transit traffic,leasing of land for MCC, rates, charges and payment arrangements for variousservices to be provided by TAZARA, THA and MCC, ownership of assets and itsmaintenance, road transport agreement, right of transit, customs control,visa and other privileges and restrictions. The Agreement, in particular,includes protocols on (i) port operations, (1i) MCC and (iii) competentauthorities, as well as annexes on (1) road transport, (Ui) agreementbetween Malawi Railways and TAZARA, and (iiI) Lease Agreement. It should benoted that the road transport agreement which is incorporated as Annex I tothe bilateral agreement was signed by the two Governments on December 4,1984 and has been in effect since. The Association reviewed and commentedon the draft final Agreement and considers it acceptable. The Agreement wassigned by the Minister of Transport and Communications for Malawi and theMinister of Communications and Works for Tanzania on August 15, 1987, andofficially cleared the way for the NTC investments to be made in Tanzania.

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E. Future of the Alternative Routes throuth Mozambigue and South Africa

2.11 Reactivation of the Beira and Nacala railways to carry Malawiantransit traffic is dependent upon the cessation of activities by armed bandsin Mozambique and the capacity of the lines to operate services after manyyears of neglect and heavy damages. The Southern African DevelopmentCoordination Conference (SADCC) has undertaken to formulate a program ofrehabilitating various transport corridors crucial to the IndependentSouthern African countries. Work has already begun In two of the transportcorridors in Nozambiquet the Nacala Cor-idor and the Beira-ZimbabweCorridor. A consortium of French, Canadian, and Portuguese government aidagencies has been formed to finance the rehabilitation of the Nacalarailway. The first phase (rehabilitation of 200 km of rail from Nacala toNampula) which began in mid 1983 is scheduled to be completed in 1987. Theremainder of the rehabilitation works (second phase) is expected to becompleted in 1989, barring any disruptions and delays. The Nacala line,however, has carried a maximum of only 250,000 tons (302) of Malawian cargoin the past. Until other aspects of railway operations are also improved(e.g. maintenance capacity, rehabilitation of rolling stock and locomotives,and manpowerimanagerial capacity) the Nacala transport corridor is notexpected to carry more than a third of the total Malawian importlexporttraffic. The other active rehabilitation program is the Beir, transportcorridor program (to Zimbabwe border). This corridor has been kept open,despite many attempts to disrupt the traffic, by Zimbabwean security forces.USAID and the Zimbabwe Government have begun rehabilitation of certain railsections and replacement of sleepers on this corridor. A large consortiumof donors (World Bank, USAID, EEC, Netherlands and Nordic group) have alsobeen formed to develop a rational investment program to rehabilitate theentire corridor (including Beira port and railway and manpower development).This work, however, will not have much importance for Malawian traffic, dueto the fact that this route will be used predominantly for transport ofZimbabwian import/export traffic. The rehabilitation of Beira rail line toMalawi border has not begun due to the security problems in the area. Theyears of neglected maintenance and exte%sive damage done on this line byarmed bandits preclude the line from regaining its former capacity to carryNalawian traffic until the hostility has completely ceased and extensiverehabilitation work carried out. Based on these circumstances, it wouldtake at least three to five years from cessation of armed activities inNozambique for Malawi to return to its traditional pattern of using theBeira and Nacala corridors.

2.12 Another possible complication for Malawi's future access to thesea is the possibility that the southern route to Durban will also be closedto transit traffic. In a reaction to the international community's call forsanctions, RSA has already begun limiting the access of neighboring land-locked countries to its transport system and outlet to the sea. Completeclosure of the border is an eventuality which Malawi, as well as theneighboring land-locked countries, may face. The affected countries(namely, Zimbabwe, Zambia, Botswana, Swaziland and Nalawi) have begun makingcontingency plans against such eventuality. The four main alternativeroutes for these land-locked countries are through the ports of Maputo,Beira and Nacala in Mozambique, and the port of Dar es Salaam in Tanzania.However, only the two transport corridors to the ports of Dar es Salsam andBeira (from Zimbabwe) are currently open to traffic, and the other corridorsin Mozambique are closed due to armed bandit activities in the area.

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2.13 Closure of the South African transit routes will force nearly 3million tons of international transit traffic to be diverted to these twoports, resulting in an unmanageable excess demand on the transit facilities;the main constraints will be in the port capacities. In the port of Dar esSalaam, significant congestion will be encountered until the end of 1989when the on-going port improvement project (Cr. 1536-TA) will be completed.In the port of Beira, apart from the security problem surrounding thecorridor, the proposed port rehabilitation project (scheduled to begin in1988), will reduce the port throughput capacity by half until its completionin 1990. The net Impact of the two ,ort improvement works is that duringthe period between 1987 and 1991, demand for transport services willsubstantially exceed supply if transport routes through RSA were closed.This in turn may significantly reduce the trade acetivities of theindependent Southern African countries.

2.14 In regard to the impact of such an eventuality on the viability ofNTC, there are three factors to consider. First, Malawi will have a certainadvrctage over Zimbabwe and Botswana in terms of having already negotiatedthe various procedural requirements for using TAZARA and the port of Dar esSalaam. Second, the required investments to operationalize NTC are readyfor Implementation. Third, nearly 1 million tons of Zambian traffic will bediverted to the Tanzanian route if its access to the South African route isdiminished, causing significant reduction in availability of TAZARA servicesfor Malawian traffic. The third point is a major concern for Malawi, butgiven that NTC would be the only available transit route for Malawi, effortsto secure rolling stock and motive power from TAZARA would be the bestpossible alternative. Another possibility would be to increase the use ofTANZAM Highway. The proposed NTC project, however, can only make an impactin the medium term (two to three years). Under these circumstances, theMalawi Government has begun to formulate a short term contingency plan touse the existing facilities on NTC until the required investments are inplace. A few cargo handling equipment items will be procured and placed atMbeya for transshipment. A freight forwarding and cargo handling companywill be contracted to operate the equipment and to make arrangements withTAZARA aud the Dar es Salasm port authority to expedite the transport ofMalawi cargo. Experience gained during this period will certainly enhancethe ability of the Malawian authorities to efficiently utilize NTC once itcomes into full operation.

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III. The Proiect

A. Objectives.

3.01 The main objective of the project is to assist the Government ofHalawi in improving NTC, thus enabling the route to handle one-third ofMalawi's external traffic at reduced transport cost as compared withalternative southern routes through Zambia, Zimbabwe and RSA. The anticipateddiversion of one-third of Malawi's transit traffic to the northern route isexpected to reduce the far-reaching economic Coats attributable to the use ofthe lengthy and costly southern routes. An additional affect of the projectis that the development and operation of NTC will alleviate high transportcosts on the southern routes-for Malawi cargo by giving Malawi a strongerbargaining position in seeking reduction of transport charges on the southernroutes.

3.02 In general, the project will contribute to the important objectiveof developing improved transport links between various countries of SouthernAfrica, thus facilitating the expansion of regional trade and industry. Whilethe primary purpose of the NTC is to handle the transit traffic of Ma:awi, itwill, in addition, serve as an expeditious route for trade between Malawi andTanzania. The development of such international links is one of the primarygoals of the SADCC. The project will also contribute to the expansion ofregional trade between Malawi and Tanzania, as well as to the Government'spolicy objective of promoting greater economic integration of the countrythrough development of the northern region (least developed in Malawi).

3. Proiect Scope

3.03 The project consists of:

(A) improvement of roads including:

(i) construction of a two lane, bituninous-paved road betweenKaronga (Malawi) and Ibanda (Tanzania)(54.6 km);

(ii) rehabilitation of the Ibanda-Uyole bituminous-paved road inTanzania (98 km);

(iii) rehabilitation of the bituminous-paved Saliia-Balaka road(145 km), including a short access road to the port of Chipoka(2.5 km); and

(B) construction and equipping of dry-cargo transshipment facilitiesin Tanzania, including:

(i) MCC, near the port of Dar as Salaam, for the handling andtemporary storage of dry cargo;

(Ui) MCC, at the Mbeys railway station, for the handling andtemporary storage of dry cargo;

(iii) infrastructure improvements at the resettlement site;

(C) construction and equipping of fuel storage and transshipmentfacilities in Tanzania including:

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(i) fuel storage and handling facilities for petroleum productsnear the port of Dar es Salaam;

(ii) fuel storage and handling facilities for petroleum products atthe Mbeya railway station;

(D) procurement of railway fuel tank wagons to be used by TAZARA andtank containers for transport of jet fuel;

(E) Lmprovements In facilities of LS on Lake Malawi, including:

(iM procurement of a containerlfuel carrying vessel suitable fortransport of exportlieVort traffic;

(ii) construction of dry cargo and fuel storage facilities inChipoka port and procurement of cargo handling equipment forthe port;

(iii) port improvements, construction of dry cargo and fuel storagefacilities in Chilumba port and procurement of cargo handlingequipment for the port;

(iv) improvement of ship maintenance facilities at Monkey Bayincluding construction of a repair jetty, the provision ofequipment for the maintenance workshop and rehabilitation ofexisting slipway; and

(P) (M) construction of border post; and

(ii) provision of a weighbridge at the Malawi/Tansania bordercrossing;

(G) consultancy services for:

(i) technical assistance to NTC it project coordination, projectfinancial control, traffic facilitation and establishment of1CC;

(Ii) technical assistance to LS for cargo operations;

(iii) supervision oft

- A(i) and F(U);- A(i); and-B

(iv) supervision of:

- A(ii); and- C, D, E and F(i)

(v) supplemental detailed engineering.

(H) training of transport sector personnel.

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C. Detailed Proiect Descrintion

Road Construction and Rehabilitation

3.04 The Karonga-Ibanda road (54.6 km), built quickly in 1984 as a highpriority link to the TANZAM corridor, will be upgraded from a narrow,emergency gravel standard to two-lane bituminous-paved standard. Includedin the construction are two sizeable bridges over the Songwe and Kivirarivers presently spanned by Bailey bridges.

3.05 Selected segments of the Ibanda-Uyole road (98 km) will berehabilitated. The existing road has some steep grades but the horizontalalignment is relatively good. Its asphalt surface is also good except forsome sections amounting to 12 km between Ibanda and Tukuyu. Reconstructionwork will be done on those 12 km and, in addition, other spots as requiredbased on detailed survey.

3.06 The Salima-Balaka asphalt road (145 km), which has deterioratedseriously throughout its length, will be rehabilitated. Though not a majorbottleneck in the corridor, it is a main connection to the lakeshore roadwhich is the preferred road for transporting NTC traffic, and also connectsthe port of Chipoka and the major commercial city of Blantyre. The workwill include Improvements in road formation and drainage as well asresurfacing and paving of the Chipoka access road (2.5 km).

MCCs

3.07 An inland freight station, MCC, is to be established outside theport of Dar es Salaam to avoid the problems within the port itself of ashortage of container storage area and the high incidence of loss and damageto Malawi cargo. A site less than a kilometer from the southern portboundary has been identified. The site would provide 10,000 m2 of coveredstorage area for break-bulk cargo, and an open area for container storage,providing 225 ground slots fo. containers based on gantry crane operationand an annual throughput capacity of 45,600 T%U. Project Improvementsinclude concrete surfacing of 5,660 m2 of container stacking, 5,540 m2 ofbreak-bulk storage area, 6,020 m2 of maneuvering area, provision of adequatelighting, construction of a workshop, construction of a 400 a port accessroad and installation of 850 m of railway track within the storage area.Equipment procurement includes 16 tractor trailers to move cargo betweenshipside and MCC, 14 forklifts (3 tons each) and a gantry crane forcontainer handling. Optimal storage and equipment requirements weredetermined on the basis of a system study taking into account traffic flowsand performance factors for equipmenr of various types.

3.08 At Mbeya another MCC will be constructed in the northwestern partof the TAZARA railway station. A container stacking area of 1,970 m2 is tobe concrete-surfaced. A break-bulk stor6ge shed of 4,460 m2 will beconstructed as well as 4,800 m2 of maneuvering area and a workshop.Equipment procurement will consist of 5 forklifts (3 ton capacity each), agantry crane for container handling, and workshop equipment.

3.09 The current residents at the designated site for HCC Dar es Salaamwill be resettled in an area 9 km outside the city center (para. 3.38).Infrastructural Improvements are required on the new site. These Include:

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(i) improvement of the .xisting road to gravel standard (3.0 kmn), (ii}construction of a new gravel road (1.5 km); (iii) extension of electricalline; (iv) construction of a borehole well; and (v) construction of adispensary.

Fuel Storage and Transshiument Facilities

3.09 Separate fuel storage and handling facilities for Malawi petroleumprotucts moving through NTC will be required because Malawi and Tanzaniahave adopted different atandards for these products. In Dar &a SalaamMalawi requires storage for petrol and diesel of 7,500 =3 and 14,000respectively. A site identified for the fuel storage is located adjacent toMCC Dar es Salaam. For jet fuel and illuminating paraffin, storage can beshared with Tansania as the standards for these products in the twocountries are about the sase and no additional storage is needed; fuelhandling facilities in the port of Dar es Salaam for these products areadequate for the needs of both Malawi and Tanzania.

3.10 In Mbeya, no fuel handling capacity exists; fuel storage of 1,900=3 for diesel and petrol will be provided under the project adjacent to theproposed site for MCC Nbeya. In addition, 5 unloading points will beinstalled for emptying rail tankers and 5 loadiug points established forfilling road tankers. The optimum storage and pumping facilities wereestimated on the basis of a system study which took into account theestimated flow of traffic and performance factors for pumping.

Railway Tank Watons and Tank Containers

3.11 In view of the limited inventory of tank wagons in the TAZARkfleet and to ensure that such wagons are available for Malawi fuel transit,the project includes procurement of about 22 tank wagons for the railway (tobe owned by MR and operated by TAZARA). These wagons will be sufficient tomove the anticipated volume of Malawi's diesel and petrol on the line. Jetfuel, however, must be transported by a different tank dedicated to it toensure purity of the product. About 33 tank containers will be procured tocarry the estimated annual jet fuel throughput of 5,000 tons.

Improvements for LS

3.12 A new 600-ton pontoon vessel will be procured for LS, suitablydesigned to carry the type of exportlimport traffic expected to move involume on the lake. The new ship will be capable of handling break-bulk,containers, and fuel. Because of limited volumes of each type of cargo,however, some compromise in design is required. For the commodity mix andtraffic levels projected, various types of vessels were considered and a600-ton vessel with capacity to carry fuel, break-bulk and container wascho3en as most suitable.

3.13 NTC traffic on the lake will be transported mainly between thenorthern port of Chilumba and the southern port of Chipoka. The capacity ofChipoka port will be expanded to accommodate the anticipated traffic. Acontainer stacking area of 730 m2 will be concrete-surfaced, break-bulkstorage of 670 m2 and workshop will be constructed; in addition, the portwill obtain a gantry crane, 3 forklifts (3 ton each) and minor changes inthe fuel handling system will also be made.

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3.14 The port of Chilumba w*ll require additional cargo handlingequipment, expanded storage capacity and a gantry crane. Specifically, theport will be provided with 6 forklifts of 3 tons each, 1 forklift (6 tons)and a gantry crane. A container stacking area of 1,830 m2 will be concrete-surfaced and a storage shed of 2,600 m2 will be constructed. Minor changesin the fuel handling system will al60 be introduced.

3.15 Improvements are required in the ship repair facilities at MonkeyBay to service vessels and shorten their annual overhaul periods. A newjetty will be built to allow two vessels to berth on either side while alsoproviding direct access to the floating dock. In addition, a workshop willbe provided with suitable machinery and tools.

Border Post and Weighbridges

3.16 A border post and staff housing will be constructed and aweighbridge installed at the Karonga-Ibanda road border crossing. As agreedby the Malawian and Tanzanian governments, the border post will be openedtwenty four hours a day to allow continuous flow of traffic.

Consultancy Services

3.17 LS management is in need of strengthening in the fields ofmarketing, positioning and schedu2ing of vessels, port operations andmaintenance and vessel repair. Therefore, the project Includes 84 man-months of technical assistance for purposes of providing advice and trainingIn these Important areas.

3.18 Technical assistance is also included in the project for a projectcoordinator and a financial controller (72 man-months) to enhance thecapabilities of IMC to coordinate project Implementation and facilitate theflow of traffic over NTC, as well as to assist in establishing MCC.

3.19 Consultant services will be engaged for the purposes ofsupervising the construction work and equipment procurement involved inabove-described project components. During negotiations agreements werereached with Government that consultants for services in this projectcomponent will bs employed under terms and conditions sctisfactory to theAssociation (para. 6.01(b)).

Training of Transport Sector Personnel

3.20 Training for Government staff in the transport sector has alsobeen included for higher degrees in transport economics and several shortcourses in areas such as transport management, economic and financialanalysis to be held at institutions such as the Eastern and Southern AfricaManagement Institute (ESAMI) in Arusha, Tanzania.

Status of Proiect Preparation

3.21 Detailed engineering of the Karonga-Ibanda road which was carriedout by a Greek firm in association with a UK firm has been completed. Thecontract for the works has recently been awarded. The detailed engineeringfor the rbanda-Uyole road, undertakon by an Italian firm, has also beencompleted. The Salima-Balaka detailed engineerlng, financed under the Fifth

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Highway Project, has been completed. The tender documents were issued tobidders In September 1987 and bids were received in early December 1987.The preliminary engineering for the LS improvements and the MCC8 wascompleted in July 1986. However, delays in completing the final engineeringand preparing the tender documents were experienced due to a change in thesites designated for the MCCs and revisions to the design specifications forequipment and civil works at the lake ports and the MCCs. The derasledengineering and the preparation and issue of tender documents for all thecivil works and equipment components for the LS improvements were completedin August 1987 and those for the MCCs are expected to be completed by March1988. The contract for the preliminary and detailed engineering for the LSimprovements and MCCs was awarded to GITEC, the firm of consultants thatconducted the feasiblity studies for these components. Financing for theseworks was provided by the Association under the Fifth Highway Projectsupplemented by an advance from the Project Preparation Facility to coverthe increased scope of work as a result of the revisions in designspecifications and the changes in the site for MCC Dar es Salaam.

3.22. The sites where the two MCCs and fuel facilities will be erectedhave been identified. All the sites are under the jurisdiction ofrespective City Councils (Dar es Salaam and Mbeya) and lease agreements foreach site have been prepared and are to be signed by MIHC (Malawi RailwaysHolding Company) and the City Councils (included as a project condition forthe ODA grant). As for the Karonga-Ibanda-Uyole road, both governments haveagreed on the constructionlrehabilitation works to be carried out on thisroad and have agreed under the bilateral agreement (para. 2.10) to maintainthe road once it is constructed. Total delay of 14 months was experiencedafter negotiation in October 20, 1986 due to delays in signing of thebilateral agreement (condition of Board Presentation) and complications insecuring the site for the construction of MCC Dar es Salaam.

Cost Estimates

3.23 The total cost for the project, including contingency allowances,is estimated at IlK 252.5 million or US$109.8 million. Total cost includes(a) physical contingencies of 101 of base cost on all items and (b) pricecontingencies amounting to about 12.1Z of base costs on all itmem, ircludingphysical contingencies, for an estimated implementation period of 6.0 yearsafter Board Presentation. Escalation rates for foreign costs have beenapplied to the foreign component and local escalation on the estimates forlocal costs in the calculation of price contingencies (Table 3.1, footnotebi). Escalation estimate for local inflation in 1987 was 15S. It isassumed that any persistent divergence between local and foreign costescalation will be corrected by exchange rate adjustments. The foreignexchange component is estimated at MK 209.2 million (US$91.0 million).Identifiable taxes and duties are about HK 3.5 million (US$1.5 million), andthe total project cost net of taxes and duties is MK 249.0 million (US$108.3million).

3.24 The length of the implewentation period is based on pastexperience on similar projects as reflected in the relevant standarddisbursement profile. It is, however, possible that if the project is

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Table 3.1 Estimated Prolect Cost. 2/

WM hII oe US mlliotenLocel Fer snTi Xstal Local Forelg Totl Forel.

A. Road Construction(a rouse tgwe (46ke) 7.67 17-.6 25.7 J.34 7.70 11.12 76tb Song-lbend (5 k-) - 6.2J S.23 - 2.27 2.27 16I

(it) Ibanda-1Uyole (98 km) - 31.9 U.99 - 13.9) 13.91 1to(lli) (t) Stlims-Jet.U16 (63 ka) 4.24 9.91 14.16 1.64 4.11 0.15 is

b) ChIpoka Access (t2.6 k) 6.14 6.25 6.39 6.00 6.1S1 .17 67c1 Jet. M16-Uslaka (62 ha) 4.42 16.39 14.72 1.92 4.46 6.46

Subtotil 1i7 i6.Hi 9. vm1 " E 4Jl US. Mlwi Cargo Center

( a) r cry Cop - 23.16 23.16 - 19.97 16.O7 in(it lbeyo Dry ar - 13.36 13.36 - 5.1 6.61 1I4

Vit SquatteuRttt_tsnt - 1.68 1.68 - 0.73 6.73 16Subtotal - JE SEW 1ER - I1

C. fuel H 4itnnIjI Dar4FiiiFStorag - 11.68 11.68 - 6.08 6.08 16(tt) Mboyn-Fu.l Storags - 5. 5.24 2.26 2.26 io

Subtotal - Jr11JrS vurvu t

0. Fuel Trnnert13 Tank continers 1.04 1.04 - 0.45 6.45 164

(i) Rall tank wages - 2.42 2.42 - 1.065 1.5 164Subtotal - a r.4 = l C C i

E. Loke Fae lit?.sp) V"sel 1.61 2.99 4.60 6.76 1.30 2.06 65

(Ii) Chipok& Port 1.22 6.95 6.17 0.68 3.e2 3.55 es(tii) Chilumba Port 1.82 16.26 12.10 0.79 4.47 5.26 6s

(IV) olnkey Bay Shipyard 1.45 6.62 7.27 o.63 2.53 3.16 ofSubtotal 2li 2P SET.i n in! I1.2 71

F. Border Post S Weigh Bride,1) Border Pet~ 6.56 6.56 1.16 0.25 0.25 0.560 s

(tt) Weig Brg e 6.02 0.30 0.82 0.01 0.13 0.14 90Subtotal 0e Fs r14 7l F. a :ii ia

0. Con wIttns S riceltr.A er. 0irc 6.32 1.34 1.66 0.14 0.56 6.72 W

5I,I T.A. - Lake Servies 0.26 1.08 1.36 0.12 0.47 0.59 so(iti Superviston of:

4(1)* F(tli) 0.96 3.92 4.90 0.43 1.70 2.18 aA(1?) 0.46 1.91 2.39 0.21 S.63 1.04 UoB 6.37 1.46 1.62 6.16 6.63 6.79 of

(IV) Supervision of:4(111) 0.46 1.91 2.39 6.21 D.63 1.64 80C, 0, E & F(t) 0.62 2.51 3.18 0.27 1.09 1.3t as

(v) Supplementary detail dEngieering - 3.46 8.46 - 1.60 1.560 16Subtotal 1.37 I1B 2C 147.47 77 38

M. Trainina

(I) Staff Training - 0.68 0.68 - 0.26 6.26 164Subtotal - CF 6 87a U1 B 0C

Base Cost A-H 26.s 178.63 206.06 11.54 77.61 66.15 67

1. Conttin asPhysical (lSO 2.65 17.51 20.16 1.16 7.61 6.77 esPrie (12.1)* 14.14 13.13 27.27 6.83 5.62 11.95 C0

Subt4t0 -. M 0I6 47.48 7 TI iTM lV.42 uTOTAL PROJECT COST 43.82 269.17 252.49 16.73 91.64 169.7 63TOTAL PROJECT COST

(net of taxes) 89.65 269.17 249.62 17.22 91.04 108.26 84

/ Noveber 1937 pricesDi Expected price increase (U)

1967 1963 1969 1996 1991 1992 1993Ialaui (local cost) 1 Cr "-r 12 -- Ir 4 --Foreign (interantional) 1.0 2.5 2.5 2.5 2.2 2.2 2.2

Decebr 197

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implemented more efficiently and with fewer delays, the implementationperiod could be reduced to 3.5 years. This would result In project costsbeing reduced by about 82 or from US$109.8 million to US$101.0 million, andimprove the ERR by 51 to 211 (para 5.32).

3.25 The base costs are estimated as of December 1987 and have beenderived as follows:

(a) Road Construction and Rehabilitationt The cost estimates forconstruction of the Karonga-Ibanda and Ibanda-Uyole roads arebased on quantities derived from detailed engineering and onthe consultants' estimates of unit costs, in turn based onconsiderable experience from similar construction work In bothMalawi and Tanzania. The cost of the Balaka-Salima roadrehabilitation is derived from detailed engineoring and on theconsultants estimates of unit cost for similar work currentlybeing executed under the Fifth Highway Project. The foreignexchange component is assessed at 70X of total cost for workin Malawi and includes all elements except labor and taxes.Work in Tanzania is considered as 1001 foreign cost.

(b) MCCs: The costs of the civil works are based on detailedengineering and the consultants' estimates of quantities andunit costs obtained from recently tendered contracts forsimilar works in TanzaDia. The cost of the equipment is basedon information received from equipment manufacturers andsuppliers. The costs of civil works for the resettlement areaimprovements are estimces based on recent experience in thearea.

(c) Fuel Storane and Handling Facilitiess The consultantsprepared detailed estimates of quantities. The unit rateswere derived from the consultants' data base on internationalconstruction projects.

(d) Railway Tank Wagons and Tank Containers: Unit prices for tankwagons and tank containers have been obtained by directenquiry from suppliers.

(e) LS Facilities: For the civil works, an early tender wascalled for due to uncertainty in the strength of the existingstructures, particularly at the port of Chilumba. Bids werereceived and found to be higher than the consultants'estimate. The report has incorporated the most recent costdata. The cost of the vessel has been estimated by the Bankmission and includes prefabrication in the suppliers countryand transport to and assembled in Halawi. Cargo and containerhandling equipment has been costed based on information fromsuppliers.

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(g) Consulting Servicess The technical assistance for LS andproject coordination will require a total of 131 man-months ofconsulting seivices and has an estimated base cost of US$1.3million. The total estimated cost also includes provision forthe cost of vehicles, local travel, and other minor expenses.The supervision costs have been estimated at about US$6.0million, corresponding to about 7S of the estimatedconstruction and equipment costs, which is in line with recentexperience in Malawi.

(h) Border Posts -The price of border post sad related housing tobe built at the border is based on actual cost of such housesand post built by MWS's force account units.

(i) WeixhbridLe: The cost of the weighbridge was based on recentquotations to MTC.

(j) Staff Trainings The costs of master's degree for twocandidates (48 man-months at $3,000 per month) and 35candidates for training at ESAMI at $3,000 per course percandidate have been based on similar components financed underthe ongoing Fifth Highway Project and the experience of MWS.

D. Financing

3.26 In view of the severe domestic resource constraints, theGovernment contribution to the project financing would be limited to 102 ofthe IDA-financed components (net of taxes) and to the tax component (US$0.8million) on the KfW portion of the Salima-Balaka road. The project willrequire external financing of about US$106.9 million to cover the foreignexchange component of US$91.0 million and local cost amounting to US$15.9million. The external financing will be provided as shown in Table 3.2,through an IDA credit of US$13.4 million, an EDF contribution of US$20.0million, a KflW grant of US$18.9 million, ODA grant of US$19.3 million, USAIDgrant of US$18.0 million, and a Dutch grant of US$17.3 million.

3.27 The following conditions for financing will apply for the project:USAID has stipulated (i) signing of project agreement between ODA (UK) andMalawi Government and (ii) signing of the bilateral agreement between thegovernments of Tanzania and Malawi, as conditions of disbursement.Agreement with the Government was reached during negotiations that (i)signing of the ODA (UK) grant agreement with Tanzania would be a conditionof IDA credit effectiveness (para. 6.01(c); and (ii) no later than September30, 1988, all co-financing agreements between the Government and the donorsinvolved in this project shall have become effective (para. 6.01(d)).

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Table 4.2 f l_s PlantUt at I llon)

Total

A. Road Co tructiontl} (*} Ibren" (460) 14.42 14.42

(b) Song.-Ib.nds (5 b) 12.68 2.,0(t,) Ibanda-Uyolo (OS ha) 10.40 1.40(;tii (a) S 0ima-Jlt.M16 (08 ha) 6.41 7.26 0.6

~ b) ChipokF MoAns (2.3 km* 0.22 90.2f .02Jet. VlI-l8l4 (62 km L.J 7LE4 - - --

Subtotal .10 7.04 17.06 7.4 14.40 2.08

B. Iaw Cargo C.nter(i) De Dry Cio7 11.18 18.51 1.87

(tt) Mbeya Dry Cargo 0.8 6.40 1.7?(1ii) Squatter Resettlemet _ 0.66 --. 6

Subtotal 19.0 16.36 2.74

C. Fu l Hand1in1 POP-FPol FSterge 19.4 6.94

(1i) Mbeya-Fuel Storage 19 - - -.09

SubtoOal 6.68 6.08

0. Fool Trn por(TJTiiik74iisiiiners .58 0.58

(Is) Rail tank wagon 1.24 - - 1.24

Subtotal .7 1.77

E. Lak Factilttes1yv jf7_ 2.68 2.68

(i)t Chipoke 4.44 0.81 4.18(iii) Chi luba Port CS. 0.36 0.06(Iv) monkey say Shipyard jjj - - - 0. .23

Subtotal 17.62 2.65 1.40 18.49

F Border Post £ Weish BrTab1i Border post 0.69 0.59 0.10

(i) Weigh Brldg 0.16 _ -.18 -

Subtotal 0.n7 0.50 0.10 0.10

0. Consulting Servles(1 T.A. -MTC 0.1 0.78 0.12

(Ii) T.A. - Lake Service 0.74 0.58 0.18(Iii Supervition of:

AtI) 4 F(il) 2.69 2.60A(I ) 0.02 0.91a 1.0 1.060

(iv) Supervisioo ofsA(ili); and 1.81 1.11 0.20C, D, E A F(I) 1.71 1.48 0.28

(v) Supplementary dbtailedEnsginering 1.60 1.68

Subtotal 1U.70 5.45 2.09 1.0 0.91 0.71

H. Trninins(1) SUfI Traininy 0.82 0.82

TOTAL PROJECT CoST 0. 18.40 19.95 16.68 19.84 16.06 17.81 2.690 S

OI QDA financing of this componenatill be undr a eprate agreement betwon ODA and theGovernment of Tanzanla.

1 Kf plans to appraise the compon_t once Lake Service treffic begins to inresr_.St In additton, tho Gove rAmt of alaiI has budgeted compensation paymont of about US8l 6tillon

for resettlement.Decmbor 1987

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E. Implementation and Procurement

3.28 Project execution will be the responsibility of; (1) MTC withrespect to development of MCCs in Dar es Salaam and Mbeya, fuelinstallations in Tanzania, liaison with both the Tanzania Government andTAZARA and overall project coordination including technical assistance forthis purpose; (ii) MR in the case of tank wagons, tank containers and LSvessel procurement, lake port improvements and technical assistance; (iii)MWS regarding the road construction and rehabilitation works in Malawi andconstruction of the border post and installation of a weighbridge; and (iv)the Tanzanian Ministry of Communications and Works for road works inTanzania.4/

3.29 MTC and MR will take the lead in negotiating with suitable privatesector firms the necessary arran8ements for the operation of MCCs in Dar esSalaam and Mbeya. One firm will undertake the operation of both MCCs andan established oil company will take responsibility for the operation ofthe fuel storage and handling facilities in the port of Dar es Salaam andin the transshipment terminal at Hbeya.

3.30 Construction of the Karonga-Ibanda road and rehabilitation of theIbanda-Uyole road will be executed under unit price contracts awarded afterinternational bidding in accordance with guidelines of EDF and the DutchGovernment, respectively. The rehabilitation work on the Salima-Balakaroad will also be executed under unit price contract awarded after ICB inaccordance with guidelines of IDA. KfW has agreed to apply IDA guidelinesfor selecting the contractor for the construction of the segment Salima-Jct. M18 and the Chipoka access road.

3.31 The cargo handling equipment for lake ports and for the MCCs,machinery and equipment for the Monkey Bay maintenance facility and tankwagons and tank containers will be procured through competitive bidding inaccordance with the procurement guidelines of USAID. Civil works contractsfor Chipoka port and Chilumba port will be executed under unit pricecontracts awarded in accordance with USAID guidelines. Procurement of thelake vessel will be according to guidelines of KfW. MCC civil works andequipment in Dar es Salaam and Mbeya will be tendered through competitivebidding procedures satisfactory to ODA. Civil works contract for borderpost will be procured following LCB in accordance with guidel.L. c of IDA.As for the infrastructural improvements to be made to the resettAementarea, all construction, except the electrical extension and the boreholewell, will be carried out by the firm contracted to construct the MCCfacilities. TANESCO (Tanzania Electric Supply Company) will be sub-contracted to extend the line to the resettlement area and a local drillingfirm will carry out the borehole construction. All works will be tenderedthrough competitive procedures satisfactory to ODA. Procurementarrangements are summarized in Table 3.3.

3.32 In terms of ownership and operation of the various components,with the exception of the road investments and border post/weighbridge, theremainder of the investments will be leased to various parastatal andprivate corporations for management and operation of the facilities. Thevarious entities involved are outlined below:

41 A detailed description of the road sector in Tanzania is presented inthe Staff Appraisal Report No. 5922-TA, dated December 13, 1985.

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(a) MCCs and Fuel Facilities (Dar and Mbea).: The facilities willbe owned by the Government of Malawi and vested in MRHC onterms defined in Chapter 4 of this report. MRHC will, inturn, lease the assets to a group of investors who will managethe facilities. The actual day-to-day operation of thefacilities will be contracted to a private operator on acompetitive basis. Details of the ownership structure and theoperations of the facilities are given in Chapter 4.

(b) Tank Wasons and Tank Containers: These will be owned by MRand leased to the fuel facilities operators. The actualoperation, i.e., haulage of wagons, will be done by TAZARA.

(c) Lake Facilities and the Pontoon: These will be owned andoperated by LS under MR.

Table 3.3 Procurement Methods and Costs(US$ million)

Procurement Method TotalProject Element ICB LCB Other Cost

(Figures in parentheses are the the amounts financed by IDA)

A. Road Construction(i) Karonga-Ibanda 17.1 17.1(ii) Ibanda-Uyole 16.4 16.4(iii) (a) Salima-Jct. M18 8.0 8.0

(b) Chipoka Access 0.2 0.2(c) Jct. M18-Balaka 8.3 8.3

(7.0) (7.0)

B. MCCs 19.6 19.6

C. Fuel Handling 8.6 8.6

D. Tank WaRons/Tank Container 1.8 1.8

E. Lake Facilities 17.8 17.8

F. Border Post and Weighbridge 0.7 0.2 0.9(0.6) (0.6)

G. Consultancy Services 10.8 10.8(5.5) (5.5)

H. Staff Training 0.3 0.3(0.3) (0.3)

Total 16.5 0.7 92.6 109.8

(7.0) (0.6) (5.8) (13.4)

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3.33 All documentation for procurement under ICB, LCB and forengagement of consultants, to be financed by the Association will be subjectto Association review prior to issuance of tenders and invitations.

3.34 A target implementation schedule is presented In Chart 1, thedetails of which were agreed with Government at negotiations (para.6.01(e)). The schedule shows en implementation period of about 3.5 years.However, past experience indicates that a typical implementation period forsimilar projects in the region is closer to 6.0 years (para. 3.24).

F. Disbursements

3.35 The IDA funds will be disbursed on the following basis:

(a) 851 of total expenditures for civil works on the IDA-financedportion of the Salima-Balaka road (Jct. 418 to Balaka);

(b) 851 of total expenditures for the border post; and

(c) 1009 of foreign expenditures and 501 of local expenditures on allIDA-financed foreign technical assistance and supervisioncontracts;

(d) 902 of total expenditures for local consultants;

(e) 1001 of total expenditures for staff training; and

(f) 1OOZ of total expenditures for refunding the Project PreparationAdvance.

All disbursements will be fully documented, except for contracts andpurchase orders of less than $50,000. Disbursement for items less than$50,000 will be made against statement of expenditures, documentation forWhich would be held by the implementing agencies end to be made availablefor inspection by supervision missions. An estimated schedule ofdisbursements is given in Table 3.4. This schedule is in line withcomparable disbursements under previous Bank Group financing of specificinvestment loans in Malawi. In order to expedite disbursement of fundsunder the above categories of the Credit, a Special Account with a depositof US$1.0 million (an amount roughly equivalent to four months estimatedexpenditures in US dollars) will be established and maintained in theproject entity's name in a commercial bank. The Special Account will bereplenished by the Association in accordance with agreed procedures.

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Table 3.4 Estimated Schedule of Disbursements

Bank Fiscal Year Cumulative Disbursementsand Quarter Endig& at end of Quarter

(US $ million)

FY88March 31, 1988 1.0June 30, 1988 1.6

FY89September 30, 1988 1.8December 31, 1988 2.2March 31, 1989 2.7June 30, 1989 3.3

FY90September 30, 1989 4.0December 31, 1989 4.7March 31, 1990 5.5June 30, 1990 6.4

FY91September 30, 1990 7.2December 31, 1990 8.0March 31, 1991 8.8June 30, 1991 9.6

FY92September 30, 1991 10.3December 31, 1991 10.9March 31, 1992 11.4June 30, 1992 12.0

FY93September 30, 1992 12.4December 31, 1992 12.8March 31, 1993 13.0June 30, 1993 13.3

Y94September 30, 1993 13.3December 31, 1993 13.4

Closing date: June 30, 1994.

Source: Standard Disbursement Profile, October 1985US$1.5 million of PPF disbursed in first two quarters in additionto the disbursements made under the standard profile.

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0. Account tl. Auditing and Rkeortina Reouirements

3.36 Project accounts will be maintained by the three executingagencies (MTC, MWS, MR) for their respective project components. Inprevious Bank Group projects, accounts have been audited by the AuditorGeneral; as this arrangement has proved satisfactory, it would also befollowed under this project with regard to HTC and MWS and an internationalaccounting firm in the case of MR (para. 4.31). It was agreed duringnegotiations that the Government will have all project accounts, as well asthe Special Account, the statement of expenditures and accounts of MRHC, PIRand MCC Company, audited by auditors acceptable to the Association and tohave audited accounts, together with the auditors' reports, submitted to theAssociation not later than six months after the end of the fiscal year forMRHC, HR and MCC Company, and nine months for NTC and MWS (pars. 6.01(f)).The Government has also agreed on progress reporting requirements, whichInclude indices for measuring implementation, and the submission of aproject completion report, in a form satisfactory to the Association, notlater than six months after the closing date (para. 6.01(e)).

R. Environmental Impact

3.37 In general, the project would have beneficial effects on theenvironment. In particular, paving the Karonga-Ibanda road will greatlyreduce dust which now adversely affects not only vehicle operators but alsomany pedestrians on the highway and numerous people residing along the road.Also, improved drainage will reduce the danger of soil erosion. As regardslake transport, however, increase in navigational activities on the lakethrough this project may affect the environment. These activities arenamely (i) increase of shipping traffic on the lake through addition of aself-propelled pontoon to the fleet; and (Hi) increased traffic of petroleumproducts (on the existing tanker). But the amount of traffic forecasted isinsignificant In comparison to the size of the lake (about 26,000 sq. km.),and given the track record of LS in providing safe service for many years,it is considered that the expanded services will not adversely affect thequality of the water resources on Lake Malawi. Civil works umder theproject are limited to strengthening and paving of the existing jetties.The existing fuel tanker is relatively new (1981) and is equipped withstandard safety equipment. During negotiations it was pointed out to theGovernment that necessary precautionary measures should be taken to preventadverse effects on the environment from such accidents as oil spillage.

I. Resettlement of Squatters

3.38 The construction of MCC facility at Dar es Salaam will requireresettlement of people currently living on the designated site. At the timeof the project negotiations, the facility in Dar es Salaam was to beconstructed on uninhabited land outside the port area (owned by TAZARA), buta change of plans in late 1986 moved the proposed facility to another sitethat is inhabited by Tanzanian citizens. Since involuntary resettlementappeared inevitable, the Association engaged a consultant specialist onresettlement to visit Dar es Salaam and review the resettlement program ofthe Government.

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3.39 The assessment by the consultant,5 concluded that-the newlydesignated site (adjacent to the original site) for the Dar es Salaam HCCfacility is an appropriate location for the project. This new site isdesignated as an industrial development area by the Dar es Salaam CityCouncil and the area is rapidly becoming totally industrial; it is,therefore, a matter of time before the romaining houses would have beendemolished and the current residents evicted.

3.40 The Association's assessment is that the resettlement practices ofthe Tanzanian Govertment were generally acceptable and recommended that theresettlement program, affecting some 3,000 people, should proceed accordingto the existing practices, Including i) cash compensation for the physicalstructures; and it) granting of land titles for the new housing plots in thenew resettlement site. In addition, since the resettlement site is lessdeveloped than the current area, the Association recommended to improve theinfrastructure in the resettled area to maintain the same standard as thepresent area. The recommonded improvements include i) improvements to theroad leading to the resettlement area; i) extension of electrical line;iii) construction of a borehole well; and iv) construction of a dispensary.The civil works Is estimated to cost about US$440,000 and an additional US$1million for the cash compensation. The cash compensation will be paid bythe Malawi Government, while the recommended resettlement site improvementswill be financed by ODA under a separate agreement with the Government ofTanzania.

3.41 The engineering firm carrying out the design of the MCC facilitieshas been retained to carry out the engineering design required to carry outthe resettlement infrastructural works. ODA has undertaken an appraisal ofthe above recommended infrastructure works and has included the financingfor them in a supplementary grant to the Tanzanian Government (para 3.27).

51Resettlement Consultant's Report to the World,,Bank: Malawi NorthernTransport Corridor Project". Dr. Art Hansen, Naj 22, 1987 (the report isavailable in the project file).

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IV. FINANCIAL EVALUATION

General

4.01 A number of organisatiins are to be involved in future transportoperations on NTC and there is a need to evaluate whether these entitieswill be financially viable. Among these organizations are truckingcompanies which will operate between Chilumba (and other points In Malawi)and Mbeya; current operations indicate that there are private companiesready, willing and financially able to compete for this service. A numberof non-Malawian firms currently operating between Malawi points and Durbanare expected to follow the traffic as it is diverted to the northern route;some Malawian firms also will probably participate in these operations.TAZARA will charge rates for Malawi cargo which will adequately compensatethe railway, taking account of the costs involved. Certain other entitieswhich will participate in NTC operations warrant some detailed considerationof their financial prospectas MR, including its LS d'partment, and MCCs.

A. MR

4.02 MR was marginally, if erratically, profitable through most of the1970s. However, since 1980, the company's financial performance hasdeteriorated with losses increasing from NK 0.5 million in 1980 to around MK6.0 million per annum in the fiscal years 1983 to 1985. This poorperformance has been due mainly to the sharp decline in the profitability ofthe railway service as international traffic fell from a peak of 167 millionnet ton-kilometers (712 of total goods traffic) in 1980 to 22 million netton-kilometers (212 of total goods traffic) in 1985, resulting fromdisruption of the railway lines in Mozambique. The financial performance ofMR over the six year period to 1985.is detailed in Table 4.1.

4.03 Between 1980 and 1983, MR implemented a substantial capitalinvestment program totalling MK 78.4 million. About MK 61 million of thisinvestment was for the Salima-Lilongwe-Mchinji line extension which wasfinanced by bilateral grants to Governm3nt that were in turn granted to MR.The balance of the program, mainly locomotive purehases, was financed mainlyby borrowings from the Government. Although the company's leverage remainedreasonable because of the financing of most of the investments by equity, acombination of sharply deteriorating working profits, rising net workingcapital Investments, and the interest obligation on increased long-term debtcontracted for the balance of non-grant financed investment led to mountingliquidity problems. To alleviate these problems, the Government Increasedits financial support from under MK 0.3 million in 1979 to MK 2.7 million in1982183, mainly through a rollover of interest due it.

4.04 Since 1983, recommendations of an ODA-financed management andfinancial study commissioned in 1981 have been progressively implemented aspart of ODA's investment and technical assistance to MR. In particular, therailway's investment programme has been sharply curtailed and investmentsare now subject to more rigorous analysis. Working capital management hasImproved markedly and financial management is now clearly focused onadjustments required by the redu;'d traffic level.

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Table 4.1 Financial Performance of MR al(MK millions)

1979 1980 1981 1981283 1983184 1984185

Turnover:Railway Service 13.6 16.7 18.2 19.6 15.8 16.5Lake Service 1.6 1.8 1.8 2.9 2.5 2.8Road Servicebi 0.6 0.5 0.3 -

Total 15.8 19.0 20.3 22.5 18.3 79.3

Working Profits:Railway Service 0.X 3.7 2.4 (0-7) (0.8) nlaLake Service 0.3 - (0.2) - (0.3) nfaRoad Service (0.3) (0.3) (0.3) -

TotalCI 0.8 3.4 1.9 (0.8) (1.1) (1.2)

Operating Incme (0.4) 1.2 (0.9) (4.4) (4.0) (4.4)

Net Income (1.9) (0.5) (3.4) (7.5) (6.2) (6.0)

Cash Flow (0.6) 1.7 (0.6) (3.4) (3.9)

Net Working Capitaland Fixed AssetInvestment (5.6) (38.1) (18.8) (24.0) (0.5)

Net Cash Generationin Operations (6.2) (36.4) (19.4) (27.4) (4.4)

Government AssistancesInterest Rolloverand Waiver 0.4 1.4 2.0 2.7 3.1

Capital InvestmentGrants 23.0 18.8 21.3 1.3

a/ 1979-81: 12 month calendar year1982/83: 15 months - January 1982 to March 31, 1983

bi Liquidated in 1982el Some rounding errors.

4.05 As part of this adjustment process, the Government has agreed tothe restructuring of MR's indebtedness to it. The terms of therestructuring agreement provide for capitalization of MK 17 million of theNK 48.9 million total debt to the Government and consolidation of thebalance of indebtedness into a new loun with effect from December 31, 1985.Interest on this new loan was waived for 2 years. This agreement isfavorable to MR, providing a sound financial performance benchmarks thelevel and rate of the new loan was determined within the framework of MR'sforecast of performance after a 2-year adjustment period. Importantly, itrepresents a first step towards strengthening the existing framework ofGovernment oversight by linking its future financial support to financial

I

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performance requirements as opposed to subsidies through rollover ofinterest payments as a means of covering losses.

4.06 Formal projections of MRe financial performance have not beenprepared since the focus of MR's involvement is LS, accounting for only asmall part of MRs total.activity. Howeoer, in the medium term, MR'soverall finanecal performance will-depend on the following factorss (i)lncreased domestic traffic on the railways; (it) the performance of LS and,in particular, its success in attracting NTC traffic to the railways as wellas to the lake service; and (iii) continued tight financial management.

4.07 ODA is currently Implementing a two-phase program of technical andinvestment assistance to MR for railways service. Under the ongoing Phase1, ODA will now provide an analyst to help strengthen the railway'smarketing function, rationalize the tariff structure In the light of currentcircumstances, and more firmly orient the service to the requirements of thedomestic market. Phase 2, which commenced in 1986, involves rehabilitationof the Salima-Balaka line which will strengthen the physical capability toprovide an integrated rail-lake NTC service. MR is keenly aware of thesignificance of the NTC investments in LS both in terms of its impact on theshort-term cash position of MR and on its longer term benefit of greaterdiversification of operations.

4.08 ODA's monitoring procedures for its investment program are sound.It maintains a satisfactory capital expenditure review process and theAssociation views as satisfactory its plans to agree on financial andoperational targets with MR to ensure that the minimum debt-service-determined cash generation requirements from 1988 onward will be met.

B. LS

Financial Performance

4.09 Although LS is organized as a department of MR, its operations areconducted largely independently. A senior MR manager combinesresponsibilities for railway operations with overall responsibility for LSoperations. Otherwise, joint functions with railway operatioas are confinedlargely to shazed accounting services. Thus joint costs are incurred onlyin respect to accounting service and general management.

4.10 LS's recent operating and financial performance, summarized inTable 4.2, has been poor with working losses in three, and operating lossesin four, of the last six years.

Table 4.2 General Financial Performance of LS(MK '000)

1979 1980 1981 1982/83 11 1983184 1984185 i2

Revenues 1617 1923 1815 2871 2494 2639Working Income 326 210 194 (43) (325) (195)Operating Income 289 173 (13) (298) (568) (507)Working Ratio (X) 80 89 89 101 113 105

_1 15 months 21 11 months

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4.11 This poor performance ls-attributable mainly to structural costend demand constraints in both passenger and cargo services and inadequateefforts by Government and MR management to deal with these constraints.Historic financial performance for specific lS operations is presented inTable 4.3.

Table 4.3 Financial Performance of Particular LS Operations(MK '000)

1979 1980 198_1 982 1 983 21 1983184Passenier ServiceRevenues 231 221 312 361 393 456Working Profit

(losses) (231) (448) (577) (646) (748) (904)

Carto ServiceRevenues 1216 1351 1159 1479 1613 1237Working Profit

(losses) 564 653 476 576 547 78

Other ServicesWorking Profit

(losses) (7) 3 (93) (29) 220 501

11 Calendar years tI 12 months to March 1984

4.12 Scheduled passenger service is provided by LS to numerous ports andlandings around the lake and as a consequence operating costs (predominantlyfuel) are largely fixed. At the same time, tariff levels for LS's passengerservices are severely linted by competition from bus service between manypoints. The combined effect of high fixed costs and low tariffs has made itdifficult for LS to avoid large losses on this part of the business. Itthus appears that the lake passenger service is uneconomic and accordinglythe Government will require LS to restructure its passenger services.

4.13 The cargo service operates on a tramp (as offered) basis. Thischaracteristic of operations has ensured that profits have been made despitebroadly stagnant traffic and the failure of tariff increases to keep pacewith fuel cost increases. Notwithstanding this comparatively goodperformance, profitability could be substantially enhanced by more vigorousmarketing activities and improved vessel assignment practices.

4.14 LS began a container transport service in January 1985. Thisservice, based on the carriage of containers on a pontoon leased by LS fromViphya Pulp and Paper Company, is oriented to Malawi export/import trafficmoving over the northern route. LS operates the pontoon between the twolake ports of Chipoka (south) and Chilumba (north). The break-even level oftraffic per voyage is about 45Z of load capacity per voyage and the servicehas been operating since July 1985 at significantly higher utilizationrates.

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4.15 The existing level of tariffs in the cargo service Is consideredadequate. However, particular attention should be paid to obtainingadequate tariff increases to offset cost increases, particularly fuel costs(para. 4.28). There is little scope for increases in passenger tariffs toimprove the working performance of passenger services since such tariffs arecompetitively set.

Traffic Pro1ections

4.16 The financial projections for LS have been prepared on two bases:(i) forecasts of traffic on the lake with the proposed projectl and (i1)forecasts of traffic on the lake without the project. The cargo trafficforecasts for each of these cases and the incremental cargo trafficattributable to the project are shown in Table 4.4 below. Forecasts of NTCtraffic and LSB8 likely share of such traffic are outlined in para. 5.11.These forecasts are reflected in the 'with project' traffic forecasts. Thebasis for the 'without project' forecasts are outlined in paras. 4.17 to4.19 below.

T b4e 4.4 Forecast to Ca= Tratffc on Lake Valawl

Average1os5 19!9 1990 1691 19 LM 4 1995 199M

with Project

Breakbulk 29 s9 42 Oa Ss6 so a6 7 75 7.8Container - 14 4t 72 7S 79 82 8S 94 16.7Fuol 6 8 9 11 20 22 24 27 81 16.1

Total Cargo 84 61 96 146 160 167 174 1U8 20 14.6

without Prolect

Brekbulk 29 89 46 89 46 41 42 48 47 8.6Container - 14 17 17 17 17 17 17 17 2.9Fuel 5 8 8 7 15 1i 15 15 15 8.8

TotalCar. 84 61 i 8 7 T78 74 75 T9 6.7

Incrse - - 81 68 94 101 1n 121

4.17 Without the project, breakbulk cargo which currently consistslargely of fertilixers and agricultural produce is forecast to grow at 7.7Sp.a. from 1985 to 1989. This growth largely reflects the nationalagricultural marketing organization ADMARC's increasing use of LS inpreference to more expensive road hauliers. With the full mplementation ofNTC project components in northern Malawi and Tanzania, fertilizer shipments

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on the lake are forecast to decline substantially since most points in thenorth of Malawi can be more economically served by road with fertilizerimported through Tanzania. However, It is expected that, even withoutadditional investments in the ports, LS will attract NTC breakbulk trafficbecause of Its cost advantage over road transport.

4.18 Container transport on LS is cheaper on a per-ton-kc basis thanroad transport, transshipment costs being Included In both cases. LSintroduced a scheduled container service during 1985186. This service wasdiscontinued in 1987 because of low demand relative to the fixed cost ofoperations. Shippers have been reluctant to use the route to any greatextent because of the erratic availability of trucking services betweenChilumba and Mbeya and handling problems at Mbeys. Nonetheless, theshippers' perception of the potential reliability of the service offered byLS has increased markedly. Hence, even without the LS sub-project somecontainer traffic is expected to use the lake. However, the amount of suchtraffic would be severely limited by lack of container handling equipmentand storage facilities at the ports and, in the longer term, by inadequatevessel capacity. Currently, the lake ports do not have adequate facilitiesto efficiently handle more than 20,000 tons of containerized traffic whilstthe effective capacity of the container vessel is .0,000 tons p.a. Theforecast of container traffic on the lake in the absence of the proposedproject investment Is based on the above factors and recent (October 1985)evidence of containerized traffic on the lake.

4.19 Currently, all fuel movements on the lake are from the southernlake port of Chipoka to the two main northern lake ports of Chilumba andNkhata Bay. Fuel movements on the lake were relatively depressed in 1985 atabout 5,000 tons due to severe fuel shortages in Malawi. Such movements areexpected to recover to about 8,000 tons in 1987, and, thereafter, staybroadly constant to 1990. With completion of the NTC fuel handlingfacilities in Tanzania, it is anticipated that fuel for areas now servedfrom the two northern lake ports will be supplied by road from Mbeya. Thiswill free the LS's only dedicated fuel carrier for transport of fuelimported through Tanzania and destined for southern Malawi. Although theexisting container vessel also has fuel carrying capability it is unlikelyto be utilized for fuel transport since this would severely disrupt itsscheduled service thereby reducing its service reliability. Accordingly, inthe without project case it is assumed that fuel transport from 1990 onwardsis limited to the dedicated fuel vessels' Affective annual capacity.

4.20 Passenger traffic on the lake has grown at an average rate of 41p.s. over the last decade. Growth in demand has been partly determined byavailable passenger vessels capacity. Passenger vessel capacity wasincreased by the commissioning of a new vessel in 1981. However, to reducethe growing working losses incurred in the passenger services this increasehas subsequently been offset, in part, by reductions in the number ofvoyages undertaken by the oldest and least efficient vessel in the fleet.This vessel now undertakes only a few relief voyages a year. In addition,the number of voyages undertaken by the next least fuel efficient vesselhave recently been gradually reduced. Consultants recently reviewed thetraffic prospects for the passenger service and the appropriate structure ofservices to meet demand and contain working losses. The consultant's reportsuggests that there is substantial latent demand for passenger services on

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the lake. However, this demand because of its distribution cannot besatisflod by expansion of the current levol and mode of services withoutsignificant deterloration In the financial performanc, of LS. Accordingly,It is assumed in this analysis that passengor traffic stays constant at the1985 level through the projection period.

Financial Projections

4.21 Projected income and cash flow statements, based on the trafficassumption detailed in pars. 4.16 to 4.20 above, 1987 costs and tariffs(excluding container tariffs) escalated by projected domestic inflationthrough to 1989 and incorporating tho effects of the project are summarizedin Table 4.5 below and detailed In Annex 2. Tables 2. 3 and 4. About 63%of the total value of investments under the project vill consist of buildingand civil works structures These assets have useful lives significantly inexcess of the most favorable term on debt by Government to parastatals (15years). To ensuro a prudent capital structure it is assumed that overallonly about 601 of the value of investments in fixed assets is on-lent to MR.The balance of investments is assumed to be passed on to MR, through itsholding company, as equity. No balance sheets for LS are available asworking capital data are not separately broken out from MR accounts and mostphysical assets have been fully depreciated.

Table 4.5 Snummry of Financial Forecasts with the ProJect(1969 UK *0)

1069 190 1991 1992 1900 1994 1995 1998

Reweue 4051 6681 19072 11789 12108 12649 18192 14852

operating Incom (1in6) (185m) 1665 2710 8189 8616 4189 6268

Not Income (1975) (4667) (567) 476 my7 184 2129 8919

Cash Oeneratiou fromOperatlon (88) m 8782 4777 6S 5668 6265 7825

Debt ServiceOblIpti one - 2282 2282 2282 2282 2282 4241 8571

Cash Transfers to N (679) (1106) 2189 2469 2944 8419 1927 8746

Working Ratio 116 96 eS 9 57 55 58 49

Debt Servlce Coverage - 0.1 1.7 2.1 2.1 2.6 1.6 2.1

4.22 The above table shows that, based on assumptions that are believedto be conservative, LSBs financial situation Is strengthened by the proposedproject. Debt service coverage is satisfactory in all years. Overall netcash flow Is substantial enough to allow significant transfers of cash to MRfrom 1991 onward.

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Financial Rate of Return and Sensitivity Analyses

4.23 The incremental financial rate of return under the project based onthe difference in cash flow between the 'with and Nwithout' projectforecasts is 101. This base case return is acceptable.

4.24 LS faces 2 major risks In undertaking this project. These arethats (i) the project costs may turn out to be higher than estimated end,more significantly, (iU) the anticipated levels of NTC traffic on the lakemay not materialize. In regard to the first risk, sensitivity analysesassuming a 101 increase in project capital costs have been prepared. Theseshow that the financial rate of return declines from around 10 to 92 withsuch an event. The risk of an Implementation period for the project longerthan envisaged in the financial analysis is one of the potential sources ofcost overruns. In addition, anticipated project benefits will be deferredwith such an eventuality. The financial analysis for the LS investmentsassumes a target implementation period of a total of 3.5 years. Animplementation period of six years, which reflects more general Bank projectexperience in Malawi, will lead to a decline in the base case FRR on LSinvestments from 101 to 91.

4.25 The risk that the level of fuel traffic on the lake will fall shortof the forecast levels is small sinces (i) the Goverament has alreadydecided to import 502 of Malawi's fuel requirements through Tanzaniaassuming the fuel handling capabilities of NTC are developed; (Ui) LStariffs for fuel transport are cheaper on a per-ton-km basis than roadtransport (Table 5.09, page 62); and (iii) the basic fuel handlingfacilities are already in place in the main lake ports. There is, however,the possibility that the NTC fuel handling facilities in Tanzania may not becompleted on time thereby deferring the introduction of NTC fuel movementson the lake.

4.26 Although LS's tariffs for breakbulk and container movements arecheaper than road transport rates, there is the risk that shippers mayprefer alternative routes or modes to an extent greater than forecast orthat the Malawian economy may not perform as well as the basis for thetraffic forecast indicates. However, it seems reasonable to assume thatchoice of route will be largely on the basis of comparative cost andreliability of service; the costs clearly favor NTC and the operation of theMCCs is designed to assure reliability of transport on NTC. Overall transittime on NTC should be less than that on southern routes. The impact oftraffic-related risks on the project's viability have been tested bysensitivity analyses and the results are presented in Table 4.6.

Table 4.6 LS - Sensitivity Tests on Financial Rate of Return()

FRR

(i) Base Case 10.0(il) 101 Decrease in Container Traffic 9.0(iii) One Year Delay In Implementation of

NTC Fuel Handling Project in Tanzania 9.0

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4.27 In view of the adverse impact of project cost increases on theproject's viability, substantive measures have been taken to minimisepossible sources of increases in such costs. The cost estimates for thecivil works components are based on recently received bids and there isadequate provision under the project for close supervision of all civilworks components. In respect of traffic related risks, the terms on whichthe project assets will be passed on to HR will take account of the factthat the project is a significant developmental venture. This will requirethe potential risks to LS's ongoing financial viability to be carefullybalanced against the much greater returns to the economy (estimated economicrate of return of 152). In this regard, Government agreed duringnegotiations to transfer project assets to LS in the form of a mixture ofdebt and equity on terms and conditions to be determined in consultationwith the Association. Further, LS's operations enjoy an important defensivecharacteristic in respect to traffic declines: cash operating costs arelargely fixed and determined by voyage schedules which in turn areultimately determined by the amount of traffic expected to be on offer. Inthe case of the proposed project container vessel, for example, theoperating cashflow break-even point when carrying containers but no fuel isonly 28% of its annual effective container load capacity of 42,000 tons.The sensitivity analysis with regard to traffic declines assumes that voyageschedules are maintained as in the base case to preserve a given level ofservice. The impact of traffic declines on the FRR is significantly lessthan indicated if account is taken of the flexibility in voyage schedulingavailable. Under the project, LS's operations planning capability will bestrengthened to, amongst othe things, enhance its ability to makeappropriate decisions about oyage schedules given prospective traffic,operating costs and tariffs.

4.28 Since the LS vessels' fixed costs are predominantly fuel, thisproject's viability is very sensitive to fuel price increases not matched byappropriate tariff increases or sufficient gains in traffic. Sensitivityanalyses indicate that a 10 p.a. increase in fuel prices unmatched byappropriate increases in overall tariff levels decreases the base case FRRfrom 101 to 52. To protect against the risk of inadequate tariff increasesto offset operating cost increases, agreement was reached with Governmentduring negotiations that LS would be set explicit financial performancetargets (para. 4.29). The attainment of such targets may necessitate,amongst other measures, the commercially appropriate adjustment of tariffsin the light of cost increases ane traffic prospects.

Financial Covenants

4.29 LS has in the past operated with only the broad financialobjective, mediated through the annual budget, of minimizing cash losses inthe passenger services and cash costs in the cargo service. LS assumedlittle market risk. During negotiations, agreement was reached with theGovernment that LS be set a formal financial objective of achieving aworking ratio of no more than 100% during the first year of projectimplementation, 952 in the second year and 901 to the end of theimplementation period. To facilitate attainment of such an objective,agreement was reached with Government that MR be allowed to restructure thepassenger service of LS over a period of three years (June 30, 1988 to June30, 1991) to progressively reduce its working losses. Agreement was reached

_ 4k

with the Government that the funds for the LS related investment will betransferred to LS on a mixture of on-lending and equity contribution fromthe Government on terms and conditions to be determined In consultation withthe Association (para. 6.01(g)).

4.30 During negotiations, agreement was reached with Government that itwill consult with the Association before undertaking any major investmentsin vessels and In port maintenance facilities (para. 6.01(a)).

Auditin2 and Reportinx Requirements

4.31 MR's financial accounting and internal control systems for projectimplementation are adequate to record and report project-related financialtransactions. MR's annual accounts are audited by a locally-based affiliateof a reputable international accounting firm and are released within 6months of the end of the financial year. The auditors are acceptable to theAssociation. During negotiations, agreement was reached with HR thatproject-related transactions be separately audited by its auditors andfurnished to the Association together with HR's audited annual accounts nolater than 6 months after the end of the finsacial year (para. 3.36 andpara. 6.01(f)).

C. MCCs

Proiect Description and Operation

4.32 MCCs will comprise two physically d stinct but organizationally andoperationally integrated facilitiess (i) the fuel storage and transportfacilities; (i$) the dry cargo goods transshipment terminals. The fuelstorage and transport facilities will consist of tank farms at Dar es Salaamand Mbeya in southern Tanzania and a fleet of tank wagons and tankcontainers to be dedicated to the transport of Malawi fuel. The dry cargotransshipment terminals will consist of a road/rail terminal at Nbeya and aport/raillroad terminal in the vicinity of the port of Dar es Salasm. Theoperators of the MCC will operate a rail freight reservation service toachieve optimum use of the existing TAZARA link between Hbeya and Dar esSalasm. In respect of dry cargo movements, this service will initiallyinvolve periodic booking of TAZARA wagons. However, it is expected to beexpanded to Include the lease of wagons from TAZARA to form unit trainsdedic*ited to the movement of Malawi Cargo. Agreement has been reached withTAZARA under the bilateral agreement between the governments of Malawi andTanzania that it will facilitate such an arrangement.

4.33 For dry cargo operations, Malawi import cargo arriving by ship atDar es Salaam will be unloaded from ship side and transferred to MCC in Daras Saleam from where it will be shipped by rail to Hbeya. At Mbeys, thecargo will be offloaded and stored for subsequent transfer by truck trailersto Malawi. The reverse flow will apply to traffic from Mbeya. In respectof the fuel operations, fuel will be railed in unit trains consisting of thededicated tanker wagons for diesellpetrol and tank containers on flats forjet fuel from Dar es Salaam to Mbeya. The tank containers will be offloadedto a segregated container park and the diesellpetrol pumped into the tanksto await transfer to road vehicles for onward shipment to Halawi. Theinvestment in equipment in the facilities have been sized to attain timelytransfer of cargo from/to the port of Dar es Salaam and tolfrom road andrail.

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Organizational Structure

4.34 Three entities will be involved in the ownership and management ofthe MCCss (i) the Government of Malawi, (1i) MRHC, the parent company ofMR, and (lit) a mixed enterprise company comprising Malawi private sectorinvestors and two parastatals. Funding for the construction and equipmentof the facilities will be provided on a grant basis to the Government ofMalawi by ODA and USAID. The Government of Malawi will vest the assets inMRHC. MRHC as the asset holding company will in turn lease the assets toMCC Company which will be a company consisting of Malawi private sectorinvestors, MR and the Petroleum Control Commission (PCC), an oil industryregulatory body with significant private sector oil company ripresentation.MCC Company will be created specifically to manage the assets of thefacilities and to promote and market the use of such facilitfes and NTC.

4.35 MRHC will be responsible for supervision of the use of assets andfacilities to ensure that operations are consistent with the attainment ofoptimal lives for the assets. NRHC will also be the primary party Inresolving disputes between MCC Company and TAZARA who will be providing thecritical railways link between Mbeya and Dar es Salasm. A substantialreason for the Government to vest the assets of the MCCs In MRHC is that theroles described above can be most appropriately discharged by a party with adirect financial interest in the success of MCCs. In the case of HRHC,there is a further incentive to good performance since the financialperformance of its subsidiary's lake operations will be improved with thesuccess of MCCs.

4.36 The creation of MCC Company as a lessee company Is predicated onthe fact thac development of MCCs involves significant market and operatingrisks balanced by substantial potential benefits to the country. Theserisks make it unlikely that Maliwi private sector enterprises withsignificant interests and experience in the transport and transport servicesindustry will invest directly in establishing transshipment facilities onthe scale and in the long-lived assets necessary to generate substantialbenefits to the country. Leasing of the proposed MCC facilities enables theGovernment, through MRHC, to attract the necessary private sector expertiseand interest to the management and marketing of the facilities and NTC byreducing the investment risk to be borne by such investors.

4.37 Malawi has a broad spectrum of transport services comp *ies.Several of the largest of these companies have expressed a strong interestin subscribing to the share capital of MCC Company. An ownership structurewith such a broad mix of companies will endow MCC Company with access, atboard level, to expertise in freight forwarding, freight brokerage,transport services marketing, etc. In addition, such a balanced compositionof investors in the transport and transport services sector will ensure thatMCC Company, which will provide services complementary to such companies'activities, will not be viewed as partial to the interest of any onecompany. MCC Company will concentrate exclusively on developing NTC. Thisis in contrast to the market position of the companies in the transportsector, almost all of which have significant interests in alternativeroutes. Finally, award of a lease to an entity like MCC Company In contrast

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to a periodic awa.d of an operating lease to varying operators will ensurecontinuity of operations which will be the best means of developing localexpertise in terminal and associated operations. The proposed structure ofMCC Company is acceptable to the Association.

4.38 It is envisaged that in its initial years of operation, MCC Companywill hire the services of companies experienced in dry cargo terminaloperations on the scale anticipated to manage the operations of thefacility. Similarly, the fuel tank farms will be managed on a day-to-daybasis by one of the oil companies currently operating similar facilities inTanzania. Although the terms of any management contract will be determinedon commercial grounds by MCC Company, the terms of the.leasing agreementbetween MRHC and MCC Company will specify that award of such a contract besubject to competitive bidding procedures acceptable to HRHC.

4.39 The financial arrangements between the Government, MRHC and MCCCompany have been designed such as to ensure that all parties assume anappropriate level of risk and have a high incentive to make the proposedsystem a success. In the case of MRHC, the terms on which the assets willbe vested in it recognize the different levels of market risk attached tothe dry cargo operations and the fuel storage and transport operations. Thetransfer of all assets will be effected on the basis of 60% of the value ofthe assets being assumed by MRHC as a debt obligation to Government and thebalance (40Z) of the value of assets representing an equity contribution byGovernment in MRHC. The debt will be substantially on standard MalawiGovernment lending terms to parastatals - 10 p.a. interest and 15 yearsrepayment period. Two classes of debt securities will be created: (i) onereflecting the value of the fuel facilities assets transferred as debt,(ii) the other reflecting the value of dry cargo terminals' assetstransferred as debt. There will be a grace period of three years from thecommencement of operations in respect of all debt service obligations on thedry cargo assets related debt. Debt service on the fuel facilities relateddebt will be due from commencement of the facilities' operations.

4.40 The Government has accepted the recommendation of an NTC Operations lStudy Team comprised of staff from MTC, ODA and the Association that theterms of the lease of the dry cargo terminals' assets by MRHC to MCC Companyshould provide for an implicit rate of return on its total investments inthe facilities of 52 p.a. over the assessed lives of the individual assets.In respect of the fuel facilities' assets, it is envisaged that the terms ofthe lease of the assets to MCC Company will provide for an implicit rate ofreturn of 12% p.a. The lease payments on the dry cargo terminals' assetswill be deferred for three years from commencement of operations.Thereafter they will be paid annually in arrears. The lease payments on thefuel facilities will be due one year in arrears from the commencement of thefacilities' operations. The differential in payment terms and conditionsreflects the differential market risks faced by the two business segments.Government has a defined policy of diversifying the country's source offuel. It is committed to acquiring 50Z of total domestic fuel requirementsthrough the port of Dar es Salaam. Accordingly the fuel facilities willenjoy a high degree of assurance of adequate fuel throughput. In contrast,the preference of the potential customers for the dry cargo facilities aremore diffused. It is reasonable to expect that it will take time todemonstrate that the NTC is commercially viable. The lease agreement

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between H1WC and MCC Company will provide for a minimum lease period. Thecontingent lease payments for the lease period will be contractualobligations of MCC Company to HRHC. Provisions for adequate resources to beavailable or to be on call will be Incorporated in the Articles ofAssociation of MCC Company. To ensure that MRHC earns in total acompetitive return on its dry cargo terminals assets, the lease agreementwill provide for a pr*fit sharing arrangement in the first three years ofoperations when the lease payments will be waived. Thereafter a modifiedprofit sharing arrangement will supplement its income from the basic leasepayment on the dry cargo assets.

4.41 The financial arrangements ensure that both MRHC and MCC Companyassume a measure of financial risk principally related to the total flow oftraffic. IMRHC will forego part of the resources used in supervising the us'e_of the facilities and assets while MCC Company will lose part of its leasepayments and the fixed costs of operating and marketing the facilities iftraffic falls below certain traffic cashflow break-even levels judgedattainable (see paras. 4.44 and 4.45). On the other hand, because the totalcosts of both entities are largely fixed, the rewards once the trafficbreal.-even levels are exceeded can be substantial. The arrangements,however, recognize that this is a significant development venture where thetotal returns to the country substantially exceed the returns to these twoentities (economic rate of return of 311 for the dry cargo facilities and312% for the fuel facilities versus a total financial rate of return to MCCsof 12X). Accordingly, it is reasonable that Government bears a substantialportion of the investment risks if for unexpected reasons the venture doesnot succeed at the levels anticipated. These arrangements are acceptable tothe Association.

4.42 To ensure success of the MCC concept, the organizations detailedabove should be in a position to participate as fully as possible in theprocess of construction and acquisition of assets for MCCs and in detaileddefinition of the terms of the working agreements appended to the bilateralagreement on transit traffic facilitation. To this end, the Associationagreed with the Government and MR tbat by June 30, 1988 It will, inconsultation with the Association, take all measures necessary to: (i)suitably amend the Articles of Association of HRHC to empower it to holdphysical assets and execute a subsidiary loan agroement; (ii) register MCCCompany as a limited liability company under Malawi company law and solicitpotential shareholders; and (iII) prepare a draft lease agreement betweenNHEC and MCC (para. 6.01(h)).

Competitive Backzround

4.43 The primary consideration at this stage is to assess the long-termfinancial viability of MCC and Its attractivoness to commercially orientedinvestors. Hence, the financial analysis in this report focuses firstly onassessment of the levels of traffic and pricing necessary to provideadequate returns to MRHC and MCC Company and the related competitiveimplications. Then the result of this analysis Is used in the forecast ofMCC Company's financial performance given the traffic forecasts for NTC.

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4.44 In respect of the dry cargo operations of MCC Company, the cashflow break-even levels of traffic to ensure that MRUC earns a 5S p.a. returnon its assets at various price levels for handling and storage of containersand breakbulk cargo are detailed In Annex 3(a) and summarized In Table 4.7below. The table is based on the assumption that the unavoidable costs,both operating and capital of MCC Company are allocated to containers andbreakbulk cargo pro rats to their projected maximum traffic (attained Inyear 2000). For purposes of this analysis, all general management costs areassigned to the dry cargo operations.

Table 4.7 Cash Flow Break-even Levels of Traffic for MCC Comsany

Containers Break BulkPricelContalners Break-even Traffic PricelTon Break-even Traffic

(MK) (Unit Containers) a/ (MK) (Tons)170 16,800 14 272,000210 13,300 18 196,000250 11,000 22 153,000290 9,400 26 126,000330 8,200 30 107,000450 5,900 36 87,000

at Assumed 12 tons per container.

4.45 The lease payments assumed in the break-even analysis imply a debtservice cover of about 1.Ox for NRHC at the indicated break-even trafficlevels.!/ Traffic generated over and above the break-even levelscontributes directly to returns on the equity invested in both MRHC and MCC.The traffic projections outlined in Chapter 5 indicate that, subject to theprices that can be charged for the services provided, MCC Company shouldreadily break even in overall operations and MRHC should be able to serviceits debt.

4.46 For containerized cargo from the Blantyre area, the current costdifferential between the NTC route (using rail/lake in Malawi and road inTanzania) and the southern route to Durban is about MK 340-MK 450 per 12 toncontainer in favor of the former. Cost savings from use of rail versus roadbetween Nbeys and Dar es Salaam amount to around MK llOO/container.Currently, shippers do not benefit from savings realized by use of therailways because of freight forwarders' uncertainty about the availabilityof railway services and the poor transshipment facilities. Organizing andfinancing a block train service on TAZARA specifically serving the two MCCterminals with schedules, determined by the operator, should minimizeuncertainty of freight forwarders and permit a substantial widening of thecost differential vis-a-vis the southern route as well as make the routemore cost-competitive with the Mozambique routes if and when the latter arereopened. On the basis of the above, MCC handling charges for containerscould be very high and yet not erode the competitive advantage of using NTC.

61 Assuming equal annual payments over the life of the debt of MRHC.

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4.47 For breakbulk traffic, the transport cost differential between NTC(using TAZARA) and the southern route to Durban for cargo from south MalawiIs about RK 100/ton in favor of the northern route. With full operation ofMCC, this differential vill be partly eroded by handling charges at MCC.However, transport security will be considerably enhanced. Breakbulktransport fromito northern Malawi, which is expected to comprise asignificant proportion of NTC breakbulk traffic, will enjoy significant costadvantages over the use of the route to Durban. Overall, however, pricingof MCC breakbulk handling services will be relatively sensitive tocompetitive conditions on the alternative southern route to Durban.

4.48 For the fuel storage and transport segment of the business, thecost of handling, storing and transporting fuel from Dar-es-Salsam toLilongwe (including the lake stretch) plus payment of a 42 commission onsuch costs to MCC Company for supervisory, transport brokerage andadministrative services provided has been estimated at 23.0 tambalas/litrefor diesel and petrol for the levels of throughput projected for 1991.These costs represent around 701 of the cost of such services on alternativeroutes with RSA sourcing. The MCC's cost competitiveness is furtherbolstered by the fact that a significant proportion of the fuel to bedelivered through NTC is destined for northern Malawi thereby necessitatingeven shorter transit distances.

Financial Proiections

4.49 Projections of the financial performance of MCC Company based ontraffic projections for NTC outlined in Chapter 5 are detailed in Annex 3(b)to 3(e) and summarized in Table 4.8 below. The financial projections arebased on the division of MCC Company's operations into two business segments(dry cargo and fuel) reflecting their distinct operating charvcteristics.For the dry cargo business segment it is assumed that handling charges willbe MK36/ton for breakbulk and MK450/container for containerized traffic.These changes, representing respectively about 402 and 302 of the savings intotal transport costs (net of MCC projected handling costs) that will berealised with establishment of MCCs for transport of breakbulk andcontainers are considered reasonably conservative. Jet fuel, which will becontainerized, is assigned to the dry cargo business and the relatedhandling services are assumed priced at a premium of 202 on containertariffs to reflect its additional handling costs. For the fuel business,all costs of operations incurred to third parties on diesel, petrol andkerosene handling will be charged through to the oil companies. Commissionon such costs is assumed at 42 and is assumed to be based on (i) thedifference between the per litre FOB cost of product and the delivered cost(excluding duty and surtax) to Chilumba in Malawi and (Ui) the estimated netamount delivered based on the losses incurred on deliveries to Chilumba.The commission rate is considered reasonable and its basis provides anincentive for close supervision of operations by MCC Company. No account istaken of the necessary investment and income from operating a unit trainservice, although such operation Is likely to be financially viable.7 /

7/ The basis of such service would be the charge of a premium on TAZARAtariffs to shippers to offset the cost of leasing wagons from TAZARA andprovide a return on organizing the service.

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Table 4.8 MCC Company: SummZry of Financial Projections(Constant 1989 MK '000)

1990 1991 1992 1993 1994 1995 20C0

Dry Cargo Revenues 4889 8232 8493 8754 9015 9276 10768Fuel HandlingCommission 407 503 521 549 577 595 731

5296 8735 9014 9303 9592 9871 11499

Dry Cargo IncomeAfter Basic LeasePayment 3824 6936 7184 3648 3896 4144 5564Net Fuel Handling

Commission 327 423 441 469 497 515 651

4151 7359 7625 4117 4393 4659 6215

MCC Co. Income AfterProfit Share andGeneral ManagementCostsa/ 401 963 1019 1301 1465 1620 2537

Ratios

Working Profit Margin/IDry Cargo Segment (Z) 78 84 85 85 85 85 87

Operating Income/Avoidable Lease PaymentasBreakbulk - - - 1.7 1.8 1.8 1.9Containers - - - 3.9 4.1 4.3 5.4

'MRHC Debt ServiceCover 3.1 5.0 5.2 1.5 1.5 1.5 1.6

a/ Profit sharelsupplemental lease payment to URHC computed at (i) 85S ofoperating profits during first 3 years; (ii) 752 of first MK 0.5 millionof gross profit after basic lease payment, 652 of the second MK 0.5million and 452 of incremental amounts thereafter for succeeding years.

kI For purposes of calculating a working profit margin for the dry cargoservices, profits is defined as profits before any lease payments (ineffect a combination of depreciation and financing charges) and generalmanagement costs shared with fuel facilities.

4.50 The projections Indicate a satisfactory degree of profitability forthe containers handling segment of the business. Cash generation In thissegment of the MCC Company business is sufficient to cover its long-runavoidable costs and to make a substantial contribution to MCCs coumon costs.The breakbulk handling and storage business although less profitable thanthe container handling business covers its asses4ed long-run avoidable costsand its cash generatlon is adequate to cover its attributable share of

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common costs If this is assessed on a prorated traffic level basis. Theprojected financial performance of the fuel handling business Issatisfactory especially in view of the limited market risk assumed by MCCCompany.

4.51 The overall level of cash generation of the MCC. Is satisfactory.Total cash generation increases from MK 2.4 million in 1990 to, MK 8.2million in 2000. The proportion of such cash generation accruing to MCCCompany rises from MK 0.4 million in 1990 to MK 2.5 million in 2000. MRHC'sdebt service cover increases from 1.5 In 1993--the first yesr of full debtservice payments on all debt--to 1.7 in 2000. This level of cover isacceptable.

Financial Rate of Return

4.52 The base case Financial Rate of Return (FRR) to the MCC sub-projectis estimated at 122. The gross rate of return on equity to MRRC isestimated at 112.8/ The residual cash flow of the MCC Company after leasepayments and profit shuring is projected as rising from MK 0.4 million in1990 to NK 1.7 million In 1995 and MK 2.5 million in 2000. This lovel ofcash flow generation should ensure that MCC Company, subject to itsaunagement and administrative costs in Malawi, earns an attractive return onthe investment it Is likely to make in the entity. The projected rate ofreturn on the Investment of all parties in MCC is thus acceptable on thebase case.

Sensitivity Analysis

4.53 The project faces 2 main ricks both in respect of the dry cargooperations: (i) the price that can be charged for handling cargo to attractthe forecast level of traffic may be lower than indicated; and (it) thelevel of traffic forecast may not materialize. In respect to the firstrisk, the magnitude of the cost advantage of NTC over the southern route toDurban for containerized traffic will be critically dependent on the extentto which freight forwarders pass on the benefits of a more assured level ofservice between Mbeya and Dar es Salaam to their customers. Theorganisational and financial arrangements governing the MCC Company havebeen partly designed to ensure that there is little Incentive for freightforwarders and other Intermediaries to pre-empt the financial benefits thatshould arise with improved service as a result of the MCC investments. Thecost advanttge for breakbulk is more marginal. Sensitivity analysesundertaken, however, indicate that a reduction in the charge for handlingand storage of breakbulk from the assumed 402 of expected savings throughuse of NTC to 30X of such savings reduces the F%R to l12 and the return on

8/ Based on (i) profit sharing during the first 3 years of operation assessedon 852 of the net income of the dry cargo operat;ons after deducting HK 0.5million but before general management costs; (ii) supplemental leasepayments from the fourth year of operations assessed at 752 of the first NK0.5 million gross profit tranches of the dry cargo operations 652 of thesecond MK 0.5 million and 452 of incremental amounts thereafter; (1i1)replacement investments financed with debt at 12S p.a. over 10 years on anannuity basis; (iv) stream of 30 years of net cash flow attributable toequity and terminal equity valuation of 2 times such attributable cash flownet of the value of outstanding debt.

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equity on MRHC to 62. These results should permit a small return onInvestment to MCC Company. The return on equity in ERHC is acceptable underthis scenario given the entity's risk-underwriting role. The result ofsensitivity analyses on the projected traffic levels are summarized in Table4.9 below.

Table 4.9 Sensitivity Analyses on Traffic Levels

Return onFRR Sauity in MRHC

(1) 302 Reduction in Broekbulk Traffic 11 8(2) 30Q Reduction in Container Traffic 10 7(3) 302 Reduction in Overall Dry Cargo Traffic 9 4

A sizeable decline In overall traffic will not severely affect the overallfinancial rate of return. It will however, undermine the return on equityin MRHC. Since the return on equity depends crucially on the profit sharingand supplemental lease formula oenvisaged, such formulao will be subject torevision as experience evolve" to protect the financial viability of MRHCwhile ensuring an adequate Incentive for good porformance to MCC Company.

4.54 The project has been designed with particular mphasis oninstitutional arragements embodied in a bilateral agreement between thegovernments of Tanzania and Malawi and a series of working agreements to-nsure smooth transiting of Ealawi cargo through Tanzania and thus servicecompetitiveness with alternative routes. Adequate attention has beendevoted to organizational arrangements to ensure a high degree of efficiencyin the operation of the MCC facilities and a high level of commitment on thepart of MCC Company to mzrketing its services to local shippers and theiragents. These measures, In conjunction with tho intrinsically much lowercost of transport through NTC are believed to be adequate safeguards againsttraffic levels substantially lower than projected.

4.55 Finally, the financial analysis is based on a target implementationperiod of 3.5 years. An implementation schedule of 6 years will load to anincrease in total investment costs in the MCCa of about 82 as compared tothe estimated costs of the target implementation schedule. The FRR undersuch a longer Implementation schedule Lo estimated at 102. This FRR issufficient to allow an acceptable return on the investments made by allinvestors in MCCs. Nonetheless, all necessary measures have beon taken toensure that the target Implementation schodulo is met and that the expectedben-efits from the project are realised as soon as possible.

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V. ECONOMIC EVALUATION

General

5.01 The project is consistent with the Government's objectives in thetransport sector and represents a continuation of transport developmentunder previous projects financed by the Bank Group. Improvement of theKaronga-lbanda road will continue the work begun in the 1960. to develop themain north-south artery as an instrument of economic integration of thethree regions comprising Malawi. This road will attain special significanceas a key link of the NTC route for export/import trade of Malawi.Rehabilitation of the Ibanda-Uyole road likewise will strengthen anotherimportant link in this corridor. MCCs and fuel handling installations inTanzania will facilitate the flow of both dry cargo and bulk fuel trafficover NTC# thus minimizing transport costs and adding to the reliability andattractiveness of the route. Lake transport improvements will enable LS tohandle much of the export/import traffic at substantially lower cost thanalternative road transport. The Balaka-Salima road rehabilitation will notonly reduce the cost of transport for a portion of Malawi's internationaltraffic but also will provide notable benefits to domestic traffic.

A. Evaluation of Prolect Overall

5.02 The main benefits from the project (exclusive of the lakecomponent) are reductions in transport costs for a major part of Malawi'sexport/import traffic which are based on forecast tonnages of such trafficand the difference between the transport cost per ton with the project andwithout the project. With the project, the traffic will be transportedbetween Malawi and the port of Dar es Salaa (about 1,800 acm) rather than bythe longer (about 2700-3600 km) and more costly route between Malawi and theport of Durban. Since the 1985 closure of the relatively short railwayroutes through Nozambique, about 901 of total export/import traffic hasmoved through the southern corridor. To the shippers of this traffic withassumed origin or destination in Blantyre, the savings in transport cost perton on NTC versus the southern transport corridor are MK 192 for fuelimports, MK 115 for general imports and HK 103 for exports.8 1 NTC trafficin 1995 is expected to reach 301,000 tons. On the basis of this traffic andsavings in transport costs per ton, forecasted savings in transport costsfor the diverted traffic in that year are projected at INK 26.8 million. Thetraffic and thus the total benefits are projected to grow at a modest 3Xp.a. Sometime in the future, the railway lines through Mozambique willprobably reopen causing benefits from NTC to be somewhat reduced asdiscussed below. In that case as well, however, the economy of Malawi willbenefit greatly from the reduction in transport cost attributable to the NTCProject. Even with the Mozambique routes fully operational, NTC will remaincost competitive for importlexport traffic of the-northern and centralregions of Malawi.

8/ The savings indicated are for road/rail route to Dar es Salasm. Savingsfrom use of lake route have not been included.

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5.03 Additional benefits anticipated from the project include savingsin vehicle operating costs on normal (non-diverted) traffic and savings inroad maintenance costs on three sections of roads that will carry NTCtraffic; only in the case of the Balaka-Salima road are these benefits takeninto account in the benefit/cost analysis. In the case of the Karonga-Ibanda road where only single-lane operation is possible on one segment,some benefits in terms of time savings will occur as the improved road willallow two-lane operation throughout its length; these benefits are notquantified.

5.04 Further project benefits w.'1 derive from savings in transportcosts based on more extensive use of lake transport as compared with roadtransport. The addition of a cargo vessel, various port improvements andmaintenance facilities, along with appropriate technical assistance, areexpected to result in a substantial increase in lake cargo. The benefitsfrom these investments are measured by the difference in transport costbetween lake service (including transshipment) and road transport, the onlyalternative surface transport available. Differences in tra4sit timebetween lake and road transport are about two to three days due totransshipment requirements at the ports.

5.05 The direct beneficiaries of the savings in transport costs ontraffic diverted from the southern to the northern corridor will be theshippers and receivers of freight. Because of competition, these savingswill be largely passed along to others through lower prices on a widevariety of products, thus benefiting virtually the entire population. In asimilar way, the cost savings in lake transport versus road transport willbenefit nearly all population elements. Savings in vehicle operating costson improved roads, as well as reductions is vehicle operating time willresult in direct benefits to truck owners and operators; however, in view ofthe competitive nature of the road transport industry, it is expected thatthese benefits will be largely passed on as lower freight rates to theshippers and receivers of freight. Farmers and consumers in the area ofinfluence of the roads are also expected to benefit from the reducedtransport costs. Some savings in road maintenance costs are alsoanticipated which would be beneficial to the Government.

B. NTC Traffic Forecast

5.06 The forecast of traffic on NTC is a fundamental factor in theeconomic evaluation of the project. Although the current level of Malawiexportlimport traffic on the corridor is small, substantial traffic growthis anticipated as the project is implemented. This section presents detailsof this traffic projection and explains how the forecasts were derived. Aparticularly important assumption underlying the basic forecast is that theMosambique rail routes to Beira and Nacala will remain closed until 1990 andthereafter the routes will be gradually improved, permitting Malawi trafficby 1993 to flow at a rate equal to half the potential route capacity leveland remain at that level in subsequent years. The rationale for thistraffic limit after 1993 is that there may well be continued banditryinterference with the operation of the lines and, in any case, the poorcondition of the facilities would probably seriously restrict the operatingcapacity of both lines (particularly the Beira line) since rehabilitationwould be costly and time-consuming. Consideration Is also given to theeffect of variations in the reopening assumption on future levels of NTCtraffic.

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5.07 National trade of Malswi Is forecast to reach 932,000 tons in 1990and the pattern of origins and destinations is expected to remain much thesame as in 1985. For example, in the case of tea exports, 67Z was destinedfor overseas, 31X for South African and 22 for regional markets while 94S ofthe tea originated in the south of Malawi and 62 in the Mxuzu area. In thecase of fertilizer importst 502 originated In RSA and 502 overseas while 36Zof the product was destined for southern Malawi, 192 for the Kasungu areaand the balance for other locations. The traffic was assigned among variousroutes taking into account comparative cost of transport on the routes.Another consideration was the policy of the Malawi Government to spreadprocurement and transport risks among available sources and routes. Anadditional factor in traffic assignment was the time required not only tobuild up capacity and operational expertise on NTC route but also to developshipper confidence in that route.

5.08 A forecast of commodity breakdown of NTC traffic in 1995 is asfollows: export commodities of 33,000 tons of tobacco, 20,000 tons of teaand 72,000 tons of other goods; imports of 55,000 tons of fuel, 74,000 tonsof fertilizer and 47,000 tons of other commodities. Thus 125,000 tons ofexports and 176,000 tons of imports, cr a total of 301,000 tons, areexpected to move on the corridor In 1995. This volume is about one third ofMalawi's total exportlimport traffic. No sugar exports or coal imports havebeen included in the rather conservative traffic forecast but it may bepossible to attract Dwangwa sugar exports to the route as well as othertraffic.

5.09 A commodity breakdown of future NTC traffic is shown in Table5.01. About 332 of the traffic will be transported as breakbulk, some 502will be containerized and the remaining amount will consist of bulk fuel.The forecast represents half of potential maximum NTC traffic if theanalysis was based only on cost differential between southern route and NTC.

Table 5.01 Forecast of NTC Traffic('000 tons)

iggol/ 1995 2000

Exports

Tobacco 30 33 36Tea 15 20 25Others 66 72 80

Subtotal 111 125 141

Imports

Fuel 43 55 70Fertilizer 57 74 95Others 44 47 50

Subtotal 144 176 215

Total Traffic 255 301 356

1I Assuming opening of NTC In 1990.Sources GITEC, "Transport System Study of the Blantyre-Dar es Salaam

Corridor,' July 1985.

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5.10 The foregoing estimates reflect the unlerlying assumption that theMozambique routes will reopen in 1988 and by 1993 will accommodate MalawAtraffic equal to half the potential capacity of those routes. If,alternatively, it Is assumead that the Mozambique routes remained closedindefinitely, the NTC traffic would be about 502 greater than this baseforecast. If the Mozambique routes are assumed to reopen fully in 1990 andremain open thereafter, then the NTC traffic would be only 621 of the baseforecast.

5.11 Shippers of traffic on NTC have a choice between differenttransport modes on certain sectors. Between Dar es Salaam and Mbeya whererailway and road transport are available, it is quite clear that all trafficwill be transported more cheaply on TAZARA than on the TANZAM Highway.Between Chilumba and Chipoka it is also clear that traffic will move atlower cost by lake than by road but since traffic origins and destinationsare widely dispersed within Malawi, only a third of total NTC traffic willbe transported by LS. Accordingly, the forecasted NTC traffic on the lakeIs about 108,000 tons in 1995 (Table 4.4). Relatively high proportions ofNTC fuel traffic (551) and NTC container traffic (471) are expected to betransported on the lake while lower proportions of breakbulk will be shippedby this mode.

C. Economic Analysis

Evaluation of Proiect Overall

5.12 The economic justification of the NTC Project Is based on anassessment of economic costs and benefits with and without the project overthe estimated 20 year life of the major components. Since the cargohandling equipment 'or MCCs and lake ports, as well as the equipment for themaintenance facility, are assumed to have an economic life of only 7 years,additional investments for replacement of such equipment are taken intoaccount in the economic analysis. Recognizing the uncertainty concerningthe future feasibility of operating on the traditional access routes throughMosambique, particular consideration is given to determining the minimumnumber of years required for the project to yield an acceptable EconomicRate of Return (ERR).

5.13 The project investments In NTC are shown in Table 5.02. TheImplementation period is assumed to be siX years, based on past experiencewith transport projects as reflected in the standard disbursement profile,with 81 of the investments occurring in 1988, 131 in 1989, 211 in 1990, 251in 1991, 191 in 1992, and 142 in 1993. The project should begin to producesome benefits in 1990 and full-year benefits in 1993. This would yield anacceptable ERR of 162. On the other hand, if the Implementation period isassumed to be 3.5 years, as indicated on the target implementation schedule(Chart 1), the overall ERR will improve to 211. Analysis of the individualcomponents have been carried out for both, 6 year and 3.5 yearimplementation schedule. Additionally, a satisfactory ERR is indicated evenif one considers the economic life of the project to be substantially lessthan 20 years. 6.5 years of project life are required to yield anacceptable 101 ERR.

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Table 5.02 Protect Investments and Their T1minA(MK million)

6-Year Imilementation Schedule

Items 1988 1989 1990 1991 1992 1993 Total

Karonga-Ibanda-Uyole Road 5.5 9.0 14.5 17.3 13.1 9.7 69.1MCCs (Dar es Salaam/Mbeya 3.4 5.5 8.8 10.5 8.0 5.8 42.0Fuel Handling Including -

Tank Wagons 1.8 2.9 4.7 5.6 4.2 3.1 22.3Lake Transport 2.8 4.6 7.4 8.9 6.7 5.0 35.4Sallma-Balaka Road 2.6 4.2 6.8 8.1 6.1 4.4 32.2Border PostlWeigh Bridge 0.1 0.2 0.4 0.4 0.3 0.2 1.6

Subtotal 16.2 26.4 42.6 50.8 38.4 28.2 202.6

Technical Assistance,Training and DetailedEngineering 5.1 2.5 4.0 4.8 3.6 2.7 22.7

Total 21.3 28.9 46.6 55.6 42.0 30.9 225.3

3.5-Year Implementation Schedule

Items 1988 1989 1990 Total

Karonga-Ibanda-Uyole Road 20.7 34.6 13.8 69.1N4CC (Dar es Salaam/Mbeya) 12.6 21.0 8.4 42.0Fuel Handling Including

Tank Wagons 6.7 11.2 4.4 22.3Lake Transport 10.6 17.7 7.1 35.4Salima-Balaka Road 9.7 16.1 6.4 32.2Border Post/Weigh Bridge 0.5 0.8 0.3 1.6

Subtotal 60.8 101.4 40.4 202.6

Technical Assistance, Trainingand Detailed Engineering 6.8 11.4 4.5 22.7

Total 67.6 112.8 44.9 225.3

Notes All costs are based on prices as of December 1987 and includeallowances for physical contingencies and exclude price contingencies,taxes and duties.

Source: Mission estlmates

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Economic Evaluation of Various Proiect Components

5.14 While the NTC project as a whole has been shown to be economicallyjustified with ERR of 161 (ERR of 212 for 3.5 year fimplementation), one mayquestion whether some particular component or components may be unjustified.The purpose of this section is to analyse specific components and ascertainwhether each can be found to have an acceptable economic return. Thegeneral approach has been as follows; first, consideration is given to theKaronga-Ibanda-Uyole road improvement which Is assigned the highestpriority; benefits related to the road are based on the diverted trafficthat can be attributed to this improvement aloie. Second, this roadcomponent and MCCa are then treated together, as the latter depends on theformer, and the larger volume of diverted traffic in this case is the basisfor benefit estimates for the Joint component. Third, the fuel handlingcomponent is analysed separately and the benefits in this case are based ondiverted bulk fuel only. Fourth, the lake service component is consideredwith benefits derived from the estimated volume of RTC traffic on the lakeattracted by lower transport costs on the lake than on the road betweenChilumba and southern points In Malawi. Finally, the Balaka-Salima road isanalysed with benefits largely based on vehicle operating cost savings fornormal and NTC traffic. Special care is taken to avoid assigning morebenefits to a particular component than is appropriate.

Karonta-Ibanda-Uvole Road

5.15 The most severe constraint on NTC at present is the unreliablecondition of the Karonga-Ibanda-Uyole road and the improvement of this roadis the most important single action that could be taken to attract a majorvolume of traffic to the route. The improvement required is to upgrade thepoor gravel road between Karonga and lbanda to a two-lane paved standard andto rehabilitate selected segments of the paved road between Ibanda andUyole. The efficiency and zeliability of transport on this vital roaddepends on these improvements.

5.16 Malawi importlexport traffic on this route, with the improvement,would attract traffic primarily with origins and destinations in thenorthern and central part of Malawi. Following are traffic estimates:

Table 5 03 Traffic Forecast for Karon -Ibanda-Uvole Road(tons '000)

19YO 15 2000

Tea Exports 13 15 15Fertiliser Imports 37 43 50Other Imports/Exports 21 24 28

Total 73 82 93

1/ Assuming opening of NTC in 1990.

Sources GITEC 'Transport System Study of the Blantyre Dar es SalamCorridor, "July 1985.

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This traffic, Increasing at 32 p.a., would be diverted from the southerncorridor route becaue of th* transport cost advantage of RTC, as Indicatedin the following comparison:

Table 5.05 TransIort Cost(MK per ton)

SouthernCommodity Route NTC Savina

Tea 345 245 100Fertilizer 281 153 128Other 251 211 141

Sourc-s GITEC *Transport System Study of the Blantyre-Dar es SalasmCorridor', July 1985, and mission estimatee.

5.17 The estimated benefits from the traffic diversion are derived fromthe projected traffic volumes and the transport costs savings per ton. Thusin 1995, the benefits are:

Table 5.05 Benefits from Karonta-Ibanda-Uvole Road(HK '000)

Tea 1,500Fertiliser 5,504Other Imports/

Exports 3,384

Total 10.388

5.18 The benefits and costs of this project component are shown in Annexj and yield an 11 ERR (132 ERR for 3.5 year implementation).Significantly, only the benefits from traffic diversion are taken intoaccount; savings in vehicle operating costs on normal traffic (non-divertedtraffic) and savings in road maintenance costs aro Ignored. Even if noother project components are undertaken, improvement of the Karonga-Ibanda-Uyole road would be viable.

KCCs

5.19 Investment in MCCs would clearly not be justified on the basis ofthe present low level of Malswi transit traffic through Tanzania. Only ifthe Karonga-Ibanda-Uyole road were improved would there be sufficienttraffic on the NTC to warrant development of MCCs. Thus the analysis ofMCCs is based on the assumption that the road component f undertakenconcurrently.

5.20 MCC. at Mbeya and Dar as Salaam will have a substantial impact onthe ability of RTC to attract Nalawi export/import traffic. Intermodaltransshipment points are vulnerable to delays of traffic and loss and damage

- 59 -

to freight. Thue, it is of special Importance to provide appropriateequipment and facilities at these points and to organize transshipmentoperations that will ensure the efficient flow of traffic along the route.There is little doubt that the two centers will enhance the quality oftransport service on the routes they will expedite the flow of traffic thusminimizing transit time, hold down loss and damage to goods and ensuregreater attractiveness of the route for Malawi shippers and importers.Moreover, the greater efficiency of intermodal transfer, with MCC8, willtranslate into lower transport costs than would otherwise occur.

5.21 Traffic on NTC has been estimated assuming that both the Karonga-Ibanda-Uyole road and MCCs are implemented. On this basis, the total volumeof Malawi dry cargo export/import traffic on the NTC is estimated asfollows:

Table 5.07 Traffic Forecast for NTC RoadL/CC(tons '000)

Commodities 19901/ 1995 2000

ExportsTea 15 20 25Tobacco 30 33 36Other exports 66 72 80

Total 111 125 141

ImportsFertiliser 57 70 85Other Imports 44 51 60

Total 101 121 145

Total Dry Cargo 212 246 286

This traffic would have origins and destinations within a broad area ofnorthern, central and southern Malawi. With the development of MCCs as vellas NTC road, NTC could compete even more effectively with the southern routethan in the case where only that road is undertaken.

5.22 Transport cost advantages of ITC over the southern route would besubstantial for the large volume of import/export traffic estimated. Theweighted average transport costs, by commodity, and the savings in suchcosts are as follows:

Table 5.07 Transport Cost (includinx MCC Transshlpment)(MK per ton)

SouthernCommodity Route NTC Saving

Tea 345 268 77Tobacco 396 300 96Fertilizer 281 166 115Other imports/Exports 350 236 114

- 60 -

These costs reflect the origins and destinations, within Malawi, thataccount for the major traffic volumes of particular commodities.

5.23 Benefits from the NTC road/MCC component have been estimated on thebasis of the foregoing traffic projections and transport cost savings perton. AccordisZly, in 1995 the following benefits are derived:

rable 5.09 Benefits from NTC Road/MCC(MK '000)

Coumodity

Tea 1,540Tobacco 3,168Fertilizer 8,050Other lmportsfExports 14,022

Total 26,780

5.24 The benefits a*. costs represented by the NTC road/MCCs arepresented in Annex 5. They yield ERR of 161 (211 ERR for 3.5 yearimplementation). Thus, if only MCCs and the Karonga-Ibanda-Uyole road wereundertaken, the result would be an acceptable economic return.

5.25 The benefits and costs for MCCs alone are presented in Annex 5,pate 3. The benefits are the differences between the benefit streams forthe NTC road and the NTC road plus MCCs.. The economic return is derivedbased on the ilK 42.0 million investment cost for MCCs and the indicated netbenefits. On this basis, ERR is found to be 24S (31S ERR for 3.5 yearimplementation).

Fuel Handlinz System

5.26 The import of fuel into Mlalawi via NTC depends on the completionnot only of the fuel handling facilities in Tanzania but also the Karonga-Ibanda-Uyole road. Unless the NTC road were improved it would beImpractical to operate large tank trucks over that road. Equally, theimport of fuel over NTC requires the installation of fuel storsge andpumping facilities at both Mbeya and Dar es Salaamn. Therefore, -he economicanalysis of the fuel handling facilities (including tank wagons and tankcontainer) assumes that the NTC road is also Improved.

5.27 Fuel traffic has been estimated by GITEC consultants at 43,000 tonsin 1991, 55,000 tons in 1995 and 70,000 tons in 2000. The benefitsattributable to fuel handling facilities are the anticipated savin s intransport costs on fuel when diverted from the southern corridor.91 Savingsin such costs are estimated on the basis of: (i) MK 192 per ton differencebetween the IlK 447 on the southern route and MK 255 on NTC (weighted averagecost for distribution to the northern and southern regions by roadirail

91 Malawi has obtained small amounts of fuel from the Zambian refinery atNdola; this source is not expected to account for significant fuelimports in the future because of the high delivered cost of fuel fromNdola relative to that from other soutces.

- 61 -

transport); and (2) the estimated traffic. Thus, in 1995, for example, the55,000 tons of traffic would represent benefits of HK 10.6 million. Fueltraffic and benefits are estimated to increase at 52 p.a., stabilizing at70,000 annual throughput (design capacity). The economic return is derivedossed on the MK 22.3 million investment cost for the fuel facilities, tankwagons and tank containers and the indicated net benefits. On this basis,as shown in Annex 5, ERR Is calculated at 242 (322 for 3.5 yearimplementation).

Lake Transport Facilities

5.28 Goods for transport between the nortnern port of Chilumba andvarious points in southern and central Malaui can be moved either by laketransport to and from Chipoka (and often further transshipped on road orrailway) or by road transport (combined in some cases with rail transport incentral and southern areas). For particular shipments, the choice of routebetween these alternatives rests largely on comparative transport cost. Therelevant costs to consider in this situation are those shown in Table 5.09and the cost advantage of lake transport is apparent. Taking intoconsideration these unit cost savings and an estimated 83,000 tons per yearof lake traffic in the first full year of operation (additional trafficgenerated by the NTC), the total savings in that year are about MK 4.7million and with a modest growth in traffic over subsequent years thebenefits and costs are as shown in Annex 5. The table includes replacementinvestments in 1997 and 2004 for cargo handling equipment and workshoptools, the length of life of which is estimated at 7 years. ERR is found tobe 13X (15Z ERR for 3.5 year implementation). The traffic forecast used inthe analysis is detailed in Table 4.4.

Table 5.09 Comparison of Trassport Costs by Lake and Road Transport(t'K per ton)

Lake AlternativeCargo Type Transport Road Transport Saving

Dry Cargo 65 118 53Fuel 65 193 128

Salima-Balaka Road Rehabilitation

5.29 The Salima-Balaka road is not only the principal highway linkbetween Chipoka port and Blantyre but also an important link to thelakeshore road which is the preferred road for NTC traffic originating in ordestined for Blantyre. The lakeshore road is some 60 km shorter than thenorth-south sp.ne route from Karonga to Blantyre, and the easier terrainalong the lake represents relatively low vehicle operating costs. TheSalima-Balaka road has been identified in the Government's Paved RoadRehabilitation Program as the project of highest priority because of itscondition of critical deterioration.

- 62 -

5.30 Normal traffic (excluding NTC traffic on the Salima-Balaka road) isshown in Table 5.10. Estimates for 1988 and subsequent years are based on atraffic growth rate of 52 p.a. NTC traffic on the road has been estimatedat 45,000 tons or about 10 heavy trucks per day. The estimated traffic isabout 15 pereent of the total traffic destined for or originating inBlantyre and the Southern Region; the remaining traffic will move by rail.NTC traffic on the Salima-Balaka road is estimated to grow at 32 p.a., aboutthe same growth rate as for overall NTC traffic. Unit savings In vehicleoperating costs for various types of vehicles are praeanttd in Table 5.11.Savings In vehicle operating costs over the 20 year life of the road,derived on the basis of the foregoing data, are shown in Annex 5. Unitsavings in vehicle operating costs have been applied to both normel trafficand NTC traffic. The ERR for the Salima-Balaka road is 142 (182 ERR for 3.5year implementation).

Table 5.10 Average Daily Traffic on the Salima-Balaka Road(No. of Vehicles)

Type of Actual EstimatedVehicle 1986 1995

Car 23 37Van/Landrover 55 87Bus 5 8Truck - Light 38 60Truck - Heavy 17 27

Total 138 219

Sources Mission estimates.

Table 5.11 Vehicle Operatina Costs for the Salima-Balaka Road(MK per Vehicle-Kilometer)

Type of Poor GoodVehicle Bitumen Bitumen Savings

Car 0.63 0.41 0.22Van/Landrover 1.06 0.60 0.46Bus 1.21 0.79 0.42Truck - Light 1.19 0.70 0.49Truck - Heavy 4.A2 -3.40 1.02

Source: GITEC consultants and mission estimates.

Technical Assistance

5.31 No specific economic analysis has been undertaken for the technicalassistance component of the project because of the difficulty of quantifyingthe benefits. Nevertheless, there is no doubt that these benefits will besubstantial. The diversity of the project components and the wide

- 63 -

geographic scope of the operating entities involved In NTC transport suggestthe importance of transport coordination for which technical assistance isto be provided. The sharply expanded traffic level anticipated for LSindicates the need for technical assistance to strengthen the functioning ofthat service. Likewise, the introduction of the two MCCs requires technicalassistance to assure that these tmportant entities perform their criticaltransshipment operations with maximum effectivenesz.

5.32 In summary, the economic returns for the project overall and forthe various components are as followst

Table 5.12 Sumary of Various ERRs(Z)

6-year 3.5-vear

Project Overall 16 21Karonga-Ibanda-Uyole (NTC) Road 11 13NTC Road and MCC 16 21MCC 24 31Fuel Handling 24 32Lake Facilities 13 15Balaka-Salima Road 14 18Technical Assistance No estimate No estimate

D. Sensitivity Analysis

5.33 The sensitivity of the economic return to variations in theestimated costs and benefits was determined and the results indicate thateven if the Mosambique routes were to reopen fully as early as 1990(equivalent to about 40% reduction in NTC traffic), the total project wouldstill yield an acceptable ERR of 102. In the case of the Karonga-Ibanda-Uyole road and MCC, ERR would be reduced to 102. For lake transportcomponent, ERR would be reduced to 91. In the case of fuel handling, ERRwould be reduced from 322 to 182, assuming reopening of Mozambique routes in1990; thus, even if costs for such facilities rose considerably, as benefitsreduced, the component is likely to be viable.101 For the Salima-Balakaroad, the investment is justified without considering any diverted NTCtraffic (reduction of ERR from 141 to 12S). In case the construction costswere to increase 151 over the estimates, ERR would still be acceptable.Under a shorter implementation schedule of 3.5 years, rather than the 6-yearimplementation, the project will yield a significantly higher ERR of 212.Al" components i'ill yield satisfactory ERRs ranging from 131 to 321.

101 The assumption that the Hozambican routes will reopen In 1990 is anextreme assumption and highly unlikely. Given the damage done to theBeira line from lack of maintenance and war damages, it would take atleast two years from complete cessetion of guerilla activities to reopenBeira. The Nacala line, which is currently being rehabilitated, hasnever carried more than 301 of Malawi's external traffic.

-64-

S. Risks

5.34 The principal risk associated with the project is that thegovernments of Malawi and Tanzania might fail to follow the variousagreements reached on the procedures to operate the NTC route. Possiblepoints of disagreement ore customs procedures for Malawi transit traffic,charges for port services at Dar es Salaam, and freignt rates on TAZARA.While these are notable risks, representatives of the two governments havediscussed these matters extensively and have signed a bilateral agreementfor operating the NTC route. The agreement, signed by Ministers ofTran*port and Communicationz (Malawi) and Communications and Works(Tanzania) on August 15, 1987, covers the particular agreements necessary toeffectively operate the NTC route. The development of this internationalroute is consistent with the objectives of the Southern Africa DevelopmentCoordination Conference, of which both Malawi and Tanzania are members.

5.35 Another "risk* is the possibility that the traditional routesthrough Mosambique will be reopened at an early date, thus causing some ofMalawi's traffic to move once again on those routes rather than on NTC. ItI.; unlikely that the line to Nacala will be reopened in the near futuregiven the security problem in Mozambique. Even if the problem is resolvedin the next few years, the line would require significant rehabilitation torestore satisfactory operations. With reepect to the Beira line, even ifthe security problem along the link to Malawi can be resolved, it is likelythat a significant proportion of the port capacity will be for use byZimlabwe. However, it should be noted that the NTC Project would still beviable in the event that the Mozambique routes were to reopen in the nearfuture (para. 5.33). NTC will remain competitive for iuport/export trafficfor the northern and central regions of Malawi even after the reopening ofthe traditional routes to the sea.

- 65 -

VI. AGREEMENTS REACHED AND RECOMMENDATIONS

6.01 At negotiations, agreements were reached with Government on thefollowingi

(a) The Government will consult -with the Association prior toundertaking any major-investments in the transport sector,including investments in vessels and port maintenancefacilities on Lake Nalawi (paras. 1.21 and 4.30);

(b) That consultants will be employed on terms and conditionssatisfactory to the Association (par.. 3.19);

(c) Signing of the ODA (UK) grant agreement with Tanzania would bea condition of IDA credit effectiveness (paras. 3.27);

(d) Not later than September 30, 1988, cofinancing agreements withall the donors involved shall be effective (para. 3.27);

(e) A Project Implementation Schedule (para. 3.34) as well asprogress reporting requirements, and the submission of aproject completion report (para. 3.36);

(f) That all project accounts, including the Special Account, thestatement of expenditures of MRHC, MR and the MCC Company,will be audited by auditors acceptable to the Association andthat the audited accounts together with the auditor's reportwill be submitted to the Association not later than six monthsafter the end of the fiscal year for MRHC, MR and MCC Companyand nine months for MTC and MWS (paras. 3.36 and 4.31);

(g) Funds for the LS related investment will be transferred to LSon a mixturo of on-lending and equity contribution from theGovernment on terms and conditions to be determined inconsultation with the Association; and a formal financialobjective will be set for LS to achieve a working ratio of nomore than 10O1 during the first year of projectimplementation, 95S in the second year and 90S up to the endof the project implementation period. To attain thisobjective, the Government shall: (i) permit MR to restructurethe passenger services of LS over a three-year period (June30, 1988 to June 30, 1991) to progressively eliminate theworking losses; and ({i) cause MR, before December 31 in eachof its fiscal years, to review whether it would meet therequirements set forth in working ratio, and furnish to theAssociation the results of such review (para. 4.29);

- 66 -

(h) In consultation with the Association, by June 30, 1988, takeall measures necessary to: (i) suitably amend the Articles ofAssociation of MRHC to empower it to hold physical assets andexecute a subsidiary loan agreement.between Goverment andMRHC; (ii) register MCC Company as a limited liability companyand solicit potential investors; and (iii) prepare a draftlease agreement between MRHC and MCC Company (para. 4.42).

6.02 The proposed project to suitable for an IDA Credit of SDR 11.1million (US$13.4 million equivalent) on standard terms to the Goveriment ofMalawi.

-67-

ANNEX 1Page 1

MALAWI

NORTHERN TRANSPORT CORRIDOR PROJECT

TRANSPORT-RELATED BANK GROUP PROJECTS IN MALAWI

A. HIGHWAY PROJECTS

Approximate StatusYear Credit Amount Main Purpose Length IX complete

(US$mi1} (km)

1966 S-2MA1 0.49 Detailed engineering for - 100main roads

1968 112-MAI 11.50 Main roads construction; 290 100study of road transportregulations and roadlrailcoordination. Refunding ofCredit S-2MAI

1974 523-MAI 10.5 Main roads construction; 113 100pilot scheme for theDistrict Roads Maintenanceand Improvement Program(DRIMP)s First Phase 300 100extension of DRIMP. 1,100 100

1974 S-17-M&I 2.0 Design of infrastructure - 100requirements for exploit-ation of the Viphya forestresources.

1977 758-MAI 10.5 Main road construction. 85 100feasibility study anddetailed engineering ofmain roads

1981 1099-HA1 33.0 Main :oad construction. 63 100Main road Improvement. 100 100Second phase DRIMP.Comprehensive study of 2,400 100maintenance needs

1983 LN 2362 18.0 Main road construction 50 100CR 14232 13.1 Resealing program 400 40SF-6-MAI 13.8 Rehabilitation (paved) 71 90

Rehabilitation(gravel/earth) 1,100 70Third Phase DRMP 1,800 60

t

- 68 -

Page 1MALAWr

Northern Transport Corridor Proiect

Lake Service

Assumptions Used in Financial Proiections

General

1. The financial peojections (Annex 2, Tables 2-4) have beenprepared in terms of constant 1989 MK on a "with' and 'without" projectbasis. The project Is assumed to be fully Implemented in 1990. Equipmentfor the ports is assumed to have been purchased by March 1989. Technicalassistance provided under the project is assumed from March 1988.

Traffic and Vessel Assianment

2. The traffic forecasts in the "without project' case are detailedin the text and the pattern of traffic for the first projection year isillustrated in Anex 2, Chart 1. The financial forecasts for the "withoutproject" case are based on vessel assignments that take into account thepattern of existing cargo flows on the lake, relative vessel fuelefficiences, distances between ports and vessel capacities. Vesselcapacity utilization rates per voyage are based on historic utilizationrates and the forecast traffic level patterns. The traffic forecasts inthe "with project" case are based on consultants' projections. Fourvessels are specificallv assigned to exclusive movements between Chipokaand Chilumba. Operating costs are based on engineering characteristics ofthese vessels and capacity utilization rates per voyage which are based onthe size and direction of forecast traffic.

Other Revenue

3. Other revenue consists of income from work undertaken by LS foroutside entities, catering income and rent of houses to staff. Otherrevenue is projected at 152 of the combined revenues from passengerservices and revenues from transport of breakbulk; this is a conservativeassumption in light of recent experience.

Accountinz Policies

4. Depreciation is based on the historic cost of existing fixedassets (primarily 2 vessels) and additions to fixed assets under theproject; depreciation is on a straight line basis at rates used by MR whichare considered appropriately conservative.

5. Working capital requirements are based on the following paymentterms: (i) 30 days for transport of NTC container and fuel cargo and forpurchases by LS of goods and services other than fuel; and(ii) 15 days fortransport of breakbulk cargo and for purchases of fuel by LS. Technicalassistance costs are expensed In the year incurred.

- 69 -

ANNEK 2Page 2

Proiect Debt

6. Tho project loan are aassmed to be made for 15 years - includinga grece period of 5 year - at an annual effectivo rate of Interest of 102.

Financial Rate of Return

7. The financlal rate of return Is computed on the basis ofdifferences In cash flows betwen the "with project 3 and "without project*cases. Asset lives aros civil structures - 30 yr. * vessel - 25 years;gantry crsne - 15 yr..; port equipment - 7 years; tho project life used Incomputing the rate of return is 30 years; assets are replaced at the end oftheir useful lives 1 over the period assumed; residual values are based onstraight lino depreciation of such assetsg no residual value is assumed inrespect of civil works and buildings.

70 -

ANNEX 2Chart 1

MALAWI

NORTHERN TRANSPORT CORRIDOR PROJECT

LAKE SERVICE: ESTIMATED 1985186 DOMESTIC TRAFFIC AND PATTERN

1,000 tons: sugar 4,600 tons r8 er/Soda: 1,600

Other: 100 1tons CHIEUMBA Fertilizer: 3,000

- 2,400 tons fuel

(empties) 1,000 tons

INRHATA BAY

Beer/Soda :1,900 11,100 tonsCement :2,000 +5,600 tonsFertilizers5,000 fuelOther :2,200

,9100 tons L - §10,500 tons

Mraiz e 2,400 Maize : 7,000Empties I 1,000 Rice : 3,000Other s 1,700 Other s 500

Total Tonnage - 41,400 tons

COMPARATIVE RECENT COMMODITY MOVEMENTS(Tons)

1983184 1984/85 1985186(Actual) (Actual) (Estimated)

Cement 1,96.0 1,574 2,000Fertilizer 7,427 8,351 8,000Maize 5,798 8,231 9,400Rice 1,752 1,364 3,000Sugar 50 985 1,000Fuel 9,253 4,837 8,000Others 2,978 7,875 10,000

Total 29.209 33.217 41,400

- 71 -

ANNEX 2Table 1

I4ALAWI

Northern Transport Corridor Pro3ect

Lake Service: Historic Financial Performance(MK 'I00Q

1979 1980 1981 198218311 1983184 198418521

A. TRAFFIC

Cargo Service:

Tonnage (000 tonnes) 35.4 31.2 29.4 40.3 29.2 32.8Net tonne-kms (000) 12,434 10,691 9,695 13,870 9,142 11,483

Passenger Service:

Passengers (000) 104.9 105.1 132.7 182.0 191.2 174.6Passenger-km (000) 16,801 16,155 18,334 23,105 23,197 19,870

B. FINANCIAL

Revenues:

Cargo 1,216 1,351 1,159 1,824 1,236 1,355Passenger/parcels 229 221 312 495 486 448Other3 l 172 351 344 452 772 836

1,617 1,923 1,815 2,871 2,494 2,639

Working Expenses 1,291 1,713 2,009 2,914 2,819 2,834

Working Income 326 210 (194) (43) (325) (195)

Depreciation (37) (37) (207) (255) (243) (312)

Operating Income 289 173 (13) (298) (568) (507)

1/ 15 months2/ 11 months31 Mostly fuel rebate from 1980

-72- AM=I 2-l WPT CORR= NW1

LUIE KIINCEW CKIIL tfW U S0 1ECT

I tCSrniIT 19 891M 1907 1 1MO l99 1991 192 t1 la" IN5 l9 197 19

so='

0611(313! 33~V401" 43 1711, UP57 40*5 385 39i$3 40790 42OC-7 4~751 44596 O9Ut 47414cOgAIE.8 12000 14400 1200 144* 17269 OM 1721 170 1720 1.2&' 12O 1726I? tM28ua VOc MO Oo UN 8000 00t4 -i 1460 4 14tv* 1460 MW 1460 1461*ITALCMS 53400 5.13t S712! 99 MM7 1oe. ?asC-' 7lov 7W 3 S i4470 n7i 704

.M<000m -24291z 2129 "21'91 2111 2,c I 21Z91 21r1 1Z12f 21.21 2119 2191 2191 21291

NtU :134 1536 190l 2199 2461 sth 2374 2449 256 260. 2600 2173 290COAm s 612 734 612.1 M 9! go1 El El m1 eel ee1 HI m1FlL l4 34 410 455 '4' 5 1095 19 1095 1045 10"5 15 1095PUI 0 ICO so. So 07 71 7'm TIN 779 779 m 779 779 779 779OilE 2H1 3" 436 55. *tg to .Q tt5 M 1 697 ?15 733 751TOTAL 31 S 4U00 4651 5292 509 S 59 52 60i5 6161' 06 4374

- EIOff

FRL * 21372244 2547 179 2975 3019 33 S33 3396 3414 3432 3451 3471FoiIIL 50 567 633 700 71 46 7*i 7 6 763 10 761. hEi01_M AOl. I .:5/

TN CIL 503 503 57P 63 4H1 t Hl 61 691 f91 H91 61 091IMT 279 301 343 330 413 413 413 413 413 413 413 413 413

TOM. 352- 3615 41V 452 4647 4891 53 5251 52 5h 504 5W 5

KIlsiOMIT -30 -62 -95 126 445 203. 545 1 9 774 n57 43 10

061C1AT10 3 342 342 342 342 302 302 302 302 302 302 30 302

P0676 tIw_ -711 -42k -43 214 10 - 243 316 393 472 555 64 13

mIlN ; 0 0 0 00 0 * 6

ET talE -iu -424 -437 -214 te 243 316 393 472 5S5 o41 731

a IIIRATW Ii I 192 l12 97 92 ae .;1 9 0 7 66 0 94

4 fo

, _ ~~~~ ~~~ ~~~~~~~~~73 _ . Wf

UIE SEIYICEtil Ft-MMCA; SEMMN _

.~~~~~~9 .w _mIa go 19 M 93 04 Is 1% 1T f

UM 1440 '126 1$93 44W 2W1 MO l*. !;C Ml 19-a 4310; W

ME_tX . 1E 2391 554 1901 21l t2551 40 % 46H 46fH 93i .90ISUFUL Z l 1 2 0 IWFM 41200 B 4** s 7S 7452 1 1214 193 Ri S;3 zmo 2

polow $MM 516~~~~~l§ soli A66 :16 31 4 0 t 9 7 r 7 7 gm L tElC 5 71 5WU ?43 5 *h lid 114p 10 1175i 1202 1210 IM

MA 1Q3. 40 6It- 01 IM IM 12I 1264 1392t I1gO 14181 143b3 2 4 S

-FULDU Z*2 ?X7 Ut 71 4M .4W -M 49* 9 tWI t 49 *FIRm!4 W 43B *10 o ed is "a3 laZ be I as bcum11 Sl i S m m mt m n

, t NSu 3 54Z 1491 iW It 1t 721 liq IzSl 1A II IS

"1151_ *}I -M -it -M 272 33 4M 'M W 4" 66 717 73

. T?. @ qeo 53iR *6~~0 0 t22r 2912 i?M 22im =2 2 170 7S 1

Wi 1NK -47S *356 -43 -IffS -47 -6? 476 7 IM . 212 U43 3U4i 3919

4hN*i' ;al ' .4 :* t Mi t 46 ac 59 57 M 53 Sl iC 0

AMU 2; , - ~~74-

-NNE iwmsq j,gm aumWEE i umchq40EmY Us

-if~tJ

anno

Iifi li 141 tSA I i;t;. F2 P; 1:;4 1;t 194 l &i *e 1447 !EU.

tIIl INKE -41? -34 -:3b -103 -133 It I S7ll 31# I1 413 4 51k *iMPUtC IIb 342 34 342 !42 2107? 2047 2t 207 2W; 206? 2- 07 207

MtL -1s -'2 -. - 2 3 4m .IS i

FINur

NW 0u 222 0 iv 0 ft f

-. ,

FLO ST A.M 0 ft 3&73 .0 0 0 0 0 0

1173403 ft 33 2232 2232 2232 :z23 :200 ilk 15! I33UPA,IS16 0 0 0 0 to 2232 232 t3 2212

TOTAL DIE-MIEIIC *. 00 232 2 2 222232 2232 4241 4016 M79 WI7

TILL -l ,-� -0 -1194 2110 24&4 -i43 341 1921 204 m 51 374l

INCEAS IN _P.;Is

CAPrITL .!a 4 -10 -el 92 Z34 R~I 72 437 33.33 0

TOTAL AftPlICATIUi -07 -12 -a4 -13!. 37706 '59! 47!? SZOe !~ii s2oS asO 7171 732

MT-MICE cm VN i R WP off .12 L 2.14 2. .55 l.i t1.6 1.19 LOS

-75 -Annex 3(a)

Pat8 1 of 2

Eft

Break-even AnalsisL

Structure of Oneratins Costs

A. Fixed Costs (HR 000) Avoidable Unallocated8reakbiuk Containers

Sonior Manageumet 0.0 0.0 862.5Management Support 17.7 13.4 31.1Security 0.0 0.0 53.1Gang Reservation 2.0 0.0 0.0Msaitenanec Labor 0.0 7.6 68.7Drivers 127.7 69.7 0.0Fixed Gang Related Labor 18.1 38.1 13.6Facility Electricity 0.0 0.0 69.0B-Bulk Supplies 65.7 0.0 0.0Maintenance Supplies 106.3 109.9 0.0

337.5 218.7 1098.0

B. Variable CostsBreakbulk Contalners(HK/ton) (NK/container)

Fuel/EnerrvTractor-Trailers 1.98 9.38Forklift Trucks 1.43 0.0 (for handlIng at 2

facilities)Gantry Crane 0.0 8.65 (for handling at 2

facilities)Lubricant 0.17 0.47 (52 of value of diesel

consumption)Labor 0.12 0.0

--… -----Total 3.70 18.50

C. Capital Costs (HK'000)

Breakbulk Containers Unallocated

Assumed Annual Annual AnnualLife Equiv. Equiv. Equiv.(irs) Items PV Cost a/ PV cost a/ PY Cost a17 Tractor Trailers. 2318 400 1325 229 0 05 Forklift Truck81

Pallet Wagons 1595 368 0 0 0 015 Gantry Cranes 0 0 3680 355 0 050 Civil Works/Infra. 1165 64 7226 396 4484 24630 Buildings 14098 917 2013 131 4028 2625 Other 0 0 184 42 1233 235

_____ ---- ____ ---- --_ -

Total 19176 1749 14428 1153 9745 793_____ __e_ ---- ----

al At 5Z p.a. over assumed life of assets.

-76

Annex 3(a)Page 2 of I

Break Even Analysis

A. Relevunt CostsUnallocated

BFeakbulk Containers (System Common Cost)(1KI _(U"K) (MK)

Variable Operating Costs 3.70lton 18.50lContainer 0

Assigned Flexd Costa p.a.Operating INK '000) 337.5 218.7 1098.0Capital (MK '000) 1749.0. 1153.0 793.0

2086.5 1371.7 1891.0

B. Contribution MarginsPrice/ Contribution Break-evenContainer Margin Traffic 1/

Containers (MK) (MK) (Unit Containers)

170 151.5 9,000210 191.5 7,200250 231.5 5,900290 271.5 5,000330 311.5 4,400

Pricel Contribution Break-evenTon margin Traffic 11

Breakbulk tMRl (Tons)

14 10.3 202,50018 14.3 145,90022 18.3 114,000

-. 26 22.3 93,60030 26.3 79,30036 32.3 64,600

1 traffi£ level to ensure 52 return to lessor on assets devotedto containerlbreakbulk business; MCC will have to genorateadditional traffic to cover system coimn costs.

- 77 -

Annex l(b)Page 1 of 4

H4CCs

Operating Costs

Backtround

1. The structure of Operating Costs detailed In this Annex are based onassessed operating cycle times for equipment and estimates of labor costs andcomplements based on similar transshipment operations In Tanzania.

2. All costs are in U3 dollars and Tanzania shillings (Tsh). At the timeof estimation of these costs (February 1986), the ruling rate of exchangebetween Tah and US$ was TSh 15 - US$1. As of mid-1987 the Tanzania shillinghad progressively depreciat-d to about TSh 50 - US$1. There is as yet nocertainty as to the degree *f adjustment of wages in Tanzania to thesubstantial depreciation oi the exchange rate since the costs were estimsited.For purposes of estimation of operating costs, it is assumed that Tanzaniashilling denominated nominal wages and salaries will increase by 752 (152 p.a.)between 1986 and 1990. US dollar denominated costs are converted into HalawiKuacha at the August 1987 cross-rate of MK1 Tash 21.7.

Detailed Operating Costs

A. Fuel/Energv

(Al) Tractor-Trailers: Containers

(i) Operating cycle (per 2 containers load) 76.25 mins.

(31) Assume port container discharge/loading technique such thattractor-trailers constrained to maxmum of 501 load factor i.e.2 montaizjers per round trip.

(iti) Tractor fuel consumption - 5 liter/hr. - 0.083 11mn.

(iv) Tanzania diesel fuel costs - US$1.29/litre

(v) Fuel consumption per round trip - US$ (76.25*1.29*0.083) -US$8.16

(vi) Fuel consumption per container (502 load factor per roundtrip) -US$4.08.

(A2) Tractor-Trailrs: Breakbulk

ti) Operating cycle per 30 ton trailing load - 240 mins.

(*il Assume that per round trip load factor - 501.

(iii.) Fuel consumption per ton per round trip -US$((240*1.29*0.083)1301 - US$0.86

- 78 -

Annex 3(b)Page 2 of 4

(A3) Gantry Crane-Containers

(.) Dischargelloading rate per container - 5 mins.

(ii) Electricity consumption per hour of operation - 90 kwh 1

(ii) Electricity costs - US$0.20 per kwh

(iv) Electricity consumption per container per facility (adjusted for20% idling time) - US$1.88

(A4) Fork Lift Trucks

(i) Operating cycle - 2 m4in/ton

(i4) Double handling coefUIcient - 801: effective operating cycle3.6 mins.Jton.

(iii) Fuel consumption per ton per facility - US$(0.067*3.6*1.29) =US$0.31

B. Fixed Labor Complement

(B1) Equipment-Related (Mbeya and Dar es Salaam)

LaborEquipment ateigto Numbers Waxesivear Total Wages

Tractor Trailer Drivers 40 63,000 2,520,000Gantry Cranes Drivers 4.- 63,000 252,000Forklift Trucks Drivers 36 42,000 1,512,000

(B2) Fixed Gang-Related (Mbeya and Dar es Salesam)

Labor Catetory Numbers Wates/vear Total Wages(TSh) (TSh)

Checkers/Tally clerks 22 21,000 462,000Supervisors " 22 28,000 616,000

1,078,000

1/ Specifications of gantry crane are assumed as follows:(i) Hoist motor - 45 kw.;

(ii) Trolley motor - 7.5 kw.; and(i&l) Gantry motor - 2*18.5 kw.

-79-

Annex 3(b)Page 3 of 4

( U Maintenance

Labor Catetorv Numbers Waxesivear Total Wanes(TSh) (TSh)

Storekeepers 2 84,000 168,000Tire fitters 2 52,000 104,000Asst. Workshop Mgrs. 2 126,000 252,000Mechanics 4 84,000 336,000Asst. Mechanics 4 73,000 292,000Electricians 4 84,000 336,000Welders 2 84,000 168,000

1,656,000

(B4) Security

Labor Category Numbers Waxesyvear Total Wares(TSh) (TSh)

Security Managers 2 44,000 88,000Security Guards 28 26,000 728,000Janitors 16 21,000 336,000

1,152,000

(B5) Senior Manatement Administration

Labor Catesory Numbers Wateslvear Total WaRes(USO) (USS)

General Manager 1 75,000 75,000Facility Manager 2 60,000 120,000Engineers 2 60,000 120,000Accountant 1 60,000 60,000

375,000

(B6) Manapement Support

Labor Catetory Numbers WaRes/year Total WaRes(TSh) (TSh)

44 ~ ~ 44

Asst. Facility Mgr. 2 262,000 524,000Clerks 16 44,000 704,000

1,228,000

- 80 -Annex 3(b)

Page 4 of 4

C. Casual Labour-Breakbulk

(i) Assume standard gang size ' 6 laborours

(1i) Assume 2 gangs (per facility) on permanent register at 202 ofachievable daily wage rate.

(iii) Per gang productivity - 10 tons/hr.

(iv) Effective gang shift - 8 hrs. *0.85 - 6.8 hrs.

(v) IPay per laborer per gang shift - TSh 17.5*1.75 30.6

(vi) Number of laborers per gang - 6

(vii) Gang reservation costs per annum - 300 days * 2 gangs * 2facilities * Tsh (30.6 * 0.2 * 6 labourers/gang - Tsh 44,000

(viii) Variable gang labor costs per ton -

(Tab 30.616.8 hrs.,------------------- - Tsh 2.70Jton/gang(10 tons/hr. 1 6 workers/gang)

D. Maintenance Supplies

Assumed-Equipment Annual Cost/Unit Total

(USS) (US$)

Tractor-Trailers 3,000 42,000Fork Lift Trucks 1,400 25,200Gantry Cranes ; - 26,800

95,000

Other

(E1) Administrative Supplies and Supports 10 adsmin. support staffcosts - Ts 123,000

(E2) Electricity for Facilities: US$30,000 p-a- (assumed)

(E3) Breakbulk Supplies

(i) Tarpaulin: initial stock - 20 * 2 facilities * Tsh 83,000 Tsh3,320,000

Annual purchases - 332 * 3,320,000 - Tsh 1,095,000

(ii) Pallets, Initial stock - 1,000Annual renewal - 332 * 1,000 * US$20 - US$6,600

elI - 81 - 3(c)

__ - -

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83 * -

REL IULIUNEdlC O19SIIII MillQI

I119EL(Usol) 0. Im 0.1201 0.118 -.0.1153 0.M1M Od11o 4.0i6O o.1014 0.164 0.1050 0.1037PE_ 0.1206 0.119* 0.1159 0.1134 0.112( v.I1(6l 0.1063 (s.1009 0.1054 *.lPMAIF!t *' 0.1359 4.111 0.117 o.1*41 v.1III O.U103 V.1064 O.100l : U.103t 0.1025

mmI3u9utitti, sIEtL 1Oi;: OM5t? 110024 01Ml I W.,t: 15?T £i675332 174*32 16112 1"314 19*8PEtNiR o - 34 UiM72 WOUs 95732 Wtfs 103015 10i83* 112i37 1165i 1210PM111 ;-2 20?v' 20221 1975 1934 19104 16772 1843 120 17JIM . 11'OTAL i. 4' 21L6.4 2265b 2310tt 2s5%b 250142 270347 M26i 254 317 31791TXTALIK £CiflVt F4, 5o29W 521170 54955 516531 54616 .*2225I 1496 *17029 704199 151313

o *19I- 3i-)

alFul parices we v-Auril 19i9 srp 4.o.b L.A usawtssuUTCr q i.0.3 Bar is qeitala ceagercts t hftn EaaCn sue transwt rt cest to Ckilusi IaW r;

c Ul UClugei:-IfSi rv! fce i sclit:if uhact as macted Mt to weC s1w.01/1itr, ;tr a imsi typut(ifOutIwtazi -

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/4

-84-

*9111IITHII tA T CORIDOR PROJECT

NUW I AIUMAS HIIINB Co.

fINANCIAL PEROINC

1198" K 000)

199* 1991 1992 1993 1994 1995 1996 1M 199 199 2000

LEASM REWHES:0D cM0 "ISSETS 0 4 0 3784 3794 Wi9 3764 3784 .3784 384 3784FUl DING ASETS 2182 2182 2182 2192 212 U 2182 2192 212 212 2192 21

mAL 21i2 2162 2192 5966 56a 5966 5966 5966 59.6 5966 5966SRIIE. OF C tO.P MOF 225 5471 5681 1992 2003 2115 2227 2354 2492 2610 2754TTAL REVU 5100 165 764 79 7970 9011 8193 0321 449 e6576 720

RTIN COStSINSURANCE 6t0 610 610 61* 610 610 610 610 610 610 olOADNIN.COSTS 250 250 250 250 250 250 250 250 250 250 250

IET IKOhIE 414 6793 7004 &9"B 7110 7221 7333 7461 7519 7716 7860

DEBT SERVICE OES 1350 1350 130' 4842 4942 4842 4842 4842 4042 4842 4942

DEKT MICE RATIO 3.07 5.03 .l19 1.45 1.47 1.4 1.51 1.54 1.57 1.59 1.62

^ A5 -

Annex 4

MALAWI

Northern Transgort Corridor Project

Related Documents and Data Available in Prolect File

1. GITEC, Consultants "Transport System Study for the Blantyre-Dar esSalaam Corridor," July 1985.

2. Bilateral Agreement between the Governments of Malawi and Tanzania on:(a) TAZARA rates for unit train service on Malawi transit traffic; (b)Tanzanian Harbor Authority rates for port services at Dar es Salsamapplicable to Malawi transit traffic; (c) customs procedures,documentation and charges applicable to Malawi transit traffic; and (d)terms and conditions of lease for land and facilities to be madeavailable by Tanzania authorities to the Government of Malawi for use bythe MCC and fuel handling organization.

3. GITEC, Consultants. 'Detailed Engineering Studies for MCC, FuelHandling Facilities and Lake Service Equipment and Facilities".

4. Scott Wilson Kirkpatrick and Partners "Detailed Engineering for Balaka-Salima Road".

5. Bank Pro-Appraisal Mission "Aide Hemolre," October 1985.

6. Bank Appraisal Mission "Aide Nemoire," October 1985.

7. World Bank "Transport Bottlenecks in Malawi's Access to the IndianOcean," No. 5316-MAI, October 31, 1984.

8. Initial Project Brief and Revised Project Briefs.

9. Working Papers: (a) Corridor Operations; (b) Lake Service; (c) MalawiCargo Centers.

10. Terms of reference for Lake Service consultancy, Financial controller,corridor coordinator and supervision consultancies for Salima-Balakaroad and NTC project.'

11. Financial Analysis: Computer Print-outs.

- 86 -

ANNEX 5p 8ge 1

MAIAWI

Northern Tranaport Corridor Profect

Benefit/Cost Tables for Particular Conponents of NTC Proiect

Benefits and Costs Related to NTC(MK million)

Benefitsto Savings Benefits to

Diverted of Lake DivertedCapital Traffic Balaka- Trans.vs Fuel NetCosts Dal Cargo SalimaaI Road Trans. Traffic Benefits

1988 58.8 -58.81989 98.0 -98.01990 39.1 11.9 3.0 1.8 - -22.41991 4.6 23.8 5.4 4.7 8.3 37.61992 24.5 5.9 5.0 8.8 44.21993 25.3 6.2 5.5 9.4 46.41994 26.1 6.4 6.0 10.0 48.51995 26.8 6.7 6.6 10.6 50.71996 27.6 7.1 6.9 11.1 52.71997 19.3 28.2 7.3 7.3 11.6 35.11998 29.3 7.7 7.6 12.2 56.81999 30.2 8.1 7.6 12.8 58.72000 31.1 8.5 7.6 13.4 60.62001 32.0 8.9 7.6 13.4 62.02002 33.0 9.2 7.6 13.4 63.32003 34.0 9.6 7.6 13.4 64.82004 19.3 35.0 10.1 7.6 13.4 46.82005 36.1 10.5 7.6 13.4 67.62006 37.2 11.0 7.6 13.4 69.22007 38.3 11.5 7.6 13.4 70.82008 39.3 12.0 7.6 13.4 72.3

3.5-year Implementation ERR - 21S6- Asr Implementation ERR - 161

______---------- S-

a/ Primarily savings in vehicle operating cost on normal traffic.

Source: MNisaon estimates.

- 87 -

ANNEX 5Page 2

MAIAWI

Northern TranaDort Corridor Proiect

Benefit/Cost Tables for Particular Components of NTC Prolect

Benefits and Costs Related to the Karonza-Ibanda-UWole Road(INK million)

BenefitsFrom

Capital Diverted NetCosts Traffic Benefits

1988 20.7 -20.71989 34.5 -34.51990 13.9 4.6 -9.31991 9.6 9.61992 9.7 9.71993 9.9 9.91994 10.1 10.11995 10.4 10.41996 10.7 10.71997 3.8 11.0 7.21998 11.4 11.41999 11.8 11.82000 12.2 12.22001 12.6 12.62002 13.0 13.02003 13.4 13.42004 3.8 13.8 10.02005 14.2 14.22006 14.7 14.72007 15.A 15.22008 15.8 15.8

_______________________

Source: Mission estimates.

3.5-year ERR = 1326-year ERR - 11%

- 88 -

ANNEX SPage 3

NAAWI

Northern Transport Corridor ProLect

genefit/Cost Tables for Particular Components of NTC Prolect

Benefits and Costs Related to the MCC and Karonta-Ibanda-Uvole Road(MK million)

BenefitsFrom

Capital Diverted NetCosts Traffic Benefits

1988 33.3 -33.31989 55.5 -55.51990 22.3 11.9 -10.41991 23.8 23.81992 24.5 24.51993 25.3 25.31994 26.0 26.01995 26.8 26.81996 27.6 27.61997 9.8 28.2 18.41998 29.3 29.31999 30.2 20.22000 31.1 31.12001 32.0 32.02002 33.0 33.02003 34.0 34.02004 9.8 35.0 25.22005 36.1 36.12006 37.2 37.22007 38.3 38.32008 39.3 39.3

_______________________

Source: Mission estimates.

3.5-year ERR - 2126-year ERR - 161

- 89 -

Page 4

!4ALAVI

Northern Transport Corridor Pro1ect

BenefitiCost Tables for Particular Components of NTC Pro1ect

Benefits and Costs Related to the L-'alavi Cargo Centers(MK million)

BenefitsFrom

Capital Diverted NetCosts Traffic Benefits

1988 12.6 -12.61989 21.0 -21.01990 8.4 7.3 -1.11991 14.2 14.21992 14.8 14.81993 15.4 15.41994 16.0 16.01995 16.4 16.41996 16.9 16.91997 6.0 17.2 11.21998 17.9 17.91999 18.4 18.42000 18.9 18.92001 19.5 19.52002 20.1 20.12003 20.8 20.82004 6.0 21.2 15.2'2005 21.9 21.92006 22.5 22.52007 23.1 23.12008 23.5 23.5

_______________________

Source: Mission estimates.

3.5-year ERR - 31Z6-year ERR - 24%

_ 90 -

ANNEX SPag 5

MALAWI

Northern Transport Corridor Prolect

BenefitlCost Tables for Particular Comgonents of NTC Prosect

Benefits and Costs Related to the Lake Facilities(NK million)

BenefitsFrom

Capital Diverted NetCosts Traffic Benefits

1988 9.1 -9.11989 15.2 -15.21990 6.0 1.8 -4.21991 4.6 4.7 0.11992 5.0 5.01993 5.5 5.51994 6.0 6.01995 6.6 6.61996 6.9 6.91997 3.6 7.3 3.71998 7.6 7.61999 7.6 7.62000 7.6 7.62001 7.6 7.62002 7.6 7.62003 7.6 7.62004 3.6 7.6 4.02005 7.6 7.62006 7.6 7.62007 7.6 7.62008 7.6 7.6

_______________________

Source: Mission estimates.

3.5-year ERR - 15Z6-year ERR - 13%

- 91 -

Page 6

Northern Trans2ort Corridor Pro1ect

Benefit/Cost Tables for Particular Comuonents of RTC Pro_ect

Lenefits and Costs Related to the alaka-Sallma Road(Ex~ million)

RoadCapital VOC Maintenance metCosts Savinea SavMnZA lenefits

1988 9.7 -9.71989 16.1 -16.11990 6.4 2.6 0.4 -3.41991 4.6 0.8 5.41992 5.1 0.8 5.91993 5.4 0.8 6.21994 5.6 0.8 6.41995 5.9 0.8 6.71996 6.3 0.8 7.11997 3.: 6.5 0.8 3.61998 6.9 0.8 7.71999 7.3 0.8 8.12000 7.7 0.8 8.52001 8.1 0.8 8.92002 8.4 0.8 9.22003 8.8 0.8 9.62004 3.7 9.3 0.8 6.42005 9.7 0.8 10.52006 10.2 0.8 11.02007 10.7 0.8 11.52008 11.2 0.8 12.0

_______________________

Source: Mission estimates.

3.5-year ERR - 1826-yesr ERR - 141

- 92 -

ANNEX 5Page 7

NALAWI

Northern Transport Corridor Project

Benefit/Cost Tables for Particular Comaonents of NTC Proiect

Benefits and Costs Related to the Fuel Facilities(MK million)

BenefitsFrom

Capital Diverted NetCosts Traffic Benefits

1988 6.7 -6.719A9 11.2 -11.21990 4.4 - -4.41991 8.3 8.31992 8.8 8.81993 9.4 9.41994 10.0 10.01995 10.6 10.61996 11.1 11.11997 2.2 li.6 9.41998 12.2 12.21999 12.8 12.82000 13.4 13.42001 13.4 13.42002 13.4 13.42003 13.4 13.42004 2.2 13.4 11.22005 13.4 13.42006 13.4 13.42007 13.4 1 42008 13.4 13.4

_______________________

Source: Mission estimates.

3.5-year ERR = 32Z6-year ERR - 24X

- 93 -

Chart 1

MALAWINorthern Transport Corridor Project

Target Project Implementation Schedule

1987 1988 1989 1990 1 1991

Main Activit!esBoard Presentation *Signing of Credit Agreement *

Karonga-Songwe Road a _ c _ _ _ _ _ _ _Songwe-Ibanda-Uyole Road -L - I I I _Salima-Jct M18-Chipoka Road --- __Jct M18-Balaks Road I c_MCC Dar: Civil Works die C A c

MCC Mbeya: Civil Works f - CA £ C

Gantry Crane: MCCsEquipment: M4CC L! fFuel Handling: Dar and Mbeys I ~-- -- 2Fuel Tank Wagons & Tanktainers fLake Ports: Civil Works - - - -_ _ s 1Lake Ports: Gantry Crane - _Lake Ports: Equipment a X

Monkey Bay: Civil Works O [CAMonkey Bays Equipment - _ _ _ _ _ F _ E

VesselBorder Post and Weighbridge -_Tech. Assistance: Coordinator - _ _ _ _-_Tech. Assistance: Lake Service L c- a piConstruction Supervision: w

EEC Roads --

Construction SupervisionsSalima-Balaka Road … _ _ _ _

Construction Supervision:NTC Project - _ _ _ _ -_

Legend:

FD: Final DesignBD: Bid document (preparation, review and approval)PC: Prequalification of contractorsBE: Bidding and bid evaluationCA: Review, approval and contract awardC: ConstructionDE: Delivery, erection and testing of gantry craneD: Delivery of equipmentS: Shortlist of consultantsTP: Tender periodEN: Evaluation of proposals and negotiationsW: Work of consultantsY: Completion of works

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MALAWINORTHERN TRANSPORT CORRIDOR PROJECT

- Project Roads, Construcion and RehabilitationG Molawi Cargo Centers 5,= %I Fuel Handling and Storage Facilitiesll Port Improvmetess /

- Prftd R-rclsI - - - - Paved Roads Under Construiction.-------. Paved Rood, Proposed

Principal Gravtl and Eorth Roads

......... .Corridor Roubt-- Rivner

3 District Administrative Centers• National Capitols

Intematioal Boundaries

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