Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY Report RESTR ICTED No. p-546 This report was prepared for use within the Bank and its affiliated organizctions. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR THE PAKISTAN WESTERN RAILWAY May 15, 1967
INTERNATIONAL BANK FOPR RECONSTRUCTION AND DEVELOPMNENT REPORT AND RECONPENDATION OF THE PRESIDENT TO THE ECUTIVE DIRECTORS ON A PROPOSED LOAN TO TIM ISLAMIC REPUBLIC OF PAKISTAN FOR THE PAI K STAN 14ESTERN RAILWAY 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to U.S. $13.5 million to the Islamic Republic of Pakistan to finance part of the foreign exchange requirements under the 1967/68 investment program of the Pakistan Western Railway (PWR). PART I - HISTORICAI. 2. The Bank/IDA has assisted PWR in carrying out substantial programs of rehabilitation, improvement and expansion. In 1952, 1957 and 1959, the Bank made loans jointly to the Pakistan Eastern and Western Railways totalling $70.7 million with about $51 million going to PWR. In 1962, the Bank made a loan of $18.25 million to PW4R exclusively. All four loans have been fully disbursed. In addition, PWR received one IDA credit of $25 million in 1964. As of April 30, 1967, $17.6 million of this credit had been disbursed or committed. 3. In April 1966, the Government of Pakistan approached IDA to obtain financing for specific imported goods required as part of the 1965-1970 Third Five-Year Plan of RPR. Two missions visited Pakistan, in M,ay and October 1966, to appraise the project. In November 1966, we informed the Government that IDA funds could not be made available for this project at the present time. Tne Government then requested the Bank to make a loan for this purpose. 4. Negotiations wfith representatives of the Government of Pakistan and the Provincial Government of West Pakistan were held in Washington from April 3 to April 14, 1967. 1r. Shah Mahmud Su.laiman, Economic and Financial 1%inister, Embassy of Pakistan and Mr. M.K. Nohiuddin, Railway Commissioner, represented the Government of Pakistan. Messrs. N.A. Qureishy, Chairman, PWR, and A.A. Shah, Chief Planning Officer, PWl, represented the Provincial Government of West Pakistan and PWR. 5. The Bank has made 22 loans to Pakistan totalling about $412 million, of which 13 are fully disbursed. The Association has made 23 credits totalling about $331 million, of which two are fully disbursed. The following is a summary statement of Bank loans and IDA credits to Pakistan as at April 30, 1967:
-2- Loan! Amount (US $ million) Year Borrower Purpose Credit No. Bank IDA Undisbursed 1960 Islamic Republic Indu.s Basin of Pakistan (Multi-Purpose) 266 90.0 81.0 (Pakistan) 2.961 P.I.C.I.C. Industrial Developmernt 286 14.8 0.1 2762 Pakistan Railways 321 4.8 0.2 " Pakistan Khairpur Ground Water and Salinity Control 22 18.0 12.5 " Pakistan Indu.strial Estates 30 6.5 3.2 1"63 P.I.C.I.C. Industrial Development 330 20.0 1.8 Pakistan Brahmaputra Flood Embankment 39 5.0 1.7 Pakistan Chandpur Irrigation 40 5.2 2.4 " Pakistan Dacca 'Water Supply and Sewerage 41 16.0 15.2 Pakistan Chittagong Water Supply and Sewerage 42 14.0 13.0 i7,!4 Sui Northern Gas Sui Northern Gas Pipelines Ltd. (distribution system) 377 15.0 2.5 Trustees of the Port of Karachi Port Development 376 17.0 15.0 P.IoCoI.C. Indu.strial Developmnent 382 30.0 114 Pakistan East Pakistan Education 49 4.5 2.3 Pakistan West Pakistan Education 50 8.5 6.6 Pakistan East Pakistan Highway 53 22.5 20.9 Pakistan West Pakistan Highway 54 17.0 14.6 " Pakistan Pakistan Eastern Railway 56 10.0 7.8 " Pakistan Pakistan Western Railway 57 25.0 14.9 Pakistan Indus Basin 60 58.5 14 " Pakistan Inland Water Transport 65 5.3 2.2 1965 Pakistan Agricultural Development Bark 76 27.0 13.1 P.I.C.i.C. Indu.strial Development 421 30.0 28.5 1?66 Pakistan Commercial Vehicles 81 25.0 2.9 Pakistan Foodgrain Storage 83 19.2 18.6 Pakistan Second East Pakistan Education 87 13.0 13.0 " Pakistan Project Preparation Credit (Highway Engineering) S-1 1.0 0.9 Pakistan Indu.strial Imports 98 25.0 22.8 1967 KESC Karachi Electric Supply 488 21.5 21.5 Loans/Credits fully disbursed 168.7 3.0 Total less cancellations 411.8 329.2 of which has been repaid 87.2 Total now outstanding 324.6 Amount sold 20.1 of which has been repaid 15.3 4.8 Total now held by Bank and IDA 319.8 329.2 Total undisbursed 161.8 190.0 351.8
- 3-6. In addition to the above loans and credits an IDA credit of $1.75 million for the Lahore Water Supply, Sewerage and Drainage project was approved on fay 9, 1967. 7. IFC has made six investments in Pakistan totalling $12.6 million. Of this amount, $11.3 million has been disbursed as of April 30, 1967. The principal areas of investment have been the cement, paper and jute industries and development banking. IFC is presently considering investment applications for fertilizers and additional jute and paper projects. The IFC operations in Pakistan are thus far proceeding satisfactorily. 8. In my report to you No. P-519 dated December 14, 1966, I commented on the slow rate of disbursement of IDA credits to Pakistan. Since that time some improvement has been made; in particular, the undisbursed balance of effective credits which amounted to $200.6 million on November 30, 1966, has been reduced to $190.5 million as at April 30, 1967, even though the amount of effective credits increased by $25 million during the same period on account of credit 98 PAK. We are continuing to keep this matter under careful review. PART II - DESCRIPTION OF THE PROPOSED LOAN 9. Borrower: Islamic Republic of Pakistan, acting by its President Beneficiary: Amount: Ptrpose: Amortization: Interest Rate: Commitment Charge: Relending Terms: Pakistan Western Railway, through the Province of West Pakistan U.S. $13.5 million in various currencies To assist in financing the foreign exchange cost of the 1967/68 investment program of the Pakistan Western Railway. 25 years including 3A years of grace. Repayment in 44 semi-annual instalments beginning February 15, 1971, and ending August 15, 1992. 6 percent per annum 3/8 of 1 percent per annum The Borrower will relend the proceeds of the loan to the Province of West Pakistan on terms and conditions not more favorable than those granted to the Borrower by the Bank.
PART III - THE PROJECT 10. An Appraisal Report entitled "Appraisal of Eighth Railway Project (Pakistan Western Railway) Pakistan" (TO-587a) is attached. 11. Transportation requirements in West Pakistan are predominantly met by the railway with a small but fast growing proportion of traffic being carried by road. As a result of the country's economic development, traffic has increased substantially over the past decade at a rate of 6.3 percent per annum for freight and of 3.9 percent per annum for passengers. To meet this growth PWR has carried out substantial programs of rehabi.litation, improvement and expansion. Although recent years have shown a decline in traffic growth, possibly as a result of increasing road competition, railway traffic is expectied to continue to grow at a substantial pace in the future and require further heavy investments in improvement and expansion. 12. The investment program of PWR over the Third Five-Year Plan period provides for expenditures totalling Rs 1,500 million (U.S. $350 million equivalent). The Plan has been designed to meet minimum requirements of the railways and is considered a suitable basis for the proposed project. Execution of the Plan is behind schedule because of time lost during the hostilities with India and delays in obtaining foreign financial assistance for projects. However, there is a reasonable prospect that much of the ground lost will be recovered before the end of the Third Five-Year Plan. 13. The project consists of the PWTR investment program for the fiscal year 1967/68 covering requirements for motive power and rolling stock, track material and equipment, plant and machinery for workshops, continuation of electrification and for miscellaneous engineering and structural works and bridge strengthening. The total cost of the project is estimated at about Rs 305 million (U.S. $64 million equivalent) with a foreign exchange component of about U.S. $36 million equivalent. The proposed Bank loan and loans from other countries would provide the foreign exchange required for the program. In arranging procurement, the Government has aimed at placing orders so as to standardize equipment and purchase at the lowest cost. The proceeds of the proposed Bankl loan would be used to finance the import of track materials, materials and components for the local manufacture of rolling stock and plant and machinery for workshops. In addition to the proposed Bank loan, funds will be made available by Germany, the United Kingdom and the United States and negotiations with these countries are either already concluded or well advanced. All contracts to be financed from the proceeds of the proposed Bank loan would be placed on the basis of international competitive bidding. 14. The proceeds of the proposed loan would be re-lent by the Government of Pakistan to the Province of West Pakistan on terms and conditions not more favorable to the Province of West Pakistan than those granted to the Central Government by the Bank. The terms on which the Province would make the funds available to PWR would follow the arrange-
- 5 - ments used in Pakistan for financing the railways' capital expenditures, Funds for additions to railway assets will be arnorti'zed by the Provincial Government and an equivalent amount added to the Government's investment in the railway (capital-at-charge) on which the railway pays to the Provincial Government an annua'l return of 4 percent on capital invested up to June 30, 1965 and 5 percent on capital invested thereafter. Funds used for replacements are treatwed as debt, the service on which is charged to PWR. 15. The PWR is administered as a department of the Provincial Government of West Pakistan, headed by a four-man Railway Board. The railway functions as a commercial enterprise and the Railway Board has adequate authority over day-to-day operations. PIWR's management is competent and the executing staff well trained and efficient. 16. PWR's financial position remains sound and almost half of the funds required for the Third Five-Year Plan program will be provided from cash generated by the operations of the rai'lways. However, net operating revenues, operating ratio and the rate of return on net investments have declined over the last five years. PWR have given assurances that appropriate steps will be taken to arrest this decline in profitability and PWR will aim to maintain an operating ratio of about 80 percent. In addition, PRJ agreed to study the feasibility of revaluing the railway's assets. 17. One of the reasons for the decline in the operating ratio is that operational efficiency has not improved sufficiently to offset cost increases. PWR is aware of the need to improve operating efficiency and have given an assurance that high priority will be given to technical and organizational measures for improving standards of performance. 18. PWR has recently formed a Traffic Costing Cell with a view to introducing modern methods of cost control. It is the intention to expand the functions of this Traffic Costing Cell to become a Railway Planning Cell which would be responsible for carrying out all studies and appraisals for the railway involving economic and traffic analyses. In particular, this body would study questions concerning movements of major commodities, the economic and financial justification of stations and lines and the use of more efficient bogie freight cars. 19. Pakistan has invested substantially in transportation during past years. A number of further investments in railways and roads are either about to be implemented or planned. Although there will be growing demand for the services of all modes of transport, competition is likely to increase and priorities of investments will have to be investigated more carefully than was necessary in the past. For these reasons, the Province of West Pakistan has established a Transport Plarning Cell which will undertake transport coordination studies or initiate and assist similar studies performed by other Government agencies, including PWR. In addition to the Transport Planring Cell, the Provincial Government has also established a high level Transport Coordination Board.
- 6 - On the basis of the studies carried out by the Transport Planning Cell, the Transport Coordination Board iwill advise the Government on all matters relating to transportation investments and policy. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 20. The draft Loan Agreement between the Islamic Republic of Palkistan and the Bank, the draft Project Agreement between the Province of West Paidstan and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 21. The draft Loan and Project Agreements generally follow the pattern of agreemenlts for projects of this type, and are similar to previous agreements providing for loans for railways in Pakistan. PART V - THE ECONOMOY 22. An economic report, "Current Economic Position and Prospects of Pakistan" (AS-124a, dated April 19, 1967), has been distributed to you. 23. Mhile Pakistan's economic performance during 1965-67 has been miixed, particularly public savings performance has been disappointing, on balance it can be considered relatively satisfactory. The overall growth rate has slowed down compared to the higher rates achieved in the Second Plan period. In industry, there has been a greater underutilization of capacity than in 1964-65, particularly in industries dependent on imports. On the other hand, the export sector has continued to perform well with export earnings increasing by an annual 11 percent. 24. The prospects for further improvement in Pakistan's development effort are quite good and they warrant a continuation of Bank/IDA lending at about the same level as in recent years. Pending IDA replenishment, Palcistan has a sufficient margin of creditworthiness to justify a larger than normal portion of Bank/IDA operations on Bank terms. However, beyond this Pakistan should continue to be regarded as a soft blend country. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMEIT 25. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.
- 7 - PART VII - RECOONEDATION 26. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of Loan to Islamic Republic of Pakistan in an amount equivalent to U.S. $13,500,000 RESOLVED: THAT the Bank shall grant a loan to Islamic Republic of Pakistan, in an amount in various currencies equivalent to thirteen million five hundred thousand United States dollars (U.S. $13,500,000), to mature on and prior to Augu.st 15, 1992, to bear interest at the rate of six percent (6%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Pakistan Western Railway Project) between Islamic Republic of Pakistan and the Bank, and the form of Project Agreement (Pakistan Western Railway Project) between the Province of West Pakistan and the Bank, which have been presented to this meeting. Attachments Hay 15, 1967 George D. Woods President by J. Burke Knapp