Document of

The World Bank

FOR OmCIAL USE ONLY

Report No. 14027

PROJECT COMPLETION REPORT

TURKIEY

SECOND RAILWAY PROJECT(LOAN 2739-TU)

March 7, 1995

Infrastructure Operations DivisonCountry Department IEurope & Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ACRONYMS AND ABBREVIATIONS

CTC = Centralized Traffic ControlDLH = General Directorate of Construction of Harbor, Ports, Airports and

Railways, Ministry of Public Works and SettlementEDP = Electronic Data ProcessingELMS = TCDD Locomotive Factory in EskisehirER = Economic ReturnFYR = First Year ReturnGTKM = Gross Ton - KilometerMOF = Ministry of FinanceMPW = Ministry of Public Works and SettlementNTKM = Net Ton - KilometerPEE = Public Economic EnterprisePKm = Passenger KilometerSEE = State Economic EnterpriseSMIS = Specialized Management Information SystemSOE State Owned EnterprisesSPO = State Planning OrganizationTCDD = Turkish State RailwaysTDC = Iron and Steels Works IndustryTDI = Turkish Maritime OrganizationTU = Traffic UnitsUB = Ministry of Transport and Communications

CURRENCY EQUIVALENTS

Unit = Turkish Lira (TL)

Year Value of US$1.00

January 1980 - 70.00January 1981 - 91.00January 1982 - 139.00January 1983 - 191.15January 1984 - 309.20July 1985 - 540.00July 1990 - 2,608.00July 1991 - 4,171.00July 1992 - 6,872.00July 1993 - 11,185.20July 1994 - 30,966.90

FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Director-GeneralOperations Evaluation

March 7, 1995

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on TurkeySecond Railway Project (Loan 2739-TiL)

Attached is the Project Completion Report on Turkey - Second Railway Project (Loan 2739-TU), prepared by the Europe and Central Asia Regional Office with Part II contributed by theBorrower.

The project had these main objectives: to relieve bottlenecks in rail transport and raise therailway's operational efficiency; to improve the railway's competitiveness and financial health; and tointroduce the railway to modern management concepts and practices. The project was to reverse atrend of declining rail traffic. Improvements in locomotive maintenance and track overhaul were themain items financed.

Implementation of physical components went well on balance, though it lasted over two yearslonger than planned. A study on locomotive maintenance management was cancelled. Actualproject costs were below projected costs.

The project largely achieved its physical and operational objectives, and it led to selectiveimprovements in railway management. However, it strengthened the railway's competitiveness bylittle, and it did not prevent a further deterioration of the railway's financial health. The borrowerdefaulted constantly on financial covenants. Rail traffic, which the appraisal had projected to rise,remained stagnant. Railway expenditures rose much faster than revenues, and cost coveragedeteriorated to an all-time low. The weak competitive situation precluded tariff increases.

Based on imputed savings in railway costs, the PCR calculated the ERR on physicalinvestments at 17 percent overall, as compared to the 22 percent estimated at appraisal. But the ex-post ERR is a poor measure of project economics as it ignores (large) operating subsidies to supporttraffic demand. Without the subsidies, the demand would have been much lower and someinvestments may not have been needed.

Since the key objective of financial viability was not met, project outcome is unsatisfactory.Further, institutional impact is modest, and sustainability uncertain. PCR quality is satisfactory,though vital statistics (on traffic and finance) are lacking for the years after 1990. This omissionleaves an unclear picture about the most recent railway developments. No audit is planned.

Attachment I

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLY

TABLE OF CONTENTS

Preface ............. i

Evaluation Summary ............. ii

PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

I- Project Identity. 111 - Background. 1IIl - Project Objectives and Description .......................... 2IV - Project Design and Organization. 4V - Project Implementation. 5

Loan Effectiveness and Project Start-up. 5Implementation Schedule. 5Procurement. 6Project Costs and Financing .7Disbursement. 7Loan Covenants. 7

VI - Project Results. 7Project Objectives. 7Physical Targets. 8Economic Performance. 8Financial Performance .9Technical Assistance and Training. 9

VIl - Project Sustainability ............ ....................... 10Vill - Bank Performance ....................... 11IX - Borrower Performance ....................... 12X - Bank-Borrower Relationship .13Xi - Consulting Services. .Service 13XII - Project Documentation and Data .13

PART II - PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE ...... 14

PART Ill - STATISTICAL INFORMATION ..... . ......................... 17

MAP - IBRD 19221 - Turkey - Transport Infrastructure ..................... 40

This document has a restricted distribution and may be used by recipients only in the performance of theirI official duties. Its contents may not otherwise be disclosed without World Bank authorization.

PROJECT COMPLETION REPORT

T U R K E Y

SECOND RAILWAY PROJECT(LOAN 2739-TU)

PREFACE

This Project Completion Report (PCR) refers to the Second Railway Project inTurkey for which Loan 2739-TU in the amount of US$197 million equivalent was signedon July 24, 1986. The Republic of Turkey was the Borrower and the Turkish StateRailways (TCDD) and General Directorate of Construction of Harbor, Ports, Airportsand Railways (DLH) were the immediate beneficiaries. The Loan became effective onJanuary 27, 1987 and it was closed on December 31, 1993 after a one year extension.The Bank did not agree to further closing date extensions due to maJor defaults in

compliance with financial loan covenants and the Government's inability to support acomprehensive restructuring of TCDD to reflect its changing role in the transportsector following the development of road transport (para. 5.10). Ultimately, US$171.83million was disbursed and about US$25.17 million was cancelled.

This Completion Report (Parts I and ll) was prepared by the InfrastructureDivision of Country Department I (EC11N) of the Europe and Central Asia Region. Thereport is based on information obtained from Project files, Staff Appraisal Report,President's Report, Staff Supervision Reports, procurement documents and workingpapers prepared in connection with the project. The Borrower prepared Part II of thePCR and provided basic statistical information incorporated in Part III of the PCR.

PROJECT COMPLETION REPORT

T U R K E Y

SECOND RAILWAY PROJECT(LOAN 2739-TU)

EVALUATION SUMMARY

Objective

1. The project was mainly designed to relieve key transport bottlenecks and toimprove TCDD's operational efficiency and loco availability by restructuring TCDD'slocomotive technology and maintenance and promoting institutional developmentmeasures, such as introduction of modern management methods and technology transfer(paras. 3.01, 3.02, 3.03 and 4.01). The project also included as one of its main objectivesto support the Government's efforts towards TCDD's financial recovery so as to reducethe burden of subsidies on the budget (paras. 3.01 and 4.01). The project made apositive contribution to the reorganization of the whole system of Turkey's locomotivemaintenance and operation (paras. 5.02, 5.06, 6.01, 6.03, 7.01 and 8.01) - the center-piece of the project - and provided much needed technology transfer through technicalassistance and training. The project, however, failed to bring about TCDD's financialrecovery. TCDD's financial performance became worse during project implementationand the Borrower was continuously in default of financial loan covenants (paras. 5.10,6.01, 6.05-6.06, Annex 3A-D Pt. III, 7.02, 7.03, 7.04).

Implementation Experience

2. The Republic of Turkey was the Borrower and TCDD was responsible forimplementation of all project components except new line works, for which DLH wasresponsible. The proceeds of the Loan were passed on to TCDD and DLH for executionof the respective components (para. 4.04) and the arrangements proved to besatisfactory. Once the Loan became effective, the physical implementation, technicalassistance and training (para. 5.01) progressed smoothly. A substantial number of civilworks including the track renewal of 740 km and improvement of diesel loco componentproceeded according to schedule and were completed on target dates (sometimes earlier- paras. 5.02 and 5.03). The execution of a few sub-projects, namely: signallingimprovement, new line works, 'part-exchange' system, and procurement of a few trackoverhaul and maintenance machinery faced significant delays mainly due to shortage offinancial resources, especially local funds, project re-design, delay by the Ministry ofFinance in import authorization of track steel material financed by the Bank Loan andnecessity of rebidding the signalling and telecommunications components (paras. 5.02,5.03, 5.04 and 5.05). The quality of construction of civil works was satisfactory.

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3. The project encountered no serious procurement problems excepting purchasingtrack steel material (para. 5.05) due to a delay in contract approval and importauthorization of track materials. Significant delay was also experienced in procuringinspection cars because of the problems of car stability and excess axle loads (para.5.03). At an early stage, the Bank mission found that the technical specifications,schedules of delivery and Bill of Quantities (list of unit prices) prescribed at the time of bidinvitation of some works needed amplifications to permit an adequate response frominternational competitors. The Borrower readily revised the necessary documents andon the whole procurement action proceeded without serious difficulty (paras. 5.03, 5.05and 5.07).

4. The Loan (2739-TU) was scheduled to close on December 31, 1992. However,due to numerous delays in contracting, the signalling component of the projectprogressed slowly. The concerned contractor notified TCDD of further possible delays inits services due to force majeure caused by the Gulf War and the civil war situation inYugoslavia affecting its Yugoslav partner (para. 5.04). This contract was of a turn-keytype covering both supply and installation. Although a considerable part of the equipmentwas delivered, the installation was delayed. At the Borrower's request, the Bank extendedthe Loan closing date up to December 31, 1993 to enable the railway/contractor to installabout US$35 million worth of expensive electronic signalling equipment which wasdelivered but lying uninstalled. This reasonable and flexible approach helped TCDD toimprove further the technical parameters and avoid about US$3 million in penalties.

5. The expert services enlisted in "in-line" positions in TCDD for technical assistanceand training program secured through "twinning" arrangements with other Europeanrailways progressed exceedingly well (paras. 5.06 and 6.08) and the benefits permeatedthrough the entire system and were reflected in the results (paras. 7.01 and 9.01) oflocomotive availability and maintenance including improvement in traffic safety andincreasing fuel efficiency.

6. The total cost of the project, US$ 420 million, was below the estimated total costat appraisal of US$582.2 million. A part of the reduced cost, US$ 25.2 million, isexplained by the fact that a portion of the Signalling and the Specialized ManagementInformation System (SMIS) components were cancelled. The remaining part of the costreduction (US$ 137 million) was due to the redesign of the Hanli-Bostankaya line usingnew technology for salt water protection of lines, reduced costs of ICB, and somereduction in the quantity and costs of imported and locally procured goods and services.

Results

7. The project produced tangible benefits by improving diesel locomotive operationsand availability (paras. 6.01 and 7.01) - the main focus of the project. As a consequence,during project implementation TCDD covered all loco requirements and has had for the

first time a surplus of more than 40 main line locomotives, some of which were leased

iv

to Iranian Railways. The improvement in loco availability helped TCDD to avoid plannedadditional investments of up to US$200 million (para. 6.03).

8. Track renewal and signalling improvement together with the training componentincluding loco drivers' simulator, contributed to increased traffic safety and in 1993,accidents came to about half the level in 1985 (para. 6.03) Furthermore, the project'straining program helped to increase TCDD's trained staff from about 3,000 (about 5% ofstaff) in 1986 to about 32,000 (about 55% of staff) in 1990 (para. 5.06).

9. TCDD's volume of traffic declined since 1985, while the SAR and TCDD hadprojected that overall freight traffic would increase by about 1 million tonnes per year(para. 6.04). The cost of civil works were well maintained and are generally 28% belowappraisal estimates (para. 5.08 and Table 5A Pt. ll). These results had opposite influenceon the re-assessed E.Rs. The declining traffic depressed the ERs while the cost savingsboosted up the same. On the whole, the recalculated ERs remain within a reasonablerange of 12% to 22% (Table 6 Pt. Ill) but are consistently lower than the appraisalestimates. The overall project remains economically well justified with a weighted ER of17% (Table 6).

10. The financial performance of the railways during 1985-89 and thereafter did notcome up to appraisal expectations (paras. 6.01, 6.03-6.07 and Annex 3 (A-D), Pt. ll). Theproject completely failed to assist the railways in its financial recovery and thereby reducethe burden of subsidies on the budget, one of its principal objectives (paras. 3.01 (d) and6.01). The financial position of the railways worsened almost continuously during theproject implementation period (Annex 3A-D, Pt. Ill). During the period 1985 to 1990,revenues increased by 26%/ (in constant 1985 terms), whereas costs increased by 42%.Due to TCDD's lack of autonomy, its management had limited control on, reducing costsand enhancing revenues. For example, the real cost of wages and salaries increased 82%between 1985 and 1990 (in constant 1985 terms), in spite of a staff reduction of about5,000 (para. 6.06). This was because salary increases for civil service employees isdetermined nationally according to Law 657. Although, operations were partiallyrationalized by the closure of some stations (about 250) to freight services/parceloperations and cancellation of passenger trains (40 main line and regional passengertrains since 1988), the approach was piece-meal and significant staff reduction on accountof such closures was not possible. TCDD management could not raise tariffs, althoughon paper they are entitled to do so. Under the circumstances, the major financialcovenants of the Loan were continuously in default (paras. 5.10, 6.03, Table 7 Pt. Ill).

11. The poor financial performance of TCDD is not just an organization/sector-specificproblem. This is a wider problem covering most of SOE's in Turkey (paras. 6.07 and7.03). Financial recovery could be hoped for only by restructuring the railway. The Bankcorrectly identified the needs of TCDD's restructuring (paras. 6.03, 6.04 and 7.04). Thiswould require significant down-sizing of the railway while improving quality of services,providing managerial autonomy and developing an aggressive commercial orientation.

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All parties concerned (including TCDD, MOT, SPO and the Treasury) expressedwillingness to support the restructuring program suggested by the Bank. However, nosignificant action in this direction has yet been taken (paras. 6.07 and 7.04).

Sustainability

12. The Bank felt greatly concerned that if the deteriorating financial trend was allowedto continue unchecked, the benefits accruing to the project (para. 7.01, 6 and 7) wouldnot be sustainable. Higher freight rates may, no doubt, reduce the TCDD's deficit in theshort run but would only address the symptoms rather than causes of the structuralproblems plaguing the sector (paras. 7.03 and 7.04). In practice, the railways approachto simply adjust freight rates on a cost-plus basis without considering the commercialviability or making necessary efforts to reduce costs was likely to outprice TCDD andmake it more and more vulnerable to traffic losses to competing road transport.(paras.7.02 and 8.03). Passenger traffic on the other hand has become a major sourceof losses; many such services cannot be justified and are only being provided for socialand political reasons since passenger rates only cover about 15% of the costs attributableto the main line passenger services (in 1992/93).

Lessons Learnt

13. Although the project has been successful in meeting some of its objectives, anumber of lessons can be drawn. These lessons are summarized below:

(i) With hindsight, the Bank must be faulted for failing to forcefully address theneed for restructuring the railway as a condition for involvement with a state-owned agency hampered by red tape and political constraints and unableto compete with other transport modes.;

(ii) provision of an overall coordination agency (TCDD) for all project-relatedactivities with appropriate counterpart from each project-executing agency(DLH) contributed to successful monitoring project progress (para. 4.04);

(iii) establishment of a Special Account (revolving fund) greatly facilitated thetimely flow of funds to the beneficiaries to finance eligible projectexpenditures with minimum administrative delay (para. 5.09);

(iv) technical assistance of expert services enlisted in "in-line" positions in TCDDand training program secured through "twinning" arrangements with otherEuropean railways proved very successful (paras. 5.06 and 6.08); and

(v) the Bank should have been more forceful in seeking to persuade theGovernment, particularly TCDD management, to make an all-out effort tocapture more bulk traffic, ideally suited for railways, to reduce unit cost

vi

significantly, intead of concentrating prmarily on tariff adjustment on acost-plus basis (pars. 8.03); and

(vi) as in most Bank-financed railway projects the demand projections were toooptimistic, suggesting that the pressure of competition from truckers wasunderestimated (para. 7.02).

PROJECT COMPLETION REPORT

T U R K E Y

SECOND RAILWAY PROJECT(LOAN 2739-TU)

PART I

I. Project Identity

Project Name Second Railway ProjectLoan No. : 2739-TURVP Unit : EC1IN/EMTINCountry TurkeySector : TransportSub-sector Railways

II. Background

2.01 In response to the crisis of the late 1970s, characterized by a massive extemaldebt burden, sharp deterioration of credit-worthiness, and high domestic inflation, theTurkish authorities implemented a program of stabilization combined with structuralchange that reduced the external deficit and inflation and increased reliance on marketforces for the allocation of resources, also shifting from an inward to an outward orienteddevelopment strategy. On the external side, the policies achieved an impressive growthof exports and contributed to restore international credit-worthiness. On the domesticside, however, since 1986 the achievement of stabilization has been undermined by alarge public sector deficit. In spite of large internal imbalances, Turkey was able to growat an average rate of 5 percent per year during 1985-93.

2.02 Transport plays a vital role in the Turkish economy by providing essential supportfor commercial and industrial activity, foreign trade and transit traffic. Turkey serves asa vital transport link between Europe and the Middle East; its trunk routes andinternational connections are particularly important to its development prospects becauseTurkey aims to improve its integration with the world economy, and particularly withEurope, through increased international trade.

2.03 Despite the existence of extensive mountainous areas, Turkey has a fairly welldeveloped and evenly distributed transportation network (see Map) which has served tointegrate its 780,000 sq. km. of territory and its population of over 55 million. The currenttransport system in Turkey consists of about 300,000 km. of state, provincial and localroads, about 8,000 km. of railways, 12 major public ports, and civil and military pipelines

2

and airlines which serve several domestic and international routes. During the lastdecade, the transport and communications sectors accounted for about 20-25% of totalpublic investment in Turkey.

2.04 Road transport now dominates the transport market. The railways' share in thefreight transport market declined continuously during the last three decades from about55% to about 10% with road transport gaining the railway's loss in market share. Roadtransport today carries more than 95% of domestic passenger traffic. The road transporthas been able to cope with this increase in traffic due to the responsiveness of privateoperators who enjoy considerable freedom to negotiate rates and operate commercially.

2.05 The railways have lacked a commercial orientation and have been unable to riseto the challenge posed by road transport. Despite seeming comparative advantages fortransportation of bulky products over long distances the railway has persistently lostmarket share to trucking. The poor performance of the railway has become an issue forthe development of the core sector of the economy, namely: mining, iron and steel andother key bulk industries. Heavy bulk commodities such as lignite, iron ore, cement,fertilizers which should economically be carried by rail over long distances are carried byroad transport because of the railway's poor operational efficiency and poor reputationfor reliability. Moreover, energy consumption has become an important concern for theTurkish economy and transport accounts for about half of total oil product consumptionbecause of the rapidly increasing and widespread role of road transport. TheGovernment is anxious, therefore, to make better use of the energy efficient railway andshipping transport modes wherever appropriate.

Ill. Project Objectives and Description

3.01 The objectives of the project were to:

(a) overcome key bottlenecks in railway operations;

(b) increase railway operational efficiency and to provide essential maintenanceand technical assistance for the. improvement of diesel locomotivemaintenance, technology and operation with the aim of increasinglocomotive availability;

(c) enable the railways to handle the ttaffic for which they are inherertly themost economic mode, particularly long-distance bulk traffic;

(d) improve railways competitiveness and assist in the railway's financialrecovery and thereby reduce the burden of subsidies on the budget;

3

(e) introduce corporate planning, action and operational plans and improvepoor track conditions (overhauling of about 740 km. of mainline), providetrack overhaul equipment and replace out-moded signalling (about 700 kmof obsolete mainline signalling) on a phased basis to match capacity needs;

(f) construct about 65 km. of new track (Bederli-Bostankaya) consisting of asecond track on a new alignment to remove a critical bottleneck to themovement of bulk commodities; and

(g) familiarize the railway staff with recent developments and expected trendsin operating, monitoring and maintenance techniques utilizing the lateststate-of-the-art techniques.

Description of the Project

3.02 The project consisted of high priority items included in TCDD and DLH'sInvestment Plan (1985-89). Improvement of locomotive availability and efficiency was the'centerpiece' of the project. This task included improvements in the technology of thelocomotives and in the efficiency of their operations. The re-organization of the wholelocomotive maintenance and operation system involved systematic use of the 'partexchange' method, centralized reconditioning of the dismantled parts, improved planningto reduce turn-around time, deployment control, modernization of the workshop andstores equipment, and procurement of a basic stock of component and spare parts.

3.03 The other components included: (i) overhaul of 740 km. of poor mainline trackwhich had serious safety problems, (ii) acquisition of track renewal and maintenanceequipment to meet the urgent track rehabilitation needs; (iii) replacement of obsoletesignalling systems on 700 km. of the Kayas-Cetinkaya line with modemized stationsignal-equipment (TAS); (iv) improvement of line capacity on the short stretch betweenBedirli/Hanli and Bostankaya (see Map) to facilitate long distance movement of iron orefrom Divrigi mines to the steel plants as well as international transit traffic. The projectalso included as an important component technical assistance and training to be providedby three senior experts supported by five middle-level assistants appointed to "in-line"positions within TCDD for 48 man-months. These experts and their assistants wereexpected to contribute significantly to institution building, management improvement andintroduction of new technology. In addition, the Bank assistance also provided for morethan 300 man-months of technical visits and training for railway (TCDD and DLH)managers, operation specialists, craftsmen, etc., through "twinning" arrangements withappropriate European railways engaged in similar works. The project also included theprocurement and installation of a 'simulator' for training of locomotive drivers and acomputer-assisted specialized management information system (SMIS) study forlocomotive maintenance and operation.

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IV. Project Design and Organization

4.01 The project was designed to address the complex but worthwhile task ofmodernizing TCDD to improve operational efficiency, and loco availability, and to supportthe Government's efforts towards TCDD's financial recovery. This was in accord with thecountry's objectives of decreasing budgetary support to state-owned enterprises and tointroduce commercial management methods to improve competitiveness. The majorthrust in the project design was to improve locomotive availability (paras. 3.01 and 3.02)and to improve operational efficiency by restructuring TCDD's locomotive technology andlocomotive maintenance (para. 3.02) and by supporting institutional developmentmeasures, such as introduction of modern management methods and to provide fortechnology transfer.

4.02 At the project formulation and design stage the Bank was involved in detailedpolicy discussions on institutional issues in the transport sector and on modal investmentplans through a Transport Investment Review concluded in July 1985. The total railwayinvestments proposed by TCDD and DLH were then considered to be far in excess of thecountry's Fifth Five Year (1985-89) Plan provision. Based on discussions with users andoperators, the Bank mission made specific recommendations to avoid over-investment.The investment program in railways endorsed by the Bank mission was about 55% of thelevel originally requested by the railways. The mission's recommendations were reviewedfurther by the Bank multi-sector investment review mission and the size, and compositionof the railways program as recommended by the Bank's transport mission was confirmed.During project preparation, the long-standing issues of the construction of the Ariflye-Sincan (260 km), an expensive high speed line from Istanbul to Ankara, was resolved.It was decided that there would be no further investments on this line beyond the on-going contracts (to be completed by the end of 1986) unless and until a feasibility studydemonstrated the economic viability of further investment. This arrangement saved about85% of the total investment cost of the high-speed line.

4.03 Based on an approach suggested by the Bank mission at the design stage, TCDDprepared and agreed on an Action Plan to be periodically up-dated and monitored on acontinuing basis for the railway operation and management.

4.04 The Republic of Turkey was the Borrower. The beneficiaries of the project wereTCDD and DLH. The latter, as a government Department and a non-revenue earningentity, received project funds through the budget. The Bank entered into a ProjectAgreement with TCDD to which the Govemment on-lent loan funds under the same termsand conditions as the Bank loan. DLH was responsible for the implementation of the newline works and TCDD for all other project components. TCDD appointed a suitablyqualified project coordinator responsible for planning and coordinating implementation ofits part of the project. Similarly, DLH appointed a counterpart project coordinator to carryout similar responsibilities with respect to its component, in close liaison with the TCDDproject coordinator. The entire arrangement worked out smoothly throughout the project

5

implementation period, particularly with reference to physical and technical aspects (Sec.V, paras. 5.01 - 5.07).

V. Project Implementation

Loan Effectiveness and ProJect Start-up

5.01 The Loan (2739-TU) was approved on July 8, 1986 and was signed on July 24,1986 (Table 2, Pt. IIl). The loan became effective on January 27,1987 (para 8.02). Oncethe loan was effective, the physical implementation, technical assistance and trainingprogressed smoothly.

!mplementation

5.02 Improvement of diesel locomotives - This task included the modernization of theworkshop and stores equipment, phasing-out weak points in locomotive design,systematic use of 'part exchange' method, one-time basic overhaul of the immobilizedand the unreliable locomotives and procurement of a basic stock of components andspare parts. Most of these sub-components were scheduled to be completed betweenthe end of 1988 and 1989 (SAR and Table 4, Pt. III). All machines, materials, laboratoryequipment, loco components and spare parts were procured and assembled before 1992,except for the work-bench for Derince Workshop. However, the part exchange systemcould not be fully put into operation as scheduled due to lack of local funds andinsufficient number of qualified staff. The situation was remedied by 1992/93 and thisvery important project component yielded very good results (paras. 6.01 and 7.01).

5.03 Track overhaul and maintenance machinerv - The track rehabilitation program(about 740 km -Table 4, Pt. Ill) was completed in most part one year ahead of scheduleand the quality of works was satisfactory. A substantial number of track maintenancemachinery was procured according to schedule with minor variations (up to a maximumof one year). There was, however, substantial delay (about 3 years) in putting intooperation eight heavy track maintenance cars (draizines). These cars from Krupp -Germany were assembled at the Tulumsas factory in Turkey but were not accepted byTCDD due to problems of car stability and excess axle load which were solvedsatisfactorily in due course and technical acceptance was issued after appropriate testing.

5.04 Signalling and telecommunications (700 km) - Due to the numerous delays incontracting for the works, progress on this component was unduly delayed. Thecontractor, SEL, notified TCDD of possible delays in its services due to Force Majeurecaused by the Gulf war and the civil war situation in Yugoslavia, affecting one of itsYugoslav partners, Iskara. This contract was "turn-key" type covering both supply andinstallation. At the Borrower's request, the Bank extended the Loan Closing date by oneyear to December 31, 1993 to enable the railway/contractor to instal about US$35 million

6

worth of expensive electronic signalling equipment which was delivered but lyinguninstalled. This extension helped TCDD to further improve some of the technicalparameters within their control and avoid about US$3 million in penalties. However, sincethe project was in serious default of major financial covenants and the government wasunable to submit a program to resolve this issue, the Bank did not agree to extend theloan closing date beyond December 31, 1993. The Bank did allow disbursements againstexpenditures incurred on signalling works up to April 31, 1994.

5.05 Now Line Works - The implementation of this component by DLH was more thantwo years' behind the appraisal schedule (Table 4, Pt. Ill). The reasons for this delaywere: shortage of local financial resources; project redesign; delay by the Ministry ofFinance's in approval of contracts and authorization of imports for track steel materialfinanced by the Bank Loan; and need to rebid the signalling and telecommunicationscomponent included in TCDD's Kayas-Cetinkaya package.

5.06 Technical Assistance and Trainina - Expert services were enlisted for "in-line"positions in TCDD to provide technical assistance and training. They were securedthrough "twinning" arrangements with other European railways. This componentprogressed well and according to schedule (Table 4, Pt. Ill). The project's trainingprogram helped to increase TCDD's trained staff from about 3,000 in 1986 to about32,000 in 1990.

Procurement

5.07 By the time of implementing the second railway project, the implementing agencieswere more familiar with Bank procurement guidelines due to their experience with the firstrailway project. The Second Railway project costs were well maintained and are about28% below appraisal estimate primarily due to positive ICB results and Bostankaya-Hanliproject redesign (para. 5.08). Still in several instances, the Bank mission found thattechnical specifications, schedules of delivery and Bill of Quantities (Ust of Unit Prices)needed clarifications/amplifications to permit an adequate response from intemationalcompetitors. Based on Bank's suggestions, the Borrower readily revised the necessarydocuments and on the whole, procurement actions proceeded satisfactorily. Overall, theproject did not encounter serious procurement problems excepting procurement of tracksteel material (para. 5.05) for Hanii-Bederli-Bostankaya line and the need to rebid thesignalling and telecommunications component included in TCDD's Kayas-Cetinkaypackage (para. 5.05).

Project Costs and Financing

5.08 The estimated total project cost of the project at appraisal was US$582.2 million.The final cost came to US$420 million (Table 5A). The decrease in total cost of about28% in terms of LIS$ was partly (3%) due to the cancellation of the SpecializedManagement Information System (SMIS) component and a part of the signalling

7

component. The remaining savings (25%) was primarily due to the redesign of the Hanli-Bostankaya line using new technology for salt water protection, reduced costs of ICBprocurement and some reduction in quantity and costs of imported and locally procuredgoods and services. The structure of project financing was very similar to what wasplanned at appraisal (Table 5B).

Disbursements

5.09 The Loan was disbursed as provided in the loan agreement. Statements ofexpenditures, against which the Bank disbursed, were submitted at regular intervals bythe Borrower. As agreed, the Borrower also established a Special Account (revolvingfund) to maintain an adequate flow of funds to the beneficiaries to finance eligible projectexpenditures with a minimum of administrative delay. Actual disbursements, however,consistently lagged behind (about 30 to 40%) the appraisal estimate (Table 3, Pt. Ill).

Loan Covenants

5.10 Compliance with Loan Covenants was generalty satisfactory excepting thoserelating to financial performance (paras. 6.01, 6.034.05) which were in serious default(rable 7, Pt. Ill). Accordingly, the Bank did not agree to further extension of the loanclosing date beyond December 31, 1993 and about US$25.2 million of Bank Loan wascancelled. This decision largely reflects the inadequate compliance with the financialcovenants and the Government's inability to support a comprehensive restructuring ofTCDD to reflect its role in the transport sector in Turkey following the development of roadtransport.

VI1. Proiect Resus

6.01 Project Oblectives: Overall, the project was successful in meeting its physicalobjectives of relieving key bottlenecks in railway operations and increasing railwayoperational efficiency by improving diesel locomotive operation and availability (paras.3.01 and 7.01). Furthermore, technical assistance and training helped to successfullytransfer modem state-of-the-art technology to improve locomotive maintenance as wellas the maintenance system and efficiency of locomotive operation. The project producedtangible benefits (paras. 7.01) and improved traffic safety and fuel efficiency (para. 7.01).However, one of the major objectives of the project was to assist the railways in itsfinancial recovery and thereby reduce the drain on government budgetary resources. Theproject failed to achieve this important objective and witnessed a continued worsening inthe financial position of TCDD compared to past years (paras. 6.03-8.06; Annex 3A-D, Pt.Ill; Table 6C, Pt. Ill). During the period 1985 to 1990, revenues increased by 26% Onconstant terms), whereas costs increased by 43%. Costs increased porimarily due tomassive increases in wages and salaries (82% In constant terms) from 1985 to 1990. Theapproved tariff Increases were cearly Inadequate and were granted with a time-lag that

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contributed to continuous deterioration in TCDD's financial situation. In addition, thedeterioration of market share indicates that the problems faced go far beyond what couldhave been resolved through tariff increases.

6.02 Physical Targets: The physical targets of the project, improvement of locomotivemaintenance and operation, track renewal and procurement of track maintenancemachinery were generally achieved as planned (paras. 5.02 and 5.03) with substantialslippage in time schedule for signalling and new line works (paras. 5.04 and 5.05).Technical assistance and training progressed very well though the SMIS component hadto be cancelled when the loan closing date was not extended (paras. 3.03 and 5.01).

6.03 Economic Performance: The general and sub-project specific methodologiesfollowed for the economic re-evaluation of the completed project are, basically, the sameas those used at appraisal. The quantified economic analysis for the improvement oflocomotive availability takes into consideration the savings in procurement of newlocomotives (including benefits due to lease of surplus locomotives to other railways -para. 7.01) due to improved loco availability. The improvement in efficiency of mainlinelocomotives helped to avoid planned additional investments of up to US$200 million. Themain benefits from track rehabilitation accrued from decreased maintenance of track andoperating costs of rolling stock due to reduced wear and improved safety. The economicbenefits from modernization of main line signalling and telecommunications resultedmainly from increased line capaciy at a smaller cost and greater safety. Track renewal,signalling improvement together with the training component (including loco drivers'simulator), contributed to reducing railway accidents in TCDD in 1993 to half the levelprevalent in 1985. The expected benefits for one new short link (Hanli-Bostankaya)include savings due to avoidance of considerable detour for heavy bulk traffic oncircuitous routes.

6.04 The actual traffic growth and its projection (para. 7.02 and Annexes 1 and 2, Pt.Ill) has been re-assessed at completion. TCDD's volume of freight traffic declined since1985 (para. 7.02) though SAR/TCDD projected that overall freight traffic would increaseby about 1 million originating tonnes every year. This declining traffic pattern hasparticularly affected the anticipated traffic flows on Kayas-Kayseri-Sivas-Cetinkaya andHanli-Bostankaya sections where substantial growth of bulk traffic was anticipated atappraisal. On the other hand, the cost of civil works (track overhaul, signalling and newworks) were well maintained and are generally below 28% of appraisal estimates (paras.5.08 and Table 5A, Pt. Ill). These characteristics had an opposing influence on the re-assessed ERs. The declining traffic depressed the ERs while the cost savings of civilworks boosted up the same and on the whole, the recalculated ERs remain within areasonable range of 12% - 22% (Table 6, Pt. Ill). Re-evaluated economic returns are,however, consistently lower than the appraisal estimate(s) but still all the projectcomponents remain acceptable and are individually higher than 12%. T he overall projectremains economically well justified with a weighted ER of 17% (Table 6B, Pt ll).

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6.05 Financial Performance (TCDD): The financial statements, including both appraisalestimates and actual results for 1985-1990 are given in Annex 3 (A-D), Part IlIl and Table6C, Pt. Ill. The Bank felt grave concern over TCDD's continuing rapid financialdeterioration which brought into question the sustainability of the physical gains achievedthrough improved technical parameters (Section VII, paras. 7.01-7.04).

6.06 Deterioration of TCDD's financial situation was partly due to conditions beyond itscontrol. For instance, wages and salaries increased 128% (in real terms) between 1988and 1991, in spite of a staff reduction of about 5,000, mainly because of large semi-annualwage increases sanctioned by the Government. Though operations were partiallyrationalized by the closure of some stations (over 250) to freight services, parceloperations and cancellation of passenger trains (40 main line and regional passengertrains since 1988), still the approach pursued was very limited and piece-meal. TCDD'slack of autonomy in the closure of uneconomic lines, and of control over costs,particularly wage and salary increases and over tariff increases was a key factor in thisdevelopment, which the Government failed to address by imposing a hard budgetconstraint. Hence, the easy solution of relying on financial support from Treasury led toa progressively worsening performance. TCDD identified (1993) 22% of Its network to beuneconomic, carrying less than 100,000 tonnes per year. The cost coverage ratio formainline passenger trains which was faltering around 17% in 1992 declined to 12Y% in1993 and still most of the uneconomic services continue to be in operation. Under thesecircumstances, the major financial covenants of the loan were continuously in default(para. 5.10 and Table 7, Pt. Ill).

6.07 The poor financial performance of TCDD is not just an organization/sector-specificproblem. This is wider problem covering most of the SOEs in Turkey (para. 7.03). TheBank must be faulted for failing to require a comprehensive restructuring that addressedmost causes for TCDD's problems as a condition of its Involvement. This would haveinvolved significant downsizing of the railway while improving quality of services, reducingdependence on Government budgetary support, providing managerial autonomy anddeveloping an aggressive commercial orientation. All parties concerned (including TCDD,MOT, SPO and the Treasury) have recently expressed willingness to support therestructuring approach suggested by the Bank during implementation but no action hasyet been taken.

6.08 Technical Assistance and Training: Senior foreign railway experts supported bymiddle-level professionals appointed in "in-line" positions in TCDD greatly assisted tostrengthen railway operations and locomotive maintenance (paras. 5.06 and 11.01).Training secured through 'twinning" arrangements with SOFRERAIL and DECONSULTalso yielded rich dividends and the benefts due to transfer of technology permeatedthrough the entire system and were reflected in the results (paras. 5.02, 6.01 and 7.01).The locomotive drivers' simulator was put into operation in early 1992 at the Eskisehirtraining center and the training program with North American Railroads (NAR) was alsocompleted on schedule.

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VII. Project Sustainability

7.01 Overall project results and project performance are mixed. In terms of physicalimplementation, the project progressed well, a major number of components werecompleted according to schedule, sometimes earlier, with only a few exceptions (e.g.signalling of Kayas-Cetinkaya line and new line works -Hanli/Bederli-Bostankaya) and theproject costs were well maintained (about 28% below appraisal estimates, paras. 5.02,5.03, 5.04, 5.05 and Table 5A, Pt. Ill). The principal focus of the project, namely:improvements of locomotive availability (para. 3.02) and the reorganization of the wholelocomotive maintenance and operation system progressed satisfactorily and showed verygood results. Availability of mainline diesel locos increased from 64% in 1988 to about81/82% in 1991/92. Technology transfer to achieve a radical change in traction systemand technology for maintenance and locomotive control was a formidable task which wassuccessfully pursued. As a consequence, TCDD during project implementation periodcovered all loco requirements and has had for the first time a surplus of more than 40locomotives, some of which TCDD leased to Iranian Railways. By introducing moderntechnology with particular reference to rehabilitation, the number of immobilized diesellocos was significantly reduced (from 110 in 1988 to 8 locomotives which were alsoultimately put into operation in 1992/93) - a remarkable feat.

7.02 TCDO, however, failed in two important areas, namely: (i) recapturing traffic, and(ii) financial performance. TCDD's volume of freight traffic declined from 14.8 m. tons in1984 to 13.1 m tons in 1989 in spite of its improvements in technical efficiency.Passenger traffic remained stagnant at about 6.5 billion passenger-km since 1985 (para.6.04 and Annexes 1 and 2, Pt. Ill). The SAR had projected that freight traffic wouldincrease by about 1 million originating tonne every year during project implementationperiod. A major share of increased freight traffic was expected to comprise bulkcommodities such as iron ore, hard coal and lignite. TCDD's performance fell far shortof expectations and TCDD failed to take advantage of the economic role for railways inTurkey for TCDD's trunk lines which should be ideally suited to low-cost, long distancebulk transport. However, in 1990 TDC, the Iron and Steel SEE transported about 400,000tonnes of iron ore by trucks in preference to rail. The continuing deterioration of TCDD'sfinancial performance was even more alarming. TCDD suffered a loss of over TL2.1trillion (about US$515 million or over US$1.4 nmillion per day) in 1991 and this loss wasfurther increased to more than TL3 trillion in 1992. The cost coverage of rail trafficdeclined (Annex 3A, Pt. Ill) from 51% in 1988 to a very low 34% in 1991 and falteredaround 30% in 1992 against a target of 65%.

7.03 There are multiple arguments behind the deteriorating financial and disappointingtraffic performance of the railways throughout the project implementation period (paras.6.06, 6.07, 7.04 and 8.03). However, if this trend is not soon reversed, the benefitsaccruing to the project (paras. 7.01) cannot be sustained. This poor financialperformance was not unique to TCDD. This was a wider problem covering most of theSOEs. It has been widely rerognized that higher public tariffs may, no doubt, reduce the

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sectors'/enterprises' deficit but would only address the symptoms rather than causes ofthe structural problems plaguing the sector. At the root of these problems is an outdatedview of the role of the state, which concentrates on a wide range of responsibilities. Theproblems were exacerbated by the monopoly position of the SOEs and the lack of a hardbudget constraint.

7.04 The SOEs/SEEs including TCDD have been hampered by government interventionin pricing and employment, and have carried the burden of the Government's wage policywhile lacking the instruments to adjust their tariffs or improve their efficiency. The legalframework is inadequate to promote the participation of the private sector in activitieswhere it may play a role or let the SOE's enterprises be run as commercial enterprises.It precludes them from being subject to the commercial code, especially from theprovisions on bankruptcy, provides inadequate managerial autonomy, and leads to a lackof accountability. The Bank correctly identified the needs of TCDD's restructuringprogram and all parties (including TCDD, MOT, SPO and the Treasury) involved in theproject expressed their willingness to support the program. But, regrettably, no actionhas yet been taken.

VIII. Bank Performance

8.01 Through the Second Railway Project, the Bank made a positive contribution to thereorganization of the whole system of Turkey's locomotive maintenance and operation(paras. 7.01 and 6.03) and through technical assistance and training provided muchneeded technology transfer (paras. 6.01 and 6.08). At the project formulation, design andimplementation stage, the Bank was involved in modal investment plans through atransport sector investment review, particularly, those of TCDD and DLH and helped tosharpen the investment profile and avoid over-investment (para 4.02). For rolling stock,TCDD agreed to use the Bank methodology for up-dated operational plans and to makesuccessive procurement tranches for rolling stock under a 'rolling plan' commensuratewith actual traffic growth to avoid possible over-investment (paras. 4.02 and 4.03) andconsiderable savings were realized.

8.02. The Bank made provision of an overall proJect coordinator (TCDD) for all projectrelated activities with appropriate counterpart from DLH, a project executing agency, aspecial condition of loan effectiveness. This arrangement went a long way to successfullymonitoring progress and complying with Bank requirements (para. 4.04). The Bank'sinsistence on the establishment of a Special Account (revolving fund) facilitated the timelyflow of funds to the beneficiaries and allowed financing of eligible project expenditureswith minimum administrative delay (para. 5.09).

8.03 However, in retrospect, the Bank should have been more forceful in persuadingthe Government to address the root causes of TCDD's inefficiency, which should havebeen evident at the time of project preparation. In addition, the Bank should have sought

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from TCDD management, an all-out effort to capture more bulk traffic ideally suited forrailways and to reduce unit costs. Instead, the Bank and the Borrower's main thrustappears to have relied more on the railway's ability to adjust the tarfff on a cost-plus basisto reduce budget deficts which, in turn, caused TCDD to be out-priced and more andmore vulnerable even to losing traffic (such as iron ore) that previously had remainedcaptive (para. 7.02). In addition, the Bank must be faulted for failing to take more decisiveaction when the financial covenants were not met and no satisfactory plan could beagreed on to improve TCDD's financial performance.

8.04 Furthermore, the Gulf crisis affected the Turkish transport situation significantly andleft the road transport system with a large surplus capacity due to substantial reductionof transit traffic through Turkey to Iraq. The elasticity and resilience of the privatelymanaged road transport operators in adapting to the changing situation resulted in asevere cut-throat competition and put the railways to a greater disadvantage as they werestill largely motivated by public service obligations with very little commercial autonomy.

IX. Borrower's Performance

9.01 On the whole, the Borrower's performance was satisfactory as regards technicalconsiderations and physical implementation of the project but unsatisfactory so far asfinancial performance was concerned. A substantial number of civil works proceededaccording to schedule and were completed on target dates or earlier (paras. 5.02, 5.03and 6.02). The project costs were well maintained and are about 28% below appraisalestimates (paras. 5.07 and 5.08). The quality of construction of cMl works included in theproject was satisfactory (para. 5.03). The twinning" arrangements of training of railwayprofessionals with appropriate European railways progressed smoothly (para. 5.06 andTable 4, Pt. 111). The technical approach to the improvement of locomotive technologyand effective utilization of expert services in "in-line' positons in TCDD proved verysatisfactory (para. 5.06). However, the implementation of the 'part exchange' methodsystem suffered a 'delay' due to Borrower's inability to provide local funds. Thelocomotive drivers' simulator with two control desks (for Alsthrom and EMD locomotives)was successfully put into operation by the Borrower at the Eskisehir Training Center. Thisimproved traffic safety (para. 6.03) and increased fuel efficiency. Compliance with theLoan covenants was generally satisfactory except for 'financial' covenants (para 5.10,Table 7, Pt. Ill) and for the 'boiler plate' clause regarding management practices (Section3.01 (b) of the Loan Agreement which in view of the poor overall performance cannot beconsidered to have been met.

X. Bank - Borrower Relationship

10.01 Good relations between the Bank and the Borrower contributed to clarification andresolution of many issues that arose during project implementation (para. 5.07). At the

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Bank's suggestion, the Borrower introduced corporate planning and prepared Action andOperational Plans on a continuing basis following a methodology agreed with the Bank(para. 4.03). The Bank's involvement with the Borrower on modal investment plansthrough a Transport Investment Review (para. 4.02) bore ample testimony to their jointcollaborative effort.

10.02 This Loan was scheduled to close on December 31, 1992. However, the Bankagreed to extend it up to December 31, 1993, on the understanding that TCDD, with thesupport of the Government, would make progress towards addressing the restructuringissue, as well as on the ongoing signalling and telecommunications prcject component.The Bank's flexible approach enabled the railway to instal about US$35 million worth ofexpensive electronic signalling equipment which was delivered but lying uninstalled, avoidUS$3 million in penalties and further improve some of the railway operational parameterswithin their control (para. 5.04). The Borrower fully appreciated the Bank's understandingand flexible approach. However, the project was in serious default of financial covenantsand the poor financial situation resulted in acute cash flow problems for the railways.Direct and indirect subsidies were costing the Government over US$2 million a day (para.7.02) in 1992. TCDD's resource crunch was already undermining the improvementsmade in productivity, locomotive efficiency and safety from the Second Railway Project.Under these circumstances, the Bank did not agree to extend the loan closing datebeyond December 31, 1993.

XI. Consulting Services

11.01 Technical assistance to strengthen railway operations, locomotive maintenance andmanagement information system was undertaken with the help of foreign expertssupported by middle-level specialists appointed to "in-line' positions within TCDD and thearrangement proved highly satisfactory (paras. 5.06 and 6.05). However, the study of acomputer-assisted specialized management information system (SMIS) which was to becarried out by TCDD's electronic data processing (EDP) center with close cooperation ofthe above railway experts could not be carried out and had to be cancelled because theclosing date was not extended (para. 6.02).

XII. Project Documentation and Data

12.01 The appraisal report and the Loan documents were well-documented and provideda useful framework for both the Bank and the Borrower for review of projectimplementation. Supervision reports, procurement documents and the Bank's responseto the procurement documents, contained in-depth on-going analysis of physical, financialand operational aspects of the railways (TCDD) in general, and on each projectcomponent as well. Submission of progress reports and audit reports also facilitatedpreparation of the PCR.

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PROJECT COMPLETION REPORT

PART II

Project Name : II Railway Project

Loan No. : 2739-TU

Project Cost : US$420 million

Establishment : Turkish State Railways (TCDD) and General Directoratefor Railways, Harbors and Airports Construction (DLH)

Evaluation of Bank's Performance and Lessons Learned

1. The mission members coming to TCDD between 1987, when theimplementation of the project began, and 1993 when it ended, were experts in thefields. The missions were technically strong and there was good staff continuitybetween missions. This has very positively contributed to the solution of problemssowing up from time to time during the implementation of 5 sub-projects of the II.Railway Project.

2. Thanks to confidence as a result of the rapport with the Bank officials, a yearextension was favored for the Kayas-Cetinkaya Signalization project which had notbeen completed in time. The important lesson learned is that project managementtype of organization is indispensable for the success of projects that embrace severaldifferent technical fields.

Evaluation of Borrower's Performance

3. TCDD's performance, in terms of physical implementation,was of success inmost of the project components. The total project was composed of the following 5components:

* Diesel locomotive Improvement: This very important projectcomponent was completed with success resulting in the improvement inthe operation and thus high availability of diesel mainline locomotives.The capacity at main workshops and depots has been increased as well.As a consequence, some surplus locomotives were even leased to Iranin 1991 and 1992.

* Track rehabilitation program: The track rehabilitation program (about740 km) was completed on time and track maintenance machines have

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ben put into operation, that have been yielding satisfactory resuits.

* Technical Assistance and Training: All training programs werecompleted on time and the locomotive driver's simulator with two controldesks has ben put into operation, that has been measuring driver skillsand thus improving traffic safety and increasing the efficiency of fuelusage.

* The other very important component of the project was the signallingcomponent that could not be completed on time, mainly due to therebidding process; Gulf war and the unexpected events in Yugoslavia.

Though TCDD had exerted every effort to speed up the project, there stillremains some work to be completed in 1994. The physical realization asof the end of April 1994 is 81%.

As for DLH components, procurement of super-structure materials,substructure works and the following technical acceptance on Hanli-Bostankaya line and the training program were completed. Track layingwork on the same line has been going on. After the cancellation of theBank loan, TCDD is in a financially difficult position that would jeopardizethe completion of the project.

* The Bank cancelled the part of the loan that would be used to financeSpecialized Management Information System (SMIS) due to the reasonthat TCDD lacked the commitment to efficiency improvement. Theestablishment of such system would be the first step to an integratedinformation system that would provide an essential amount of costreduction.

It is TCDD's understanding that recognition of the need for such systemis, in itself, one of the indicators for the commitment to efficiencyimprovement and TCDD has been looking for sufficient financial sourcesto back up the establishment of such systems.

As for the operational and financial targets set by the loan agreement,TCDD has been quite successful in attaining the operational targets butnot the financial covenants. TCDD has taken several such measures forcost reduction as reducing staff and increasing productivity which are themain areas under control, but it has not been able to cover itsoperational costs mainly due to the factors beyond its control.Operational expenses have increased more than the revenues in realterms. This is primarily, on the one hand, due to the increases in wages