PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2518 Operation Name Bangladesh Railway Reform Programmatic Development Policy Credit Region SOUTH ASIA Sector Railways (100%) Project ID P Borrower(s) GOVERNMENT OF BANGLADESH Implementing Agency MINISTRY OF FINANCE AND BANGLADESH RAILWAY Government of Bangladesh Bangladesh Ministry of Finance Room 13, Block 16, Sher-e-Bangla Nagar Dhaka Bangladesh Tel: Fax: Bangladesh Railway 16 Abdul Gani Road Dhaka Bangladesh Tel: , Fax: Date PID Prepared August 31, 2006 Date of Appraisal August 28, 2006 Authorization Date of Board October 19, 2006 Approval 1. Country and Sector Background 1. Bangladesh has achieved some remarkable economic and social development progress in recent years. GDP growth averaged 5.4 percent per annum over the FY01-05 period. Similarly, social indicators have improved: gross primary school enrollment has reached 98 percent, and gender disparity in primary and secondary enrollment has been eliminated. Food security has improved markedly, even for the very poor. The share of the population in poverty declined from 59 percent in 1990 to 50 percent in Bangladesh s gains have taken place despite widely held perceptions of weak governance 1. On most perceptions-based governance indicators, Bangladesh ranks low, especially for control of corruption, regulatory quality and rule of law. However, as the Country Assistance Strategy (CAS) for Bangladesh notes, understanding Bangladesh s success in an environment of perceived poor governance requires unbundling the broad concept of governance, recognizing that Bangladesh has had both successes and failures, and that it needs a more nuanced interpretation of the governance indicators. 2. A poor governance environment and inadequate infrastructure services are the two greatest obstacles to doing business in Bangladesh, according to an Investment Climate Assessment carried out in For discussion on the conundrum of governance in Bangladesh, see the "Bangladesh CAS" (March 2006), PP 3-9. Bangladesh: Investment Climate Assessment (2003), World Bank.

2 The two obstacles are interrelated, as a poor governance environment affects the ability of sector institutions to provide effective and efficient infrastructure services. Poor governance in the railway sector combined with poor infrastructure conditions has led to inadequate rail services for businesses and passengers, and thus hampering trade and investment in Bangladesh. The overarching objective of the proposed Bangladesh Railway Reform Programmatic Development Policy Credit (DPC) is to improve the governance structure within which the Bangladesh railway sector is organized and financed, and thus, improve a key infrastructure sector that would contribute to the overall improvement of the investment climate in the country. The Railway Sector 3. Transport sector spending has been one of the largest development expenditures in Bangladesh, averaging about 27 percent of the total Annual Development Plan (ADP) in FY period, and 1.5 percent of GDP. Yet, despite the significant investments (albeit mostly in the road sector), the transport system is considered deficient by users. The quality of the vast road network is poor, often single or intermediate lanes, with only 40 percent of the major road network (RHD network) in good condition. Congestion and safety are major concerns; modern logistics systems and multimodal transport systems are rarely employed. The port sector and associated land transport systems (road and rail connection to the port) have been a major deterrent to trade. In recent years, several reports on the port sector have highlighted the problems of Chittagong Port and its effect on trade. 4. Traffic and Market Share. BR carried 42.3 million passengers and 3.2 million tons of freight during the operating year. Rail s market share has been declining; BR provides less than 17 percent of the total passenger transport and 15 percent of freight transport in the country, down from 20 and 17 percent, respectively in This, however, is a national estimate, and in some market segments the rail s market share is higher and has some competitive advantages. For example, on the Dhaka Chittagong corridor the rail s market share for freight in terms of ton-km is about 24 percent. The average container tariff between Dhaka and Chittagong is about Tk400 per ton (though this is a regulated tariff), whereas the truck charge for the same is about Tk (for garment), in spite of the fact that the rail has a much longer travel distance (319km) than the road (245 km). 5. BR is mostly a passenger transport system, with 83% of the train-km devoted to providing passenger services; yet, this is also the most money losing part of its operation. Both passenger and freight tariffs are fixed by the Government at a much lower level than the average cost of providing the services. The main commodities transported by BR are food grains, petroleum products, fertilizer and stones, and more recently containers. These freight service areas make up 70 percent of the rail freight traffic in BR s container business is growing rapidly at percent per year in the last five years and, now comprises 20 percent of BR s freight revenue and operations. 6. Financial Performance. In part due to its declining market share, increasing costs and regulated tariffs, BR has been running at a deficit. BR s operating revenue for 2005 was Taka 4.5 billion and operating expense was Taka 7 billion, resulting in an operating deficit of Taka 2.5 billion and a working ratio of 156 percent. The proposed reforms are aimed at helping improve revenue for BR so that the deficits could be reduced and BR's financial situation could improve. 2

3 7. Business Incentives. BR is the sole provider of rail infrastructure development and rail service in Bangladesh. It is a Government department in the Ministry of Communications, subject to government civil service rules and management. BR s civil service department status has limited its managerial and operational autonomy and exacerbated its lack of commercial orientation. BR is not in a position to take business decisions, respond to changing market conditions and focus on profitable market segments where rail has a competitive advantage over other modes. 8. Employment Structure. The employment structure and personnel policies do not provide for an incentive system that rewards staff and operational units for providing cost-effective services and increasing rail's market share. Promotions are awarded according to very rigid civil service rules, without sufficient regard to merit and performance. There is a high turnover rate within BR's top management, most of them are appointed towards their retirement age, and thus do not stay long enough in their positions to make significant management decisions. 9. Operational Problems and Inadequate Maintenance. A severe shortage of capacity exists on critical sections of the network especially the Dhaka-Chittagong corridor. On average, only about 40 percent of the annual maintenance requirement is met, causing huge maintenance backlogs. Frequent locomotive failures also consume needed track capacity. BR maintains its track manually following the 1958 Bangladesh Railway Way and Works manual, which provides for only manual maintenance on old type tracks. A further operational problem is the increasing incidents of derailments on BR. The average annual number of derailments between 2001 and 2005 was 586, compared to 312 between 1996 and Financing 10. The proposed Bangladesh Railway DPC is the first of two policy-based lending operations designed to support, in partnership with ADB and JBIC, the implementation of GOB s railway reform program. The first Bangladesh Railway DPC is for US$40 million and is proposed for FY07 upon completion of the prior actions in the reform program. The Second DPC will be for US$60 million and is planned for FY09 after completion of the triggers in the reform program. 3. Operation Objectives 11. The Development Objective for the proposed Bangladesh Railway Reform DPC is to improve the governance structure within which BR operates, addressing both governance relationships between GOB and BR on the one hand, and corporate governance and management structure within the railways organization on the other. The reform program will have five interrelated components: (a) (b) (c) (d) (e) Restructuring BR by Line of Business (LOB). Transform BR into a Government-Owned Corporate Entity. Improve Cost Accounting and Financial Reporting. Improve Human Resources Management. Operational Improvement. 3 Bangladesh Railway Information Book (2005). 3

4 4. Rationale for Bank s Involvement 12. Policy-based Lending. The proposed Railway DPC will be the first major Bank operation in Bangladesh s railway sector. Because of the underlying importance of sector governance reforms for the success of any railway investment, the first Bank engagement in the sector is proposed as a policy-based lending to support reforms before substantial investments are undertaken. The long history of Bank engagement in railways worldwide suggests that institutional and governance improvements are fundamental for ensuring the efficacy of railway investment. 13. Link to CAS. The new CAS for Bangladesh makes governance a central focus of its strategy for supporting the two pillars of the PRSP, improving the investment climate and empowering the poor. The CAS also envisions an expanded support for infrastructure in order to facilitate private sector investment and promote trade. The proposed Credit aligns itself with the CAS; in that, it addresses both sector governance issues and infrastructure development. In improving railway governance, the proposed Credit will contribute to improving sector performance, as well as create a conducive environment for expanded government and donor investment in railways. 14. Link to Development Support Credit (DSC). The Bank has been supporting Government s reform agenda through a series of DSCs, the first three of which were approved by the Board in 2003, 2004, and A fourth one is currently under preparation. The DSCs support initiatives focusing on deepening governance reforms over time contributing to accelerating the rate of economic growth, employment creation and poverty reduction. An area, which lies outside the immediate domain of the DSCs, is railway sector reform. While the broader reform programs supported under the DSCs are complementary, the railway sector needs focused attention, as the scope of the reform program is too large and deep to be covered under an umbrella operation. 5. Institutional and Implementation Arrangements 15. The overall coordination of the reforms will be the responsibility of both the Ministry of Finance (MOF) and the Ministry of Communications (MOC), and BR will carry out day-to-day implementation of the reform program. MOF/MOC Level. Secretaries for MOF and MOC will co-chair a Steering Committee, which will be established to provide overall guidance for the implementation of the reform, and facilitate the coordination across Government departments that have a bearing on the reform program. In addition, a focal person within MOC will be assigned to look after the day-to-day implementation of the reform program, liaise with Railways and facilitate decision making within the ministry. The Steering Committee will have a compact with BR for the implementation of the reform program. BR Level. A Reform Implementation Team has been established in BR and is headed by the Additional Director General (M&CP). It will be supported by consultants throughout the preparation and implementation of the program. The team will liaise with various departments in BR and labor unions during the implementation of the reform. It will have effective communication strategies to discuss the benefits and costs of the reform program with BR staff and field managers. 4

5 6. Benefits and Risks 16. Benefits. Improving governance of BR would contribute to the economic development of Bangladesh by improving transport services, government finances, and the investment climate in Bangladesh. Line of business structuring and performance incentives will focus management on customer service and improve transport for both passengers and freight. New accounting and financial management systems will allow the Government to identify appropriate subsidies to achieve social goals while BR focuses on efficient operations. Reduced transport costs will improve the investment climate for small businesses as well as large-scale investment projects and provide efficient services to passengers. 17. At the end of the reform program, the following outcomes are envisaged: Increase in passenger and freight traffic. Increase in container freight traffic. Increase in labor productivity and asset utilization. Increase in operating revenue. Better user satisfaction of the railway services (user satisfaction survey will be carried out before and after reform implementation). 18. Risks. The main risk associated with the proposed Credit is that BR and GOB do not implement the agreed reforms. To avoid this scenario the Bank has developed a series of Risk Mitigation measures that include analysis of benefits and costs, linkage to future investment projects, effective communication between BR and the public, and upfront actions that would make it difficult for a future administration to reverse the reform programs. 7. Poverty and Social Impacts and Environment Aspects Poverty and Social 19. The proposed reform program aims to improve the corporate governance and management structure within BR to make it more commercially and market oriented, thereby, creating a more conducive environment for investment in railway operations. In line with the Government s reform agenda being supported by the Bank through a series of DSCs, governance reforms and private sector investment in infrastructure will contribute to employment generation and poverty reduction. 20. Operational reforms in the railway sector can have distributional impacts, especially those related to employment and wages, passenger tariff increases, service quality and access. To more systematically analyze the link between proposed policy reform and their poverty and social impacts, a Social Impact Assessment (SIA) will be carried out as part of the implementation of the reform program. The SIA will identify the range of social impacts (both positive and negative), and examine the distributional impacts of the reform program on different stakeholders with a particular focus on the poor and vulnerable. 5

6 Environmental Aspects 21. The policy reforms supported by the proposed DPC will not cause any significant effect on the country s environment and natural resources. Detailed screening of the policy measures undertaken during identification and preparation indicates no direct environmental impact. Proactive interventions to be supported under the proposed DPC will have a positive impact by enhancing BR s capacity to mitigate negative environmental impacts and enhance positive effects of future investments and railway operations. Positive outcomes are also expected in the form of introducing measures for better environmental management of the operations of the restructured company. 22. The proposed reform program provides an opportunity to add another dimension to operational improvement measures and enhance BR s capacity to manage future adverse effects on environment. Economic benefits from developing capacity for environmental risk management and sustainable transport business include increased competitiveness, reduced remedial environmental cost, reduced investment cost and reduced liability to damage claims. To achieve this at policy and structural levels, the proposed Credit will support the following actions in the Policy Matrix: i. Conduct an Environmental Audit and Management Plan in order to determine the BR s environmental baseline conditions; evaluate current institutional and legal framework for improved environmental performance; evaluate direct and indirect impacts and benefits of current and proposed operations and measures to bring BR operation in line with acceptable corporate standards. ii. BR authority to establish a Railways Environmental Unit with a basic staff of two environmental and two social specialists. 8. Contact point Contact : Binyam Reja Title : Senior Transport Economist Tel : (202) Fax : (202) Breja@worldbank.org 9. For more information, contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Facsimile: (202) pic@worldbank.org Web: 6