metadata: authors: 0: author: Rebelo,Jorge M.
docna: 0: docna: Preparing multiyear railway investment plans
            : a market-oriented approach
docty: Policy Research Working Paper
subtopic: Telecommunications Infrastructure,Railways Transport,Transport Services,Intelligent Transport Systems
teratopic: Transport
abstracts: cdata!: With the emergence of a powerful
            trucking industry and the deregulation of transport, most of
            the once-powerful developing country railways are facing a
            struggle for survival.  Traditional traffic is shifting to
            trucking and pipelines, governments are increasingly
            reluctant to write blank checks to cover deficits, and the
            falling morale of railroaders is harming productivity and
            reliability.  Railway managements know they must introduce
            institutional and organizational changes that make railways
            market-oriented.  Governments must support legislation that
            creates an enabling environment that supports the
            railway's autonomy and allows it to compete.  Young
            planners and not-so-young railroaders struggling with
            multiyear investment plans tend to concentrate only on
            investing in infrastructure and acquiring equipment (bricks
            and mortar).  They tend to ignore or underestimate essential
            institutional reform, without which the revival of the
            railways cannot be sustained.  The author's practical
            and detailed paper will help railway planners prepare
            profit-oriented multiyear investment plans.  He describes
            the steps of a plan, and within each step, lists basic
            issues and questions relevant to that step.  He highlights
            the importance of marketing and sales in the modern railway,
            and shows how to screen proposed projects and package them
            into meaningful corridors, where the level of service can
            benefit substantially from the proposed investment.
            Long-term objectives for modernizing a railway, according to
            the author, would include achieving complete autonomy from
            the government, supporting ongoing economic rehabilitation
            programs, maximizing profits, signing contract plans for
            government-imposed services, and developing railway real
            estate. Medium-term objectives would include increasing the
            railway's commercial orientation, continuing the
            rehabilitation of plant and equipment, searching for and
            developing new markets, lobbying for approval of an enabling
            plan, and achieving an acceptable tonnage/staff ratio.
            Short-term objectives would include supporting an ongoing
            economic rehabilitation program; maximizing profits;
            removing bottlenecks when an investment is not necessary to
            do so; starting the rehabilitation of plant and equipment;
            preparing a plan for developing an enabling environment;
            strengthening marketing and sales, accounting, and railway
            costing; and starting a manpower development and retraining program.
repnme: repnme: Preparing multiyear railway investment
            plans : a market-oriented approach
display_title: Preparing multiyear railway
            investment plans : a market-oriented approach
listing_relative_url: /research/1992/10/699548/preparing-multiyear-railway-investment-plans-market-oriented-approach
topicv3: Transport m1326661 135,Telecommunications and Broadband Access
            m1327340 286,Railways m1327400 166,Axle Loads m1505458 4211,Traffic Management m1583399 4231
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Transport
origu: Latin America and Caribbean: Country
            Department I
no_of_pages: 82
author_keys: 0: author_key: 93182
model_extractions: <!-- Start of picture text --> Policy Research<br><!-- End of picture text --> I <!-- Start of picture text --> ~~~~~~~~~~~~~~~~~~Infrastructure<br><!-- End of picture text --> WPS 1006 This paper -a product of the Infrastructure Division, Latin America and the Cauibbean, Country - Department I is part of a larger effort in the region to provide practical guidelines which promote the commercial orientation of government-owned railway enterprises to make them financially self-sufficient. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Allison Tumer, room 17-15 1, extension 30933 (October 1992, 74 pages).

With the emergence of a powerful trucking industry and the deregulation of transport, most of the once-powerful developing country railways are facing a struggle for survival. Traditional traffic is shifting to trucking and pipelines, governments are increasingly reluctant to write blank checks to cover deficits, and the falling morale of railroaders is harming productivity and reliability.

Railway managements know they must introduce institutional and organizational changes that make railways market-oriented. Governments must support legislation that creates an enabling environment that supports the railway's autonomy and allows it to compete.

Young planners and not-so-young railroaders struggling with multiyear investment plans tend to concentrate only on investing in infrastructure and acquiring equipment ("bricks and mortar"). They tend to ignore or underestimate essential institutional reform, without which the revival of the railways cannot be sustained.

Rebelo's practical and detailed paper will help railway planners prepare profit-oriented multiyear investment plans. He describes the steps of a plan and, within each step, lists basic issues and questions relevant to that step. He highlights the importance of marketing and sales in the modem railway, and shows how to screen proposed projects and package them into meaningful orridors, where the level of service can benefit substantially from the proposed investment.

Long-term objectives for modernizing a railway, according to Rebelo, would include achieving complete autonomy from the govemment, supporting ongoing economic rehabilitation programs, maximizing profits, signing contract plans for government-imposed services, and developing railway real estate.

Medium-term objectives would include increasing the railway's commercial orientation, continuing the rehabilitation of plant and equipment, searching for and developing new markets, lobbying for approval of an enabling plan, and achieving an acceptable tonnage/staff ratio.

Short-term objectives would include supporting an ongoing economic rehabilitation program; maximizing profits; removing bottlenecks when an investment is not necessary to do so; starting the rehabilitation of plant and equipment; preparing a plan for developing an enabling environment; strengthening marketing and sales, accounting, and railway costing; and starting a manpower development and retraining program.

The Policy ResearchWorking Paper Series disseminates the findings of work under way in the Bank. An objectiveofthe series is to get these fndings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily reprcsent official Bank policy.

Produced by the Policy Research Dissemination Center
# PREPARING MULTIYEAR RAILWAY ENVFSIMEN PLANS: A MALKET ORENTED APPROACH

by JORGE M. REBELO
# TABLE OF COWTBNTS

|PAGE NO.|
|---|

|PREFACE|*..................<br>..<br>........<br>ii|
|---|---|
|I. Introduction<br>.1... . .<br>. . . . . . .<br>.|. . . . . .<br>. . .<br>..|
|II. The Planning Process<br>... . . . . . . .|. . . . . . . . . .<br>.<br>7|
|III. Setting Objectives<br>.... . . . . . . .|. . . . . . . . . .<br>.<br>10|
|IV. The Marketing Plan .....<br>. . . . . . .|. . . . . . . . . .<br>.<br>14|
|V. The Transportation Plan . . . . . . . .|. . . . . . . . . . . .<br>19|
|VI. Project Identification and Definition ..|. . . . . . . . . .<br>.<br>24|
|VIZ. Project Evaluation<br>.... . . . . . . .|. . . . . . . . . .<br>.<br>33|
|VIII. Financial Impact of the Plan<br>. . . . .|. . . . . . . . . . . .<br>36|
|AtNXS||
|1. The planning process: An example .... .|. . . . . .<br>. . . .<br>.<br>37|
|2. The marketing plan: Table of contents for|a|
|marketing<br>plan<br>for<br>passengers<br>and for<br>a co|mmodity<br>. . . . . . . .<br>40|
|3. FinancialImpact<br>of<br>Investment<br>Plans:<br>Case|Studies<br>. . . . . . .<br>47|
# PREFACE

1. With the emergence of a powerful trucking industry and the advent of transport deregulation, most of the once powerful developing country railways are facing a struggle for survival. Traditios.al traffic is shifting to trucking and pipelines, governments are increasingly reluctant to write blank checks to cover deficits, the falling morale of once proud railroaders is affecting in a very negative way overall productivity and reliability. Railway management knows that survival requires finding the proper role for the railway in the economy, exploiting its comparative advantages over other modes, tailoring its plant and equipment to its new needs, and challenging its competitors. But, above all, they also know that they must introduce institutional and organizational changes which will make the railway a market oriented enterorise which puts marketing and sales at the core of its actions and which shapes the other railway functions to serve the needs of the clients identified in the marketing plan.

2. Furthermore, management knows that without adequate traffic costing and a minimum of management information systems and telecommunications, real time troubleshooting and tailoring of services is hardly possible. Finally, governments are beginning to understand that if they want to see the railway's deficit reduced, they must support legislation to create the enablinQ environment which will enhance the railway's autonomy and allow it to compete on an equal footing with other modes.

3. One of the opportunities to embark on railway modernization plans arrives when a new multiyear investment plan is requested by Government and/or by bilateral or multilateral agencies which might be interested in financing the railway. A coherent investment plan using the corridor concept and calling for institutional and organization reforms within the railway and in the environment in which it operates, must be carefully prepared, evaluated and presented to both Government and financing agencies.

4. In most railways I have worked with, I saw young planners, and not so young railroaders, struggle with the preparation of these multiyear investment plans. More often than not, there was a tendency to concentrate only on infrastructure investment and equipment acquisition, while the fundamental institutional reforms mentioned above were either ignored or underestimated. The upshot was invariably a short-lived revival of the railways which could not be sustained because the plan was only "bricks and mortar" and lacked a durable institutional framework.

5. This paper is intended to help railway planners in the preparation of profit oriented multiyear investment plans. It describes the basic steps of a plan and within each, it lists a series of basic issues and questions which are relevant to that particular step of the planning process. The paper also attempts to highlight the importance of Marketing and Sales in the modern railway and to illustrate the screening of proposed projects and their packaging into meaningful corridors, where the level of service can benefit substantially from the proposed investment. It is my sincere hope that this paper will be useful to all
--ii

-

railroaders involved in the difficult task of preparing multiyear investment plans.

Jorge M. nebelo
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## PREPARING MULTI.AMR RAILWAY INVESTMBNT PLANS:

## A MARKET ORIENTED APPROACH:

# BY: J.M. REBELO 1/

## I. INTRODUCTION

1.01 One of the most challenging tasks faced by Railway managements around the world, is the preparation multi-year (usually five) Investment Plans designed to modernize their plant and equipment and to make their organizations more competitive and financially self-sufficient in the long run. To undertake the rehabilitation of the railways' physical plant and equipment, railway managers in developing countries are often faced with the thankless task of having to select only a very small number of projects from a lengthy list of proposals submitted by the various departments of the Railway. In addition, unlike their North American and European colleagues, they are seriously constrained by foreign exchange restrictions in their countries and by their lack of autonomy in a highly regulated institutional framework. Furthermore, their governments see their railways as employers of last resort and repeatedly ignore management requests to downsize their staff to more acceptable levels, because they fear the political and social impacts of such decisions. In short, the

institutional, regulatory and financial obstacles faced by railway managers in developing countries are awesome and severely limit their autonomy and their ability to manage their enterprises from a commercial standpoint.

1.02 In general, the following problems are common to most developing railways, especially in Africa:

- a. In the area of Infrastructure and Equipment.

- Track, in general, is in poor condition and substantial portions of it require renewal or some form of rehabilitation;

- Track maintenance equipment is run down or non-existent;

- Locomotives are poorly maintained either for lack of spare parts or inadequate maintenance practices. In addition, the locomotive fleet is composed by too many makes, making maintenance and acquisition of spare parts a difficult, if not impossible task;

1/ Sr. Transportation Planner of the Infrastructure Operations Division of the Brazil, Peru and Venezuela Department, Latin American and Caribbean Region of the World Bank. Prior to joining the **Bank he was** Director, Transportation Planning and Development of a wholly-owned _subsidiary_ of Canadian Pacific Limited. He has worked both in an **operating** and railway consulting capacity in more than 25 countries.
-2-

- Freight cars are old, badly maintained and their braking systems need to be modernized;

- Communications are very primitive and prevent management from acting promptly throughout the system;

- Signalling, in arnd oetween stations on the network, is also unreliable and very often constrains capacity and safety.

- b. In the Marketing and Sales area:

- Marketing railway services is an activity which is often not considered a priority and is, in general, confused with sales;

- Sales is an activity which consists in waiting for the -

- client to come to the railway rather than the opposite.

- Railway traffic costing is very aggregate and, therefore, of limited use, resulting in ir.adequate knowledge about the costs incurred by commodity and by type of service;

- 3 Freight traffic is often "less than carload" (LCL) and container traffic is not encouraged.

- c. In the Financial and Accounting area:

- the general accounting system is always late in producing financial statements. Moreover, the cost accounting system doesn't function and does not provide management with t::mely cost data for decision making or the costing department with basic inputs;

- The working capital (cash on hand) is very low and makes the use of revolving funds a constant necessity. This increases short-term debt to unacceptable levels;

- The long term debt is high, due to the successive devaluation of the national currency since most of the loans were incurred; debt service consumes most of the net income.

- d. In the Operations and Maintenance area:

- Operations management is weak due to poor motive power and rolling stock management;

- Lack of real time communications and management information systems prevent immediate corrective actions in operations;

- Stores management is inefficient and most of the times produces bottlenecks in the maintenance schedules, increasing down times and affecting availability;
-3-

- The maintenance organization lacks discipline, motivation, and spare parts.

- e. In the Institutional area:

- The President of the Railway and the senior management change too often, preventing planning continuity and stability;

- The railway is overstaffed by unskilled workers who cannot be easily fired or retrained;

- Government does not pay the subsidies which it has agreed to pay when they are due, adding to the existing cash-flow problems;

- Salaries are low compared to the private sector;

- Branch line abandonment and station closure are often prevented by Government;

- Tariff regulation does not allow a quick response to market needs and special contracts with major users;

- There are no contract plans between Government and Railway to force each to explain deviations from pre-agreed commitments;

- Furthermore, main rail lines are parallelled sy national highways in which an aggressive, privately owned, flexible and politically powerful trucking industry operates new trucks, at axle loads above those allowed by law and with an overall level of service sometimes better than the railway can offer.

1.03 This picture is grim and may suggest that developing railways are financially unviable unless they modernize to exploit their comparative advantage over other modes, if any. The modernization of plant and equipment calls for well structured and cohesive investment plans, accompanied by oraanizational and institutional chanaes which ought to be carefully designed to increase the chances of a financially viable operation.

1.04 During the last three decades, multilateral and bilateral agencies have financed a great number of railway projects. According to the results of a controversial Bank report 2/ IDA loans to railways in developing countries have not always produced the desired financial self-

_2a_ ***The** Railways' Problem. Transportation, Water and Telecomuunications Department, **The** World Bank, January 28, 1982
-4-

sufficiency they were aiming at. The problem seems to go far beyond technical improvements such as motive power or track rehabilitation which were often the most common targets for investment and which normally show short lived improvements after the rehabilitetion. Indeed, at the core of the problem, there is a question of railway manaaemeLat attitude and/or aQvernment nhilosonhy which must be urgently tackled if %.-he railways are to modernize, play an effective economic role within the transport sector of their countries and have a chance of becoming financi.lly viable.

1.05 Experience has shown that in very few cases have management of the railways and Governments sincerely attempted and succeeded in introducing orqanizational and institutional chances to accompany the physical infrastructure rehabilitation and equipment acquisition made possible by bi-lateral and multilateral loans. For example, gcvernments are slow in allowing tariff deregulation, they do not give sufficient autonomy to railway management,they block indefinitely branch line abandonment, station closure and staff rationalization, they do not respect contracts-plans (yet they impose loss making services on the gro_nds that they are socially justified) and overall they are unwilling to work with the railways to find solutions for the overstaffing that plagues them. As a result, lending can produce short-term operational improvements due to the infrastructure rehabilitation and equipment acquisition but the financial viability of the railway is gradually undermined and, in five years or less, the lack of money for maintenance of track and equipment has an impact on its level of service and starts a new cycle of low reliability and high delays, which diverts traffic to other modes.

1.06 What made North Americar and some European railways so different from those in the developing countries? Faced with similar problems in the 1960's, North-American railways fought back. They specialized and trimmed their staff, they diversified into new areas, they changed their marketing and sales forces from a static group to an aggressive and dynamic organization which tailored the railways to the specific needs of their clients. Furthermore, they strengthened their costing and financial management, they introduced management information systems and telecommunications and poised themselves to compete with truckers by introducing intermodal services. However, both in the USA and Canada, the Federal Government cooperated with the railways to provide the required enabling environment through the introduction of appropriate legislation and by moving from total regulation to a policy of quasi deregulation and, in the 80's, to a stage of total deregulation. They agreed to branch line abandonment and to the absorption of passenger services and signed contracts to compensate the railways for services imposed by the State which had to be performed at tariffs below their long run variable costs. This marriage of efforts between Government and railways produced the organizational and institutional changes required to prop up the railways into an era of fierce competition between themselves and with other modes and allowed railway management to be commercially oriented.

1.07 The railway problems in Africa and in most of the developing world cannot be solved as easily. Even with the most competent managers, major rehabilitation is only financial self-sustainable if they operate in an "enabling environment", i.e., in a climate where they can effectively manage the railway with a commercial orientation without being choked by
-5-

institutional, regulatory and foreign exchange restrictions which handicap even the most able managers. But, if one continues to believe that infrastructure and equipment renewal oriented investment plans are the solution for a revival of the railways without a more comprehensive approach which proposes changes in the organization and institutional environment iA which the railway operates, the results will continue to be as deceiving as they have been in the last 20 years. Without a solid commitment from Government _1/_ r" ch must be prepared, among other things, to allow staff cuts, line abandonment, cost based tariffs and management autonomy, it is illusory to expect that developing railways will give the quantum leap required to modernize and be Einancially selfsufficient.

1.08 Since the interaction between most railways and financial donors takes place when they prepare their 5-year investment plans, the latter are always an opportunity to provoke changes in the organizational, regulatory and institutional framework which surrounds the railway in order to create the enabling environment required for the restructuring of the railway. But, before doing that, the railway ought to be able to prepare a solid 5- year plan which is a blue print for change in all areas of the organization such as marketing management, railway costing, management information systems, financial management as well as in the traditional areas of investment. The railway must also define clearly the organizational and institutional changes required.

1.09 Faced with the huge list of problems described in paragraph 1.02, railway managers have two main preoccupations. One is to survive in the short-term by tackling individual problems that threaten to stop operations; the other is to modernize in the medium- and long-term to allow the railway to handle the traffic for which it is best suited. However, the list of problem is so long that managers often do not know where to start. Improvised actions or individual projects in the short-term are sometimes incompatible with medium and long-term plans. And then ... the crucial moment comes when a five year Investment Plan is needed in order to embark on a rehabilitation program and approach bilateral and multilateral organizations with a coherent list of projects which will enhance the financial viability of the Railway.

1.10 When the Railway's central planning office requests projects for inclusion in a five year Investment Plan, chances are that they will get a large number of projects from each of its departments, without priorities assigned to them. Frequently, projects will be submitted as individual actions and more often than not, the regional planning units, if they exist, will not submit packages of inter-related projects. Upper management receives a wide range of uarelitad potential projects and decisions are made more or less subjectively. If the railway system is a network, what normally happens is that the five year Investment Plan results in a series of individual investments rarely concentrated in corridors and, therefore, the overall benefits of such investment are neither perceived by the users, i.e. by the market nor are they profitable

l/ **See *NuiddelLes** for **Railway** Restructuring m by Lee W. Buff, L.S. **Thompson, IDUD, b.pte.ber** 1969.
-6-

to the Railway. Indeed, these fragmented investment actions may even lead to decisions which are counter-productive because the problem has not been viewed as a whole.

1.11 In view of the above it may be useful to describe the planning concepts and tools which have been suggested and introduced in several Railways when faced with the problem of preparing a five year Investment Plan. The objectives of .nis paper are two-fold:

- a) To propose a clear procedure for the preparation of S-year plans, with check lists to help in each step of the procedure.

- b) To emphasize organizational and institutional changes to be considered by the railway, in order to complement the modernization of its plant and services and act as a catalyst for change in management phJ.losophy.
-7-

II. THE PLANNING PROCESS 2.01 The planning process followed in this paper consists in the following steps:

- Setting Objectives and Performance Targets

- Preparing a Marketing Plan

- Preparing a Transportation Plan

- Identifying and Defining Civil Works, Equipm.ent, Technical Assistance and Institutional Projects

- Evaluating the Projects in the Investment Plan

- * Determining the Financial Impact of the Plan

2.02 T,4<sup>ereader</sup> might have noticed that there is nothing original in the proposed process since it follows the basic step by step approach used in most systems analysis. However, it is quite surprising that frequently, one or more of these essential steps are missing or are not clearly differentiated from the others in 5 year plans proposed by developing railways. For that reason, the output of those plans is often an unstructured and sometimes confusing picture of the proposed rehabilitation and, consequently, is not appealing to the Ministry of Planning and Finance and/or to the potential financing agencies.

2.03 Most North American and many European railways prepare their investment plans in considerable detail, using the opportunity to listen to the suggestions from their employees and customers, and tailoring them to available resources. They use different methods to put their plans together out, in general, they stress some interaction between the several levels of management in order to stimulate creativity and become aware of operational strategies and minor projects which the people who are closer to day to day operations consider crucial for a significant improvement of the level of service provided by the railway.

2.04 Canadian Pacific Railway created and marketed a method called Structured Planning, Evaluation and Control (SPEC) A/ which is a group dynamics tool to map out the activities required to undertake complex projects. Using group sessions in specially outfitted roims with magnetic boards and a moderator, the teams conduct brainstorming exercises listing issues and scheduling them and defining critical paths. The objective of the method is not only to encourage the interaction between specialists in different fields but also to create a responsibility, authority and communications matrix (RAC) which clearly defines the project scope and the responsibilities of the actors involved (see Annex 1 for an example). Other types of structured brainstorming are certainly useful and should be adapted to the cultural environment of the country which uses it. But as much as possible the planning process must be a mix of top down and bottom up proposals rather than an authoritarian top down approach.

**_it_** SPEC **is** an acronym for Structural Planning, Evaluation and Control and **a registered trademark** of CanadLan Pacific Ltd., of **whLeh** Canadian Pacific Railways is a maber coMpany.
-8-

2.05 To carry out the preparation of the S year plan it is suggested the creation of a Performance Improvement Task Force formed by one manavger of each department and representatives of regional and head office management. Preferably, the group should be headed by someone specialized in financial management and with good knowledge of all major departments of the railway, in order to provide more credibility to the exercise. This group should spend a period of 1-2 months preparing the plan and then meet twice a year over a two- or three-week period to review the progress made towards the objectives set, to update the plan and to adjust the short, medium and long-term objectives for the organization accordingly.
-9-

<!-- Start of picture text --> SETTING OECTIVES<br>MARKETING PLAN s~<br>TRANSPOFRTATION PLAN<br>WORKS<br>PLAN<br>PLA<br>PROJECT EVA WATION AND<br>SELECTION<br>f FINANCIAL IMPACT OF<br><!-- End of picture text -->

# FIG. 1- THE PLANNING PROCESS
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# III. Settina Obiectives

3.01 When preparing 5 year Investment Plans the first problem detected in several railways, is the state of total confusion regarding the objectives to be achieved. Sometimes, the objectives set by the Railway's upper management are too vague and cannot be easily defended when the ministry of Rconomy, Finance and Planning question their validity or even their priority over other transportation projects. Upper management must understand what are the Government macroeconomic objectives and what is the role of the railway in ongoing Economic Rehabilitation Plans. Once that role is understood, upper management must set its goals very clearly and explain them to middle management in special meetings where questions must be encouraced anr1 concerns to translate the goals into performance targets discussed. Middle management (e.g., chief of each region) must translate upper management's objectives into nerformance taroets so that these objectives are thoroughly understood at the division and subdivision level. Objectives may vary widely according to the specific railway corridor or region. It is our belief that upper management must, as a starting point, define the overall objectives for the Railway, for each region, for each line and for each corridor, if applicable. In addition, upper r 4agement must define short-medium and long term objectives in an unequi-ocal way. The advantage of a clear definition of objectives is that any projects proposed by lower management levels and whose objectives do not fit within the objectives defined by upper management, will be discarded. Box 1 is a sample of long, medium and short-term objectives for a railway. Box 2 describes the most common performance (operational and financial targets) used to translate short and medium-term objectives.

3.02 As mentioned above, before setting objectives for the railway rehabilitation, its senior management must try to understand very clearly the context in which the railway is inserted. In most developing countries the railways are government owned and must compete for scarce funds with other modes. The government will be pressured both internally and externally to select the most economic investments from the standpoint of the country as whole. Therefore, the railway management ought to start by understanding what are the government macroeconomic objectives, what is the economic role of the railway and more specifically what is the economic role of the railway in the ongoing programs for Economic Rehabilitation. It is suggested that, with the help of its planning team, the railway senior management finds convincing answers to the following questions:

- Why are we investing X million $U.S. in this rehabilitation?

- What is it that the railway can offer at a lower economic cost than other modes?

- If we undertake the project w0hat can be expected in terms of reduction of subsidies from the Government budget and when will they occur?
.

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.11-

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- When do you expect the railway to be financially selfsufficient?

- What do you want from Government other than the financial contribution or credit guarantees? What are the regulatory and institutional clianges expected?

- What happens if the money for the rehabilitation is not made available (do nothing) ? How much will it cost the Government to operate the railway in this case?

- What are the consequences of shutting down the railway?

- How do you expect to repay the loans required?

Some of these questions might look unfair given that a lot of the problems faced by the railway might be the result of bad economic management on the part of the Government. However, they will be asked if not by Government probably by the officers of financial institutions and very solid answers will be more convincing than emotional and angry reactions. It is important to make a solid case for the rehabilitation objectives.

3.03 Government officials will be particularly interested in learning about the comparative advantages of the railway, its long term financial self-sustainability and the consequences of doing nothing. Thinking through these questions ahead of time will provide senior management with a clearer definition of the short, medium and long term objectives of the railway and will allow them to sharpen the focus of the rehabilitation.

3.04 One of the main obstacies in defining clear objectives is that management tends to be biased towards its railways and, after all, keeping its job and making it bigger. That is only human. However, too biased an analysis may be counterproductive because National Planning Agencies tend, in general, to be pro-highway and will be more easily convinced with solid economic arguments which point to sizeable national economic savings rather than emotional arguments based on the traditional role of the railways and its historic importance to the country. In short, arguments must be from an economic and financial standpoint solid and wherever possible quantified in terms which highlight their importance, such as the reduction in the government subsidy, the savings in the cost/ton of strategic commodity exports/imports, etc.

3.05 Having gone through this "soul searching" exercise, senior management will be in a position to list a first version of its short, medium and long term objectives. At this point, it should start an interactive process with middle management to obtain their feedback in how realistic are the proposed objectives and whether they can be translated into performance targets. One way of doing this is to hold special meetings where questions will be encouraged and concerns voiced. In some countries there might be cultural barriers which prevent this type of open criticism. In those cases it is senior management's responsibility to find the best way to obtain a genuine feed-back from middle management and to encourage dialogue between middle and senior managers.
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# 301 2 . MEXMIPLE OF PERFOMRMNCE TARGETS

|Operational Perforance Targets<br>1987|1988|1989|1990|1991|1992|
|---|---|---|---|---|---|
|1. FreightTraffic<br>(billion<br>net<br>ton-km)<br>8.0|8.8|9.8|10.1|10.4|10.7|
|2.Locomotive<br>Availability(t)<br>70|73|76|78|79|80|
|3.Locomotive<br>Utilization<br>(%)<br>67|<br>69|<br>70|<br>72|<br>73|<br>74|
|4. LOco. Productivity (million gross ton-km)64|68|76|84|86|88|
|5. Freight Car Availability(0)<br>91|91|<br>92|<br>92|<br>93|<br>93|
|6. Frsight Car Turnaround Time (days)<br>9.0|8.3|7.5|6.8|6.7|6.7|
|7. Average Wagon Loan (net tons)<br>45|<br>45|<br>45|<br>46|<br>46|<br>46|
|S. Maximum Number of Staff (in '000)<br>20.0|20.0|20.0|19.7|19.5|19.2|

|Fi|nancial Performance Targets|1987|1988|1989|1990|1991|1992|1993|
|---|---|---|---|---|---|---|---|---|
|1.|Working Ratio 1/|.93|.94|.77|<br>.75|.73|.71|.69|
|2.|Fteight usuiness<br>WorkingRatio1/|.93|.84|.75|.70|.67|.64|.61|
|3.|Long-Distance Passenger||||||||
||WorkingRatio1/|1.6|1.5|1.4|<br>1.3|1.2|1.1|1.0|
|4.|Metropolitan<br>Train<br>Working||||||||
||Ratio1/|1.4|1.0|1.0|1.0|1.0|1.0|1.0|
|5.|MaxiLmu Normalisation||||||||
||(t Op. Revenue) 2/|12|12|10|8|7|5|3|
|6.|Maximum Borrowings||||||||
||(*mnt. Gen.Funds)3/|340|4/3404|/ 80|<br>45|<br>40|40|40|
|7.|Collection of Accomunt||||||||
||Receivables<br>(Days)|60|60|60|60|60|60|60|

_JJ_ Including normaliuation payments within the stipulated limits.

_ZI_ Normalization payments for long-distance passenger and freight services only, as a percentage of the corresponding total operating revenues, including payments for the long-distance passenger services to reduce to no more than 25* of long-distance passenger operating revenues in 1993. 3J Excluding Bank loan and funds borrowed from the Federal Government for servicing federally guaranteed debt. _J/_ Based on the 1987-1986 combined results.
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# IV. Marketina Plan

4.01 In internal audits of railway projects, the Bank has often found that traffic forecasts, especially those pertaining to freight traffic, are very optimistic and do not materialize within the project horizon. The lower traffic levels lead to lower revenues and often, projects which were considered financially viable at appraisal, become real losers. Traffic forecasts are a very crucial input to any rehabilitation plan and, therefore, deserve a lot of attention. Quite often, traffic forecasts are inflated to justify the project and no "worst" case scenarios are tested. Proper assessment of traffic requires an elaborate plan which not only forecasts traffic but also proposes strategies to capture it and indicates the level of the revenues which the traffic is expected to generate. This step of the planning-process is called the Marketina Plan.

4.02 In most developing Railways, a Marketing Plan either exists in a very general form (and is not good for anything) or it does not exist at all. Why is it so often neglected? One reason may be that contrary to North American practice, most railways in developing countries are stateowned and very little importance is given to the Marketing Departments. MATRKETNG is one of the main functions where institutional chane is reauired in most develooina country railways. Some of these railways are still functioning under the "monopoly syndrome" and no attempt is made to attract shippers to use its sexvices. The North American mentality is that "marketing is the heart of the railway" and all that can be done to attract the shippers, divert them from other modes, and serve their specific needs must be done. This philosophy has been successful and was basically responsible for a "comeback" by the railways at a time when it was losing traffic to the highway.

4.03 Marketing Plans are only useful if they contain detailed passenger and freight demand analyses for each corridor or link under study. Passenger traffic must be analyzed carefully and sound knowledge of elasticities of traffic with respect to tariffs and other level of service attributes must be shown. For freight, the analysis should be done on a commodity basis by corridor and, again, elasticities of traffic with respect to tariff, reliability, etc. must be analyzed. However, this cannot be only a theoretical modelling exercise in which the human factor is underestimated. On the contrary, detailed traffic forecasts require continuous interaction with present and potential clients in order to determine their industrial strategies, their distribution needs, their packaging requirements, their alternative options to ship the products, their P.O.B. cost at the port of exit and their upper limits for the transportation cost in order to be competitive in the world markets. It also requires knowledge about storage methods, reliability, loss and damage. All this information will allow the design of strategies to capture the traffic at a cost which is lower than the competition. We stress the importance of a Marketing Plan because the whole planning process hinges on traffic forecasts and the marketing strategy proposed to capture that traffic.
<!-- Start of picture text -->
*  xnnww  is defined  as~~~~~~~~~"  the identification of markets<br>and the" design of. the transportation services,<br>including ~the price, required. to  serve the market at<br>*VheA  xiu  po  it  attainable.<br>* sas  is viewed  a  the activity of persuading the<br>,c.ustomer. to, use:and tob increase the  use  of<br>trasportation.an<br>a knpons~~~~~~gilt±litiesj 'of the Marketn  adSales<br>Maket analyi an  -teidentification of<br>E.'iWer  an  seric  desn<br>. ...... d...rial  Ievlopen<br>t4stribut ion system  designs)<br>..  a.. es.  ...  W1<br><!-- End of picture text -->

FIG.2 -WHAT IS MARKETING AND SALES ?
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4.04 Marketing is also the catalyst for the **developmont** of **new typo** of operations and services and was largely responsible for the introduction of services such as "Intermodal". A Marketing Plan needs to address questions such as the following:

- O How should the Marketing Department be organised, by region or by group of products?

- What,makes the marketing of one product a priority over another product (profitability vs. national economic factors)

- Should marketing strategies be corridor or networkoriented?

- How should customers be reached? (through freight forwarders, directly to customer servic* centers, etc.?)

- Should LCL **5/** traffic be abandoned?

- * Should TOFC/COFC £/ services be started in any corri3or? How can these services be appraised?

4.05 The Marketing Plan must contain a clear explanation of the marketing strategy assumed to achieve the traffic forecast: Higher frequency? Lower tariff? Faster turnaround time? Higher reliability? Annex 2.1 describes in detail the main aspects of a Marketing Plan for Passengers and Freight and Annex 2.2 the issues to consider when planning intermodal services.

4.06 Inaccurate forecasts will result in inaccurate investment evaluations because traffic forecasts are one of the main inputs for the revenue cost projections. Box 3 shows how the revenue projections, the profit plan and annual budgets interface and reiterates the importance of a well prepared marketing plan. One cannot overemphasize the importance of a Marketing Plan since it is the basic document where the strategies which the railway plans to use to satisfy its present and potential clients are described. A good marketing plan requires an intimate knowledge of the several industries and busiLesses serned by the railway and must be based on a reasonable forecast of the economic trends in the **country and its** neighbors. It must also be a document which is easy to read and follow by the sales force.

4.07 Box 4 shows the information flow freight forecast for a North American railway. It is the responsibility of the Marketing and Sales Department to identify the equipment (specialized care and **facilitieos)** to satisfy the needs of each major client and to propose the type of service required to meet the level of service requiremonts expected by **the** client. This information is passed on and **discussed with the Transportation** Department.

**E/** LCL - Less than Carload.

**_ji_** TOFC - Trailer on Flat Car. Container on Flat Car.
<!-- Start of picture text --> BOX 3<br>f reight forecast Payment Revenue<br>forecast forecast forecast<br>PRFIT<br>PLAN<br>maitenance I nance I<br>Monthl I NTERACTION<br>PerFormneat BEIWEEN MARKETING &<br>Reports PROFIT PLANS<br><!-- End of picture text -->
<!-- Start of picture text --> BOX 4<br>INFORMATION FLOW FREIGHT<br>CuStOme/Busin FORECAST FOR A NORTH-AMERICAN<br>v RAILWAY<br>Mawtng & Sales<br>D-kt<br>Regional Mkt Inbf _| Regn Manager | Sysim Comnmodity | |Ecolnofom. StgDn<br>EqulpnmatPoky Made" & Sala Mangem s* Trends<br>Condkonsm<br>Systom PrbRevnue nn<br>RatePROGRAM &Anays<br>v<br>IAoqum 1<br>hight An"Regional;Com. Nbsg<br>_ ~~~Commodty Sr.Mgs.Ma |wkk<br>| Marketng Sbbs i_ Fo xI<br>S abs plan _ _ ^ , 7, a]lFREIGHT S=T , _ ._ ManagmetSenior<br>. / ~~~System,Regional<br>Car Repair Ptrogmm>, / } ~~Year, DbU Custom. Month,Dalty _ Planr<br>s s ~~~Commfodity<br>Commodky Dat BOK Fb ast<br>I~ ~~~~--- - v Budgsts<br>/ t ~~Monthly commo.<br>rRTKMIGTKM { Foc I ~~~PeComwanc rep.<br>0 Plan<br><!-- End of picture text -->
# -19 -

# V. The Tranagortation Plan

5.01 Once the MWeketing Plan defines the customers and services to be provided, the next step is to produce a Transgortation Plan, i.e., a plan which indicates how the railway is going to move the co-modities identified in the Marketing Plan to/from the shippers. It is the primary responsibility of the Transportation Department to devise the operating strategies required to move the commodities at the lowest cost to the company and which provide the level of service which the customer has been promised by the Marketing and Sales Department. This shows how interrelated become the marketing and sales and the transportation functions and also suggests that several iterations are necessary before both arrive at a consensus. Before proposing any operating strategies, the Transportation Department must identify the basic restrictions (length of sidings, speed restrictions, grade rulings, axle load limitations on bridges and links of the system, track maintenance windows). It must also review the present bottlenecks such as long delays in yards due to poor switching, lack of motive power, car unavailability by type due to long turnaround times, poor telecommunications, etc and make reasonable assumptions about the evolution of those aspects. This evidently requires continuous interaction with the Way and Works and Mechanical Departments.

5.02 After having examined in detail the improvements which it can achieve in its 3 basic functions, namely, locomotive manacement. car mana* ement and yard manaaement, the Transportation Department will be in a position to propose the operating strategies required to move the commodities. For example: Short vs. long trains, unit trains, intermodal trains, mixed trains, trains of empties, scheduled vs. unscheduled trains, etc. On the basis of these proposed strategies, the transportation department will be able to indicate the base locomotive and car fleets required in the next few years. This information is then sent to the Mechanical Department which will examine whether it can provide those fleets or if there is a need to acquire extra motive power and cars. At the same time the Transportation Department will inform the Way and Works Department about its assumptions concerning speeds, axle loads and grades and discuss if they can be achieved or if they should be adjusted otherwise. In most cases, to satisfy the goals of the marketing plan, it will be necessary to undertake civil works and equipment acquisition and, therefore, a preliminary list of proposed projects to be included in the rehabilitation plan will emerge from this exercise.

5.03 At the same time, the TranaDortation De2artment must focus on the projects required to improve locomotive and car management, and yard operations. Car management philosophy must always take into account:

- Freight cars are valuable system assets.

- Freight car turnaround times must be improved and nmonitored.

- Freight car inventory must be kept at the level of base demand.
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- Freight care must be maintained to system standards.

- Non company equipment, i.e., equipment from other railways should be used to maximum advantage.

- Profitability is a consideration in car distribution strategy.

- New equipment is acquired on a strict economic basis.

5.04 The car manaaement procesa takes into account the following functional componencs:

- Ordering of equipment.

- Forecasting car demand and supply.

- e Planning car distribution.

- Supplying of equipment.

- Monitoring car distribution

- * Monitoring demand for equipment. i Post auditing car demand and supply.

The planning team must remember that additional cars , as required to meet demands, ought to be justified on the basis of profitability and only when it can be proved that the railway is getting the maximum utilization from the oxisting.fleet, utilized at its maximum. To help in the car management process the railways must examine if the introduction of management information systems is justified and maybe suggest the inclusion of such project in the rehabilitation plan.

5.05 The locomotive management 7/ philosophy to be used is also a major aspect of the plan. The main points to be examined are:

- Locomotive control and distribution: Who assigns the locomotives? Should they be assigned centrally? Are locomotives deployed according to plan ? Are they assigned according Co availability and train specification? Are there any displays showing the location, type and status of each locomotive at any moment? Are there reliable 24 hour real time communications with all points of the system? How is the interface with the Mechanical Department? Can it be improved? Is there knowledge of anticipated demand with time to react? How are priorities established at peaks?

- Locomotive utilization: How is it measured? Can it be improved? Is there a control system? Are maintenance standards satisfactory? Do territorial productivity standards vary considerably and why?

_V_ **For a** good diacussion of the locomotive availability and utilization **concept see** sudln, K. 'Managing locomotive availability and utilization', Transport note, March 1990, INUTD, IBRD.
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<!-- Start of picture text --> TELECOMMUNICATIONS<br>RAIO<br>MICROWAVE<br>TRANSPORTATION<br>CAR MAAGEMENTi<br>MECHANICAL<br>LOCOMOTIVE MANAGEMENT AVAILASULnY<br>MATERIAS MVOM.<br>YARD MANAGEMENT WINEORY MOMr.<br>CAR SHOPS<br>CAPACITY BOTTLENECKS<br>DIESELSHOPS<br>TELECOMMUNICATIONS<br>SIGNAWNG<br>SLOW ORDERS | \<br>WAY AND WORKS<br>TRACK REHASIL<br>SIGNAUNG<br>BRIDGE REHADIL<br>SIDING CONST.<br>YARD REHASIL<br>MAUL<br>GRADE RUUNGS<br>ATOS<br>AXLE LOADS<br>BOX 5 SPEED RESTICTIONS<br><!-- End of picture text -->

INEACTMN BETWEN TRANSPORTATION MD OTHER DEPARTMENTS
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- Locomotive planning: How is the distribution plan monitored (daily) ? In times of shortage can leasing be easily

- arranged? Are their reciprocal exchanges with other systems? How is the fleet sizing and design undertaken ?

From this type of exercise will emerge a consensus about the areas of locomotive management which need improvement ;'nd the type of projects which must be undertaken to achieve those improvements.

5.06 Yard Planning is one of the most important components of the Transportation Plan. Bad yard management and planming has led, in the past, to long delays in yards which increase considerably the car turnaround times. Inadequate permanent inventory , control and location techniques make car tracking very difficult in yards and adds to the unreliability of the systems. Lack of advanced train consist information is another reason tor delays which are unacceptable. Finally, poor switching practices and often lack of adequate switching power may aggravate the delays in the yard. Yard planning is therefore an important aspect of the transportation plan, because minor changes such as the introduction of a management information systems module and basic telecommunications, might produce substantial productivity gains in car and locomotive utilization. Addition of additional switching tracks and even, wherever adequately justified, construction of new yards are some of the few projects which might be evaluated by the planning team.

5.07 The Mechanical Department, once it receives the overall car and locomotive requirements from the Transportation and Marketing and Sales, must check its inventory and decide on the basis of the existing availability and utilization rates whether there will be enough cars. If not, the first thing to check is whether the availability rates can be substantially improved and which are the operating practices and capital improvements required:

- Is this a problem of availability of spare parts? How can it be improved?

- Is there effective inventory management?

- Are running shops providing the expected level of service? What about the major car repair facilities? Are they properly equipped? Is labor productivity a major problem?

- Are diesel shops properly equipped and managed? Is there a need for skilled personnel?

- Are there too many makes of locomotives and consequently a need for major standardization?

- Are there too many unforseen immobilization of locomotives due to accidents,etc.?
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* Are there many locomotives and cars which should have been scrapped but which are still in the active list and, consequently, make availability rates look worse?

After answering this type of questions, the Mechanical Department should propose its fleet acquisition plans and be able to defend it in meetings with the Transportation, Marketing and Sales and Planning Department. A cost efficient Mechanical Department must try to defer capital acquisitions and work very hard on viable equipment rehabilitation, improvement of availability rates and efficiency of its workshops.

5.08 The Way and Works Department, after having received the plans from Transportation, should verify all the speed restrictions, grade rulings, axle load limitations, especially in bridges, and prepare a plan for track rehabilitation and heavy maintenance. Plans for building new sidings, branch lines, improve or rehabilitate bridges must be ranked by order of priority and costs. Major plans to extend the line on building major capital improvements must be properly documented and justified. Maintenance philosophy and policies (degree of mechanization, standards) should be explained and maintenance windows indicated.

5.09 Several iterative cycles will be required between the Marketing, Transportation, Mechanical and Way and Works departments until a fine-tuned plan emerges for each of the scenarios assumed by Marketing: At this point and as a result of the several interactions there will be a preliminary list of projects required which will be labelled high, medium and low priority.

5.10 At this stage, all the regions and districts must receive a copy of the Railway Objectives and the Marketing and Transportation Plans and they must start defining individual projects which must be undertaken to allow efficient operations as proposed in the Transportation Plan. Projects will have to satisfy the requirements established in those three documents and be ranked by some multi-criteria method before submission to Central Planning Group.
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# VI. Prolect Identification/Definition

6.01 The next step is the **Proieot Xdentitiatidn a Definition plan.** Using the projects submitted by each region, the Performance Improvement Task Force should try to put the inter-related projects in packages which are relevant for the railway as a whole and for each corridor identified in the Marketing Plan. There will be broadly 4 categories of projects which must be taken into account: i) Civil Works . ii) Bquipment Acquisition. iii) Institutional and O_ganization studies. iv) Technical Assistance. They are discussed below.

6.02 The Civil Works project are normally those identified by **the** Way and Works and Mechalical Departments. They involve track rehabilitation, bridge rehabilitation, lengthening of sidings, improvement in yards, rehabilitation and/or construction of mechanical workshops, etc. They are normally easy to identify and very costly to execute and account for most of the money available. Caution must be exercised in order to propose only what is required for the substantial improvement of operations and relegate to subsequent phases major extensions which are costly and will only produce benefits in the long term.

6.03 The Equipment acquisition projects consist in the actual definition of the cars and locomotives to be bought. They also include other equipment such as telecommunications and signalling, intermodal equipment, track maintenance equipment, mechanical shops equipment, spare parts, etc. Equipment acquisition rw4uires very careful planning to guarantee a certain standardization which later will facilitate maintenance. Equipment normally accounts for the other important shre of the investment plan.

6.04 The Organization and Institutional Studies are normally accepted by most railways seeking money because they know that bi-lateral and multilateral agencies would not make them loans if they don't accept them. This is clearly the wrong attitude towards probably the most significant changes which can be introduced in the railways. These studies and the implementation of their recommendations should form the core of the blue print for modernization which most developing railways are actually seeking in order to become commercially oriented and self-sufficient in the long run. Some of the questions which will lead to these studies are:

- What are the basic regulatory and institutional constraints which prevent us from working as any other commercial enterprise?

- What is the "enabling environment" which we would like the government to create so that we can be less dependent on government?

- Should we propose a contract-plan to government and insist in guarantees that social imposed services be timely and adequately compensated?
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# BOX6 TYPICAL PROJECTS IN A REHABILITATION PLAN

<!-- Start of picture text --> CATRACKQREUAIIUATION<br>TRACK RENEWAL<br>CRIDE REHASIUTATION<br>YARD CONMTRUCT IOWREHABIUTATION<br>/ ~~CAR ACQU18ITION\<br>- ~~~CAR REHABILITATION\<br>/ I~~~LOOOTIVE ACCQUISffONliREHAEIILIrATION\<br>SPARE PARTS<br>WORK8HOP TOOLS<br>SI\NALUNG EQUIPMENT<br>X ~~~TRACK MAIWNAN*CE EQUIPMENT/<br>_ ~~TELECOMMUNICATIONS COMPUTE EQUIPMENrEQUIPMEt /<br>VEHCLES<br>_-- ORGAIZATIONAND INSTITUTION<br>ORGANIZATION STUDY<br>ENABUNG ENVIRONMENT STUDY<br>MANPOWER DEVELOPMENTIRATIONAUZATION STUDY<br>RAILWAY COSTING AND TARIFFS STUDY<br>MANAGEMENT INFORMATION SYSTEM STUDY<br>\PRIATE DEVELOPMENT STUDY<br>< ~TECHNICAL ASSISTANC\<br>MARKErlNO<br>FINANCIAL MANAOEMENT<br>TRACK MAINTENANCE<br>EQUIPMENT MAINTENANCE<br>STUDIES AND PLANNING<br><!-- End of picture text -->
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- What type of organization structure should we have to achieve the goals set by management?

- What type of staff structure is most appropriate? What are the needs in terms of staff rationalization, retraining, recycling? How can we entice staff to quit and yet provide adequate compensation?

- What are the impediments to abandon branch lines where the railway has no comparative advantage?

- Is our costing system I/ providing disaggregate information which allows us to assess adequately the profitability of each commodity ? What can be done to improve costing?

- Is our accounting system providing accurate and on time information for financial management purposes?

- Is our planning and statistics department providing the accurate information required for day to day management?

- = Should we commission a study to investigate where management information systems J/ can help in improving productivity and propose a M.I.S. plan?

- z Are there any other ways of tapping revenue such as selling or leasing railway land, sell idle workshop time, etc.?

- e Can any of the present activities of the railway be subcontracted to the private sector? Should joint ventures be undertaken and why ?

/ For a good discussion of railway costLng see 'Railway Costing: A Review' Canadian Transport Commission, Rep. 3 1986/023. **The Bank has financed the preparation** of a Lotus based spreadsheet to **compute long run marginal costs in developing railways using default values whore the basic information in not used. The name of this program is** 'OCAR' and **is prosently belng tested in African Railways**

**2/** For a good **discussion** of Management Information Systems, see D. Porter NModular Management Information Systems for Railways*, IDRD, 1988.
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-28-

**Many** other questions can and should be asked in a very open minded way in order to raise issues which are particular to each country and which must be addressed at this time.

6.05 Planners should make an effort to identify the potential contradictions, duplications or even deviations from the objectives which were agreed at the outset. A second problem frequently noted is that proponento of some projects are not able to answer the following question:

> e What will be the consequences of not undertaking or delaying implementation of the project proposed?

This very fundamental question should be posed to every proponent of a project and will certainly show whether he really thought about the need for the project. The forms shown in Figures 4,5, 6 and 7 were successfully used in the process of project definition. The form, when properly completed, is a system analysis of the project definition and allows the planning department to screen very quickly projects which were not properly identified.

6.06 The result of this process should be a list of projects by corridor, link or region grouped in packages with a priority assigned by their proponents on the basis of a multi-criteria method, but without economic and/or financial analysis. 10/ 1J/It would be ideal to have a multi-criteria analysis, including economic and financial rates of return. However, it would be unrealistic to expect that all the regions or districts would have the personnel to do such calculations.
# FIGURE 4 EXANPLE OF A NULTI-CRITERIA METHOD FOR PRIORITY ASSIGNNENT

|Projects<br>Paraueters(t<br>Weights(2)<br>Project(3)<br>Points roject<br>Points roject<br>Points Project<br>Po|ints Project<br>Points|
|---|---|
|1. Amount<br>of Investment<br>||
|2. Maintenance<br>cost||
|3. Hoogeneity<br>of subsystem<br>(speed,<br>axle load)<br>||
|4. Minimum<br>speed<br>||
|S. Continuity||
|6. Present<br>traffic<br>density<br>7. Potential<br>freight<br>traffic||
|8. Potential<br>passenger<br>traffic||
|9. Benefits<br>for Isolated<br>areas<br>10. Relations<br>with neighbour<br>countries<br>11. Economic<br>activity<br>of country<br>12. Connection<br>toports||

(1) These parameters are selected by Central Planning Office (CPO) (2) The weights are set by a task force representing the CPO, users, and government (3) A value between 0 and 10 (O = worst, 10 = best) is assigned by proponets of projects (4) This column is equal to the weight Limes the points
# FIGURE 5 DESCRIPtION Of PROPOSED PROJECT (PROJECT IDENTIFICATION)

|(1) Code:||(2) Date:|
|---|---|---|
|(3) Oepartaent/Line/Gerencia/Vice-Pre|sident<br>(4) Prepared<br>by:<br>(5) Approved<br>by:|(16) Classification|
|(6) Project|(13) Benefits||
|(7) Objectives|||
|(8) Expected<br>results|||
||(12) Costs<br>Type Year||
|(9) Consequences<br>if project is eliminated|Investment<br>Naterials<br>Nanpower<br>||
||Total<br>||
||Operating<br>Naintenance||
|(10) Alternatives<br>to obtain desired<br>results<br>(15) Notes|<br>(11) Advantages|(14) Oisadvantages|
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# FIGURE 6 PROJECT OEFINITION

<!-- Start of picture text --> COOE<br>Objectives:<br>Measures of efficiency:<br>Generation of alternatives: (Oescribe the alternatives considered)<br>Alt. 1<br>Alt. 2<br>Alt. 3<br>9Alt 4.<br>Alt. 5<br>Evaluation of alternatives:<br>'Selection of alternatives:<br>Notes:<br><!-- End of picture text -->
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# FIGURE 7 PROJECT OEFINITION

CODE Objectives: Increase capacity of a single line in order to handle "x" trains/peak hour in each direction at the lowest cost and highest safety.

Measures of efficiency:

- number of trains/peak hour

- minutes of delay/type of system

- investment cost

- number of station agents

- maintenance costs/year

- number of accidents/year

- Generation of alternatives: (Describe the alternatives considered) Alt. 1 - Automatic Block System (ABS) Alt. 2 - Centralized Traffic Control Alt. 3 - Sidings and ABS

- Alt. 4 - Double Track Alt. 5 - Manual Block (status quo)

## Evaluation of alternatives:

Number of Number of Investment Maintenance Capacity Delay Agents Accidents Cost Cost itrains/h) (minutes) (No.) (No.) (S) (TL/ ear) Alt. 1 _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ Alt. 2 = Alt: 3 _ Alt. 5 _ _

## Selection of alternatives:

e.g. Alternatives (1) and (2) are the preferred from a technical standpoint. They must be submitted to financial analysis.

Notes: The financial analysis will complete **the** evaluation of alternatives.
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# VII. Project Evaluation

7.01 The next step is the Rxoleat Evaluation Plan. This step, which is to be performed by both the railway central planning organization and planners in each region (if any), consists in the economic and financial evaluation of the projects in the plan. Using well-know discounted cash flow techniques, the planners must try to determine the Net Present Values or Internal Rates of Return for both the project and the corridor where the project is located. This step is also considered of great importance both by international lending agencies and the Transport and Planning Ministries which must decide between investments for several modes and sectors.

## EVALUATING INVESTMENT PROPOSALS

7.02 Financial and Economic Evaluation techniques based on discounted cash flows, either by the Net Present Value or Internal Rate of Return methods, are widely known. We will not address these techniques because that is not the main issue in this step of the evaluation project. The main issue is: To which projects should those techniques be applied?

7.03 Should we prepare the plan on the basis of individual projects, e.g., rehabilitation of 100 km of track or acquisition of 100 locomotives? Or should we evaluate them as packages attributable to a specific corridor? If we have limited capital, generally the rule rather than the exception, should we assign the money to the individual projects with the highest rate of return, irrespective of their location in the network? Or should we group the projects in packages, determine the overall rate of return for each corridor; establish the most economic and/or financially profitable corridors and then assign the money to the projects with the highest rates of return within the chosen corridors? These questions are crucial in selecting projects for a five-year Investment Plan. Let us examine the issues involved.

7.04 If we determined the rates of return for individual projects, we might get a scattered distribution of investment throughout the network: some locomotives in Line A, a few track renewals in Lines B and C, signalling in Line D. If this scattered pattern of investment is followed, the result is no clearly perceived improvement in the level of service offered by the Railway. In addition, each of those individual projects is evaluated on the basis of assumptions related to the completion of other projects in the line or region where that project is located. For example, track renewal in Line B assumed that new four-axle freight cars to replace the old two-axle cars will be used in Line B. The second project may not materialize (maybe it was the track project). Therefore, some of the benefits attributed to the track renewal project will never materialize.

7.05 Instead, if the corridor concept is used, the situation is differenit. The projects in each corridor are put together in packages. The package for the corridor, that is, a set of integrated projects which will provide a certain level of service quality targeted by the decisionmakers, will be evaluated against the corridor without projects and compared to all the other corridors identified in the network. The most promising corridors will be slated for investment and inter-related
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projects will be programmed in such a way that they will be implemented in the shortest possible time, making their benefits to the users visible at the earliest possible time. The perceived improvement of the level of service offered by the Railway will be noticed by shippers and will attract traffic.

7.06 The corridor concept does not mean that the project will have to be located in a straight line. The term corridor may be replaced by hinterland in the case of a group of branch lines which lead to a port (or other terminal). The idea behind the corridor concept is a group of lines, branch lines or segments of a line whose main purpose is to attain certain primary objectives such as the transportation of grain, or the high speed transportation of passengers or the flow of exports and imports from/to a landlocked country. In the next section, we examine in more detail the corridor concept and how evaluation techniques can be applied to them.

# APPLYING THE CORRIDOR CONCEPT

7.07 To determine the rate of return for a corridor, the following steps must be taken:

- a) Identify all the relevant projects in the corridor.

- b) Select the projects which are inter-related, i.e., those which are in the critical path and without which the others cannot be.

- c) Map out a cash flow schedule (benefits and costs for each project) assuming that other inter-related projects in the corridor will be undertaken.

- d) Ensure that there is no double counting of costs and benefits

- e) Apply the discounted cash flow techniques to the package of projects by comparing the corridor with and without the projects.

One of the main concerns in application of the concept should be to avoid double-counting of costs and benefits and considerable experience and attention is required to avoid this very common pitfall. The analyst should devote a great deal of attention to this aspect. 7.08 In summary, the Investment Plan, as defined in previous sections, consists of many sub-projects, organized by corridors, most of which have been submitted to an economic and financial evaluation. Most of the sub-projects in a corridor are inter-related. For example, the benefits from rehabilitation of permanent way depend on the forecast level of traffic, which depends in part on the availability of motive power and rolling stock, which in turn is affected by other sub-projects which affect operating efficiency, including rehabilitation of permanent way, thus completing the causal circle. The individual projects in each corridor, therefore, constitute an integrated investment program.

7.09 However, in order to evaluate the contribution that each individual project would make to the corridor, it is necessary to isolate the effects from each sub-project. To do this, when evaluating the individual sub-projects it is assumed that "the without project case"
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represents only the exclusion of the sub-project in question and that the other integrated sub-projects in the corridor would be implemented according to the Plan. Thus, the resulting rate of return on each subproject represents the economic contribution of that sub-project when all the sub-projects in the corridor to which it is related are undertaken. Alternatively stated, the realization of the rate of return on any one of the sub-projects is dependent upon the implementation of several other subprojects in the corridor. The importance of implementing the investments as a package or an integrated program is clearly seen from these relationships.

7.10 The above-mentioned approach is fairly easy when the projects are track renewals or improvements, signaling projects or any other projects related to fixed installations. The approach becomes more problematic when the projects are related to locomotives and rolling stock. In different corridors, one has to artificially assign a fleet of locomotives and rolling stock to the corridor. In the case of passenger coaches, it is not as difficult because they are in general dedicated to a particular corridor. Despite these difficulties, the package approach is the most realistic way to examine the rate of return for all investment projects proposed for a corridor.
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# VIII. Financial Imoact of the Plan

8.01 Finally, the planners must determine the Financial ImDact of the proposed Investment Plan on the balance sheet. income statement and sources and applications of funds of the Railway and obtain the ratios which describe the financial health of the firm, with and without the Investment Plan. The Financial Plan, under several scenarios, will allow the calculation of the break even volumes of traffic required for different tariff schedules and, at the same time, will provide more information about the sources and applications of funds necessary to undertake the plan. Several iterations might be required to re-schedule the investments in a way which will not strain the Railway's finances beyond what is considered reasonable by Government and lending institutions. Annex 3 which was developed in the context of a Bank financed Railway Project in which the author participated, exemplifies how to assess the financial impact of an Investment Plan.

8.02 While undertaking the financial impact of the plan, the planners should study very carefully the present financial ratios and propose ways to improve them. For example, are accounts receivable too high ? Can the average collection period be reduced ? Are there clients which systematically take too long to pay their bills? Are Government bills being paid and to what extent do they affect working capital if they are not paid ? Is the total bill for fuel and materials reasonable ? What proportion of annual expenses goes to staff salaries and benefits? What can be done to reduce short term debt service? What is the actual break even point of the railway before and after the plan ? Is it achievable? What sort of across the board tariff increases or traffic increases or both are necessary to reach the break even point? Where else can we cut expenses ? All these questions must be asked and the financial impact of a plan must be an opportunity to rethink financial management and send a message throughout the railway about where to cut expenses and increase revenues.

8.03 Particular attention must be paid to the preparation of the sources and applications of funds. From this statement the railway management will have a good idea of the external financing required and will be able to prepare a financing plan for presentation to government and bilateral and multilateral agencies.