world bank document · document of the world bank report no. 15988-mor staff appraisal report...

Document of

The World Bank

Report No. 15988-MOR

STAFF APPRAISAL REPORT

KINGDOM OF MOROCCO

Railway Restructuring Project

November 26, 1996

Private Sector Development, Finance and Infrastructure Operations DivisionMaghreb and Iran DepartmentMiddle East and North Africa Region

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CURRENCY EQUIVALENTS

Currency Unit = Dirham (DH)DH 1 = US$0.12US$1 = DH 8.5

FISCAL YEAR

July I - June 30

WEIGHTS AND MEASURES

Metric system British/US system

1 meter (m) = 3.28 feet (ft)I square meter (m 2 ) = 10.76 sq. ft

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

B billionCIIPEP Comite interministerielpermanent des entreprises publiques

(Interministerial Committee of Public Enterprises)GOM Government of MoroccoM millionMED Ministry of Economic DevelopmentMT Ministry of TransportOCP Office cherifien des phosphates (National Company of Phosphates)ONCF Office national des chemins defer (National Railway Company)ONT Office national des transports (National Transport Office)PSO Public Service ObligationSOE Statement of Expenditure

Vice President: Kemal Dervi§Director: Daniel RitchieDivision Chief: Amir Al-KhafajiTask Manager: Henri Beenhakker

KINGDOM OF MOROCCORAILWAY RESTRUCTURING PROJECT


Table of Contents

LOAN AND PROJECT SUMMARY ............................. i

1. INTRODUCTION... 1

CouNRY BACKGROUND ............................. 1BANK SECTOR ROLE AND STRATEGY. 2

2. SECTORAL BACKGROUND. . . 3

THE TRANSPORT SECTOR .................... 3TH E RAILWAY SUBSECTOR .................... 3RAILWAY STRATEGY AND RESTRUCTURING PROCESS. . .. . . . .. . . . 4

3. THE PROOJCT.CT.. .. S

PROJECT OBJECTIVES.5PROJECT DESCRIPT.ON.5COST ESTI.ATES ........................................ ,.......6FINANCING PLAN .6PROJECT IMPLEMENTATION. 7PROCUREMENT .8DISBURSE. .NTS.9PROJECT SUPERVISION .9ENVIRONMENTAL ASPECTS. . 10

4. ECONOMIC EVALUATION . ... 10

EVALUATIONMETHODOLOGY .. 10ECONOMIC EVALUATION AND SENSITIVITY ANALYSIS .10PROJECT RISKS.11

S. FINANCIAL EVALUATION.... 1 1

ACCOUNTING SYSTEMS AND STANDARDS .11PAST AND CURRENr FINANCIAL PERFORMANCE .12FURIRE FIlNANCIALPERFORMANCE . 13

6. AGREEMENTS AND RECOMMENDATIONS .................................... ... 15

TablesTable 3.1 Project Cost Estimates and Financing. 7Table 3.2 Procurement Arrangements for the Bank-Financed Items. 8Table 3.3 Allocation of Loan Proceeds. 9Table 5.1 ONCF: Projection of Sumnmary Financial Statements (1996-2003) .15AnnexesAnnex 1 ONCF Organizational ChartAnnex 2 Performance Indicators for Selected RailwaysAnnex 3 ONCF Main Statistics - 1980 - 1995Annex 4 ONCF Motive Power and Rolling StockAnnex 5 Outline of Studies and Consulting ServicesAnnex 6 Projected Activity IndicatorsAnnex 7 Key Perfornance IndicatorsAnnex 8 Project Implementation ScheduleAnnex 9 Estimated Loan Disbursement ScheduleAnnex 10 Economic EvaluationAnnex 11 Financial EvaluationAnnex 12 Financial Sensitivity AnalysisAnnex 13 Policy LetterAnnex 14 Selected Documents and Data Available in the Project FileMAP IMRD 28080

i


Loan and Project Summary

Borrower: ONCF (Moroccan National Railway Company)

Guarantor: Kingdom of Morocco

Beneficiary: Not applicable

Poverty: Not applicable

Loan Amount: ESP 5,443 million + US$42.5 million (US$85.0 million equivalent)

Terms: 20 years, including a five-year grace period, 50% standard interestrate for LIBOR-based Spanish Peseta single currency loan (SCL),and 50% standard interest rate for LIBOR-based US Dollar SCL.

Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days aftersigning, less any waiver.

Financing Plan:Local Foreign Total

=----- US$ million-------World Bank 46 39 85African Development Bank 69 21 90European Investment Bank 61 42 103Government and others 197 139 336TOTAL 373 241 614

Economic Rate of Return: ERRs per subproject range from 19% to 54%. ERR is about 22%for the overall project.

Environmental Rating: B

Staff Appraisal Report: Report No. 15988 MOR

Map: IBRD 28080

Project Identification No.: 43725

iiL Project Cost Estimates

(ISS million)Poject component Loca Foreign Custom Total

(direct) Duties

A. World Bank _IRD)Studies and coulting services (1) 0 2 2Computer equipment 0 1 1Acquisition of rail and tumouts - 21 1 21Track renewal FP9/Oujda (2) 34 10 1 45Track renewal Rabat/Sidi Kacemn (2) 8 2 0 10Track renewal Casablanca/Maffakkech (2) 1 1 3 0 15Base cost (end 1995) 53 38 2 93Physical contbqencIes 5 4 0 9Price contingendes 7 3 O 11TOTAL PROJECT COSTS (A) 66 45 3 113

B. African Development Bank (AfDB)Realignment, track renewal, and platform doubling section Sidi 64 18 1 183Kacem/Mekn&s (2)Base coas (end 1995) 64 18 1 83Phycal contingencIes 6 2 0 8Price contingencies 11 2 0 13TOTAL PROJECT COSTS (B) 81 21 1 103European Investment Bank (EIB)Renewal and reinforcement of electric traction facilities 14 18 7 40(e sy, ubstions)Doubling and track renewal Kenitra/Sidi Slimane (3) 43 25 2 70Bae cots (end 1995) 57 43 10 110Physal contgenci 5 4 1 10Price conftfgencies 9 4 I 14TOTAL PROJECT COSTS (C) 71 51 12j 134D. OtherRolling sdock rebilitation 8 12 3 22Acquisition of 7 electric locomotives - 35 1 36Acquition of 100 wagons 4.79 2.66 0.93 8.38Other wagons 3 8 0 11Containers 0 1 1 2Modenization of signaling and telecommunications facilities 13 31 4 48Tools 19 12 1 32Bue costs (end 1995) 44 98 9 151Physia contingencIes 1 3 0 SPrice contagencies 4 6 1 11TOTAL PROJECT COSTS (D) 49 108 10 167GRAND TOTAL BASE COSTS END 1995 (A+B+C+D) 218 197 22 437TOTAL CONTINGENCIES (A+B+C+D) 49 28 3 80Phys conthigencies 18 12 2 32Price contIngencies 31 15 2 48TOTAL (A+B+C+D) 267 224 26 517MIscelaneous (4) 76 17 4 97GRAND TOTAL 343 241 30 614(1) Outside investment program(2) Including cost of control of works(3) Including realignment, track renewal, and station remodeling(4)Outstanding operations from the 1988 - 1994 plan and miscellaneous

IL FINANCING (USS million)LOCAL FOREIGN TOTAL

World Bank 46 39 85African Development Bank 69 21 90European Investnent Bank 61 42 103Governmnt and others 197 139 336TOTAL 373 241 614

IL ESTIMATED DISBURSEMENTS ([JSS million equivalent)

IBRD Fiscal YeuM FY98 FY99 FYOO FYO1 FY02 FY03

Annual 7.5 17.2 17.2 17.2 17.2 8.7

Cumulative 7.5 24.7 41.9 59.1 76.3 85.0



1. INTRODUCTION

1.1 A policy environment conducive to private sector development has largely been put inplace in Morocco. Since the mid 1980s, growth of private sector exports, particularly in thetextile and agricultural industries, has been significant. The Moroccan transport sector plays a keyrole in encouraging exports, reducing the cost of imports, and enhancing prospects for growth intourism. Ongoing Bank-financed projects therefore focus on improving port and road transportpolicies. The Government and the Moroccan National Railway Company (Office national deschemins de fer, ONCF) first expressed an interest in Bank assistance in 1990. However, theBank's position was that in order to prepare a railway loan two conditions had to be satisfied; i.e.,establishment of a Performance Contract between the Government and ONCF, and completion ofdiscussions on rail tariffs for phosphate transport. Both of these conditions have now beensatisfied.

1.2 A railway loan makes sense only if it bolsters a fully commercial operation of railwayactivities by transforming ONCF into a joint stock company. In the long run, this would enablethe Government to significantly reduce support to the railway subsector. To achieve this goal,ONCF's financial viability and fixed infrastructure (in need of rehabilitation and maintenance,which have been delayed due to lack of funds) have to be improved. The proposed singlecurrency loan to ONCF with a Spanish Peseta loan tranche in an amount of ESP 5,443 million(M) and a US Dollar tranche in an amount of US$42.5 M (US$85.0 M equivalent) would financeurgently needed infrastructure rehabilitation, as well as consulting services for the transformation,including studies to be carried out.

COuNTRY BACKGROUND

1.3 The Kingdom of Morocco occupies an area of about 459,000 km2 (without the WesternSahara), characterized by a great diversity of landscapes, from a 3,500 km long and flat coastlinebordering the Atlantic Ocean and the Mediterranean Sea to the Atlas mountains stretching acrossthe country from the southwest to the northeast. Its population of about 26 M is concentrated inthe northern region and is growing at about 2.3 percent annually. Morocco is the world's largestexporter of raw phosphate and byproducts, which generate heavy rail traffic from mining zones inthe center and south of the country to the ports of Casablanca, Safi, and Jorf Lasfar.

1.4 Over the past decade Morocco has instituted enduring reforms designed to achievemacroeconomic adjustment and stabilization. Today, significant progress can be seen. Budgetand current account deficits and debt stock and service ratios have been reduced and inflation hasbeen kept to single digits. Wide-reaching and comprehensive reforms have gradually movedMorocco away from a predominantly administered economy toward one that is more marketdriven and outward oriented.

1.5 Yet, Morocco's annual growth rate, which averaged 3 to 4 percent a year during the lastdecade, fell well below expectations and was too low to absorb the country's growing labor force.

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Private investment and domestic saving rates remain modest; labor productivity is not increasing;international competitiveness has not radically improved; and unemployment is 16 percent. Thesituation has been further exacerbated by the drought of 1995. In view of these macroeconomicproblems, ONCF's management will have to proceed skillfully with a reduction in its workforce,which is desirable to improve its financial viability.

BANK SECTOR ROLE AND STRATEGY

1.6 Since 1969 the Bank has provided loans totaling US$549 M equivalent to the MoroccanGovernment for the construction, improvement, and rehabilitation of main roads under fivehighway projects, of secondary and tertiary roads under the most recent project, of feeder roadsunder ten agricultural projects; and for rehabilitation and modernization of port facilities undertwo port projects. The highway and roads projects were designed to encourage investments withhigh returns to the economy, particularly maintenance and rehabilitation; to help build up thestaffing and organization of the agencies responsible for road construction and maintenance; andfor transport organization. The feeder roads projects have met specific needs as part ofagricultural packages, and were designed as transport and agriculture-integrated investments.Bank involvement in financing these roads has encouraged the ministries of Agriculture andAgrarian Reform and of Public Works to cooperate more closely and consistently to determineappropriate design standards, and to arrange for the maintenance of these low-volume roads.

1.7 The audit reports for the five Bank-financed highway projects, designed to improve trafficconditions, highway maintenance, and transport planning, outline their successful implementationwith rates of return above appraisal estimates despite cost overruns. Loan covenants weregenerally adhered to, but progress sought on transport planning did not fully materialize, in partbecause of split responsibilities between the ministries of Transport and Public Works. The mostrecently completed highway project sought efficiency improvements in the transport marketthrough deregulation of the trucking industry. This deregulation incurred delays; only by the endof December 1995 did the Government complete a draft law.

1.8 The first Bank-financed port project, designed to maintain infrastructure in the ports ofCasablanca and Mohammedia and now completed, served to establish a good dialogue in thesubsector and helped to set the stage for a more comprehensive FY91 Port Sector Project. Thelatter project finances facilities for container and Ro-Ro handling in the ports of Casablanca andTangiers, and the construction of a coal terminal in the port of Jorf Lasfar. During preparation, aPerformance Contract was drawn up that included revision of the infrastructure fee paid to theGovernment by the Office de developpement et d'equipement des ports.

1.9 The proposed project is consistent with our strategy to reform public enterprises inMorocco. It is a response to the Moroccan Government's request for Bank assistance for therestructuring process, designed to achieve financial viability of railway operations by 2001, and torationalize and reduce Government financial support to the railway sector.

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2. SECTORAL BACKGROUND

THE TRANSPORT SECTOR

2.1 The fairly complex transport system comprises about 60,000 kms of roads, a 1,907 km-long railway network, 1 I commercial ports, and 20 airports, half of which are at internationaltraffic standards. The road network is concentrated in the most populated areas north of the Atlasmountains and provides for satisfactory coverage of transport needs across the nation. Thepriority is to provide rural areas with better road access, as part of an effective poverty alleviationapproach under the 7-year, 10,000-km rural road construction program launched in 1995. Forrailways to meet the challenge of deregulated and hence more competitive roads, infrastructurewill have to be rehabilitated and equipment modernized. The port subsector was strengthenedfollowing construction of major facilities in Agadir, Jorf Lasfar, and Nador, although Casablancaremains the main center of activity. Driven by cargo unitization and investments in specializedequipment, port productivity doubled during the last ten years. Finally, a large program of airportexpansion was carried out in the early 1990s at a time when traffic was abating, which led toovercapacity.

2.2 Roads are the prevalent mode of transportation and have further expanded their marketshare in recent years. Of total traffic, rail represents about 15 percent for freight (phosphatetransport excluded) and 5 percent for passengers. The insufficient autonomy of ONCF is in sharpcontrast to the increased freedom enjoyed by road transporters in a liberalized market that, fortrucking, will be legalized upon enactment of the new transport law called for under theSecondary, Tertiary and Rural Roads Project; this legislation will be presented to Parliament in1996. Needed organizational changes and transformation of ONCF into a joint stock companywill enhance ONCF's efficiency, autonomy, and market orientation.

2.3 For interurban public transport of passengers, the Ministry of Transport (MT) and theMinistry of Economic Development (MED) review road and rail tariffs, which are then formallyapproved by the MT. Since freight tariffs have been increasingly market based in recent years,notwithstanding existing price regulations, the new pricing freedom should not produce drasticchanges, even for the railways, provided that contracts are negotiated with major shippers withingiven limits and that flexible pricing remains in effect for passenger services.

THE RAILWAY SUBSECTOR

2.4 ONCF, a public corporation established by the Dahir 1-63-225 of August 6, 1963,manages and operates rail activities under regulations (cahier des charges) approved by a RoyalDecree of April 25, 1967. ONCF is under the control of the Minister of Transport, and isadmninistered by a Board of Directors chaired by the Minister and comprising eight representativesfrom various ministries. ONCF's General Manager is appointed by Dahir. Managementprocedures applicable to public corporations are cumbersome and bureaucratic (e.g., prior reviewof expenses by a financial controller, mandatory use of public procurement procedures). Annex 1describes ONCF's organization, while annexes 2 and 3 show that its technical and financialperformance declined from 1988 to 1994. Since mid-1994 a new management team has designedand begun to successfully implement a recovery program.

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2.5 ONCF's network (see attached Map IBRD 28080), entirely standard gauge, is 1,907 kmlong (of which 271 kms are double track); 1,003 kms are electrified. The pattern of the networkis satisfactory; most of the major towns and ports, and the mining and industrial areas areconnected. Traffic density is high (3.7 M traffic units per route km). Rolling stock and motivepower availability are satisfactory but partly antiquated (80 percent of the rolling stock is morethan 20 years old; see Annex 4).

2.6 Phosphate rock from the mines of the Office cherifien des phosphates (OCP) istransported by rail to the ports of Casablanca, Safi, and Jorf Lasfar and to the fertilizer plants inSafi and JorfLasfar. In 1994, traffic reached 19 M tons, or 3.400 M ton-km (tkm), for a revenueof DH 720 M. Contractual relations between ONCF and OCP have been satisfactory since newrates were applied in 1994. General rail freight consists mainly of grain, cement and buildingmaterials, petroleum products, fertilizers, and sugar. Traffic has remained stagnant since 1990(about 4.5 M tons in 1995 or 1,000 M tkm, for a revenue of DH 352 M). For intercity passengertransport, ONCF offers three classes of service: a shuttle service between Casablanca, Rabat andKenitra; air-conditioned fast trains between the main cities; and 'brdinary" trains. The quality ofservice (speed, punctuality, comfort, and cleanliness of trains) is generally excellent on shuttle andair-conditioned trains; it is average on ordinary trains. After having doubled from 1981 to 1991,passenger traffic volume declined from 1992 to 1994; the decline affected ordinary trains, whileshuttle and air-conditioned services continued to grow. In 1994, traffic reached 10 M passengers,or 1,900 M passenger-km (pkm), for a revenue of DH 390 M.

2.7 ONCF has a permanent staff of about 14,000. Management is competent and fullycommitted to a successful restructuring. Training programs are adequate. Staff productivity, atabout 450,000 traffic units per year per employee in 1994, is not far from European standards(Annex 2). The ratio of staff costs to traffic revenue (52 percent in 1994), while much better thanin most European railways, is still too high to ensure a sustainable financial situation for ONCF.ONCF staff enjoy their own pension system, more favorable than the common system applied toprivate enterprises, with pension benefits paid directly by ONCF; this system places a majorburden on ONCF finances.

RAILWAY STRATEGY AND RESTRUCTURING PROCESS

2.8 The Government of Morocco and ONCF recognize the need for the railway to adapt tothe more competitive environment of the transport market, to improve its financial performance,and to reduce and rationalize the transfer of state financial resources to the railway subsector.Various measures have already been implemented since 1994, including: (a) the signature inNovember 1994 of an agreement between GOM and ONCF defining the modalities of therestructuring of ONCF debt and of the financial support from the state to ONCF for 1994-1998;(b) simplification of the organization chart of ONCF to make it more responsive to customers andto increase the responsibility and accountability of managers; (c) cancellation of a number ofunprofitable passenger services; (d) redeployment of part of the staff from headquarters toproductive units; (e) revision of phosphate base tariff, and (f) definition of an investment programfor the period 1994-98.

2.9 In order to transform ONCF into a commercially oriented, market-driven, financiallysustainable enterprise, GOM intends to: (a) transform ONCF into a joint stock company (societe

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anonyme) according to a given time table; (b) attract private capital; (c) adopt a new set ofregulations (cahier des charges) for the societe anonyme, which, among other things, will draw aline between commercial services that will be operated in a fully deregulated environment andought to pay their way, and services performed at the Government's request under a PublicService Obligation (PSO) scheme that would warrant financial compensation for deficit incurred;(d) by the end of the project life (June 30, 2002), reduce Government financial support to therailway subsector to compensation for the PSO; and (e) reform the railway pension system torelieve ONCF of a burden that soon will become financially unsustainable. ONCF will make aneffort to reduce costs, develop marketing capabilities, and streamline staff. The main measureshave been spelled out in a 1996-2000 Performance Contract between ONCF and GOM. TheGovernment has committed itself in a policy letter pertaining to the development of the railwaysubsector to: (a) prepare a plan for the transformation of ONCF taking into consideration adetailed review of ONCF's pension system, including its actuarial and financial evaluation, and astatement of all assets and liabilities to be transferred; (b) submit to the Bank for its review andapproval an action plan defining dated restructuring measures to be applied to the pension systemand to be implemented before the transformation of ONCF into a joint stock company; and(c) take all actions necessary to ensure that a draft law implementing the transformation of ONCFinto a joint stock company, is approved by the Government not later than December 31, 1999.Both the policy letter and the Performance Contract have been signed and executed.

3. THE PROJECT

PROJECT OBJECTIVES

3.1 The main objective of the project is to support the preparation and implementation of arestructuring program that would lead to an efficient, commercially oriented railway operation.The principal items of the restructuring program are presented in paragraph 2.9 above. Theproject will also contribute to financing the railway's rehabilitation and modernization program.

PROJECT DESCRIPTION

3.2 The main components of the project are:

(a) a program of investment for the rehabilitation and modernization of railinfrastructure and equipment. The program concentrates on the renewal orrehabilitation of track and of electric traction facilities (catenary, substations) onselected sections of the network and the improvement of signaling andtelecommunication systems. Investment in rolling stock is limited to theacquisition of seven electric locomotives, the acquisition of 100 specializedwagons, and the rehabilitation of part of the passenger coach fleet;

(b) studies and consulting services to prepare and implement the restructuringprogram (legal services for the preparation of legal texts); prepare and implementthe reform of the railway pension system; support the improvement of railwaymanagement systems (Annex 5); and

(c) a program of acquisition of computer equipment needed for the implementation ofnew management systems.

The aforementioned rehabilitation and modernization is expected to result in improved efficiency.Projected activity indicators are presented in Annex 6. During negotiations, agreement wasreached with ONCF on the key performance indicators, given in Annex 7, which were establishedto monitor progress.

COST ESTIMATES

3.3 The total project cost (including contingencies, taxes, and duties) is estimated to be aboutUS$614 M equivalent, with a foreign component of US$241 M, or 31 percent of the total projectcost. Cost estimates were prepared on the basis of quantity estimates from ONCF engineeringstudies, from recently completed similar works for infrastructure (for unit prices), and/or frominternational sources (for equipment and materials). A detailed analysis has been made todetermine the foreign and local costs (Table 3.1). All base costs are expressed in end-1995 prices.Physical contingencies (10 percent) have been included to cover possible increases in quantitiesfor infrastructure works, and price contingencies have been applied to base costs following theBank's present forecasts of domestic and international inflation.

FINANCING PLAN

3.4 As shown in Table 3.1, the project would be financed by proposed loans from the Bank(US$85.0 M equivalent), the African Development Bank (US$90.0 M equivalent), and theEuropean Investment Bank (US$103.0 M). The balance (US$336.0 M) would be financed byONCF's internal cash generation, GOM, bilateral assistance, and commercial banks.

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Table 3.1: Project Cost Estimates and FinancingPRojECr COsT EsTIMATEs (US MILLION_

Project components Local Foreign Custom Tota(direct) Duties

A. World Bank (IBRD)Studies and consulting services (1) 0 2 2Computer equipnment 0 1 lAcquisition of rail and turnouts - 21 1 21Track renewal FWOujda (2) 34 10 1 45Track renewal RabVt/Sidi Kacem (2) 8 2 0 10Track renewal Casablanca/Marakkech (2) 11 3 0 15Base coats (end 1995) 53 38 2 93Physical contIngences 5 4 0 9Price contingencies 7 3 0 11TOTAL PROJEC_ COSTS (A) 45 3 113B. African Development Dank (AiDB)Realignment, track renewal, and platform doubling section Sidi 64 18 1 83KacemfMeknbs (2)Base costs (end 195) 64 83Physi contingences 6 2 8Price contgencies 11 2 0 13TOTAL PROJECT COSTS (B) 81 21 1 103

European Investment Bank (EIB)Renewal and reinforcement of electric traction facilities 14 18 7 40(catenary, substations)Doubling and track renewal Kenitra/Sidi Slimane (3) 43 25 2 70Base coats (end 1995) 57 43 10 110Pyskial contingencie 5 4 1 10Price contingendes 9 4 1 14TOTAL PROJECF COSTS (C) 71 51 12 134D. OthersRolling stock rehabilitation 8 12 3 22Acquisition of 7 electric locomotives - 35 1 36Acquisition of 100 wagons 4.79 2.66 0.93 8.38Other wagons 3 8 0 11Containers 0 1 1 2Modemization of signaling and teleconmmunications facilities 13 31 4 48Tools 19 12 1 32Base cost (end 1995) 44 98 9 151Physial contingencies 1 3 0 5Price contingeacks 4 6 1 11TOTAL PROJECT COSTS (D) 49 108 10 167GRAND TOTAL BASE COSTS END 1995 (A+B+C+D) 218 197 22 437TOTAL CONTINGENCIES (A+B+C+D) 49 28 3 80Physical tiencies 18 12 2 32Price contingences 31 15 2 48TOTAL (A+B+C+D) 267 224 26 517Mlscelaeous (4) 76 17 4 97GRAND TOTAL 343 241 30 614(1) Outside investment program(2) Including cost of control of works(3) Including realignment, track renewal, and station remodeling(4)Outstanding operations from the 1988 - 1994 plan and miscellaneous

FINANCING (US$ MILLION)LOCAL FOREIGN TOTAL

World Bank 46 39 85Afnican Development Bank 69 211 90European Investment Bank 61 42 103Govenmnent and others 197 139 336TOTAL 373 241 614

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PROJECT IMPLEMENTATION

3.5 The Comiti interministiriel pernanent des entreprises publiques (CIPEP) will approveall aspects dealing with transforming ONCF into a joint stock company. The project will beexecuted by ONCF. The loan agreement will provide for the transfer to the joint stock companythat will replace ONCF of all ONCF's obligations to the Bank, including those obligations relatedto the execution of the project. A high-level officer from ONCF will be appointed by the GeneralManager as the Bank interlocutor for all current matters related to the project; this officer willalso liaise with other cofinanciers. A mid-term review of progress achieved in implementing theproject will be carried out not later than February 15, 1999. The project implementation schedule(Annex 8) shows a completion date of June 30, 2002. The closing date would be December 31,2002, to permit disbursement of the remaining loan proceeds for eligible expenditures under then-existing contracts. ONCF will provide the Bank with: (a) semiannual progress reports to monitorproject implementation (commencing on September 30, 1997); and (b) an implementationcompletion report within six months following the closing date of the loan.

PROCUREMENT

3.6 Procurement arrangements for the Bank-financed project elements, their estimated costs,and proposed methods of procurement are summarized in Table 3.2. Procurement of all Bank-financed items will be made on the basis of the Bank's guidelines and standard bidding documentsfor the procurement of goods and works. Standard Bank contract forms will be used.

3.7 Acquisition of rail and turnouts for track renewal and acquisition of computer equipmentwill be done through International Competitive Bidding. Procurement of infrastructure works(track rehabilitation, improvement, and renewal, including earth works and structures), in singlelots, will be done through International Competitive Bidding after bidders have been pre-qualified.Control of works and goods will be done by technical departments of ONCF with the support ofspecialized consultants and laboratories. Publication of invitations to bid for the acquisition of railand turnouts, and publication of prequalification notice for track renewal works were conditionsof Board presentation which have been satisfied. All bidding documents and contracts estimatedto cost the equivalent of US$500,000 (US$50,000 for individual consultants and US$100,000consulting firms) or more will be subject to prior review and approval by the Bank. Othercontracts will be subject to post review.

Table 3.2: Procurement Arrangements for the Bank-Financed Items(US$ M equivalent, physical and vrice contingencies and all taxes included)

Procurement methodsICB2 Others NBF** Total24.0 24.0

Acquisition of rail and tunrouts (23.0) (23.0)1.0 1.0

C_ _ _ _ __eq ipment (1.0) (1.0)86.0 86.0

wnfiasuuch" works (59.0) 2.0 (59.0)2.0 2.0

Studin and conuting servie (2.0) (2.0)

111.0 2.0 113.0TOTAL (83.0) (2.0) (85.0)

Figurs betwen () indicate the amounts financed by the Bank. ' International Competitive Bidding. Not Bank financed.

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DISBURSEMENTS

3.8 The allocation of Loan proceeds of Table 3.3 and the loan's disbursement schedule ofAnnex 9, which are in line with the Bank's profile, are based on a realistic estimate of the timerequired to implement the track rehabilitation and renewal component and the studies providedfor under the proposed loan. Disbursements for contracts for: (a) goods and works valued belowUS$500,000 equivalent; and (b) services of individual consultants valued below US$50,000equivalent and studies and services of consulting firms valued below US$100,000 equivalent, willbe made against Statements of Expenditures (SOEs). The supporting documents will be held bythe Borrower for review by Bank supervision missions and auditors. Withdrawal applications forcontracts above these thresholds will be fully documented.

Table 3.3: Allocations of Loan Proceeds(US$ million equivalent)

Loan Amount Disburamnent

1. Consulting services 2.0 100%

2. Rail and urnouts 21.0 100%A FE; 100% LEX; 70% LE

3. Comuter equipment 1.0 100% FE; 100% LEX; 70% LE

4. Track renewal works 49.0 100% FE; 70% LE

Unatlocated (contingencies) 12.0

Total 85.0

3.9 To facilitate the timely implementation of the project, the Borrower will establish a SpecialAccount at a financial institution on terms and conditions acceptable to the Bank. The authorizedallocation will be US$3.0 M equivalent (DH 25.5 M). The Special Account will be replenished ona monthly basis, or whenever one third of the amount has been withdrawn, whichever occursearlier. Monthly bank statements detailing the transactions in the Special Account, which havebeen reconciled by the Borrower, will accompany all replenishment applications. The minimumthreshold for direct payment will be equivalent to at least 20 percent of funds in deposit in theSpecial Account.

3.10 ONCF financial statements have been regularly audited by major international firms since1986. The recent report for 1993, 1994, and 1995 contains a few reservations related to thepension system but does not question the basic soundness of accounting systems in place. Duringnegotiations, agreement has been reached with ONCF that its financial statements, accountspertaining to the Bank-financed portion, special account, and statements of expenditures will beaudited annually by independent auditors acceptable to the Bank, and that the audit reports befurnished to the Bank within six months of the close of each fiscal year.

PROJECT SUPERVISION

3.11 Two supervision missions per year during the approximate five years of implementationwill suffice to supervise all activities. The missions will be staffed by a railway specialist, aneconomist, and a financial analyst and last about three weeks (including a week at headquarters).At an average cost of US$2,100 per staff week and an average cost of US$8,000 for travel and

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lodging per staff member, and taking into account that an average of two projects will besupervised during each mission, the total cost for supervision (36 staff member missions) amountsto US$380,000.

ENVIRONMENTAL ASPECTS

3.12 The project is classified as Category B. Rehabilitation works to be done under the projectwill only have positive effects on the environment. A review of the environmental aspects of railworkshop operations will be conducted as part of the project, and methods of industrial wastedisposal will be introduced if required.

4. ECONOMIC EVALUATION

4.1 This section describes the economic evaluation of the project's components (ONCF's1996-2000 Investment Program). These components are: (a) track renewal and realignment;(b) track doubling between Kenitra and Sidi Kacem; (c) replacement of seven locomotives; and(d) acquisition of 100 freight wagons. Details of the economic evaluation are given in Annex 10.

EVALUATION METHODOLOGY

4.2 The economic justification of the above-mentioned components has been determined byestimating the economic costs and benefits related to expected passenger and commodity railtraffic during the next 20 years. The project focuses on core lines and the traffic forecast reflectsthe growth potential assessed for each one. Annual growth rates between 1995 and 2000 arewithin a 3-5 percent range for passenger-kms and a 1.5-4.5 percent range for ton-kms. After2000, traffic growth is uniformly taken at 3 percent per year for passenger-kms and eastboundton-kms and at 2 percent for westbound ton-kms. All costs are expressed in end 1995 prices andare estimated net of taxes and duties. Where applicable, the economic returns are based on acomparison of economic costs of rail transport with those of road transport. These costs areexpressed as long-run marginal costs and, in addition to operating costs, consist of rehabilitationand maintenance for road transport and track renewal and of rehabilitation for rail transport.

ECONOMIC EVALUATION AND SENSITIVTY ANALYSIS

4.3 The main benefits stemming from track renewal in ONCF's investment program arereduced track maintenance costs, reduced train operating costs through higher operating speeds,and reduced number of derailments. There are also benefits associated with capacity effects dueto increased speeds; these benefits are quantified at one-half of the transport cost savingscompared with road transport, since this additional traffic is essentially an induced traffic.Estimated ERs on the Bank-financed track renewal program range from 19 to 25 percent.

4.4 Rail traffic between Rabat and Meknes is heavier than anywhere else in Morocco. Theexisting track is double between Rabat and Kenitra, and single between Kenitra and Meknes. The

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doubling of the track between Kenitra and Sidi Kacem, a distance of 80 kin, which includes somealignment rectification between Rabat and Kenitra, is the only new construction component inONCFs investment program. High passenger load factors and major traffic peaks during thesummer months and holiday seasons justify this investment. Its ER is 28 percent, based on:(a) passenger and freight transport savings which otherwise would divert to the more costly roadtransport; and (b) savings in passenger time and train operating costs due to increased operatingspeeds. Transfer of traffic to road transport would occur when the line's capacity is reached. Thesensitivity analysis assumes that no additional traffic will be generated by the investment, a ratherpessimistic view that results in an ER of 16 percent.

4.5 The ER of the seven new locomotives in ONCF's investment program is 27 percent. Thebenefits consist of reduced cost of maintenance and improved availability of the new locomotives.The availability of ONCF's old locomotives to be replaced by the new ones is 23 percent; a newlocomotive has an availability of 95 percent. A sensitivity analysis has not been carried out sincethe estimated ER, although high, is conservative, due to the fact that benefits related to a reducednumber of accidents with the new locomotives have been ignored.

4.6 The 100 new freight wagons in ONCF's investment program are needed for the railtransport of coal which has recently increased. It is estimated that without these wagons 40percent of the coal transport would be diverted to the road, which entails a higher cost oftransport. Based on a comparison of transport costs by rail and by road, the ER is estimated to be54 percent.

PROJECT RISKS

4.7 The project would not pose specific technical risks. Most risks involve the Government'swillingness to enforce the stipulations of the Performance Contract and railway subsector policyletter. However, the settlement of the long-overdue tariff dispute with OCP, and recent changesand progress made in the management of ONCF, prove the Government's commitment to thesustainability of efficient rail services. Technical assistance and training under the project wouldreinforce the Government's and ONCF's commitment to the needed reforms by identifying andenforcing necessary actions.

5. FINANCIAL EVALUATION

ACCOUNTING SYSTEMS AND STANDARDS

5.1 ONCF maintains a satisfactory management accounting system. Good quality and timelyfinancial data are now generated in line with the standard Moroccan chart of accounts. Financialdata processing systems, which ensure the reliability and integrity of accounting information, wereupgraded in the early 1990s and their organization and staffing are satisfactory. In accordancewith current regulations, fixed assets are recorded at their historical value with the consequencethat their shown value is only one-third of the replacement value. Nevertheless, ONCF keeps anoff-balance sheet evaluation that does reflect replacement costs, thereby mitigating the issue.

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Monthly indicators cross-referencing operational statistics, revenues, and costing data areroutinely published and provide useful insight on performance of the railways.

PAST AND CURRENT FINANCIAL PERFORMANCE

5.2 ONCF's net -loss soared from DH 202 M in 1990 to an average of DH 740 M during1992-1994. Increased competition from road transporters prompted ONCF to freeze its tariffafter 1991 to stop erosion of its commercial base. As a result, the operating revenues stagnated ina DH 1.3-1.4 billion (B) range during 1991-1993. In contrast, operating costs rose at a rateslightly above inflation, from DH 1.45 B in 1990 to DH 1.75 B in 1994. Despite a 10 percentreduction in traffic, the payroll continued to expand, from 13,700 to 14,500 staff over the period,bringing the ratio of staff costs to revenues from about 35 percent in 1990 to over 52 percent in1994. The Government maintained its capital subsidy at an annual average of DH 250 M, low incomparison to the DH 800 M allocated before 1987. Faced with substantial investmentconstraints for track rehabilitation and equipment renewal amounting to DH 750 M per year,ONCF could no longer sustain its operations, even with the 7 percent increase of its tariffapproved on August 22, 1994.

5.3 A protocol was signed with GOM in November 1994, following a thorough review of therailway's finances and operations by CIPEP. The phosphate rock tariff was raised by 26 percent,retroactive to January 1, 1994. The capital contribution by Government was raised to DH 700 Mper year during 1995-1998. Most important, some DH 3.3 B of tax and debt servicing arrearswere converted into Government equity. For its part, ONCF undertook to improve itsperformance and to adopt cost containment measures. The FY94 net loss was still a high DH 744M due to changes in accounting, forcing ONCF to create provisions for risks that overshadowedthe real improvement in operating accounts. The current ratio drastically improved from 0.4 inFY93 to 1.45 in FY94.

5.4 The financial condition of the railways improved quite significantly in FY95. Greatercommercial aggressiveness enabled the railroad to regain some traffic back from road transport(e.g., coal). A systematic effort was made to cut costs, including not replacing staff leavingservice (e.g., those retiring, resigning, or being fired), not using temporary workers, a salaryfreeze, curtailment of in-kind benefits to staff, and streamlining of stores management. Forpassengers, a number of loss-making services were abandoned, stations were closed, and effortswere made to improve train occupancy rates, which are still low at about 30 percent. Overall, thepassenger services supply was reduced by 25 percent but traffic fell by only 1 percent. The netloss of DH 609 M was still high, but the net operating loss narrowed down to DH 43 M,compared to DH 305 M a year before. This solid performance has been all the more remarkablesince ONCF faced a one-month general strike in May 1994. The current ratio has improved to1.9 following payment and rescheduling of short-term debts (e.g., to the Office national del 'electricite).

5.5 There is no pension fund. Retirees are paid their rights directly from the yearly staff andemployer's contributions plus a variable amount paid by ONCF to match the deficit. Since thenumber of retirees increases by about 200 annually, the total cost to ONCF of financing thepension scheme has been growing steadily, to about DH 130 M in FY95, which is double what it

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was in FY88. It already exceeds 20 percent of direct labor costs. With the prospect of staffdownsizing, the issue is bound to worsen unless a new system is set up. Should they berecognized in the balance sheet, the accrued rights of the active staff, according to the audit reportissued in 1996, could represent liabilities in the range of DH 5-10 B.

5.6 The 1994 protocol requested ONCF to streamline stores keeping. In FY94, the storeswere valued at DH 825 M, equivalent to two years of consumption, which is very high. Thisamount included DH 120 M of stores older than five years. Loose management, publicprocurement constraints leading to larger quantities being ordered at lesser frequency, and toomany works carried out by force account have contributed to this unhealthy situation.

FUTURE FINANCIAL PERFORMANCE

5.7 Future cash generation hinges heavily on the level of activity that ONCF will be able tomaintain. Detailed assumptions on traffic growth are given in Annex 11. The projectionconservatively assumes a 2.5 percent growth in passenger-kms and 1 percent growth in ton-kmsfor freight and phosphate traffic from 1997 onward, following the 1996 recovery that mostlycomes as a correction for the one-month strike experienced in 1994. The traffic creation inducedby the project is expected to materialize in 2001 and 2002, adding some 4 percent each year to thetraffic. Overall, the average annual growth for the combined traffic would be slightly above2 percent during the period and the operating revenue would grow from DH 1.6 B in 1996 toDH 2.3 B in 2003, assuming that annual tariff hikes recoup two-thirds of inflation starting in1997.

5.8 Labor costs must be brought back to around 30 percent of operating revenues if ONCF isto overcome stiffer road competition. The projection thus assumes a reduction of personnel from13,800 in 1995 to 10,000 in 2000 and moderation in pay increases throughout projectimplementation after the 7 percent general raise scheduled for 1997. The future activity level willhave an impact on the evolution of future expenditures related to operations and maintenance,but, taking into account fixed costs, productivity increases, improved capacity utilization, anddecreased reliance on in-house services (close to DH 50 M of works that are internally producedat present would be contracted out by 2003), these expenditures are expected to grow in constantdirham at an annual pace of only 1.5 percent, and, in current dirham, from DH 594 M in 1996 toDH 816 M in 2003.

5.9 Investments planned for 1996-2000 amount to DH 5.2 B, much of which will fall in thelast three years. The gross cash flow (DH 264 M in 1996) would not allow ONCF to contributeits own resources to the project's financing plan, given the ongoing debt servicing requirements(about DH 550 M in 1996). The DH 700 M subsidy (para. 5.3) is therefore essential to enableONCF to finance its share of the investment together with the deficit of its pension system.Planned borrowings amount to close to DH 3 B during 1996-2000. From 2001 onward, the newjoint stock company will be able to generate enough cash to self-finance part of its investmentprogram.

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5.10 Table 5.1 presents a summary of the 1996-2003 financial statements, which are based onthe detailed financial evaluation of Annex 11. According to the forecast, ONCF should eventuallybecome financially sustainable. The net loss would be gradually reduced to around DH 331 M in2000. As ONCF becomes a joint stock company, the lump-sum subsidy would be removed.Instead, the Government would pay compensation for PSO for an estimated total of DH 110 M in2001, rising to DH 125 M in 2003. The net loss would further decline to about DH 150 M in2003. Furthermore, the Government would cover the pension deficit incurred by the newcompany. The related capital contribution would rise from DH 205 M in 2001 to DH 226 M in2003. Should it be treated as an operating subsidy, ONCF would indeed earn a pre-tax income ofDH 25 M in 2001, rising to DH 80 M in 2003.

5.11 The balance sheet was already strong in 1995 and will remain that way throughout theprojection period in the base case scenario. Stores management would be streamlined withinthree years: from 1998 onward, the stores would represent no more than 300 days ofconsumption. Extended resort to foreign-denominated debt financing would marginally raise thedebt-to-equity ratio from 23:77 percent in 1995 to 26:74 in 2003. The DH 700 M subsidy to bereceived until 2000 would provide for safe debt servicing despite debt service coverage ratiosbelow 1 until that date, and the capital contribution to balancing the pension scheme that wouldapply thereafter would indirectly bring the debt service ratio to 1.7 in 2001, 1.35 in 2002, and1.46 in 2003. The minor arrears problems that still existed in 1995 will be resolved by 1997,according to the projection, which relies on strict financial discipline by ONCF regarding paymentof its bills.

5.12 A sensitivity analysis has been carried out to verify the impact of risks on key financialparameters. Lower traffic growth, failure to reduce the labor force to 10,000 by 2000, anddepreciation of the dirham have been identified as major risks. Materialization of each of thoserisks would jeopardize the future financial viability of the railway company. More drastic actionsthan those considered under the current financial recovery plan would then have to be taken.Closely monitoring compliance with financial covenants will be essential so that corrective actioncan be triggered in earnest when defaults occur. The mid-term review will be of particularimportance to adjust the strategy if need be to ensure that project objectives are still being met.Detailed results of the sensitivity analysis are given in Annex 12.

5.13 During negotiations, agreements were reached on the following: (a) a working ratio lowerthan 0.8 from 1997 to 2000, and 0.75 thereafter; (b) a current ratio no lower than 1.5 from 1998onward; (c) a debt-to-equity ratio lower than 35:65; and (d) a labor-cost-to-operating-revenueratio lower than 0.41 in 1997, 0.39 in 1998, 0.37 in 1999, 0.36 in 2000, and 0.31 thereafter.

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Table 5.1: ONCF -Projection of Summary Financial Statements (1996-20031I 1-I997 199t 1999 2U0 2001 2002 2C'03

L. lwCone sement

Revenues 1587 1677 1743 1803 1866 2084 2202 2280Working expense 1323 1316 1332 1353 1464 1505 1581 lf40Depreciation 411 419 435 454 471 4S8 508 '22hnerest 199 186 197 241 271 280 277 273Net nonoperating revenue ninus tax 11 3 12 5 11 10 9 9Net income (loss) -335 -240 -208 -240 -331 -180 -155 -146Ratios:-working 0.83 0.78 0.76 0.75 0.78 0.72 0.72 0.72-opating 1.09 1.03 1.01 1.00 1.04 0.98 0.95 0.95-debt service coverage" 0.47 0.66 0.77 0.82 0.81 1.69 1.35 1.46

11. Balance sheed

Net fixed asss 7793 7754 8065 8622 9485 10264 10781 10949Workinprogress 832 1355 2296 2577 1913 1226 990 1105Otherfixedasses 573 573 573 573 573 573 573 573Stores 650 500 453 476 367 399 435 458Short4erm assets 526 303 297 307 317 353 373 385Cashinhand/bank 68 373 417 623 1010 890 598 296

Total assets 10442 10858 12101 13177 13666 13704 13751 13767Networth 7871 8331 8823 9284 9653 9678 9743 9821Long4etn debt 1934 1990 2683 3350 3567 3583 3488 3415Short-tem debt 637 537 595 544 446 444 521 531

Total liabilities 10442 10858 12101 13177 13666 13704 13751 13757

Ratios:-current 1.95 2.19 1.96 2.58 3.80 3.70 2.70 2.15-de'equity 0.20 0.19 0.23 0.27 0.27 0.27 0.26 0.26

The govenunent contribution to equity matching the pension deficit is included starting 2001.

6. AGREEMENTS AND RECOMMENDATIONS

6.1 During negotiations, agreements have been reached with ONCF on the following:

(a) the performance indicators given in Annex 7 (para. 3.2);

(b) its financial statements, accounts pertaining to the Bank-financed portion, SpecialAccount, and Statements of Expenditures will be audited annually by independentauditors acceptable to the Bank; and the audit reports be furnished to the Bankwithin six months of the close of each fiscal year (para. 3.10); and

(c) the financial ratios given in para. 5.13 will be maintained.

6.2 The Government has committed itself in the policy letter to: (a) prepare a plan for thetransfornation of ONCF, taking into consideration a detailed review of ONCF's pension system,including its actuarial and financial evaluation, and a statement of all assets and liabilities to betransferred; (b) submit to the Bank for its review and approval an action plan defining datedrestructuring measures to the said pension system to be implemented before the transformation ofONCF into a joint stock company; and (c) take all actions necessary to ensure that a draft law,

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implementing the transformation of ONCF into a joint stock company, is approved by theGovernment not later than December 31, 1999 (para. 2.9).

6.3 The following conditions of Board presentation have been satisfied:

(a) GOM provides the Bank with a signed policy letter (Annex 13) describing, interalia, its intentions to: (i) transform ONCF into a joint stock company (societeanonyme) according to a given time table; (ii) attract private capital in theoperation of rail transport services in a subsequent phase; (iii) adopt a new set ofregulations (cahier des charges) for the societe anonyme, which, among otherthings, will draw a line between commercial services that will be operated in a fullyderegulated environment and ought to pay their way, and services performed at theGovernment's request under a PSO scheme that would warrant financialcompensation for deficit incurred; (iv) by the end of the project life (December 31,2002), reduce Government financial support to the railway subsector tocompensation for the PSO and funding of the deficit of the pension system; and(v) reform the railway pension system to free ONCF from its financially unbearableburden (para. 2.9);

(b) GOM provides the Bank with a copy of the executed 1996-2000 PerformanceContract between GOM and ONCF (para. 2.9); and

(c) ONCF publishes the invitation to bid for the acquisition of rail and turnoutstogether with the prequalification notice for track renewal works (para. 3.7).

6.4 With the above assurances and conditions, the project would be suitable for a Bank loanof ESP 5,443 M and US$42.5 M (US$85.0 M equivalent) to ONCF, with the guarantee of GOM,for a 20-year term including a five-year grace period.

ONCF Organizational Chart

Chairman oAtheBoard of Directors

General Manager.

General Secretary AdvisorsInspection Generaland Audit

................ 1 ............... 1 ............... -- ------ 1------Operations Motive Power and ' Infrastructure Administration

Rolling stock................. 1 ............... I . -.... ...'Marketing & Sales., Transport Track Signaling, Telecom Buildings Human Finance Supplies InformationL__________ .__________ .____________j .Electric Traction Resources Technology

z

PERFORMANCE INDICATORS FOR SELECTED RAILWAYS

PERFORMANCE INDICATORS Morocco Tunisia [ France Spain [ Cameroon | United StatesFOR SELECTED RAILWAYS 1988 1994m ,:: 1992 1992 1992 1992 Class I Antrak 1992

...... **.*...*.*.*.*".*.* .. _ _ _ _ ~~~~~~1992_________________________________________ ....................... 6~~~~~~~~~~~~~~~~~~~~~~ it,z R M L W A: ~ ~ ~ ~ ~ .:.....

Total network route length (kin) 1893 1907? 2278 32731 13041 1106 182348 40323

Locomotive fled 228 2370 194 5664 1205 72 18004 336

Wagon fleet 8514 9335 5493 138200 34987 1313 552787 0

Passenger coach fleet 615 586 : 339 11170 2574 79 0 1990

Staff 13418 :14356 9160 198078 47867 4043 197421 24000

...... ~~~~~~~~~ .6...... .......... ...Freight (000 000tkm) 5510 4557 1999 49536 9450 691 1576008 0

Passenger (000 000 pkn) 2093 188s 1078 62647 16350 515 0 9824

Total (000 000 tu) 7603 6438 3077 112183 25800 1206 1576008 9824

Passengertraffic as %oftotaltraflic (%/6) 28 29 35 56 63 43 0 100

Averagelengthoffreighthaul (cm) 172 167 189 365 354 540 859

Average length of passenger trip (kmn) 181 190 35 76 46 219 461

Ratio passenger fares to freight rates 75 83 81 119 109 45 644

Trafficdensity(OOOtuperroutekm) 3987 3400 1351 3427 1978 1090 8643 244

Locomotiveproductiviy(OOOOOOtu/loco) 33 27 1 15 19 20 17 88 29

Wagonproductivity(000tkm/wagon) 647 488 364 358 270 526 2851

Coachproductivity(OOOpkm/coach) 3403 3210 3180 5609 6352 6519 - 4937

Staff productivity (000 tu/staff) 567 448 336 566 539 298 7983 409

Staffcosts as % ofrevenue 39 52 72 102 128 52 27 nd

X

ONCF MAIN STATISTICS - 1980-1995

1980 1981 1 1982 1 1983 1 1984 1_1985 1 1986 1 1987 1 1988 ] 1989 1 1990 1 1991 1 1992 1993 1994 1995INFRASTRUCTURE, MOTIVE POWER, AND ROLLING STOCK

Total network route (km) 1756 1779 1779 1779 1779 1779 1779 1893 1893 1893 1893 1893 1907 1907 1907 1907Single track lines (kn) 1595 1601 1601 1590 1540 1540 1539 1647 1647 1647 1647 1647 1636 1636 1636 1636Double track lines (km) 161 178 178 189 239 239 240 246 246 246 246 246 271 271 271 271Diesel loconmotive fleet 114 114 114 135 143 128 128 128 128 128 140 150 145 144 144 144Electric locomotive fleet 80 80 88 88 94 100 100 100 100 100 100 100 104 104 93 86Wago fleet 9925 9971 9931 9932 9663 9461 8865 8591 8514 9700 9818 9757 9832 9711 9335 9064Passenger coach fleet 275 275 285 313 392 441 481 567 615 624 579 642 644 566 586 622

FREIGHT TRAFFICTonnage (000 000 t) 25,9 J27,1 25,0 27,3 28,9 28,2 27,6 27,7 32,0 22,7 27,9 | 24,8 25,6 24,6 27,3 26.9Voluffe(OOOOOOltkm) 3788 3896 1 3783 4077 4448 4274 4425 4541 5510 4271 4903 | 4314 | 4877 4277 4553 4556Revenue(OOOOOODH) 359 j 393 |438 - 510 643 692 715 785 1015 874 977 | 918 1085 | 961 1122 1160

PASSENGER TRAFFICNunberofpassengers (000) 5124 6128 | 7520 7775 9534 | 10986 | 11603 12154 11556 11782 11937 12042 11369 9525 10600 9560Volutne(OOOOOOvk) | 936 | 1140 1375 1407 1620 | 1827 1958 2069 2093 2168 2237 2346 2233 1904 1922 | 1564Revenue(OOOOOODH) 65 81 104 116 156 213 236 279 286 315 339 379 385 376 398 337

STAFFAveragepeffnanentstaff 10311 10623 11393 11874 | 12068 12262 12791 | 13204 13418 13712 13653 13780 14044 14233 | 14380 | 14024Staffcosts(000 000 DH) 245 288 316 352 J 368 406 439 1 474 | 507 561 | 577 | 671 | 711 | 736 | 783 | 771

FINANCIAL PERFORMANCE (000 000 DH)Intemnancashgeneration | 18 | -27 | -7 T -33 | 94 1 49 | -69 48 154 | 32| -9 [ -213 -144 | -310 | -234 -42Depreciationandprovisions 54 54 68 93 | 186 212 226 | 251 266 ] 256 | 267 [ 272 386 377 510 567Net income | -36 I -81 | -75 -126 | -92 | -163 | -294 | -203 | -113 | -224 | -276 -485 -531 | -688 -744 | -609

X

ANNEX 4Page I Of 2

ONCF MOTIVE POWER AND ROLLING STOCKMA TPRIEL MOTEUR ETREMORQUE ONCF

.... _~~~~~~~~~~~~~~~~~~~~~~~~~~~~.......Type Manufacturer Year Power (kcw) NumberSerie Constructeur Ann~eePisne(w Effectif

_____ 'L #Ii _a__X__ _

E 700 ALSTHOM(FRANCE) 01951 1 2254E 1000 KOLMEX (PO)LOGNE) 1976 3 000 22E 1100 HIITACHI (JAPON) 1977 2 850 22E 1200 HITACHI (JAPON) 1982 2 850 8E 1250 HITACHI (JAPON) _1984 3 900 12E 1300 GEC ALSTHOM 1992 4 000 10

.. ____________ _ (FURANCE) 1993 ,.______________ 8Total Electric Locomotives/Total Locomotives electriques 86

v1&&~~~~~~~~~~~~~~~~~~~~~~~.. ..... .. ,.. ',. Qa~~a4 W.dT~ ......... ...........

DF 100 ALSTHOM (RANCE) 1967 2 6506.. .. .1968 ., 8

DH 350-370 GENERAL MOTORS 1974 2 429 16.(USA) 1976 .. 3

n. . .... 1979 2....... .1980 1

Total Main Line Diesel Locomotives/Total Locomotives diesel de ligne 36

DG200 KOLMEX 1973 589 20.. 10LEX(POLOGNE) 1974 3 7E .. 1975 2 8

n w ~~~~ ~~~1976 .. 1DI 500 TENEIAL MJAOTR 1983 736 13

E 1250 TACI(USA) 1984 3 4.. .. 1985 .. 1

DK 550 GENERAL MOTORS 1983 1 472 8______ _(USA) (USA) 1984 .. 3

DL DONELLI (ITALIE) 1990 263 12DM 600 BRUCH 1991 736 10

..________ (ANGLETERRE) 1992 .. 9

DA 300n BALDWIN (USA) 1947 1 104 7

1950 1

.. .. ~~~~ ~~~~1951 1

.. .. ~~~~~1952 .. 3

Total Shunting Diesel Locomotives/Total Locomotives diesel de manoeuvre 108

ZM BN-ACEC 1984 f 1416 | 81995 8 6

Total Electric Multiple Units/Total Rames automoices electriaues 1 14

of (USA) 1984 $1 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

ANNEX 4Page 2 of 2

. *.... *...... ~ ...... . r n A tn...

Type Number Total payload (t)Type Effect if Capacite totale

Phosphate hoppers/Wagons phosphaffers 1 203 77 742Bo aosWgn ovrs1 491 -55 104Gondola wagons/Wagons tombereaux 1 180 44 426Flat wagons/Wagons plats et porte-conteneurs 1 436 62 045Tankers/Wagons citernes 362 18 523Autres tremiies 2 191 108 406Private wagons/Wagons de prticuliers 352 14 324Specal wagons/Wagons specialises_________________

Service wagons/Wagons de service 849 25009Total wagon fleet/Total parc wagons 9 064 405 579

Type Number Number of seatsType Effectif Nombre de sieges

First class coaches!/Voitures de lere classe 61 3 414First-second class coaches! Voitures mixtes lere-2eme classe 8 576Second class coaches!/Voitures de 2eme classe 480 43 072EMU coaches!/Voitures des rames automotrices 42 3 794Sleeping coaches/Voitures couchettes et' lits 31 1 356Total coaches/Total parc voitures voyageurs 622 52 212

ANNEX 5

OUTLINE OF STUDIES AND CONSULTING SERVICES

Studies and consulting services to be financed under the project are the following:

* Legal consulting services

Objectives: (a) transformation of ONCF into a joint stock company incorporated undercommercial law; and (b) reform of railway pension system.

Contents: preparation of draft legislation to be submitted to Parliament, preparation ofregulatory texts.

Estimated costs: US$250,000 equivalent.

* Improvement of railway management systems

Objectives: Improvement in staff management, assets management, freight trafficmanagement, maintenance management, etc.

Contents: acquisition by ONCF of modem software, training of users.

Estimated costs: US$1,750,000 equivalent.

PROJECTED AcTrrvy INDICATORS

1995 1996 1997 1998 1999 2000(Actual) (Provisional) arg (Taret) arg (T

PHOSPHATE Tonnage(OOOt) 18 190 18 717 19 500 19 700 20 000 20 600TRAFFIC Voue 00OOtm 3 377 3 483 3 483 3 519 3 573 3 680

Revenue (OOO OOODH) 746 731 772 795 821 859Revenue per tkm (cDH) 0,2208 0,2187 0,2216 0,2259 0,2298 0,2334

GENERAL Tonnage (OOOt) 8 010 8 107 7 841 7 846 8 170 8 497FREIGHT Wagnloadd 214 284 188 104 189 507 190 869 198 338 205 989TRAFFIC 2 531 2 281 2 058 2 123 2 197 2 270

Volumne(OOO OOOtkm) 1 179 1 237 1 122 1 155 1 192 1 226Revenue (OOO OOODH) 415 439 413 434 458 484Revenue pertkm (cDH) 139,08 166,59 169,58 174,75 177,51 181,06

PASSENGER Suply (000 OOOsko) 4 082 4 630 4 630 4 630 4 630 4 630TRAFFIC Numberofpassengers (OOO) 9 560 10 300 10 917 11 053 11 308 11 570

Volumc(OOOOOOvk) 1 564 1 820 1 955 1 971 2 021 2 073Revenue (OOO OOODH) 337 377 419 434 454 475Occupancy raiio (%) 38B% 39% 42% 43% 44% 45%Revenue per sko (cDH) 0,0825 0,0814 0,0905 0,0937 0,0981 0,1026

TOTAL Volumne(OOOOOOut) 6 120 6 400 6 560 6 645 6 787 6 980TRAFFIC Revenue(OOOOOODH) 1 498 1 547 1 604 1 663 1 733 1 818

...... . . - - ------ ------ ow .................. ~~~~~~~~_ ....... ~~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~ ..

.......... I~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~)0

W ~ ~ ~.. ' .. *.*..........aa a .ws *SM~l.Ky. , ., . ': . ... ,: . ......*. ..,*W. :... .ELECTRIC Locomotive fleet 86 86 82 84 94 96

LOCOMOTIVES Availability (0/) 82% 80% 82% 84% 88% 90%Anlt kilometrage pa 118 117

available locomotive(OOObnkm)

DIESEL Locomotive fleet 144 132 132 132 132 132LOCOMOTIVES Availability (%) 79% 75% 80% 82% 84% 85%

Annual kilowetpagepa 37 39available locomotive

(OOO)km ELECTRIC EMU fleet 14 13 14 14 14 14MULTIPLE Availability (%/) 93% 90% 95% 95% 95% 95%UNffS Annualkilomtage per 77 118available EMU (OOOkm) .PHOSPHATE Wagon fleet 1203 1203 1203 1203 1203 1203WAGONS Availability(/) 87% 90% 91% 92% 93% 94%OTHER Wagon flcet 7012 6514 6224 6274 6324 6324WAGONS Availability (%/) 93% 94% 95% 96% 96% 96%

Avrage load per agon (t) 37 43 41 41 41 41Wagon tumaround (jours) 11,1 I 1,9 11,4 11,5 11,2 10,8

PASSENGER Coachfleet 622 464 433 433 433 433COACHES Availability (%/.) 78% 85% 87% 90% 92% 92%

...... ... ~~~~~~~~~~..... Staffat the beginning ofthe year 14385 13782 12622 12119 11621 11068Recruitments 0 0 0 0 0 0Departures 603 1160 503 498 553 504Staffat the end ofthe year 13782 12622 12119 11621 11068 10564Staff productivity (OOOtu/stafl) 450 517 541 572 6613 661

dS;

ANNEX 7

KEY PERFORMANCE INDICATORS

1995 1996 1997 11998 1999 2000 2001 2002 2603

Operating income (000 OOODH) 24 76 104 135 190 226 354 467 503Financial transfers from the State to 700 700 700 700 700 700 289 314 325ONCF (000 000 DH)of which . __

l lump-sum subsidy 700 700 700 700 700 700 0 0 0

. Public Service Obligation compensation 0 0 0 0 0 0 84 94 99

. contribution to the pension system 0 0 0 0 0 0 205 220 2.26

Ratio staff costs (*) /traffic 46 43 41 38 36 35 31 30 30revenue (%) IRevenue per seat x kilometer (passenger 8,3 8,1 9,0 9,4 9,8 10,2 10,4 10,6 10,8traffic) (cDH) _ lRevenue per train x kilometer (general 139 167 170 175 178 180 183 186 188freight traffic) (DH) - I ___

(*) contribution to the deficit of the pension system not included

Project Implementation Schedule

Year 1996 1997 1998 1999 ... 2003Quarter 2 3 1 4 1 1 2 |3 | 4 I | 2 | 3 | 4 1 1 12 1 3 1 4 1 2 |3 |4

Preparation of bidding doctunents_

Bank review of bidding documnents_

Generl procurement notice I'

Bid advertisement 4

Bidding period

Bidding evaluation period

Bank review

Loan effectiveness

Contract award

Project implemnentation

X

ANNEX 9

ESTIMATED LOAN DISBURSEMENT SCHEDULE*(US$ MILLION EQUIVALENT)

Bank Fiscal Year and Quarter Disbursements Cumulativeby Quarter Disbursements

by end of Quarter

FY 1998December31, 1997 4.0 4.0March 31, 1998 2.0 6.0June 30, 1998 1.5 7.5

FY 1999September 30, 1998 4.3 11.8December31, 1998 4.3 16.1March31, 1999 4.3 20.4June30, 1999 4.3 24.7

FY 2000September 30, 1999 4.3 29.0December31, 1999 4.3 33.3March 31, 2000 4.3 37.6June 30, 2000 4.3 41.9

FY 2001September 30, 2000 4.3 46.2December 31, 2000 4.3 50.5March31, 2001 4.3 54.8June 30, 2001 4.3 59.1

FY 2002September 30, 2001 4.3 63.4December 31, 2001 4.3 67.7March 31, 2002 4.3 72.0June 30, 2002 4.3 76.3

FY 2003September 30, 2002 4.3 80.6December 31, 2002 2.4 83.0March 31, 2003 1.0 84.0June 30, 2003 1.0 85.0

* Loan effectiveness estimated in October 1997.

ANNEX 10Page 1 of 7

ECONOMIC EVALUATION

I. This annex describes the economic evaluation of: (a) the doubling of the Kenitra-SidiKacem rail link; and (b) the acquisition of locomotives. The economic evaluation of othercomponents is based on the same methodology, and is available in the project file (in French).

General Approach

2. The economic evaluation of the proposed railway project is linked to economic sectorwork carried out in Morocco through: (a) the Bank's strategy to reform public enterprises;(b) observations about rail/road competitiveness; and (c) the railway company's strategic role forthe transportation of phosphates. The principle environmental risk is the proper disposal of usedoil in the locomotive repair shop, for which an action plan has been prepared. Otherwise, theproposed project will have a positive impact on the environment since it reduces pollution on theroads. Fiscal analysis and cost recovery are dealt with in detail in Annexes 11 and 12. Since thechange in ONCF's management about two years ago, the institutional risk has been minimized;the new management has reduced costs of operation by 20 percent in 1995 and terminatedpassenger services where demand was low.

Doubling of Kenitra-Sidi Kacem Rail Link

3. The economic evaluation of this link includes costs of some alignment rectificationbetween Rabat and Kenitra since traffic on the Rabat-Kenitra link and that on the Kenitra-SidiKacem link are interdependent. The alternatives considered are:

(a) no doubling of the Kenitra-Sidi Kacem rail link;

(b) doubling of the Kenitra-Sidi Kacem rail link; and

(c) doubling of the Kenitra-Sidi Kacem rail link plus the platform for the doubling ofthe Sidi Kacem-Meknes link (stage construction).

4. Alternatives (b) and (c) have an ERR of 28.33 percent and 18.40 percent, respectively.Table I shows the costs of investment during 1997-2000 and benefits related to diverted traffic(from road), generated traffic, time savings, higher operating speeds, savings in costs ofmaintenance, and salvage values.

5. Traffic between Kenitra and Sidi Kacem is assumed to be constant until 2001 due tocapacity constraints; in 2001 and thereafter, passenger and eastbound goods traffic are expectedto grow at 3 percent, while westbound goods traffic is expected to grow at 2.5 percent per year.In 2001, generated traffic is assumed to be as follows:

* Passengers: 500,000 passengers; 160,000,000 passenger-kms;* Goods: 500,000 tons; 103,905,000 ton-kms.

ANNEX 14)Page 2 of 7

Diverted traffic is based on the difference between weekly forecasts of passenger and goodstraffic and their saturation level without the doubling of the Kenitra-Sidi Kacem link.

6. Average per km costs in dirhams by road and rail are assumed to be:

Passengers Goods

Road 0.6610 1.0927Rail 0.3372 0.4335

7. In addition, the average value of passenger time is assumed to be DH 4.88 per hour. Theeconomic analysis is based on a 20-year period starting in 2001 (the year of opening the doubleline); salvage values have been calculated by assuming straight line depreciation and the followingexpected lives:

Infrastructure 75 yearsTrack 30 yearsCatenary 40 yearsSignalling and telecomm. facilities 25 yearsEquipment of electric sub-stations 25 yearsConstruction of electric sub-stations 75 yearsStations 75 yearsLevel Crossings & Structures 75 years.

8. Sensitivity analyses include the determination of the ERRs of the doubling of the Kenitra-Sidi Kacem rail link for the following scenarios:

- Value of passenger time ignored ERR = 27.4 percent

- With half of forecast generated traffic ERR = 22.6 percent

- Without generated trafficand 50 percent diverted traffic ERR = 16.3 percent

- Without generated traffic and annualgrowth in passenger and goods trafficis 1.5 percent (starting in 2001) ERR = 10.0 percent

With an opportunity cost of capital of 10 percent, the NPV amounts to DHI,090 million. Anincrease in costs of investment of about 275 percent or a decrease in benefits of about 75 percentwould result in a NPV = 0 (Tables 2 and 3).

Acquisition of Locomotives

9. The benefits consists of (a) the difference in maintenance costs of the old and newlocomotives; (b) improved reliability of the new locomotives; and (c) improved availability of thenew locomotives (Table 4). The reliability is expressed in the number of breakdowns per100,000 km and amounts to 8.64 for old locomotives and 1.51 for new ones. The average costs

ANNEX 10Page 3 of 7

per breakdown is DH 7,600. The availability of old and new locomotives amounts to 23 percentand 95 percent, respectively. The average cost of non-availability of a locomotive is DH 8,437per day.

10. The economic analysis is based on a 20-year period and an expected life of 30 years forthe locomotives. The salvage value has been calculated by assuming a straight line depreciation.

11. The ERR of the seven locomotives is 26.7 percent. Sensitivity analyses include thedetermination of the ERRs for the following scenarios:

Not taking into account the benefitrelated to improved reliability ERR = 26.0 percent

Not taking into account the benefitrelated to improved availability ERR = 20.2 percent.

With an opportunity cost of capital of 10 percent, the NPV amounts to DH218 million.Switching values are of the same order of magnitude as those given in para. 8 above.

Table 1: Costs and Benefits of the Doubling of the Kenitrg - Sidi Kacemn Line ('000 DH)

1995 1998 1997 1998 1999 2000 2001 2002 2003 2004 2005 2008 2007 200S 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 TOTAL

1. Owetmet 0 0 AS649 109015 149297 81069 0 D 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 358018

2. Gain related to divauted traffic

a) Poential dirveued traffic1 Passengers 0 0 0 0 0 0 4674 6076 7526 9266 11132 13967 17226 20842 25W0 29906 35287 41496 48291 55291 62757 71419 80879 91266 102451 114749 8495932 Gta, 0 0 0 0) 0 0 2160 3254 5058 7380 10381 14572 20465 27861 36898 47051 57890 69745 82274 95754 110081 125256 141096 157372 174176 191510 1380232

b) Generated diverted traffic1 Passngers 0 0 0 0 0 0 53358 54959 56608 58306 60055 61S57 63713 65624 67593 69621 71709 73861 76076 78359 80709 83131 85625 88193 9W39 93564 14337602 Goods 0 0 0 0 0 0 67767 69800 71894 74051 76272 78561 80917 83345 8845 88421 91073 93806 96620 99518 102504 105579 108746 112009 115369 118830 1820928

3 line savirgs of base passenger traffic0 0 0 0 0 0 2928 3003 3081 3159 3239 3312 3384 3456 3525 3591 3656 3716 3774 3834 3894 3945 3993 4037 4077 4110 71714

4 Tima savngs related to dierned trafrica)Potentiatdiv. 0 0 0 0 0 0 408 530 657 809 972 1219 1504 1820 2190 2611 3081 3623 4216 4827 5479 6235 7061 7968 6944 10018 74169

trafficb) Gerrated div. 0 0 0 0 0 0 4658 4798 4942 5090 5243 5400 5562 5729 5901 6078 6260 6448 6641 6841 7046 7257 7475 7699 7930 8168 125167

traffic

S Benfits related to ineased trin speedsI Passengers 0 0 0 0 0 0 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 45tl9 459 45819 45s9 4589 458g 91T102. Goocds 0 0 0 0 0 0 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 79892

6 rastr. maitren 0 0 0 0 0 0 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 10049oDst savins

7 Salagevkue 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 184384 184384

BENEFITS 0 0 -16649 -109015 -149297 -81058 145040 151507 158852 167147 176380 187974 201856 217762 236123 256367 278042 301779 326978 353509 381555 411908 443960 477629 512871 734420 5765641

2(2+3+4+5.6-1)

TOTAL BENEFfTS 0 -3936 46583 -189464 -244801 -63584 178760 191681 200969 218314 206002 229283 243010 273520 290101 328136 346083 391056 410302 461766 458782 518001 538957 605657 626930 1026971 7196116

ECONOMIC RATE OF RETURN 28,33%

NET PRESENT VALUE AT 10% OH 1,090 NMItions

-00

0

Table 2: Costs and Bentfit of the Doubline of the Kenitra - Sidi Kacem Line ('000 DMI

75% ReducHon of Benefits (compared with Table 1)

1995 1996 1991 I99 1999 2000 2001 2002 2003 2004 2005 2006 2007 200S 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 TOTAL

1llavuunea 0 0 16649 109013 149297 81051 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 356011

2. Gain elted to diverted "Meic

)sPotenCial diverted Iraflc

I Pengers 0 0 0 0 0 0 1174 1526 191 232S 2796 3506 4327 5236 6302 7513 564 10424 12131 13539 15165 17941 20317 22926 25736 2S125 2134152. Goods 0 0 0 0 0 0 543 *17 1271 1854 2601 3661 5141 6999 9269 11119 14542 17520 20667 24053 27652 31464 35443 39532 43753 48107 346714

b) Gated diverted afflc

1 Pa_egr 0 0 0 0 0 0 13404 13106 1421O 14647 150S6 1553S 16005 16455 16979 17419 11013 15554 19110 19654 20274 20S62 21509 22154 22S19 23503 360161

2. Goods 0 0 0 0 0 0 17023 17534 1060 IB602 19160 19734 20326 20936 21564 22211 22675 23564 24271 24999 25749 26521 27317 2S137 269S1 29150 457417

3. Timevingsotbfae 0 0 0 0 0 0 735 754 774 794 S14 132 550 868 165 902 918 934 94S 963 976 991 1003 1014 1024 1033 1I015

passner trffic

4. 'rme svings relatd to diveled trffica) Potmdldiverted uaff 0 0 0 0 0 0 103 133 165 203 244 306 371 457 530 656 774 910 1059 1213 1376 1566 1774 2001 2247 2516 11631

b) Gnaeeddivcsedtr 0 0 0 0 0 0 1170 1205 1241 1279 1317 1357 1397 1439 1482 1527 1573 1620 t66S 171S 1770 1123 1171 1934 l992 2052. 31442

S. Benefits rdaed to increaed train _peed

IPasegers 0 0 0 0 0 0 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 1153 23053

2. Goods 0 0 0 0 0 0 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 1003 20069

6. Wragmcnr inst-

Nuce t vinap 0 0 0 0 0 0 126 126 126 126 126 126 126 126 126 126 126 126 126 126 126 126 126 126 126 126 2524

7 SalvWevadue 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 114334 564314

BENEFITS 0 0 -16649 -109015 -149297 '-1059 36434 38059 39904 41987 44307 47219 50706 54702 59314 64399 6914 75307 82137 SS101 95147 103471 111523 1199S0 128133 322553 13198092(2+3+4+5+6-1)

7O0ALBEN4EFITS 0 .7323 -51664 -196238 -254764 42124 44905 4S200 50483 54141 5174S 57596 61044 66702 72873 82428 16936 98233 10306S 115996 115246 130122 135316 152141 1574S5 501675 1597002


NET PRESENT VALUE AT 10% DH -0 00005 MIllion

-0

TAUble 3 Cosbs and Benebts or the Doubline of the Kenitra - Sidi Kacem Line ('000 DH) with

275% Increase in Cost of Investment (compared with Table 1l

1995 1996 1J97 1996 1999 2000 2001 2002 2003 2004 2005 2006 2007 2005 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 TOTAL

I Invesgmegso 0 0 62415 408581 SS9692 303874 0 a 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 a 0 1334661

2 Gai dted to divened eaffic

2) Ptinsen ilivented tresicI Passesgen 0 0 0 0 0 0 4614 6076 7526 9266 11132 13967 17226 20842 25006 29908 35287 41496 45291 55291 62757 71419 80679 91268 102451 114149 8495932 Goods 0 0 0 0 0 0 2160 3254 6058 7380 10381 14572 20465 27861 361 98 47051 57890 69745 52274 95754 110081 125256 141096 157372 174176 191510 1380232

b) Gented divened drfficI Passengers 0 0 0 0 0 0 53358 54959 56606 58306 60055 61857 63713 65624 67593 69621 71709 73861 76076 763S9 80709 83131 85862 88193 90639 93564 14337602 Goods 0 0 0 0 0 0 67767 69600 71694 74051 76272 78561 60917 83345 85845 88421 91073 93806 96620 99518 102504 105579 108746 112009 115369 118830 1820928

3Timesavings ofdbe 0 0 0 0 0 0 2928 3003 3081 3159 3239 3312 3364 3456 3525 3591 3656 3716 3774 3834 3894 3945 3993 4037 4077 4110 71714Passenger usffic

4 Time savings rdated to divtnd traffica)Potmtildiverted sff 0 0 0 0 0 0 408 530 657 509 972 1219 1504 1820 2190 2611 3081 3623 4216 4827 5479 6235 7061 7968 8944 10018 74169b)Generateddivertedra 0 0 0 0 0 0 4658 4798 4942 5090 5243 5400 5562 5729 5901 6078 6260 6448 6641 6841 7046 7257 7475 7699 7930 8168 125167

5 Bendfits rdated to iscreased train tpeedsI PauSngers 0 0 0 0 0 0 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4589 4569 917702. Goods 0 0 0 0 0 0 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 3995 79692

6. Infmsnucam miaie 0 0 0 0 0 0 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 502 10049mmci ct Wuvn5s

7. Sulvagevuie 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 184384 184364

BENEFITS 0 0 -62415 -408681 -559692 -303874 145040 151507 158852 167147 176380 187974 201856 217762 236123 256367 278042 301779 326978 353509 381W55 411908 443960 477629 512871 734420 47869972(2+3r4+5-6-I)

TOTAL BENEFITS 0 -27188 -193284 -735140 -969984 -306429 178760 191881 200969 218314 206002 229283 243010 273520 290101 328136 346083 391056 410302 46176t 458782 518001 538957 605657 626930 1026971 5512457


NET PRESENT VALUE AT 10% DH 0 00301 Milbns

Ft 5O x

OA

Table 4: Acquisition of Locomotives

1995 1996 1997 1996 1999 2000 2001 2002 2003 2004 2005 2006 2007 2006 2009 2010 2011 2012 2013 2014 2015 2018 2017 2018 TOTAL

I-INVESTMENT 0 0 64391 1650 7 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 229892

Il-INFRASTRUCTURE MAINTENANCE COST SAVINGS-WntA proect

*Basewst 41617 41617 41617 41617 41617 41617 41517 41617 41617 41617 41617 41B17 41617 41617 41617 41617 41617 41617 41617 41617 41617 41517 41617 41617 998808'Excesscost 1095 2189 3284 4379 5474 6568 7663 8758 9852 10947 12042 13137 14231 15326 16421 17516 18610 19705 20800 21894 1095 2189 3284 4379 240839

Totalcostw/oprroecl 42712 43806 44901 45996 47091 48185 49280 50375 51469 52564 53659 54754 55848 56943 68038 59133 60227 81322 62417 63511 42712 43806 44901 45996 IE+06

-VIth projectBasecost 41617 41617 41617 41817 1875 1875 1875 1875 1875 1875 1875 1875 1675 1875 1875 1875 1875 1875 1875 1875 1875 1875 1875 1875 203975*Excesscost 0 0 631 1261 1892 2522 3153 3783 4414 5044 5675 6306 6936 7567 8197 8828 9458 10089 10720 11350 11981 12611 132418

Total costwlproject 41617 41617 41617 41617 2506 3136 3767 4398 5028 5659 6289 6920 7550 8181 8812 9442 10073 10703 11334 11964 12595 13225 13856 14487 336393

B5nefis in 1000 DH 0 2189 3284 4379 44585 45049 45513 45977 46441 46905 47370 47834 48298 48762 49226 49690 50155 50619 51083 51547 30117 30581 31045 31509 903254

111- BENEFITS RELATED TO IMPROVED RELtA8ILITYWnout preed 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 1824 43784Wtih projed 1824 1824 1824 1824 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 159 10466

-Benefts 0 0 0 0 1665 1665 1665 1685 1665 1665 1665 1665 1665 1665 1665 1665 1665 1665 1665 1665 1665 1665 1665 1665 33298

IV- AVAILA8ILITY OF LOCOMOTIVES-Diference idaysavailabte 18 34 1834 183 1834 1834 1834 1834 1834 1834 1834 1834 1834 1834 1834 1834 1834 183 183 1834 1834 36680

-Benefitsreidtoirnprove.davaihability 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 15478 309552

V- SALVAGE VALUE 57473 5

-Be~eEls 0 2189 461107 -161121 61727 62191 62656 63120 63584 64048 64512 64976 65440 65905 66369 66833 67297 67761 68225 68690 47259 47724 48186 106125 1E+06


NET PRESENT VALUE AT 10% DH 1,090 MiWions

0

ANNEX 11Page 1 of 7

FINANCIAL EVALUATION

Main Assumptions Used For Projections

Operating revenues

(a) Rail services are consolidated under two major business lines:- passengers and parcels;- freight with another subdivision: phosphate, general cargo, and the port

shuttle for chemicals (called "other revenue").The model considers each of these four segments separately. The currentprojection assumes passenger and freight traffic growth of 11 and 5 percentrespectively in 1996 that mostly accounts for the one-month strike in 1995.Phosphate traffic was not affected by the strike and will likely fall by about1 percent in 1996 compared to the previous year. For later years, traffic growth isassumed at an annual rate of 2.5 percent for passengers, 1 percent for phosphate,and 1 percent for other freight. The projection further accounts for loss ofpetroleum traffic in 1997 (a 3-percent reduction of freight traffic) and for trafficcreation directly linked to the project (addition of about 4 percent to the trendpassenger and freight traffic in 2001 and 2002). The tariffs are kept unchangeduntil 1997: they are then assumed to be raised each year by a percentageequivalent to two thirds of the inflation rate.

(b) After creation of the joint-stock company, Government is expected to paycompensation starting 2000 for the deficit incurred by ONCF in providing servicesat its request. The initial compensation is estimated at DH 110 M, growing toDIH 125 M by 2003 (the compensation is mostly for passenger services; aboutDH 20 M corresponds to low tariffs granted to chemical traffic).

(c) Miscellaneous revenues, of fluctuating nature in the past and of minor magnitude,are estimated at a constant DH 10 M.

(d) Investments by force account ("Travaux faits par 1'entreprise pour elle-meme",or TFEE) are not treated as operating revenue, contrary to ONCF's practice.Instead, they are deducted from working expenses. These investments have beenestimated by ONCF and mostly include materials and equipment.

2. Operating expenses

(a) The evolution of labor costs depends on the compensation policy and on staffing.The 7 percent increase scheduled in 1997 has been taken into account. Staffdownsizing from about 13,800 in 1995 to 10,000 in 2001 is the main factor in theevolution of labor costs. The saving in 1996 value is calculated as the number ofredundant staff times the average salary (some DH 42,000 per year) times 1.12 to

ANNEX 11Page 2 of 7

account for fringe benefits paid by the employer. The calculated amounts are thenconverted to current value by using the cost of living adjustment factor(1.5 percent p.a.) and the average merit increase (2 percent p.a.). The savingcomes to a total of slightly more than DH 200 M by 2003.

(b) For fuel and energy costs, related consumptions in 1995 are first apportioned tothe traffic. They are projected taking into account the growth prospects of eachtraffic and the elasticity of fuel consumption to traffic growth (0.8 for passengertrains, 1 for phosphate trains, and 0.9 for other freight trains) to account forexpected productivity increases. Inflation factors are then added (4 percent in1996, 3.5 percent in 1997 and 3 percent thereafter).

(c) Supplies cover materials needed for operation and maintenance, plus investmentsdone by force account. The former is derived from an estimate of variable andfixed operating costs in 1995 reduced by its labor component and train crew costs(combined share of 40 percent). The residual value is then projected based on thesame principle as the one used for fuel (traffic growth and elasticity of suppliesconsumption to traffic of 0.6 for passenger traffic, 0.9 for phosphate traffic and 0.8for other freight traffic). The amounts are then updated for inflation of 4.5 percentin 1996, 3.5 percent in 1997 and 1998, and 3 percent thereafter. The projectionfurther assumes that about 15 percent of works done by force account will becontracted out between 1996 and 2003 which will have an impact on the supplieslevel (they will be reduced by some DH 30 M by 2003). The supplies needed forTFEE investments are calculated as 35 percent of the investment values given byONCF.

(d) For services purchased, the calculation also starts from the projection of variableand fixed operating costs and assumes a higher share of contracted out services(from 33 percent of costs in 1996 to 40 percent in 2001). The value of in-houseservices is multiplied by a 1.4 coefficient when they are taken over by outsideproviders (they will charge for overheads, capital costs and the benefit margin).The services purchased are estimated in current dirham using the same inflationrates applied to supplies.

(e) Depreciation is based on 50 years for infrastructure, 35 years for rolling stock and15 years for other fixed assets.

3. Borrowings. The model features four sources. Except for outstanding loans (see (a)hereafter) and the Bank loan, the assumptions on terms and conditions are rough estimates.

(a) The debt already contracted at the end of 1995: ONCF provided the correspondingdebt servicing schedule.

(b) Credits totaling DH 600 M (bilateral assistance and buyers' credits) would bedisbursed during 1996-2000. Some of these credits are concessional with a longperiod of grace and others are export credits. The projection assumes repayment

ANNEX 11Page 3 of 7

of half those credits starting 1997 with twelve maturities and payment of interest at8 percent.

(c) Multilateral agencies (essentially the World Bank, the European Investment Bankand the African Development Bank) would lend a total of close to DH 2.4 billionduring 1997-2000 (5 years of grace, 15 maturities, and 7.25 percent interest).

(d) Unidentified banks would finance up to DH 700 M or about a third of investmentsundertaken between 2001 and 2003 (1 year of grace, 15 maturities and 8 percentinterest).

(e) All the debt contracted from 1997 onward would be denominated in foreigncurrency.

No foreign exchange loss was accounted for in the base case scenario as local and foreigninflation rates are close enough not to warrant a parity change.

4. Investments. Total investments are estimated at DH 5.2 billion during 1996-2000. Whenincurred, expenses are first recorded under "work-in-progress", from which they are transferredto the relevant fixed assets after lags that vary according to nature of the works. Fixed assets areanalyzed under four categories: infrastructure, construction and tracks, rolling stock, equipmentand tools.

5. Inventories. The stores' inventories are reduced to DH 650 M in 1996 and DH 500 M in1997, after which they represent 300 days of supplies.

ANNEX 11Page 4 of 7

FINANCIAL EVALUATION

Detailed Financial Tables

Income udatminent: rtctual (1992-95) and forecast (1996-2002) (in dirham nlillon)

1992 1993 1994 1995 1996 1991 1998 1999 2000 2001 2002 2003aclual actual actual actual projected projected projected projected projectcd projected projcckcd projected

OPERATING REVENUES

Passciigcr aniid baggagcs 385 376 389 337 375 400 420 439 459 501 544 569Frcight:gencralcargo 502 426 411 415 434 431 452 466 480 516 552 569Fmeight:phosphates 529 485 720 746 719 779 806 831 856 882 909 937Govcrnmcnt compensation 0 0 0 0 0 0 0 0 0 110 120 125Ottier revciues 80 24 54 45 50 53 55 58 61 64 67 70Nlsiscelaneotis 0 15 17 7 10 10 10 10 10 10 10 10Revenue from opCrations 1496 1326 1591 1551 1587 1677 1743 1803 1866 2084 2202 2280

Labourcosts 711 736 783 771 780 822 831 840 851 859 894 924Fuelandenergy 205 226 239 195 219 229 239 250 261 281 301 315Other supplies 247 262 387 162 196 281 305 316 164 173 196 209Services purchased 235 269 325 177 179 152 175 199 225 261 279 292Other costs 9 8 0 2 11 12 12 12 12 13 13 14Taxes 9 7 19 16 16 17 17 18 19 21 22 23

minus:

Fixcd assets creation 113 107 217 110 77 197 24S 281 69 102 125 137lotalworkiig cxpcnscs 1303 1401 1536 1212 1323 1315 1332 1353 1464 1505 1581 1640CASH FROM OPERATIONS 193 -75 55 338 264 362 411 450 401 579 621 640

Total annual depreciationi 320 353 362 391 411 419 435 454 471 488 508 522Provisioln 67 25 7 0 0 0 0 0 0 0 0 0Totalopcratingcxpcnses 1689 1779 1906 1603 1734 1735 1767 1808 1935 1994 2089 2162

NET OPERATING REVENUE *194 -452 -315 -52 -147 -58 -24 -4 -70 90 113 118Interest 263 279 276 199 199 186 197 241 271 280 277 273

Non operating items:

Non operatiig rcvcnucs 92 129 423 195 109 122 106 105 120 120 120 120Nonopcr.expcnses 418 85 576 553 90 110 85 90 100 100 100 300

Nct non oper. rcvcnues -326 44 -153 -358 19 12 21 15 20 20 20 20Incomct ax 9 0 0 0 8 8 9 9 9 10 II IINET INCOME -791 -688 -744 -609 -335 -240 -208 -240 -331 -180 -155 -146FINANCIAL RAT IOS

I' >Working ratio 0.87 1.06 0.97 0.78 0.83 0.78 0.76 0.75 0.78 0.72 0.72 0.72 tJ zOperatingratio 1.13 1.34 1.20 1.03 1.09 1.03 1.01 1.00 1.04 0.96 0.95 0.95 Dcbt service ralio' n.a. n.a. 0.06 0.61 0.47 0.66 0.77 0.82 0.81 1.69 1.35 1.46 s -Laborcosts/operatingrevervucs'* 0.50 0.57 0.52 0.51 0.43 0.41 0.38 0.36 0.35 0.31 0.30 0.30Laborcosts/cashe xpcnses'* 0.52 0.50 0.46 0.60 0.51 0.52 0.50 0.48 044 0.43 0.42 0.42

*adjusted data froiss 2001 onward '*adjusted data from 1996 onward

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003FIXED ASSEIS actual actual actual actual projected projected projected projected projected projected projected projectedStudies 84 84 84 84 84 14 S4 64 g4 64 14 t4Land 95 97 108 116 116 135 209 327 644 873 931 981Construction and tracks 3662 4404 4384 4476 4476 4638 5015 5506 6474 7487 3075 3225Rollnig stocks 4198 4634 4833 5250 5280 5395 5580 5882 5907 5913 6263 67113Equipment,tools 516 551 1902 1953 1965 2050 2159 2258 2284 2303 2333 2373Buildings and others 902 967 0Total grossfixedassets 9458 10744 11311 11878 11921 12302 13047 14058 15393 16660 17686 18376Acc. dcpec.oa studies 84 94 84 S4 84 84 84 84 84 84 84 84Acc. deprec.on track,construction 647 759 699 863 1027 1194 1368 1553 1756 1980 2215 2453Acc. deprcc.on rollingstocks 1545 1719 1834 2009 2183 2360 2541 2729 2912 3093 3280 3476Acc. deprec.on equipmcnt & tools 285 324 687 761 834 909 938 1071 1155 1239 1325 1412Other acc. depreciation 126 147Total accuin. deprec. 2687 3032 3305 3717 1128 4547 4982 5436 5908 6396 6904 7426Workinprogress 1197 513 467 223 S32 1355 2296 2577 1913 1226 990 1105Sharcs and bonds 403 400 400 238 238 238 238 238 238 238 238 238ParticipationTanger-Fez railroad 1940 2179 2474 0 0 0 0 0 0 0 0 0Loans to staff& others 88 85 91 100 100 100 000 100 100 100 100 100Impact of ncw Exch.rates 404 351 275 236 236 236 236 236 236 236 236 236Totalotherfixedasscts 4032 3529 3706 797 1405 1928 2869 3150 2486 1799 1563 1678Netfixedasscts 10802 11241 11712 8958 9199 9683 10934 11772 11971 12063 12345 12628CURRENT ASSETS

Stows 1003 1O37 125 807 650 500 453 476 367 399 435 458Receivables (clients) 177 237 416 198 296 292 287 296 1 307 343 362 375Other debtors 397 393 401 443 221 0 0 0 0 0 0 0Suspense accounts 2 7 I 5 8 11 11 11 11 11 11 11Cash available 20 33 22 153 68 373 417 623 1010 890 598 296Totalcurrcntalssets 1599 1707 1666 1605 1243 1176 1167 1406 1694 1641 1406 1139TOTAL ASSETS 12401 12948 13378 10563 10442 10858 12101 13177 13666 13704 13751 13767PERMANENT FUNDSCapital,retainedearnings -2519 -3311 6923 6883 6274 5939 5699 5491 5251 4921 4741 4585Subsidies & grants 7092 7437 78 75 775 1475 2175 2875 3575 3779 3999 4225Provisions 2878 3124 3670 1158 1158 1158 1158 1158 1158 1158 1158 1158Profit ofcurrent year -791 -688 -744 -609 -335 -240 -208 -240 -331 -180 -155 -146Lonig tcrni dcbts 2185 1999 2303 2198 1934 1990 26R3 3350 3567 3583 3488 3415Total pemiaiecnt funds 8845 8560 12230 9704 9805 10322 11506 12633 13220 13260 13230 13236CURRI NTI IAlItLITIIESSuppliers 192 175 809 317 261 304 443 388 297 291 346 359Other creditors 174 171 94 91 89 91 83 77 104 99Sortn IernportionofLTDcbt 1237 1424 0 0 1 1 1 1 1 1 1 1Amears to Govcmment 1812 2232 51 28 30 5 0 0 0 0 0 0Bankoverdraft 109 225 65 162 150 75 0 0 0 0 0 0 P'ZSuspenseaccounts 206 332 49 181 100 60 62 64 66 68 70 72 c Total current liabilitics 3557 4388 1147 859 637 537 595 544 446 444 521 531 a,TOTAL LIABILITIES 12401 12948 13378 10563 10442 10858 12101 13177 13666 13704 13751 13767 P, _R:NANCIAL IATIOS

Current 0.45 0.39 1.45 1.87 1.95 2.19 1.96 2.58 3.80 3.70 2.70 2.15Debt/equity 0.25 0.23 0.19 0.23 0.20 0.19 0.23 0.27 0.27 0.27 0.26 0.26

MAROC: ONCF - OmUe Natonal des Chemli de Fer: Source and appeadou of fdb On dirha e milel)

LONG TERM SOURCES 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

acua aua projected projected projected projected projected projected projected projected

Csh generated from operations 55 338 264 362 411 450 .401 579 621 640

Borrowings 262 245 102 41S 1031 972 443 200 250 250

Pension subsidics,financial restructuring. *Protocole 3919 700 700 700 700 700 700 205 220 226

Disinvcstmcnts & adjustments 604.920 235 0 0 0 0 0 0 0 0

Netnonoperatingrcvenues -153 -358 11 4 12 6 11 10 9 9Debt service by govemment 0 0 0 0 0 0 0 0 0 0

Totallongtermsources 4687 1161 1077 1483 2154 2128 1555 993 1100 1124

LONG TERM APPLICATIONSLoans & participations 5 9.196Investment program 526 370 651 903 1686 1292 671 580 790 S05

[ofwhich intemally produced] 217 110 77 197 248 281 69 102 125 137

Total capital investment 531 379 651 903 1686 1292 671 580 790 805

Interest 276 199 199 186 197 241 271 280 277 273

Debt repayment, incl. foreign exchange losses 682 354 366 362 338 306 226 184 345 322

Total debt service 958 553 565 548 535 547 497 464 622 595

Dividends to govemment 0 0 0 0 0 0 0 0 0 ITotal longtern applications 1489 932 1217 1451 2221 1839 1168 1044 1412 1401

EXCESS LT. SOURCES/APPLICATIONS 3198 228 -139 32 -67 289 387 -51 -312 -276

SHORT TERM SOURCES: Increase of:suppliers 634 -492 -56 43 139 -55 -91 2 48 12

other creditors 174 -3 -77 -3 -2 2 -8 -6 26 -5

S.T.portion of L;T. debt -1424 0 1 0 0 0 0 0 0 0

Arrears -2181 -22 2 -25 -5 0 0 0 0 0

Bank's overdraft -284 97 -12 -75 -75 0 0 0 0 0

suspense accounts -159 132 -81 -40 2 2 2 2 2 2

sub-total -3240 -288 -222 -100 58 -51 -98 -2 77 10

SHORT TERM APPLICATIONS: Increase of:stores -212 -18 -157 -150 -47 23 -109 31 36 23

receivables 179 -218 98 -4 -6 10 10 36 19 13

other debtors 8 42 -221 -221 0 0 0 0 0 0suspense accounts -5 3 3 3 0 0 0 0 0 0 >

sub total applications -31 -190 -277 -373 -53 33 -98 67 56 36EXCESS ST. SOURCES/APPLICATIONS -3209 -98 55 273 III -84 1 -70 21 -26 --A

CASHBEGINNINGOFYEAR 33 22 153 68 373 417 623 1010 890 598 ° _

VARIATION OF CASH -10.88 130 -85 305 44 205 387 -120 -291 -302 -'NETCASHENDOFYEAR 22 153 68 373 417 623 1010 890 598 296

ANNEX 12Page 1 of 2

FINANCIAL SENSITIVITY ANALYSIS

1. As evidenced by fifteen years of financial strains that led to the 1994 financialrestructuring, the expected financial recovery follows a narrow path and could bejeopardized, were such potential risks to materialize. Three key parameters are prone tosuch risks: traffic growth, labor costs containment and exchange rates.

(a) Traffic growth. Adequate cash generation hinges on rising traffic andcontinued competitiveness of the railway tariff. As for the latter, the assumed tariff policy(stability until 1997, then yearly revision to partly recoup inflation) is designed to minirnizerisks. Traffic growth is more uncertain, as deregulation of road transport will fosterutilization of larger trucks and economies of scale, as well as development of bus servicesthat will also be helped by extension of the motorway network. ONCF may prove unableto engineer reversal of the negative trend that prevailed during 1987-1994 (minus 1.1 and2.8 percent per year respectively for passenger and general cargo traffic). The simulationenvisages an adverse scenario by which passenger traffic would stagnate from 1997onward, and freight traffic other than phosphate would decrease by 2 percent annuallyfrom that same year.

(b) Labor costs containment. As an important share of working expenses (about60 percent in 1995), labor costs must be reduced for the financial recovery plan tosucceed. The new management determination to downsize the labor force could beundermined by the unions whose strength shows no sign of abating. The simulationconsiders a case where it would be impossible to reduce staff below 12,500 (compared to14,000 on average in 1995).

(c) Evolution of exchange rates. Depreciation of the local currency has beenone of many factors that contributed to ONCF insolvency in the relatively recent past.Based on projected local and international inflation rates, the future depreciation of thedirham should be of limited magnitude (should exchange rates strictly follow thepurchasing power parity rules, the dirham would depreciate by a mere 1.5 percent annuallyover 1996-1998, then 1.3 percent annually thereafter). The base case scenario assumes nodepreciation of the dirham. However, failure to improve the macroeconomic frameworkwould weaken the dirham, with adverse consequences to ONCF's ability to service itsdebt which would be entirely contracted in foreign currency. The simulation includes anadverse scenario corresponding to depreciation of the dirham at an annual rate of3.5 percent (in 2003, the dirham would have lost about 30 percent of its value against theUS dollar).

2. The table below summarizes the results of all simulations including one whichcombines the adverse traffic and staffing cases plus a 2 percent annual depreciation ratefor the dirham.

ANNEX 12Page 2 of 2

Sensitivity of Financial Results to Main Risk Factors(in DH million for income and cash gosition)

Financial indicators 1997 1999 2012Base case

-net income (loss) -240 -240 -1i0 -146-cash in bank/hand 373 623 890 296-working ratio 0.78 0.75 0.72 0.72-debt service ratiol 0.66 0.82 1.69 1.46-currentratio 2.19 2.58 3.70 2.15

A- Lower traffic- net income (loss) -267 -296 -272 -277- cash in bank/hand 336 509 626 -194-working ratio 0.80 0.77 0.75 0.71-debt service ratio 0.61 0.72 1.49 1.23-current ratio 2.12 2.35 3.10 1.12

B- Higher staffing- net income (loss) -260 -321 -332 -310- cash in bank/hand 353 473 473 -442-working ratio 0.80 0.80 0.80 0.79-debt service ratio 0.62 0.67 1.36 1.18-current ratio 2.15 2.31 2.76 0.76

C- Depreciation of DH- net income (loss) -313 -379 -344 -300- cash in bank/hand 338 504 652 -204-working ratio 0.78 0.75 0.72 0.72-debt service ratio 0.63 0.75 1.46 1.17-currentratio 2.11 2.33 3.09 1.15

D- Combined A-B-C-- net income (loss) -329 -456 -514 -523- cash in bank/hand 296 293 79 -1202-working ratio 0.81 0.82 0.83 0.U3-debt service ratio 0.56 0.54 1.08 0.85.-current ratio 2.04 1.93 1.79 -0.86

3. The sensitivity analysis confirms that the financial recovery remains vulnerable toadverse factors that would not allow implementation of the strategy. The impact of lowertraffic and of a depreciated dirham would be less severe than failure to reduce staffinglevel, and would still result in cash shortages of about DH 200 M in 2003 without muchpossibility of resorting to increase borrowings since the debt service coverage ratio wouldalready be below safe levels (around 1.2 in 2003). The combination of adverse factorswould bring ONCF to bankruptcy shortly after 2001.

4. In view of these results, it will be essential to monitor closely the evolution offinancial parameters and ensure full compliance with key targets covenanted in the Loanagreement. The mid-term review will be of great importance since it provides anopportunity to revise the strategy if need be to make sure that financial targets will be met,notwithstanding adverse changes in the business environment. Corrective measures rangefrom abandonment of loss-making services to more drastic staffing reductions to below10,000.

I The Government capital contribution to balance the ONCF pension system has been taken into accountfrom 2001 onward.

ANNEX 13Page 1 of 9

NON-OFFICIAL ENGLISH TRANSLATIONOF TBE STRATEGY LETTER

KINGDOM OF MOROCCO

September 25, 1996

Mr. James WolfensohnPresident, The World Bank1818 H Street, N.W.Washington, DC 20433United States of America

Subject: Railway Restructuring ProjectLetter of Subsector Strategy

Dear Mr. President:

I. Introduction

I . Improvement of the conumercial, technical and financial performance of rail transport is acentral concern of the policy on increasing the competitiveness of the Moroccan economy andrehabilitation of the public finances pursued by the Government.

II. Diagnosis of the Present Situation of the Railways

2. The present structure of the rail system, which serves most of the major populationcenters, the main ports and the mining centers, is satisfactory from an overall standpoint.However, the system needs to be modernized and made more efficient: the infrastructure hasbecome partially run down and a part of the system is at the limit of its capacity. As regards theinstitutional aspect, the Office National des Chemins de Fer (National Railways Company,hereinafter 'ONCF), which has the legal status of an industrial and commercial public institution('E.P.I.C.'), is subject--due to the legislation applicable to it (see Appendix 1 hereto)--tomanagement procedures that are often cumbersome and restrictive. ONCF has not posted a profil.since 1980 and its self-financing capacity has been markedly negative since 1991. Moreover, and.no less disturbing, it must be noted that if no steps are taken to reform the retirement-findingmechanisms, the ONCF staff pension scheme will become an increasingly heavy burden on theenterprise's future financial equilibrium. For some time now, this subsector has only beerLmaintained in financial balance by means of significant transfers from the Government. However,,

ANNEX 13Page 2 of 9

since mid-1994, ONCF's management has been implementing an important program of reforms ofthe enterprise's internal management, the main components of which are listed in Appendix 2.

Im. Main Objectives of the Rail Transport Policy

3. The medium-term rail transport policy that the Government proposes to implement has asits main objectives: (i) sharpening the competitiveness of rail transport, which falls within thegeneral context of Morocco's transport policy, namely, upgrading the quality and reducing thecost of the services provided to clients, fostering healthy competition between transport modesand enterprises, and assuring coverage by clients of the operating costs of transport services andof the cost of infrastructure maintenance and renewal; and (ii) reduction and rationalization of theGovernment's financial transfers to the subsector.

A. Modernization of the Rail System

4. Modernization of the rail system will be pursued through the implementation of aninvestment plan defined in the Performance Contract for the period 1996-2000 (hereinafter'S3overnment-ONCF Performance Contract') concluded between the Government and ONCF onSeptember 6, 1996, and which assigns priority to infrastructure renewal and modernization.

B. Revision of the Financial Relations between the Government and the RailTransport Enterprise

5. Regarding the financial transfers by the Government to the subsector, as of the year 2001the Government proposes to limit these to: (i) compensation for public-service obligationsexplicitly imposed by the Government (either for operation of special services, or in the form oftariff reductions for certain categories of clients, or else for maintaining certain lines or facilities inservice for specific needs); and (ii) financing of the construction of new infrastructure, ifspecifically asked by the Government.

C. Reorganization of the Institutional Framework: Stage I: Formation of a LimitedLiability Company and Reorganization of the Government's System of FinancialControl

6. The degree of autonomy of ONCF currently contrasts with the increased freedom enjoyedby road hauliers in a deregulated market. The institutional framework of its activity will bethoroughly restructured so as to give ONCF complete autonomy of operation and to encourage itto adopt a resolutely commercial approach. The Government is convinced that reform of itscontrol over ONCF and ONCF's conversion into a joint stock company will increase andstrengthen ONCF's efficiency, autonomy, competitiveness and market-oriented approach. Inorder to ensure that the rail transport enterprise will have the desired freedom of operation, theGovernment will: (i) give ONCF the legal status of a joint stock company; (ii) reform thefinancial control rules applicable to it; and (iii) redefine the regulatory framework for railwayactivity. The conversion of ONCF into a joint stock company will be consistent with the new lawon joint stock companies which aims at making control of company management more effective.The new law sets up a more appropriate legal framework.

ANNEX 13Page 3 of 9

7. The legislation in respect of conversion of ONCF into a joint stock company will includeprovisions to streamline Government financial control by eliminating a priori control and replacingit by a posteriori oversight and repealing, as regards the new rail transport enterprise, all currentlegislative and regulatory provisions governing Government financial control, including the DahirNo. 1-59-271 of April 14, 1960 as amended.

8. As of September 1, 1996, the Government has already begun the internal conversionprocess in ONCF. This process has to include, among other things, preparation of an inventory ofall components of ONCF's assets and liabilities, identifying those that will be transferred to thenew company and those that will be assumed or paid off by the Government, noting in each casethe current value of each item concerned. This will be a diagnostic study of the legal systemgoverning ONCF's property and obligations that will define, among other things, the alienable andinalienable rights and obligations. This first stage will be concluded with submission, no later thanJune 30, 1998, of the preparatory dossier for restructuring to the Preparatory Comnmittee of thePermanent Interministerial Committee on Public Enterprises (CIPEP). During this initial period,the Government will determine which elements of ONCF's present assets and liabilities will betransferred to the joint stock company. This will make it possible to eliminate from the initialbalance sheet those elements that could compromise the financial viability of the new rail transportcompany and to ensure that appropriate action is taken in light of the restructuring dossier topermit preparation in good time of the text of the law repealing the law instituting ONCF and togovern the company that will take ONCF's place. Subsequently, the Government will take thenecessary steps to ensure that said draft law will be adopted by the Government no later thanDecember 31, 1999.

9. The new regulatory framework for rail transport activity will be defined by a new set ofspecifications that will be based on standard models submitted by the Bank and concerning whichthe Government has given its agreement in principle (Appendix 3).

D. Reorganization of the ONCf Staff Pension System

10. The pension service for ONCF's permanent staff is managed by an internal fund which iscurrently operating at a very considerable deficit. It is expected that the ONCF subsidy needed tocover this financial deficit would rise from DH 100 million in 1996 to over DH 460 million by2015. The equilibrium rate of the ONCF pension system will move from 42 percent of the wagebill in 1996 to nearly 80 percent in 2007 and almost 110 percent by 2015. A reliable andpermanent solution has to be found for financing this deficit. A specific study of the ONCFsystem will be made in accordance with the conditions set out in Appendix 4.

11. ONCF's financing requirement up to the year 2000 is covered under the terms andconditions of the Government-ONCF Performance Contract for the period 1996-2000. Prior tothe formation of the joint stock company, mechanisms for funding the pension fund's deficit willhave to be put in place by the Government. It must be emphasized that conversion of ONCF intoa joint stock company cannot be considered without an adequate solution of the pension question.

ANNEX 13Page 4 of 9

E. Reorganization of the Institutional Framework: Stage II: Development of thePrivate Sector

12. Following the conversion of ONCF into a joint stock company, the Government will,based on future options, initiate a study to analyze and develop in depth the most appropriateapproach for ensuring, in the medium term, the active participation of the private sector in railtransport activity:

13. This study will also establish a plan of action and a schedule for implementing the optionor options ultimately adopted by the Government. The terms of reference for this study will firstbe drafted in conjunction with the Bank. The report resulting from the study will also bediscussed with the Bank.

Please accept, Mr. President, the expression of our highest consideration.

FOR THE KINGDOM OF MOROCCO

Essaid AmeskaneMIinister of Transport

ANNEX 13Page 5 of 9

Appendix 1

LEGAL FRAMEWORK WITHIN WHICH ONCF CURRENTLY OPERATES

ONCF, established by Dahir No. 1-63-225 of August 6, 1963, as amended by Dahir No.1-70-18 of July 25, 1970, has the legal status of an 'E.P.I.C." (Etablissement Public a CaractereIndustrel et Commercial, Industrial and Commercial Public Institution) and therefore possessescivil personality and financial autonomy. A set of Specifications approved by Royal Decree No.23-67 of April 25, 1967 defines the conditions under which ONCF will manage and operate therail system.

In virtue of its E.P.I.C. status, ONCF is subject to Government financial control under theprovisions of Dahir No. 1-59-271 of April 14, 1960, as amended by Dahir No. 1-61-402 of June30, 1962, organizing the Government's financial control over the offices, public establishmentsand concession-holding companies, and other companies and organizations, benefiting fromfinancial assistance from the Government or public authorities or agencies.

ANNEX 13Page 6 of 9

Appendix 2

MAIN RECOVERY MEASURES TAKEN BY ONCF SINCE MID-1994

Cost reduction measures:

No recourse to temporary labor (about 5,000 at beginning of 1994);

No replacement of retirees;

* Rationalization of costs in respect of permanent staff;

Elimination of staff benefits in kind (official cars, telephone, water and electricityexpenses, etc.);

Strict control of travel expenses and overtime;

Implementation of new infrastructure and equipment maintenance methods;

Reduction of level of stocks and rationalization of their management;

Rationalization of overhead expenses.

Application of these measures reduced operating costs by about 20 percent in 1995 comparedwith 1994.

Rationalization of rail services:

Reorganization of passenger services, with elimination of very lightly used services(resulting in roughly a 25 percent reduction in total passenger services, entailing a declineof no more than around 1 percent in revenue) and adjustment of train make-up on thebasis of demand;

* Elimination of 30 percent of passenger train stops;

Closing of certain stations no longer used for traffic purposes.

Commercial actions:

Signature of an addendum to the contract with the Office Cherifien des Phosphates(OCP) for phosphate hauling with adjustment of the base tariffs;

Seven percent increase in base freight and passenger tariffs in August 1994;

ANNEX 13Page 7 of 9

Introduction of a new commercial strategy aimed primarily at alignment of the passengerand freight transport plans to demand, and adjustment of tariffs in accordance with costsand competition.

Financial restructuring:

Signature of a financial protocol with the Government for the period 1994/98(capitalization of a part of the debt due, annual capital contribution of DH 700 million asof 1995);

Improvement of cash management (payment of suppliers).

Organization and management systems:

* Implementation as of August 1995 of a new organization that will promote greatereconomic and financial efficiency and reduce operating costs.

Investment program:

* Reexamination and reduction by about 40 percent of the previous medium-terminvestment program, assigning priority to infrastructure and equipment rehabilitation.

Transfer of activities to the private sector:

Implementation of hotel divestiture policy;

Sale to the private sector of two hotels of the Transatlantique chain (Essaouira, Meknes)owned by ONCF and closing of the Terminus Hotel in Oujda and of the Transatlantique inCasablanca;

Publication of a call for bids for sale to the private sector of ONCF's railroad tiesmanufacturing works in Casablanca;

Publication of a call for bids for privatization of the food and beverage services in stationsand passenger trains;

Publication of a call for bids for sale to the private sector of the ballast pits operated byONCF or its branches;

* Preparation of a dossier for possible operation on a concession basis of the newTaourirt/Nador line.

ANNEX 13Page 8 of 9

Appendix 3

SPECIMEN DOCUMENTS FOR THE REFORMOF THE RAILWAY INSTITUTIONAL FRAMEWORK

"Cahier des charges de la Socete de Chemins de Fer (Version 3-11 Mai 1995)"

"Convention pour I 'Exploitation d 'une Desserte Ferroviaire Voyageurs ta titred'Obligation de Service Public (Version 1-5 Janvier 1996) ".

ANNEX 13Page 9 of 9

Appendix 4

THE PENSION SYSTEM

1. The ONCF Pension Fund is an internal fund that manages the pension service forpermanent staff. It operates in accordance with the rules broadly applied in the civil pensionsystems managed by the CMR (Caisse marocaine de retraite, the national retirement fund). It isbased on an assessment system without any technical provisions to guarantee the acquired rightsof both retirees and those still in employment.

2. The income generated by the Fund already falls far short of requirements. Owing todeterioration of the demographic ratio and a considerable increase in pension amounts payable in1990, the balancing subsidy paid by ONCF on top of employee contributions is already very high.It is expected to amount to DH 100 million in 1996 and to exceed DH 460 million by 2015. Theoverall equilibrium rate is equal to 42 percent of the wage bill (7 percent employee contribution,14 percent employer contribution, and 21 percent subsidy) and would reach 80 percent in 2007and 110 percent in 2015. The cost of pensions is going to rise very sharply in the near future dueto the quickening pace of early retirements.

3. The high cost of pensions is the result of the existing very generous arrangements. Theserules set the normal retirement age at 55 years (50 years for drivers, as compared with 60 yearsfor pension schemes managed by the CMR), offer proportional early retirement after 21 yearsservice, an annual contribution rate of 2.5 percent, a high reference wage, wage-based indexing,and supplementary allowances and reversion of pension rights for family members. Theseprovisions are very costly and would be hard to retain with a capitalization system. (They wouldrequire an annual contribution rate of almost 50 percent with a real financial yield of 0 percent.)However, they are quite unaffordable for an assessment-based pension system.

4. Funding of ONCF pensions without any change in the current rules represents a hugechallenge for the Moroccan authorities. A permanent and reliable solution will therefore have tobe found. The repercussions on the pension systems of other public establishments and on theGovernment budget would be examined in the context of a global study that the Government is infact planning to launch.

5. In the intermediate future, a specific study of the ONCF pension system will be made incoordination with the possible study referred to in Paragraph 4. An actuarial and financial studywill be made of the ONCF system covering the period up to the year 2025, and will review itsmanagement and funding. This study should be started in the context of the preparation of thedossier referred to in Paragraph 10 of this letter. The intention would be for it to be completedbefore December 31, 1997, and its recommendations should be specified in a plan of actiondefining the steps to be taken to restructure the ONCF pension system that will be implementedupon the formation of the limited liability company that would take the place of ONCF. This planof action will be prepared and submitted to IBRD, for its opinion, prior to October 31, 1998.

ANNEX 14

SELECTED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE

ONCF

Etudes de rentabilite financiere: Axe Rabat - Sidi Kacem

Etudes de rentabilite financiere: Axe Sidi Kacem - Fes

Etudes de rentabilite financiere Axe Fes - Oujda

Etudes de rentabilite financiere Axe Casablanca - Marrakech

Etudes de rentabilite financiere: Acquisition de 7 locomotives electriques

Etudes de rentabilite financiere: Acquisition de 100 wagons

Etude de rentabilite financiere du programme d'investissement (Mai 1996)

Etudes de rentabilite economique: Axe Rabat - Sidi Kacem

Etudes de rentabilite economique: Axe Sidi Kacem - Fes

Etudes de rentabilite economique: Axe Fes - Oujda

Etudes de rentabilite economique: Axe Casablanca - Marrakech

Etudes de rentabilit6 economique: Acquisition de 7 locomotives 6lectriques

Etudes de rentabilite econonique - Hypothese du scenario: Acquisition de 7 locomotives6lectriques - sans le gain sur la fiabilite

- sans le gain lie a la disponibilite

Etudes de rentabilite economique: Acquisition de 100 wagons divers

Etudes de rentabilite conomique: Etudes de sensibilite

SYSTRA SOFRETU-SOFERAIL

"Etude des perspectives d'avenir du systeme de retraite des agents ONCF". February1996. Jean-Pierre ODDOU

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Report No: 15988 MORType: SAR