Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 23338

IMPLEMENTATION COMPLETION REPORT(CPL-39030)

ON A

LOAN

IN THE AMOUNT OF US$38 MILLION

TO THE

REPUBLIC OF HUNGARY

FOR A

BUDAPEST URBAN TRANSPORT PROJECT

December 28, 2001

Infrastructure and Energy Services DepartmentEurope and Central Asia Region

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

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

(Exchange Rate Effective Sept 7, 2001)

Currency Unit = HUFHUF I = US$ 0.0035

US$ 1 = HUF 284.81

FISCAL YEARJanuary I to December 31

ABBREVIATIONS AND ACRONYMS

AVM Automatic Vehicle MonitoringBKV Budapest Transport CompanyBTA Budapest Transport AssociationEBRD European Bank for Reconstruction and DevelopmentEU European UnionERR Economic Rate of ReturnICB International Competitive BiddingMAV Hungarian State RailwaysMoB Municipality of BudapestMTWM Ministry of Transport and Water ManagementNBH National Bank of HungaryVOLANBUSZ Domestic and International Road Passenger Company

Vice President: Johannes Linn, ECAVPCountry Director: Roger Grawe, ECCO7

Sector Director: Hossein Razavi, ECSIETransport Sector Manager: Eva Molnar, ECSIE

Task Team Leader: Slobodan Mitric, ECSIE

FOR OFFICIAL USE ONLY

REPUBLIC OF HUNGARYBUDAPEST URBAN TRANSPORT PROJECT

CONTENTS

Page No.1. Project Data 1

2. Principal Performance Ratings 1

3. Assessment of Development Objective and Design, and of Quality at Entry 14. Achievement of Objective and Outputs 75. Major Factors Affecting Implementation and Outcome 16

6. Sustainability 187. Bank and Borrower Performnance 208. Lessons Learned 229. Partner Comments 2310. Additional Information 25Annex 1. Key Performance Indicators/Log Frame Matrix 26Annex 2. Project Costs and Financing 27Annex 3. Economic Costs and Benefits 29

Annex 4. Bank Inputs 34Annex 5. Ratings for Achievement of Objectives/Outputs of Components 36Annex 6. Ratings of Bank and Borrower Performance 37Annex 7. List of Supporting Documents 38Annex 8. Finances of Budapest Transport Company (BKV), 1995-2000 39

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

Project ID: P008494 Project NVame: BUDAPEST URBAN TRANSTeam Leader: Slobodan Mitric TL Unit: ECSIE

ICR Tvpe: Core ICR Report Date: Decemzber 28. 2001

1. Project Data

Name: BUDAPEST URBAN TRANS L/CITF Ntnber: CPL-39030Cotnny/Department: HUNGARY Region: Europe and Central

Asia RegionSector/subsector: TU - Urban Transport

KEY DATESOriginal Revised/Actual

PCD: 04/10/1992 Effective: 12/28/1995Appraisal: 10/03/1993 MTR:Approval: 06/15/1995 Closing: 06/30/2000 06/30/2001

Borrower/lImplemenzting Agency: MUNICIP. OF BUDAPEST/BUDAPEST TRANSPORT CO.Other Partners:

STAFF Current At AppraisalVice President: Johannes F. Linn Johannes F. LinnCountry AIanager: Suman Mehra Ulrich HewerSector Manager: Eva Molnar Hans ApitzTeam Leader at ICR: Slobodan Mitric Peter ParkerICR Primaiy Author: Slobodan Mitric; Krisztina Kiss

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: L

Institutional Development Impact: SU

Bank Perfbrmance: S

Borrower Performance: S

QAG (if available) ICRQutality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

Hungary in the late-1980s was the leading reformer among the socialist countries in Eastern/CentralEurope, moving towards a market economy and a multi-party, decentralized political system. It also hadbeen one of the most successful socialist countries and, before that, was one of the highly industrialized andotherwise advanced countries of Europe. This double heritage was quite evident in the urban transport

system of Budapest, Hungary's capital, with its unusually well-developed, multi-modal public transportnetwork and its planned ring/radial roads dating from the early days of the automobile era. The city's"Millennium" metro line was completed in 1894, the first on the European continent, and two additionallines were built after WWII. The system also included suburban railway lines and extensive street-basedbus, trolley-bus and tramway lines, the latter often on a partially exclusive right-of-way. The fourth metroline was on the drawing boards. The public trarAsport modes carried 70-80% of daily trips, as was normalin socialist cities. The services were ubiquitous, frequent, rapid and low-priced. Also standard was thearrangement whereby the revenue from passenger fares covered a small proportion (less than one-third) oftotal operating costs, the balance being provided from the public budget. The State also contributed throughcapital grants for infrastructure construction and fleet purchases. Budapest Transport Company (BKV), astate-owned enterprise, was a monopoly operator of all intra-urban services. Passengers commuting toBudapest from the wider metropolitan hinterland and from other cities used Hungarian Railways (MAV)and Volan Bus Company (Volanbusz). The automobile ownership was moderate, 213 per 1,000 populationat the beginning of the decade, but the use of autos was low. The roads were far less developed than thepublic transport system.

Changes in the economic and political system of the country, starting in the late 1980s, have haddownstream consequences on both the supply and demand sides of public transport services. In essence, theinherited financing arrangement for BKV became untenable. Decentralization introduced through theSelf-Government Act of 1990 gave to the Municipality of Budapest (MoB) the jurisdiction and ownershipof local infrastructure and services, including public transport. MoB received substantial real assets and therequisite fiscal and spending powers, including the right to borrow. The problem was in the timing of thetransfer of powers and responsibilities. The State reduced its financial contributions to the municipalsectors, but MoB was not in a position to increase its revenue in line with the reduction in State-providedrevenue. This meant that paying operating and capital subsidies for municipal services, including publictransport, could not be continued on the prior scale. This in turn led to under-spending for vehiclereplacement and maintenance, with accompanying cost inefficiencies and difficulties in keeping a high levelof service. More than that, the new policy orientation meant that service users were meant to shoulder ahigher proportion of the costs of service provision. Indeed, MoB acted quickly to reduce its contributions toBKV and to raise fares. The latter action was and still is a sensitive political matter. On the demand side,the early years of transition away from socialism saw a sharp contraction of the economy, leading toreduced real wages, and a rise in unemployment and poverty. These in turn led to a lowered ability ofhouseholds to pay for public transport and other essential services exactly at the time when the new policiesrequired that they start paying more. In the most dynamic sectors of the economy, however, especially thosewhere the private sector quickly made inroads, increased incomes and a more competitive way of doingbusiness led to an increase in the ownership and use of private vehicles. Street congestion increased and thedemand for public transport services fell, meaning that the costs of an over-size system, much of itoperating in a deteriorating street environment, were to be borne by a diminishing number of passengers.BKV was in danger of losing low-income passengers because of fare increases and better-to-do passengersbecause driving became more attractive than taking public transport. Losing passengers (at about 4-5%annually) is a critical development for any enterprise, but especially for one like BKV, whose technologicalstructure implies a high proportion of fixed operating costs.

Against this backdrop, the overall development objective of the Budapest Urban Transport Project(hereafter called the Project) was to support the urban transport reforms undertaken by the city governmentand BKV. The main features of these reforms, to be addressed by the Project, were to "improve thefinancial position and performance of BKV, through a combination of revenue increases, operationalimprovements and cost-reduction measures, ...; test the potential of private sector participation in thedelivery of transport services; and ... restrain automobile traffic in the inner city through a combination of

- 2 -

traffic and parking management measures" (cf. Staff Appraisal Report, para. 1.19) The specific objectivesof the Project were to: "(a) modernize and increase the commercial orientation of BKV; (b) establish aformnal contractual relationship between BKV and the City of Budapest; (c) decrease subsidies to BKV; (d)contribute to the improvement of air quality in Budapest; and (e) implement a parking control policy" (cf.Staff Appraisal Report, para. 2.4).

This list of objectives is further extended in the Loan and Project Agreements. Taking dated covenants tobe the markers of importance, the primary objectives of the Project were as follows: (la) improve thefinancial health of BKV, by ensuring that its revenues from all sources would cover its total operating costsin 1995 and subsequent years; (lb) gradually increase BKV's cost recovery from business revenue to 37%in 1995, 41% in 1996, 43% in 1997, 45% in 1998, 47% in 1999 and 50% in 2000; (lc) introduce fareincreases necessary to enable BKV to meet the cited cost recovery targets; (Id) reduce the fare evasion to7% of BKV's gross receipts in 1997 and thereafter; and (le) introduce contracting out of transport servicesto private operators by the end of 1996. The secondary objectives, stated as undated covenants were asfollows: (2a) introduce parking management, including parking charges; (2b) separate BKV's non-coreactivities inlto subsidiary companies, with an implicit longer-term objective of their divestiture; and (2c)establish a Budapest Transport Association, essentially a fare and service union including BKV, MAV andVolanbusz. This last requirement was needed to improve the lot of passengers who travel across the city'sboundary, and now pay anew each time they change the transport mode, as well as to reduce theredundancy in the supply of public-supported services.

3.2 Revised Objective:

The original objectives were not revised.

3.3 Original Componenits:

The Project included three specific investment components together with a technical assistance and trainingcomponent.

Investment Components:

(a) Bus Fleet Replacement (base cost of US$8.4 million). Replacement of all buses over twelve yearsold through the procurement of 50 standard-size buses at an estimated base cost of US$168,000 pervehicle. The new buses would be low-floor, easy-access vehicles specialized for the central cityoperation. They would trade-off higher capital costs for reduced maintenance and operating costs, havehigher reliability and lower pollutant emissions.

(b) Tram Track Renewal (base cost of US$44 million). Replacement of 47 km of track -- mostlybig-panel tracks on heavily traveled routes in most need of repair. Because of the seasonal nature of therenewal works, possible only during the school holidays, this component was scheduled in four annualtranches. The rehabilitation of the Nagykruit, the most heavily traveled section of the network(166,000 passengers per day in 1993) received the highest priority in the renewal program. Thiscomponent also included various types of equipment for the maintenance of tracks and overhead lines,and a computer-controlled maintenance supervision system.

(c) Automatic Vehicle Monitoring System (base cost of US$3.2 million). A further expansion of theautomatic vehicle monitoring system, the first stage of which was supported under the Bank's SecondTransport Project, consisting of on-board communication equipment for 220 buses, street-side presence

- 3 -

sensing, radio system modifications, computer hardware and software.

Technical Assistance and Trainin2 Component (base cost of US$1.6 million):

(a) Financial Management. A review by extemal consultants of BKV's financial, cost-accounting, anddata-processing systems, and technical assistance for their development;(b) Management Information System and Computerization. The development of an integratedManagement Information System (hardware and software) and appropriate staff training;(c) Marketing and Public Relations. Study tours in selected countries, seminars in Hungary, andconsultant services related to marketing, PR and the setting up the Budapest Transport Association;(d) Management and Organization. Training courses in Hungary for BKV's managers, as a follow upof the Organization and Management Study financed under the BKV component of the SecondTransport Project;(e) Technical Improvements. Training seminars in Hungary and study tours abroad focused on themaintenance of rolling stock and infrastructure, and traffic management techniques related to givingon-street priority to public transport vehicles;(f) Economic Analysis. Training for the staff of BKV and the Municipality of Budapest to performinvestment analysis for transport and other infrastructure projects.

3.4 Revised Conmponents:

There was only one formal revision of the Loan Agreement, in March 2000 whereby the description of thetechnical assistance and training component was expanded, at BKV's request, to include the preparation ofprojects aiming to increase the street priority to public transport vehicles, the preparation of a 5-yearinvestment plan for BKV, and technical assistance with subcontracting, concessioning and other forms ofthe private sector involvement. The revised text defines the component as follows: "Technical assistance,studies, data processing equipment and software, training seminars, conferences and study tours to improveBKV's procedures and staff knowledge and skills, and to prepare investment projects, with regard toorganization and operation of public transport, marketing, performance evaluation, private sectorinvolvement, equipment replacement, and investment evaluation."

The fnancial management and the management information system were dropped from the description, atBKV's request, since the company wished to commission (from its own funds) the installation of acustom-tailored, all-encompassing management information system. Eventually, after an intemationaltender, BKV commissioned SAP to develop and install this system.

Also, the track maintenance control computer system was dropped, with Bank agreement, as it was nolonger necessary. BKV in 1997 identified track maintenance as a non-core activity and moved it into asubsidiary company, in preparation for divestiture.

3.5 Quality at Entry:

The Project was approved before the formal quality-at-entry by the QAG was instituted in the Bank. Thefollowing assessment of the quality-at-entry is made at the completion stage, with some references tocomments made at the yellow-cover (post-appraisal) review.

Assessment of Project fit with other Bank activities:

The Project was among the first free-standing urban transport operations of the Bank in the Europe and

- 4 -

Central Asia Region. It was not, however, an isolated operation. First, it fitted very well within the strategicapproach the Bank took vis-a-vis the transition economies, specifically the restructuring of the publicsector, the reduction of subsidies, and the opening towards the private sector involvement. Second, theProject built on earlier, informal field work on urban transport in Budapest done by the Bank in 1988, anda subsequent, BKV-focused urban transport component included in the Second Transport Project inHungary (Ln. 3032-HU, approved in March 1989 and completed in June 1995). This US$12.5 millioncomponent, of which US$3 million was provided by the loan, included an automatic vehicle monitoring(AVM) system for 250 BKV's buses, expansion of the central traffic control system to interact with theAVM, a power control system, and an organization and management study to analyze BKV's performanceand plot its restructuring and development.

Third, the Project was designed as a complement to a loan by the European Bank for Reconstruction andDevelopment (EBRD), approved in 1993 with objectives simnilar to those cited above. The EBRD's loanwas based on a major pre-investment study for urban transport in Budapest, carried out by internationalconsultants, which was also to serve as the basis for the current Project. The loan was for US$38 millionand DEM58 million, to be spent on the rehabilitation of the oldest (Millennium) metro line in Budapest, thepurchase of 272 bus vehicles, the replacement of 96 bus engines with more fuel-efficient and less pollutingengines, and a purchase of 500 pay-and-display machines for a parking control system. The loan wasclosed in 1997, disbursing US$32.5 million and DEM36.1 million. In the meanwhile, MoB's financialsituation had improved substantially, so the EBRD loan was pre-paid fully in June 1998. MoB hascontinued successfully its cooperation with intemational financial institutions, arranging in 1998 a loan ofEURO 1 10 million, with the European Investment Bank, for infrastructure and environmental projects.About one half of this will be used to renew the tramway fleet.

The continuity and consistency of Bank involvement in the sector, and the parallel financing with theEBRD are positive features of the Project, and the efforts which went into its preparation by all partiesinvolved were impressive in both scope and depth.

Assessment of Project objectives:

The main objectives of the Project, those referring to the reduction of subsidies, BKV's cost recovery,financial balance and restructuring were well chosen relative to the key issues in the sector and were wellmatched with the investment components. The cost recovery objective, in particular, was very appropriatein preference to setting separate targets for fare increases, service reduction and staffing ratios. Thisallowed BKV and MoB some flexibility from year to year in mixing and matching these three options forincreasing the cost recovery. The Project was among the first which included a specific analysis of possibleimpacts that fare increase necessary to reach 50% cost recovery might have on low-income residents ofBudapest.

The Project Agreement obliges BKV to reach the specific levels of cost recovery, as if it had a full andunconstrained decision making power over fares. In fact, BKV's Board has had only the power ofproposing fare increases and service reduction to the Municipality. The authority to approve the proposalsis vested in the General Assembly of MoB. This is covered in the Loan Agreement, which stipulates thatMoB needed to "initiate at its General Assembly the tariff increases necessary to enable BKV to meet the(cost recovery) requirements." The risk that MoB would not approve fare increases was identified, andthought acceptable, given MoB's track record in raising the cost recovery from 19% in 1986 to 34% in1994. Also, the operating ratio covenant provided an additional insurance in this regard. Even if thetransfer of cost load to passengers were not to reach the agreed targets, this covenant would oblige MoB topay sufficient subsidies (and take other measures) to ensure that BKV's operations would break even. What

- 5 -

was missed in the risk assessment was the role of the Government (Ministry of Finance). The Governmentretained leverage over the fare setting process through its control over fare subsidies, i.e. the compensationpaid for revenue losses due to social fares available to students and retirees. Before approving any fareincreases, MoB asked the Ministry of Finance to approve the compensation arising out of the proposedfares. This amounted to the Ministry of Finance having a decision making power over an important aspectof the Loan, without being a party to the Loan Agreement (except as the Guarantor of the Loan).

The design of the project could have been improved by a somewhat narrower reform agenda. The size andweight of the reform agenda are considerable. Improving the efficiency, cost recovery and financial balanceof BKV, and introducing private operators, were formidable enough to achieve and would have sufficed forthis operation. Adding the establishment of a Budapest Transport Association, which involved the Ministryof Transport and two of its large companies, none of which was a Borrower in this Loan, proved to be tooambitious.

Another weak aspect of the project design is low specificity in the statements of objectives, followed bydiscontinuities in linking objectives with othur elements of the structure of the Project. For example, theobjective of increased commercialization of BKV is nonspecific, and subsumes the objectives of decreasingsubsidies and establishing a contractual relationship between MoB and BKV. This last is cited in theAppraisal report as a specific objective, but it is not included as a covenant in either the Loan or ProjectAgreement. A pollution reduction objective is included without an assessment of the current situation,targets to be reached, and the corresponding before-and-after measurements capable of disceming thecontribution of the new vehicles and traffic restraint measures. Setting up a Budapest TransportAssociation and implementing a parking management plan are included without any specification andmeasure of success, and are not related to any investment financed by the Project.

Assessment of Project components:

The two main investment components, new buses and tramway track replacement, were of thebread-and-butter type, i.e. essential (though not sufficient) to BKV's success in keeping a high level ofservice to its passengers. The economic evaluation of both components was done at the simplest levels, onthe basis of cost savings only. For the bus component this approach was sufficient, given high utilization ofbuses in Budapest and the flexibility in re-allocating vehicles should the demand call for it. For thetramway track component, however, looking only at the cost side risked improving some lightly-usedtramway corridors, as well as high-volume ones. A preferable approach would have been to have looked atthe entire tramway network, and to have selected those sections which had an attractive return from acombined demand-supply analysis. This, of course, may also have led to the inclusion of tramway vehiclereplacement in the Project.

Possible alternative designs:

Should the project have taken a more aggressive position as regards the participation of the private sectorin the provision of transport services? The answer is no, based on the following: (i) because BKV was stillproviding good-quality services, there was no grass-roots private supply in public transport, nor was therepressure from the intemational investors and operators to get in; (ii) BKV had been given reasonably goodmarks for both cost efficiency and the level of service by the Organization and Management Study carriedout by international consultants, so the prospective benefits of privatization were not substantial; (iii) BKVhad been set up as a network operator, i.e. to unify all urban public transport modes in Budapest so as toachieve an integrated service to passengers, the benefits of which would have been endangered by thesudden entry of the private sector; (iv) Hungary was engaged in an accelerated program of privatization of

- 6 -

public sector enterprises and in the productive sectors, whereas public transport was low on theGovernment's list of candidates (even Volanbusz was -and still is- in public ownership); and (v) MoB andBKV management, not to mention the unions, had little interest (or knowledge) of privatization. The Projectcorrectly opted to use a two-pronged approach to increasing the role of the private sector: first, byencouraging BKV to divest its non-core services; and, second, by a pilot approach to private delivery oftransport services, whereby private operators would compete for sub-contracts with BKV on specificroutes. These actions, included as covenants in the Loan Agreement, were complemented by technicalassistance and study tours for the policy makers and BKV management.

The project was criticized at the yellow-cover review stage for not including more aggressive trafficrestraint measures, specifically a congestion charging system for motor vehicles in central Budapest. Theteam expressed its agreement in principle that congestion charges would be both efficient and equitable, butcorrectly ruled this measure out as premature for Budapest. In addition, the Project's agenda was alreadyoverloaded, with the introduction of parking management and charging system piggy-backing on the earlierEBRD operation. The introduction of parking fees alone was difficult enough as regards the trafficrestraint. if and when a congestion charging system is to be included in a Bank project, it should forn theproject's entire policy agenda, and all other restraint measures should already have been implemented by theclient city. Investments included in such a project should focus on urban roads, not on public transport.Altogether, the team's argument was valid.

Overall, the Project had a satisfactory quality at entry, in that it was timely, linked to past and parallelactivities, and addressed the key sectoral issues. Its policy and investment spheres were well matched, andthe investment components were well prepared for implementation.

4. Achievement of Objective and Outputs

4.1 Ouitcome/achievement of objective:

The Project has succeeded in its overall objective to serve as a vehicle for the urban transport reformsundertaken by the City of Budapest and BKV. Due to efforts by BKV and MoB, both within andtranscending the framework of the Project, the quality of passenger services has been maintained orimproved, BKV is a more cost-efficient organization, and the relations between MoB and BKV are betterregulated than they were or would have been without the Project.

The achievement of the specific objectives of the Project is reviewed in the following paragraphs. Since thelist of these objectives in the Staff Appraisal Report is not matched exactly with the stipulations of theLoan and Project Agreements, the review is organized using a composite list of objectives.

A. The Modernization and Increase in the Commercial Orientation of BKV:

The progress towards reaching this objective has been satisfactory. BKV was transformed from aState-owned enterprise to a joint stock company on January 1, 1996, managed by a Board of Directors. Forthe time being, it is fully owned by MoB, which exercises its ownership rights in two ways: through itsmajority representation on BKV's Board of Directors, and through an operational contract, renegotiatedannually (more details in item (b) below). The change in BKV's legal status was preceded by an assetvaluation exercise, and the new company implemented a commercially oriented management informationsystem, compatible with European practices.

BKV's internal organization has been restructured and streamlined under the Project, following the advice

- 7 -

from intemational consultants. Depots have been combined and 2 were closed. Some profit-makingtransport activities were divested, e.g. the cable car, chair lift, tourist boat operations, and (river) shipping.Also sold were several non-core activities, e.g. printing, clothing supply, and telecommunications. Theinformation technology department was closed and these services are being out-sourced. Bus vehicle andtramway track and vehicle maintenance workshops, and escalator maintenance workshops were set up assubsidiaries, with a view to divestiture in the near future. Currently, in-house provision of these serviceshas been replaced by contracting out to the subsidiary companies. The staff was reduced by 38%, from21,000 in 1995 to 13,000 in 2001, partly through productivity gains and partly due to the divestitures andthe creation of subsidiaries.

As regards its core services, BKV has strengthened its marketing and public information activities, coupledwith service differentiation, e.g. through the introduction of "brand lines" on some key routes. It has alsomade adjustments to its route network, working with the district authorities and organizations to improvecustomer satisfaction. These service improvements, in addition to the provision of new vehicles andimproved track and roads helped reverse the loss of passengers (1.69 billion in 1990, 1.52 billion in 1995,1.39 billion in 1998 and 1.43 billion in 2000). The focus of the next stage of reforms will be on the faresystem, to introduce more differentiation by trip length, location and time of day, and also to bring theticketing system into the information age. This last item will contribute to the technical feasibility of theBudapest Transport Association, by providing an information base for revenue sharing between diversepublic transport operators. Another improvement in the core services has had to do with the implementationof a pilot program to sub-contract some transport services to private operators (see item C below).

The use of extemal consultants has become an integral part of BKV's operations, be it for advice on thegeneral organization and management issues or more specialized technical subjects. In 1999, BKVimplemented (with own funds) an all-encompassing corporate information system, following a competitivetender. The winning system is based on the SAP approach, giving BKV managers for the first time a rapidinsight into costs and outputs of different departments. Most recently, BKV commissioned (again from ownfunds) a bench-marking and efficiency study. The consultants rated BKV highly relative to its Europeancomparators, but also identified areas within the company where further cost-reduction opportunitiesexisted. The consultants will be staying on in the second phase to advise on the implementation of theadopted measures, with a success-based fee. The internal modernization process has become continuous.

B. The Contractual Relationship Between BKV and MoB:

This objective was substantially met. The first version of the Operational Agreement between BKV andMoB was signed in 1995, and renegotiated annually, usually in the last quarter. Its essence are the routeand schedule specifications for the network, the performance indicators, the remuneration of managers, andthe incentives based on output and service quality indicators. Separately, BKV submits a Business Plan,including an operational budget and investment program. The MoB's General Assembly approves theBusiness Plan and the amount of operational and capital grants to the company. The OperationalAgreement is, however, just a step in the right direction. First, there is no competition involved. Second, theAgreement is still far from being a real contract, as the agreed budgets include a substantial operating lossfor BKV and the Agreement is usually not finalized until 34 months into the fiscal year. Also, the incentivesystem refers only to output performance, but not to the cost-efficiency of the company. The main benefitof the Agreement is to have made explicit links between service requirements, costs, fares and subsidies,which are discussed on both technical and political levels.

-8 -

C. Sub-contracting Transport Services:

This objective was met. At loan negotiations, BKV accepted with reluctance the inclusion of a pilotprogram to test sub-contracting transport services in the Project. In a situation of falling demand andsurplus staff, its managers felt that contracting out for services might increase their costs. Also, theiraccounting system did not give them cost data in the format necessary to make comparisons on the margin.Nevertheless, in 1997 BKV commissioned a study to prepare the pilot tender and organize study tours inEuropean cities with experience in contracting out and/or concessioning public transport services. Thetender for 12 buses operating on 3 lines was published in December 1998 and led to an award of a 5-year,gross-cost contract to a private Hungarian company. The performance of the contractor has been quitesuccessful, but the contractual price had to be adjusted in the second year. This positive experience, therealization by BKV managers of its advantages in terms of savings on capital investment given their currentcash flow shortages, and the exposure of BKV managers to different approaches used in Europe led toanother tender. This was for 60 buses on 12 lines, issued following a study to determine the cost/benefitframework for bid evaluation. This tender encountered legal problems, since the Hungarian ProcurementLaw would not allow the exclusion of public-sector (subsidized) companies. The tender was re-issued andno public-sector companies submitted bids. A contract with a private operator was signed in May 2001 for35 buses to operate on 5 lines in South Buda. Tenders for the other 2 route groups were not successful,with weak competition leading to high prices. No matter how the problems with the Procurement law areresolved in the future, the sub-contracting has proven its value to BKV, permnitting the retirement of someolder vehicles and a transfer of other vehicle to lines with higher demand.

D. Reduction of Illegal Travel:

This objective was achieved in substance, though its nominal target was not reached. Targets for illegalpassengers as agreed at loan negotiations were based on a small sample survey, which had estimated asystem-wide average of 12% illegal travelers. It was agreed to reduce this during the Project by 4%, butalso to have a more thorough study of the phenomenon. In 1996, BKV commissioned a study of illegaltravel, including a series of 4 on-board surveys of passengers, staggered over a 2-year period. This was afirst such study in Eastem Europe. The study showed a wide variation in illegal travel between modalsub-networks, the highest on the bus and trolley-bus network, the lowest for the metro. After BKVintensified and expanded their system of roving inspectors and fines, sample surveys were repeated. Theseshowed that metro and suburban trains came close to the agreed target (achieving about 8-9%), but buses,trams and trolley-buses stayed at higher levels (16-17%). The system-wide average fell to 11% in 1997, butthen increased to 13% in the Spring of 1998. The Bank supervision team agreed with BKV managementthat further intensification of inspection on open-access modes was too expensive, and risked having anegative impact on the ambiance of the service. During supervision missions, the team focused on ensuringthe effective continuation of the inspect-and-fine operation on the entire system. This has been satisfactory.For example, in 1999, BKV's 450 inspectors found 75,000 violators; the fines in that year amounted toHUF 390 million, equivalent to 0.7% of the total revenue. It was agreed to use other methods also, e.g. newand hard-to-forge identification cards for students. The impact of these efforts on the fraud rate are beingmonitored periodically.

E. Increase in Cost Recovery (Reduction of Subsidies Paid to BKV):

The objective of increasing cost recovery was partially met. BKV reached the agreed target in 1997, fellbehind in the next two years, and finished within 2 percent points of the target in 2000. The year by yearresults were as follows (for caveats regarding these numbers, please see Annex 8):

-9-

1994 1995 1996 1997 1998 1999 2000Cost Recovery (%) 35 36 35 43 40 41 48Target (%) -- 37 41 43 45 47 50

The increase in the depreciation was a main factor in the failure to meet the target in 1996. Failure of MoBin 1998 and the Government in 1999 to approve the necessary fare increases caused the shortfall in 1998and 1999 respectively.

The intention was to reduce BKV's dependence on operating subsidies through a combination of cuts inservices, increased productivity; and fare increases. All three factors contributed to the above citedimprovement. Service levels (in terms of place-km supplied) were reduced by 16% in line with thereduction in passengers. This was a major achievement given the difficult politics involving the GeneralAssembly and MoB relations with district municipalities. Operating costs, materials and energy, weredifficult to reduce given BKV's fleet, which overall is still obsolete and aged, hence not economical tooperate. Still, BKV managed to reduce its total operating expenses (without deducting capitalizedexpenditures) in real terms by HUF 18.6 billion or 20% over the project period. While some of thesesavings were the result of inadequate maintenance, a substantial proportion was achieved through increasedproductivity. BKV managed to reduce fuel consumption through reductions in service, new engines and busvehicles, but increases in world fuel prices in the last years resulted in a real increase in fuel costs of 1%over the project period.

The history of fare increases, shown in Annex 8, Table 6, is of interest. There were 7 increases in the1995-2000 period, representing cumulatively a real increase of about 20% in the most popular fare(monthly ticket), and about 13% in the average fare paid. This was partially offset by a loss of traffic, sothat the real increase in business revenue was about 10% over this period. The increases in the early yearsof the project's life (1995-97) were considerable, exceeding the general inflation by a hefty margin. Forexample, a fare increase of 33% was approved in March 1995 and another one of 39% was approved inJanuary 1996, while the inflation rate was 18.8% in 1994 and 28.2% in 1995. Starting in 1998, theincreases were generally well under inflation. The responsibility for fare increases is shared between BKV,MoB and the Government (Ministry of Finance). BKV's board consistently made proposals to MoB forfare increases in line with inflation and their estimation of the underlying price elasticities of the variousmarket segments. MoB agreed with these proposals every year except in 1998, when local elections tookplace. MoB recommendations were then forwarded to Ministry of Finance for clearance. In the recentyears, the Ministry refused to go along with the MoB/BKV's proposals, in an effort to control inflation.During the last years of the Project, the Ministry-imposed fare increase ceiling was 6%, with inflationrunning between 8.5 and 10%. This topic will be addressed in more detail in Section 5.2.

Paradoxically, the nominal objective of reducing subsidies to BKV has been achieved, but not exactly asenvisaged in the framework of this Project, through higher fare revenue and lower operating costs. BothMoB and the Govemment cut drastically the subsidies provided to BKV, without regard for its financialhealth (Annex 8, Tables 2 and 3; and Fig. 1). In 1994, subsidies for the Government and MoB represented62% of BKV's operational expenditures. By 2000, the Government and MoB had substantially reduced thelevel of subsidies in real terms to 31% and 43% respectively so that subsidies represented 42% of operatingexpenditures in that year. The Government's "subsidy" is, in reality, compensation to BKV for revenuelosses due to deep fare discounts provided to students and pensioners in line with the Govenmment'spolicies. The Government pays no compensation for revenue losses due to its refusal to allow general fareincreases at the level requested by BKV and MoB. Nor are all "social discounts" fully compensated, e.g.free travel for all persons above the age of 65 years, "granted" by the National Assembly in 1998, just

- 1 0 -

before the elections.

F. Financial Status of BKV:

Achieving good financial health of BKV was not included among the development objectives cited in theStaff Appraisal report, but it was provided for as an operating ratio covenant and a debt service covenantin the Loan Agreement. During implementation, the Bank team treated the operating ratio as the majorobjective. Under the Loan Agreement, MoB agreed to provide additional subsidies, if necessary, to meet theratio. The target was to maintain an operating ratio of 100; i.e. that BKV's revenue from all sources(including subsidies) should be at least equal to total operating costs. The first row of the following tableshows that the objective was not achieved (caveats cited in Annex 8 apply to these numbers also):

1995 1996 1997 1998 1999 2000Operating ratio 107 117 115 118 117 110Adjustedoper.ratio 91 101 111 113 106 102Target 100 100 100 100 100 100

The combined effects of fare revenue increases, cost reductions and subsidies were not sufficient for BKVto break even. As a partial compensation for reducing the operational subsidy, MoB increased its capitalsubsidies to BKV, earmarked for the financing of fixed assets. The funds being fungible, the differencebetween MoB making operating or capital subsidy lies in the fact that BKV's Board has more control overspending its operating budget, whereas the General Assembly of the Municipality has more control overBKV's capital budget. These capital contributions did improve BKV's financial position, but did not helpwith the operating ratio, covenanted under the Loan. In recognition of the fact that the operating ratio didnot tell the full story, the Bank, for the purpose of calculating the "contractual" operating ratio, accepted totreat these capital contributions as an operating subsidy. As shown in the second row of the above table theadjusted operating ratio came close to 100.

Going beyond the simple financial covenants agreed under the Loan, a full picture of BKV's accountsshows that its overall financial situation is not good (see Annex 8, Table 5, keeping in mind that theaccounts of BKV actually understate losses because they do not reflect the deferred maintenance; also, thedepreciation write-offs are too low, since revaluation to adjust for inflation is not done). Due to anall-too-rapid reduction in subsidies, not matched by fare revenue increases and cost savings, the company'sliquidity problems have deteriorated in the 1995-2000 period, with the current ratio falling from 1.4 in1994 to a very unsatisfactory 0.3 in 2000. Net working capital at the end of 2000 was negative HUF 19.2billion, caused by financing fixed assets using suppliers' credits. This of course reduced the management'sability to maintain its fleet and facilities. The company has been running its assets down. On the other handthe long-term debt equity ratio was low for a public transport company at 10:90. BKV's financial positionwould be considerably improved if they could use more long-term loans in lieu of credit from suppliers.

The fact that MoB reduced its subsidies to BKV has not been due to the former's persistent financialdifficulties (Annex 8, Table 7). When MoB took over responsibility for local infrastructure and publicutility services in the early 1990s, it was dependent on the Government for about 70% of its revenue andhad limited authority to generate its own revenue. During the project implementation period, MoB madesubstantial progress in improving its financial position, particularly in developing its own sources ofrevenue. Overall revenue increased by 131% from 1995 to 2000 to HUF 276 billion, substantially higherthan the inflation level. In 1995, about 51% of revenue was provided by the Government, 39% from MoB'sown resources and 10% from loans. By 2000 the Government contribution had fallen to 28%, while MoB'sown resources had increased to 70% and loan funds decreased to 2%. MoB's success in developing its own

-11 -

revenue ensured that its debt service during the project period was insignificant.

In sum, MoB has had the resources to pay sufficient subsidies to BKV to enable it to break even, in spite ofthe fact that the Government was reducing the level of its fund transfers to local governments. That theGeneral Assembly has not provided BKV with more financial support is at least in part due to their feelingthat the Government should meet a greater share of the subsidy burden for general (i.e. non-preferential)fares, or approve higher fare increases. The underlying unresolved issues include the jurisdiction andfinancial responsibility over local services, local government finance in general, and transition-relatedproblems of timing price liberalization relative to wage movements. The schedule on which these matterswill be resolved will be dictated in great part by the economic growth of Budapest and Hungary. Theprocess of accession to the European Union also should do much to sort these out, and a new PassengerTransport Law, compatible with EU policies, is being developed.

G. The Budapest Transport Association (BTA):

This objective was not reached. Two technical studies were carried out to define the association, outline thechanges to the fare system, the route network and services of the three major operators involved (BKV,owned by MoB; MAV and Volanbusz, owned by the Government), and estimate the investment costs andthe impact on the costs and revenue of the three operators. Everyone involved (MoB, Ministry ofTransport, and the operators) agreed on the desirability of the Association, from the passengers' point ofview and also to reduce costs and increase the patronage of the public transport system. As a first steptowards making this agreement operational, an Association office was set up and provided with a skeletonstaff. That the matters did not proceed further is due mainly to the fact that there has been no agreement oncompensating the three operators for the revenue losses. This is made more difficult by the likelihood thatthe distribution of extra costs and extra benefits due to the Association-related changes in fares and serviceswill differ among the operators. In 1999, a proposal was floated to start with a reduced-scope Association,introducing season tickets valid for all three operators within Budapest, and a discount for passengers whocame into or left Budapest using MAV and/or Volanbusz, but used BKV services for the city portion oftheir journey. The three operators made all the preparations for making the common season ticketsavailable to passengers, have designed harmonized timetables for all major itineraries, and stand ready toimplement this system on a short notice. Again, the question of who would pay for the expected extracompensation of HUF 540 million (USS1.9 million) per annum became a stumbling block, whose removalmay have to wait until the above cited Passenger Transport Law is passed.

H. Parking/Traffic Management Program for Central Budapest:

The parking program has met the objectives and has been a resounding success. It was initiated under theEBRD-financed parallel project, and has been expanded continuously since 1996. Currently, the ParkingScheme covers the entire central Pest (within the Grand Boulevard), with about 30,000 parking spaces, notincluding those operated independently by some individual district municipalities. The Parking Scheme isexpanding across the Danube into Buda districts. The system uses a pay-and-display technique, and isunder private management. Parking fees are highest in the inner districts and diminish towards the fringes.MoB has also opened 5 guarded P+R (Park and Ride) locations, and additional 2-3 will be opened nextyear. Underground garages are being built in the city, with expected capacity of about 2000 car spaces tobecome available in 2002. The main feature of MoB's traffic management program are highly successfulpedestrians-only zones, of which 3 (south wing of Vici Street, Raday and Haj6s Streets) were opened in thelast years, and more are planned.

- 12 -

It is of note that the purchase and installation of the hardware needed for the Parking Scheme was financedfrom the EBRD loan. The Bank-funded Project did not contribute any funds to this operation, nor did theLoan Agreement include any specific time-bound targets regarding the number of parking spaces, fees, ormethod of operation. These were all decided by MoB.

I. Improvement in Air Quality in Budapest:

The objective of increasing air quality in Budapest was included in the Project on the strength ofexpectations that the new buses to be purchased would have much lower emissions than the fleet thenoperated by BKV, which used a lower emissions standard to start with and was also overage. In addition,the Project included traffic restraint through parking control, which was also likely to reduce pollution inthe central area.

All of the above expectations were met. The new buses, purchased under the Project, conform to the EUROII emission standard, as do the other new vehicles and replacement engines purchased under the EBRD loanand from BKV funds. Also, the parking management program was implemented and is considered to havecontributed to reduced traffic congestion and pollution. As noted in the preceding section of this report, notargets and no monitoring of air pollution were included in the Project, therefore no quantitative basisspecific to this project is available. This said, however, measurements taken by Budapest Clean AirProtection Company, on locations with heavy bus traffic, representing two winter and two summer months,in 1992 and again in 2000, showed that air pollution in Budapest had decreased across the board for alltypes of emissions tested. This improvement is due to a combination of actions, including the closure ofheavy industries in and around Budapest, energy efficiency measures, the renewal of the automobile andtruck fleet, new road/bridge construction, as well as improvements achieved under this Project.

4.2 Ouitptuts by coinponeuits:

All investment components were implemented successfully and have already proven their value in practicein terms of the service to passengers, company operations, and local politics.

Investment Components:

(a) Bus Fleet Replacement (US$11.67 million from the Loan and US$6.91 million from BKVFunds): Instead of the planned 50 standard-size buses, 66 vehicles were funded from the Loan, and anadditional 5 were obtained by BKV from the supplier (Ikarus) in lieu of delay penalties. With Bankagreement, the bus tender included an option for BKV to purchase another 50 vehicles, under the samespecification but from own funds. BKV used this option to purchase 44 buses, bringing the total to115. The unit price was US$180,600, exclusive of VAT, which compares well to $178,000 base costplus price contingency estimated at appraisal. The buses are Ikarus 412A type, European-style,low-floor city buses, convenient for boarding and alighting of the young, the aged and the handicapped.They have met with approval by the passengers, city officials and BKV staff alike.

(b) Tram Track Renewal (US$22.67 million from the Loan and US$20.84 million from BKVFunds): 34.5 line km of tramway track was renewed under the project, in 5 annual tranches. This isless than the 47 km originally planned. Various track and overhead line maintenance machines werepurchased for about US$2.0 million. The maintenance control computer system, originally included inthis component, was cancelled from the Project as no longer necessary. The reason for this was thatBKV in 1997 identified track maintenance activity as a non-core one. It was then transformed into asubsidiary company, and will be privatized.

- 13 -

Actual construction costs for the renewal works were higher than estimated at appraisal, and BKV'sinvestment budget did not permit higher investments. Priority was given to strategically importanttramway corridors, such as Nagykorut (Grand Boulevard). This component faced considerablechallenges, typical of construction on heavy-traffic arteries in the inner city, where traffic cannot behalted entirely during the works. Moreover, the work season was compressed to fit the school summervacation. Elaborate time scheduling was needed, and very tight supervision. The Bank helped byagreeing to separate procurement of building materials, which was done before the beginning of theconstruction season. All contracts but one were completed on time and on budget, with one contractdivided (with Bank agreement) into 2 work seasons. BKV engineers estimate that the use ofcompetitive bidding for this component, following Bank guidelines, produced savings of about 25%relative to what would have been achieved using the Public Procurement Law.

What made this component stand out even more was that MoB undertook from its own funds a generalrehabilitation of the streets where tramway tracks were being replaced, including the application oftraffic management methods. This meant a wall-to-wall reconstruction of the streets in question,including traffic markings, signs, channelization at intersections, and other design changes toaccommodate public transport vehicles and pedestrians. All this contributed to making this componentthe most visible and successful in the eyes of the public.

(c) Automatic Vehicle Monitoring (AVM) System (US$2.36 million from the Loan and US$1.3million from BKV Funds): This component consisted of Phase II of a project started under of theBank's Second Transport Project (Loan No. HU-3032). One hundred position code transmitters werepurchased and installed and 298 buses were equipped with on-board communication devices (78 morethan originally planned), in addition to dispatcher workstations and radio system modifications. Oncecompleted, the AVM system included about 451) standard-size and articulated buses, amounting to38% of the bus fleet in peak service (49% of place-km). The resulting benefits have been in terms ofreducing travel time variation, and reducing the staff needed for control at terminals. Eighteen terminalswere partially or fully closed, and 25 jobs were eliminated.

Technical Assistance - Institutional Development Component (US$1.0 million from the Loan andUS$0.05 million from BKV Funds):

(a) Studies: The following 7 studies were commissioned under the Project, 5 of which were fundedfrom the Loan (for a total of US$ 649,000), one (#6) was funded by BKV and one was funded byMoB (#7): (1) Survey of illegal travel (TRANSMAN); (2) Subcontracting with private operators(WSP Intemational, Holland); (3) Preparation of BKV Priority Investment Program for 2002-2007Period (CIE Consult, Ireland and DUNA-BIT, Hungary); (4) Feasibility Study for Provision of Priorityfor Public Transport Vehicles - I (DUJNA-BIT, Hungary); (5) Feasibility Study for Provision ofPriority for Public Transport Vehicles - II (Bentax, Hungary); (6) Exploration of Cost reductionOpportunities in BKV (Roland & Berger Consultants, Germany); and (7) Budapest Metro Line #4Feasibility Study (intemational joint venture led by Symonds Travers Morgan, UK).

(b) Technical Visits: Eight technical visits to Austria, Denmark, France, Germany, Ireland, Spain,Sweden and UK were organized under 3 themes: (1) tendering for sub-contracting and concessions in

public transport services; (2) public transport management; and (3) traffic management for theprovision of on-street priority to public transport vehicles. A total of 72 BKV staff and managersparticipated in these visits. BKV organized 4 of these, the others being included under WSP and CIEstudy contracts. In addition to these, 4 visits to Austria and Germany were organized in connection

- 14 -

with quality control of rails and rubber elements used in the tramway track reconstruction component.

(c) Training: Two in-country training courses were funded under the Project, both for MoB and BKVmid- and high-level managers: (I) Financial Management (2 sessions, with 15 participants each), bySzamalk (Hungary); and (2) Economic analysis of investment projects, (2 sessions, 40 and 30participants) by Szamalk.

4.3 Net Present Valuie/Economic rate of return:

BKV staff carried out an economic evaluation at the completion of the Project, following the approach usedat appraisal, but with up-to-date quantities, purchase prices, and operating costs. This is a stripped-downapproach to evaluation in that it only looks at supply-side costs, i.e. net-of-tax costs faced by BKV, andthen only those costs for which BKV keeps segregated accounts. It does not include impacts on demand(travel time, comfort, safety, general attractiveness, all resulting in higher patronage), nor such things as airpollution and noise. The analysis is therefore much closer to a financial evaluation than to an economicevaluation. The real economic retums from these investments certainly are much higher than those citedbelow, especially for the tramway track component. For each of the three main investment components,Annex 3 provides tables showing the numerical inputs, main assumptions, and results for each component.The actual spreadsheets are available in the project file, but the tables would suffice for replication.

For the bus component, the with-project scenario (Annex 3, Table lb) includes all 115 buses purchasedunder the Project, whether or not the financing came from the Loan. New buses, Ikarus 400 series, havelonger expected lives, do not require an overhaul after 8 years of use, consume less fuel, and aresignificantly less prone to breakdowns (hence requiring fewer spares) than the buses they replaced, Ikarus200 series. The without-project scenario (Annex 3, Table la) assumes that BKV continued to use Ikarus200 buses over the life of the Project. The evaluation is "driven" by the operating cost indices for the twobus types drawn from the long experience of BKV with Ikarus 200 model, and a short experience with thenew model. Beyond the operating costs, the main difference between the two scenarios is in the timing ofbus replacement. The result of the evaluation is an internal rate-of-return of 17%, the same as estimated atappraisal (Annex 3, Table lc).

For the tramway track component, even the benefits on the cost side could not be fully estimated. BKV'smaintenance costing system is kept in large aggregates, so the relationships between the type of track,traffic (axles per week) and vehicle/track costs could not be quantified. The benefits are therefore based ona comparison of total track maintenance costs with- and without-project, for a given standard of trackcondition. The result is an internal rate-of-return of 11.3% for the whole component, significantly lowerthan the 23% estimated at appraisal (Annex 3, Table 2). This is mainly due to actual construction andmaterials costs being higher than forecast. Had the data allowed it, an obvious extension of this evaluationwould have been to estimate the savings in tramway vehicle operating costs and the various impacts ofremoving vehicle speed restrictions on reconstructed sections. Had this been done, the rate-of return wouldhave increased significantly, especially on high-volume sections.

For the automatic vehicle monitoring component, the analysis included only benefits from reaching agiven level of service on the bus route network with fewer vehicles than without the control system, plussavings in manpower and operating costs from closing control terminals. The result of the analysis is aninternal rate-of-return of 17% (Annex , Table 3). This is about the same as the rate of 19% estimated atappraisal.

These three components account for US$63.9 million, 95% of the total Project cost of US$ 67.1 million(with all 115 buses included). The weighted rate-of-return for the Project is 13.3%.

- 15 -

4.4 Financial rate of retitrn:

No financial evaluation of project investments were done at appraisal.

4.5 Institutional development impact:

The Project has had a significant institutional development impact, especially for BKV but also on theMoB. First, both institutions acquired basic project management skills in procurement, financial planning,progress monitoring, and auditing. These skills are often taken for granted, but in fact it takes years and asustained effort to move from previously followed practices to the new ones. The procurement of tramwaytrack reconstruction works, especially, was a test of both BKV's Project management group but also of thenascent local market of private civil works contractors. This test was passed by both with flying colors.Second, through continuous attention paid during supervision to the fare policy, illegal travel, costrecovery, inflation, subsidies, contractual relations between BKV and MoB, quarterly budget reports andaudited financial accounts, these subjects became routine elements of the agenda inside BKV and in itsrelations with MoB and the Government. Third, the technical assistance financed under the Project wassuccessful in all three of its axes. The first of these was the use of extemal consultants to explore the statusquo, and prepare policy reforms, investment projects and special innovative actions such as contracting outor setting up the Budapest Transport Association. As evident in the comments made in the Borrower'sCompletion report, the use of consultants is now a part of the normal functioning of BKV. The second axisof the technical assistance program was to train staff and managers in some basic skills, not utilized beforebut now accepted as essential, e.g. cost benefit analysis or financial management. The third axis was toexpose BKV and MoB managers to the newest experience in public transport operations, policy andplanning. The trips to some Westem European cities were very successful in changing the mind-set of BKVmanagers, especially as concems contracting out and concessioning with a quality-of-service objective.

5. Major Factors Affecting Implementation and Outcome

5. l Factors ouitside the control of government or implementing agency:

BKV operating costs were affected by changes in the world energy prices and the way the HungarianGovernment regulated these prices domestically. The unit price of diesel fuel was liberalized, increasingfrom HUF59.72 per liter in 1995 to HUF155.99 per liter in 2000. This represents a 29.7% increase in realterms over the period. The prices for "traction" electricity were controlled, increasing 14.7% in real termsover the same period. This has meant that despite the efforts undertaken by BKV to reduce their servicesand control their costs, fuel costs increased from 14% to 16% of total operating costs. The increase inenergy prices also affected BKV's suppliers and contractors, especially contractors working on thetramway track rehabilitation where at appraisal it had been estimated that energy prices would onlyincrease at 2% per annum (in real terms).

In the course of bus procurement, the response --or rather a lack of response-- of the international busmanufacturers delayed the completion of this tender by about one year. In the past, all BKV buses had beenbought through direct contracting from the domestic supplier, Ikarus. The bus tender under this Project wasthe first where an intemational competitive bidding procedure was followed. BKV's Technical Committeemade considerable efforts to ensure that the specifications used did not favor any supplier, especially thedomestic supplier. Moreover, BKV management were eager for the company to make a transition from theEastem European bus technology to a technically superior Westem European technology, as regards bothoperating cost and passenger comfort. In the event, Ikarus was the only bidder, but its bid was not

- 16 -

technically responsive and was therefore rejected. At Bank's advice, BKV canvassed the internationalsuppliers as to the reasons for not participating. The finding was that the foreign suppliers had assessedthat Ikarus had too strong a competitive advantage. In addition, BKV acknowledged that the initialspecification may have been too rigid and unrealistic, e.g. in the duration of some guarantees, and placedtoo much risk onto the supplier. For the second round of bidding, the specifications were simplified andrelaxed. This time there were two international bidders in addition to Ikarus, which is still poor compared toabout 12 in a similar, though much larger tender under a Bank project in Russia. Ikarus had a technicallyresponsive bid and a favorable price, and won in the second round. Buses were delivered with some delays,but their technical quality and subsequent performance have met the expectations of BKV.

5.2 Factors generally subject to government contr-ol:

On the domestic front, the major factors affecting implementation of the financial reforms agreed under theProject have been the actions by the Government as regards the finance of local governments, and thepolicies vis-a-vis social subsidies and price regulation of basic services. The general trust of all Hungariangovernments during the Project period has been to reduce the budgetary deficit and break inflation, startingwith the "Bokros" austerity package introduced in 1994-95. In the context relevant to the Project, theausterity regime meant a reduction of funds provided to the local governments and a reduction of subsidieshitherto provided to BKV. As noted in Section 4, the Government discontinued its operating subsidy toBKV (which amounted to about 7% of the company's operating costs) and the only funds it still provides toBKV is not a subsidy but compensation for revenue losses due to Government-imposed fare discounts forstudents and retired people. Otherwise, legally, the Government has no other role in public services of localscope. Still, the public transport fare being a part of the consumer basket for calculating the ConsumerPrice Index, the Government acted to prevent the Municipality of Budapest in implementing fare increases,as a part of its (Government's) inflation control policy. This was done without providing any compensationfor revenue losses due to keeping general fares low. In the same vein, the National Assembly in 1998approved free travel for passengers of age 65 and above, without consulting MoB and arranging for a fullcompensation to BKV. Without addressing here the complicated subject of the counter-factual estimationof the revenue lost to BKV, the inconsistency of the Govemment acting without a fair compensation isevident, and it has caused lasting damages to the company. In the course of supervision, the Bank team hadseveral exchanges of views with the Ministry of Finance (in addition to continuous exchanges with MoB)regarding the matter of prices, subsidies and the artificial reduction of inflation through the creation ofdeficits within BKV. No corrective actions were taken by the Government

5.3 Factors generally suibject to implementing agency control:

On the relation between MoB and BKV, Section 4 already addressed the policy of MoB to reduce in realterms its operating subsidies to the company, but to increase its capital grants. Initially, the capital grantswere approved for specific investment projects. Towards the end of the Project, MoB's approval did notinclude ear-marking, letting BKV's Board of Directors make investment decisions independently. Still,letting BKV face increasing financial losses has had negative impacts on the latter's maintenance andreplacement programs.

A major positive ingredient in Project implementation has been the continuity in the top management ofboth MoB and BKV, throughout the Project's life. More than that, the leadership of the ProjectImplementation Units in MoB and BKV also remained the same. This meant an accumulation of bothexperience and ownership of the Project, not least of which was experience of working with the Bank. Thecommunication channels were established at several levels, which helped both in routine aspects ofimplementation and in resolving more difficult problems.

- 17-

5.4 Costs andl financing:

The only major factor affecting Project costs and financing, other than what was mentioned above, hasbeen that the tramway track reconstruction tenders were more expensive than forecast at appraisal.Generally, this has been due to these forecasts being made during the early days of the contracting market,with much to learn as regards the risks and competition. The Bank contributed to this by treating thesemodest-size works as if they were much larger and of interest to large intemational contractors, i.e.insisting on all-inclusive, 2-stage tenders, starting with pre-qualification. After the experience with the firstyear's work program, BKV proposed and the Bank agreed to drop the pre-qualification stage, and -giventhat the only bidders were from the emerging Hungarian contractors-- to relax some of the financial andexperience-related qualifications criteria. It was also agreed to have a separate tender for the main trackmaterials, thus removing a major price risk from the contractors. This gave excellent results in subsequentyears.

6. Sustainability

6.1 Rationale for sustainability rating:

The overall sustainability rating of "likely" applies to what the Project was most successful in, which is tohave: (i) implemented successful track reconstruction and bus replacement investments; (ii) restructuredBKV into a smaller, better organized company, cost- and performance conscious, and open toexperimentation; (iii) established the first stage of a contractual relation between BKV and MoB, and agenuine contractual relation between BKV and private transport operators; (iv) moved some of the costload of public transport to its passengers; and (v) framed the urban public transport policy agenda inBudapest in terms of tightly related factors of service levels, costs and prices.

Regarding the sustainability of the first of these, it can be said with confidence that the new tracks, vehiclesand equipment were received by an organization with an excellent maintenance culture, which is there tostay. The benefits of these investments, all other things equal, will continue well into the future. Regardingthe BKV's internal reforms, these are irreversible and are likely to be followed by further developmentsarea. As the Project was finishing, BKV, acting independently of Project conditionality, had commissionedmanagement consultants to help implement their own recommendations produced in the prior efficiencystudy. The consultants' fee is based on how successful they are in reducing BKV operating costs and/orincreasing productivity. This bodes well for the sustainability of a new way of doing things. The sameholds for the successful sub-contracting of services, however small in scale, which has been of essence forcontributing to an open mental attitude of managers and city politicians towards the many options for theevolution of public transport regulation..

The level of cost recovery from fare revenue achieved so far is very good relative to the initial position. Thefare increases and service cuts have been accepted both by the local politicians and by the passengers. Nowthat the patronage of BKV has stopped falling and may be increasing, the gains on this front will not onlybe difficult to reverse, but the chances of increasing them have improved. Ultimately, the prospect ofpassengers paying more of the costs will depend on the depth of gains in household revenue, a cleardemonstration that BKV is a cost-efficient enterprise, the general quality of BKV services, and adopting auseful tactic to couple fare increases with tangible "jumps" in the quality.

As for the policy agenda, whatever the exact outcome of policy discussions in any one year, MoB and BKVleaders have intemalized the major key principles and issues involved in urban transport regulation. Theoutcomes will of course depend on the politics and economics of the moment, but an informed discourse

- 18 -

will be sustained.

Is BKV's current share of the urban travel market sustainable, given the seemingly inexorable march ofprivate motorization? Evidently, BKV has had to run hard just to stay in one place. Even more hardrunning will be necessary. BKV will have to overhaul its fare structure, introduce an up-to-date ticketingtechnology, and raise its inspection level by one notch. The recently concluded study of investments for thenext 5-year period identified considerable and urgent needs for infrastructure rehabilitation, such as majorrepairs to metro tunnels and tracks. Together with MoB, BKV will have to take a hard look at its tramwaysystem, which is its major money-loser, prune its weak branches and upgrade its surviving trunk lines intoa real pre-metro system, with high commercial speed and high comfort. Conversely, trunk bus lines shouldbe given more street priority than they now have, certainly including the use of buses on some of the linesthat now feature tramways. The pruning of the tramway network and bus/tramway substitution is anapproach not yet accepted fully by BKV technicians or MoB policy makers, in part because they have nothad the opportunity to see what some non-European cities have achieved with bus vehicles operating on anexclusive right-of-way. Also, it is always easier to add and modemize than to take things away. Theprospects for favoring buses more do not look very good just now. BKV has just purchased a large quantityof second-hand tramway vehicles from Hanover, because (as vehicles) they were a good deal. Thesystem-wide impacts will not be favorable. The purchase will put pressure on maintaining weak tramwaylines, rather than converting them to bus-based ones.

Alongside these technical actions, the sustainability of BKV's market share depends crucially on theresolution of its financial status, which would permit increased current spending for maintenance and arational program of infrastructure repairs and vehicle replacement. The main channel for resolving thefinance problem lies in the adoption of a real contractual relationship between BKV, MoB and theGovemment. The progress on this front is not too likely under the present circumstances. It is difficult foran owned company, even if it operates under commercial law, to sue its owner for a breach of contract.This points to a greater use of the private sector for operations and a greater use of the public sector to setstandards and monitor results, going well beyond what has been done under this Project. A complicatedfactor in this is that BKV is owned by MoB, and the Government owns MAV and Volanbusz. Introducingmajor reforms for one company at a time is not feasible. As already noted in this report, a PassengerTransport Law is under preparation in Hungary, in line with EU policies, and may be the right instrumentfor helping to resolve the pricing, subsidy and financing tangle in the public transport services in Budapest.

Finally, the sustainability of the public transport in Budapest as a competitor to other travel modes dependson what MoB and the Government will do to regulate the use of city streets by motor vehicles. MoB hasmade impressive progress using the parking management as a means of restraint. This will buy the city afew years' time, while various levels of the government and the civil society at large absorb the lessons ofexperience in other European cities as regards the private vehicles, and move towards some form ofcongestion pricing.

6.2 Transition arrangement to r egular operations:

No special transition arrangements are required for this Project. Project implementation units in MoB andBKV have made a seamless transition to dealing with new projects with or without the Bank participation.

- 19 -

7. Bank and Borrower Performance

Bank7.1 Lending:

The Bank's performance in the preparation stage of the Project was satisfactory. The experience with aprior operation with BKV meant that little time was lost moving from identification to appraisal. Theinformal cooperation with the EBRD worked very well. The interdisciplinary appraisal team was staffedwith high level professionals, a transport economist, an urban transport specialist, a railway engineer, 2financial specialists, and an environmental economist. The long lag between appraisal and negotiations wasdue to several factors. MoB and BKV were not quite ready to provide the counterpart funds, the period1994-95 being the most difficult in the austerity stage of transition. Also, BKV insisted on its own staffpreparing the relevant technical documentation. Some of the delay was due to the political difficultiesstemming from the loan conditionality required by the Bank's appraisal team, especially as concerns thecost recovery from fares and the entry of private operators. The initial positions taken by the Bank mayhave been too strict, taken without full appreciation of the situation in the country, especially as regards thecombined pressures on the dwindling household budgets by price increases in essential services. Thesepositions were modified somewhat at negotiations, thus clearing the way for the loan approval andratification. Another aspect of the policy conditions was that while some of the targets were based onreasonable estimates of what was feasible, once set in the Loan Agreement, they acquired a heavier weight.The target for reducing illegal travel is one example, with an added difficulty of needing special and costlyarrangements for measuring it. Also, the cost recovery conditions were set up without a full understandingof the Government's leverage through its discretionary power over the level of compensation for socialfares. The cost recovery targets were entered into the Loan Agreement (between MoB and the Bank) andinto the Project Agreement (between BKV and the Bank), but it was the Government (not a party to eitherof these agreements) which had de facto power over the pivotal matter of fares.

7.2 Suipervision:

Bank staff performance during supervision was satisfactory. The missions involved experiencedprofessionals from the key areas of expertise needed throughout the Project: an urban transport specialist,transport economist, financial analyst and environmental economist. This core team remained the sameduring implementation, which assured good cooperation with the clients and thus contributed to the results.Only in the last year of the Project, with the Bank working under a severe budget pressure, did the teammaking visits get reduced to a bare minimum, the others (e.g. the financial management specialists)contributing from Washington. The frequency and intensity of supervision was even and appropriate; thereporting was clear and fair. The focus varied between missions, depending on the stage of the Project,though financial matters received attention uniformly. Supervision missions were mounted semi annually,with increased frequency when cost recovery and BKV financial health became critical (in 1999) or inconnection with the extension of the Closing Date (in 2000). The Project correspondence indicates thatBank staff were constructive, flexible and helpful in problem solving. Responses to "no objection" requestsrelated to procurement and use of consultants were by and large prompt, clear and correct. None of theabove means that Bank staff were reluctant to address the problems under the Project. On the contrary, thecorrespondence indicates a persistent stress on the key and politically most difficult issue, e.g. fareincreases.

- 20 -

7.3 Overall Bank performance:

Overall, the Bank's performance was satisfactory.

Borrower7.4 Preparation:

The performance of the Borrower during the preparation stage was satisfactorv. Preparation and appraisaltasks were made easier by the fact that the key staff in BKV and MoB had worked on the BKV componentof the Second Transport Project. The requests for information and analytical work were answeredpromptly, though some difficulties were encountered as concerns the financial information. BKV accountsat that time were cumbersome and not meant for a quick response even to questions of fact, much less thoseregarding strategy.

The general commitment to the reforms in both MoB and BKV was strong and main policy lines had beendeveloped independently before project appraisal. As noted above, the desire to do much of the projectpreparation in-house caused some delays, but this did increase the ownership of the Project by BKVparticularly.The support of the Government at this stage of the Project was also strong. The quality andrank of Government's representatives during negotiations were pivotal in bridging the gap betweenBKV/MoB and the Bank on the most sensitive (financial) issues.

7.5 Government implenmentation performance:

The satisfactory performance of MoB during preparation continued during implementation. Apart from asolid support for the agreed investments, conditions and procedures, MoB on its own initiative decided toenlarge the scope of the tramway track reconstruction component and rehabilitate each street "from wall towall" at its expense. This did make the track works more complicated and costly, but the ultimate resultwas impressive.

MoB's activities as regards the parking management program was also exemplary, more so since there hadbeen no specific targets and/timetables in the Loan Agreement (more on this in the Lessons, Section 8).

MoB's performance as regards the key financial covenants for BKV was mixed. The support for fareincreases was strong, whereas the support for service reduction was less so. The most contentious was thesubject of BKV's financial health, specifically the size of the subsidy. MoB's commitment to reduce theoperating subsidy was stronger than its commitment to assist BKV in balancing its operating incomestatement. At least some of the reluctance exhibited by MoB to fully compensate BKV for charging lessthan economic fares had to do with unresolved problems of power and responsibility between themselvesand the Govemment. These problems generally got worse since the elections of 1998. Still, MoB were openin discussing this subject with the Bank team, commissioned local financial experts to advise them on howto assist BKV (short of increasing its operating subsidy), and took action accordingly. On the whole,MoB's performance during implementation is rated satisfactorv.

The Government was supportive in the early stages of the Project. However, after 1998, the Govenmment'sconcem about inflation, and its desire to push public-sector companies towards greater cost efficiency,without balancing its interventions regarding fare increases and free travel with appropriate compensation,has had a negative impact on BKV. On this basis, the performance of the Govemment is rated notsatisfactory.

- 21 -

7.6 Implementing AgencY:

The perfornance of the Project Implementation Unit at BKV was satisfactory. The Unit continued aneffective coordination throughout implementation within BKV with top management and the financial,operational and investment branches, while also acting as the main interlocutor with the Bank. This was nomean feat, given the strength of BKV's central and operational complexes.

Procurement procedures and contracts were handled with great care by the Unit. They did a good job ofbalancing an engineering-dominated procurement approach prevalent in BKV with the value-for-money andcompetition-focused way of the Bank. Their experience with the procurement of goods gained through theimplementation of the Second Transport Project was useful, and prepared them well for dealing with morecomplex procurement of buses and of civil works for track reconstruction. There was a marked trendtowards better performance throughout the Project as regards the preparation of tender documents andprocessing contracts. Also, the Project Unit did an excellent job of presenting alternative approaches tosome problems encountered during procurement, e.g. separate purchasing of track materials. A greatmajority of their proposals were accepted by the Bank.

Semi-annual progress reporting was adhered to, and the reports were of good quality, though it took thearrival of Bank missions to trigger the reports' completion. The organization of briefings for Bank missionswas excellent, as were the field trips to work sites and workshops. The financial reporting was an exceptionto this satisfactory performance, especially in the early stages of the Project. The old accounting systemwas cumbersome, produced inconsistent numbers, and there was a general reluctance to produce financialforecasts for BKV. All this improved after the new management information system was introduced andpassed through the calibration stage.

Annual audits were taken seriously, so that the choice of auditors, their terms of reference and the deliveryof reports all went smoothly and according to the agreed schedule. Likewise, BKV's choice of a bank to actas the financial intermediary for the Project was very successful

7.7 Overall Borrower peiformance:

Overall, the Borrower's performance was satisfactory.

8. Lessons Learned

The experience under this Project provides some clear lessons, but it also raises a number of issues where itis not easy to draw lessons. Both can be of much use in other projects.

Among the key sectoral concerns in the Bank, in urban public transport as well as other municipal services,is whether this institution should work with public-owned enterprises with a view to their improvement anddevelopment, or merely assist in their move to the private sector or liquidation. The answer coming out ofthe experience under this Project is a strong affirmative, in the sense that the Project succeeded in its mainobjectives, leaving the client company, its passengers and the sector better off. This is not to say that thecurrent arrangement in Budapest is an optimal end-state, but it is a step very much in the right direction,including this Project's constructive approach to increasing the involvement of the private sector and itsintroduction of a contractual relationship into the public sector. The Project has closed the door on the oldpublic-sector monopoly, and opened several doors to better alternatives for the future.

Another important lesson for Bank lending to public sector entities is the need to gamer Governmentcommitment to kev policy reforms which are prerequisites for improved efficiency of the entity concerned.

- 22 -

For example, under this Project, in its efforts to achieve agreed levels of financial and operationalperformance, BKV had to deal with the Government's continuing reluctance to introduce the requisite fareincreases.

Among the more general, but still clear lessons of this Project is the importance of focusing on the basics,including know-how in procurement, accounting and other project management skills. The Borrower'scomments summarized in Section 9, indicate just how highly they value the basic management skillsacquired through this Project, for example the use of competitive bidding for works, equipment andservices; the skill of writing progress reports; the adherence to strict schedules; making forecasts (asopposed to "planned" norms); the challenge of having to justify investments and other proposals in anexplicit, quantitative way; the use of data from cost accounts to assist in operational decisions and policymaking; the necessity of preparing timely financial forecasts, and even having audits.

Another clear lesson is the importance of adaptabilitv, which both the Borrower and the Bank showed to aconsiderable degree during implementation. The correspondence available in project files indicates anextensive cxchange of views, and a willingness to agree on a mutually satisfactory outcome consistent withoverall project objectives. Some examples include the adoption of an unusual approach to procurement(e.g. the procurement of track materials separate from the works contracting), the details of bus vehiclespecifications, the quantities and types of the equipment to be purchased, and numerical targets agreed forsome action programs. The most notable example of constructive flexibility was the discussion about aproposed new metro line in Budapest, where the initial positions of the Borrower and the Bank were quitefar apart, but converged and contributed to a better proposal.

Among the issues arising out of this Project where the lessons are not so clear, one concerns the scope ofthe reform agenda. The Project had a very large agenda, even with such a competent and committedborrower. For physical investments, it is much easier to judge what is doable and what is not doable withgiven time and funds; yet, time and again, designs and specifications need to be changed. In the domain ofreforms, where the "building materials" are organizations, or vested interests and powers cutting acrossorganizational boundaries, with many opaque features involved, it is difficult to say what is doable,according to which schedule and at what cost. In this Project, as mentioned in the assessment of quality atentry (Section 3.5), the creation of a Budapest Transport Association proved to be too ambitious. Whilethis objective was not a high priority, it was supported as part of the policy dialogue during eachsupervision mission, adding a bit of wind in its sails twice a year, and perhaps helped keep it alive until thepolicy environment permits the implementation of reforms in ownership, prices and subsidies in passengertransport.

Another issue in project design where this Project provides mixed evidence is the usefulness of undatedcovenants. There is much agreement in the Bank that legal covenants should be highly selective, dated andenforced. Yet one of the most successful initiatives included in this Project was the parking managementprogram, which was addressed through an undated covenant. Moreover, it was not backed up by aninvestment, had no explicit numerical targets, and no "time-bound action plan." The program was entirelyBorrower-generated and moved at its natural speed. In other words, an excellent example of totalownership by the Borrower. It would have been implemented whether or not it was included in the Project.On the positive side, its inclusion provided a continuous opportunity for an amicable and useful exchangeof views between the Borrower and Bank on a subject essential to urban transport management. On thestrength of this experience, undated covenants have their benefits.

- 23 -

9. Partner Comments

(a) Borrower/implementing agency:

The Borrower's Completion Report provided detailed and specific comments on several aspects of theProject.

On the positive side, the Borrower praised the continuity in the Project team, and the frequency andcontinuity of supervision missions. The team's orientation to problem solving was noted, as was theirflexibility with regard to changes in various Project components dictated by changing circumstances ofBKV.

On the negative side, the Borrower noted substantial delays in effecting payments, which peaked in 1996.There were delays of up to 3 months, forcing the Beneficiary (BKV) on several occasions to pay suppliersand contracturs from its working capital to avoid penalties. This resulted in additional liquidity and currentaccount problems. Also on the administrative side, the Borrower noted that on several occasions(procurement) documents mailed to the Bank failed to reach the addressee within the Bank. As a result, thefate of documents had to be continuously monitored in order to ensure that they reached the appropriateBank official in time.

Regarding procurement, the Borrower noted that the Bank sometimes did not distinguish between essentialand non-essential aspects. The example quoted is to have had to reject a favorable bid for tramway trackreconstruction, at Bank insistence, because the period of the guarantee (bid security) was 2 days less thanthe requested 120 days). On the positive side, the Borrower noted the Bank's interest to adapt itsprocurement procedures to local circumstances, e.g. tendering for tramway track works withoutpre-qualification (thus precluding collusion in the still under-developed construction market), and allowingthat track materials be tendered separately from track works.

The Borrower noted that the Bank was too rigid in its insistence on the financial targets for BKV, whichmany public transport companies in large (Western) European cities could not meet. On the other hand, theBank's insistence on BKV taking action to increase efficiency was positive. In this context also, theBorrower is not persuaded whether such rapid transformation of non-core business activities into separatecompanies was beneficial. The Borrower believes that a comprehensive preliminary analysis should havebeen conducted before introducing these measures, and the transformation should have been done withmore caution, in several stages.

In addition to the above comments, the Borrower and the Beneficiary summarized in their Completionreport their view of the lessons learned under the project and the benefits of association with the Bank.These include the following:

(i) During the period of the Project, Hungary passed the Act on Public Procurement, which isapplicable to BKV's purchases from its own resources. The company successfully used its experiencewith procurement under the two Bank projects to adapt its procurement practices to the new law.

(ii) Obtaining contract-based services of external organizations, such as engineering and managementconsultants, is essential for infrastructure investment, and for the organization and functioning of thecompany. (This used to be done in-house). The consultants can provide technical assistance atinternationally expected level, assisting with the timely and on-budget project completion, and giving an

- 24 -

independent view of technical and economic aspects. For example, the study identifying the potentialfor cost-savings in BKV has been quite valuable.

(iii) Though many capital investments in the transport sector can not be financially profitable,economic and social benefits of projects are significant. It is therefore essential to carry out bothfinancial and economic feasibility study of large investments.

(iv) Financial planning and financial control are essential for multi-year projects.

(v) The periodic progress reporting system not only monitors the project activities and results, but canidentify problems and induce actions to keep projects on track. The same applies to annual audits.

(vi) The finance provided under the Bank loan provided discipline as regards the contributions andactions by the Municipality of Budapest and BKV. In some instances, MoB and BKV reserves wereused to provide counterpart funds for implementing the project when other programs and projects werebeing cut due to financial constraints.

(vii) The experience of working with the Bank helped in dealing with other intemational financialinstitutions.

(b) Cofinanciers:N/A

(c) Other partners (NGOs/private sector):N/A

10. Additional Information

Not Applicable

- 25 -

Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome / Impact Indicators:lndicator/Matrix Projected In last PSR ActuaULatest Estimate

BKV cost recovery ratio (total BKV revenue 48% for year 2000 46% forecast for year 2001minus MoB subsidy minus Govemmentsocial fare compensation divided by totaloperating cost) to reach 50% in 2000

BKV's operating ratio to be maintained at 100 110 (nominal) and 102 (adjusted) in 2000 115 (nominal) and 103% (adjusted) forecastfor 2001

BKV's debt service coverage ratio will be no 4.4 4.4less than 1.5

A formal, log frame based presentation of performance indicators was not prepared at appraisal for thisProject. The above performance indicators for BKV (each one addressed by a covenant in the LoanAgreement) were identified in Attachment 6, Annex 11 of the Staff Appraisal Report.Output Indicators:

Indicator/Matrix Projected In hst PSR Actual/Latest EstimateReplacement of 50 buses; 71 buses funded from the Loan + 44 buses 71 buses funded from the Loan + 44 buses

funded from BKV own sources funded from BKV own sources

47 line km of tram track renewal; 34.6 line km renewed; 34.6 line km renewed

220 buses to be equipped with on-board 298 buses equipped with on-board 298 buses equipped with on-boardcommunication devices + 100 position code communications equipment + 100 position communications equipment + 100 positiontransmitters installed code transmitters purchased and installed code transmitters purchased and installed

End of projectA formal, log frame based presentation of output indicators was not prepared at appraisal for this Project.The above output indicator matrix was constructed for the investment components on the basis of theProject Description (Chapter 2 of the Staff Appraisal Report). No indicators are included for the technicalassistance component, since its various activities are not alike and thus quantitative output indicators arenot suitable. See Section 4.2 for a description of what was done under this component.

-26 -

Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent) _Appraisal Actual/Latest Percentage ofEstimate Estimate Appraisal

Project Cost By Component US$ million US$ millionTram Track Renewal 44.00 43.49 99Bus Replacement 8.40 11.76 140Automatic Vehicle Monitoring 3.20 3.66 114Technical Assistance and Training 1.60 1.31 82

Total Baseline Cost 57.20 60.22Physical Contingencies 4.10 6.86 167Price Contingencies 5.80 0.00 0

Total Project Costs 67.10 67.08Total Financing Required 67.10 67.08

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)

I Procurement MethodExpenditure Category ICB NCB Other;Ns cp DC N.B.F. Total Cost

1. Works 48.00 0.00 0.00 2.10 50.10(25.60) (0.00) (0.00) (0.00) (25.60)

2. Goods 6.50 1.80 4.30 2.80 15.40(6.50) (0.00) (4.30) (0.00) (10.80)

3. Services 0.00 0.00 1.60 0.00 1.60(0.00) (0.00) (1.60) (0.00) (1.60)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 54.50 1.80 5.90 4.90 67.10(32.10) (0.00) (5.90) (0.00) (38.00)

LIB = Limited International BiddingIS = International ShoppingCP = Commercial PracticesDC = Direct Contracting

- 27 -

Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other"I"NSC.DC N.B.F. Total Cost

1. Works 35.72 0.00 0.00 0.00 35.72

(19.30) (0.00) (0.00) (0.00) (19.30)2. Goods 30.03 0.00 0.00 0.00 30.03

(17.65) (0.00) (0.00) (0.00) (17.65)

3. Services 0.01 0.27 0.77 0.00 1.05

(0.01) (0.27) (0.77) (0.00) (1.05)4. Miscellaneous 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)5. Miscellaneous 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 65.76 0.27 0.77 0.00 66.80

(36.96) (0.27) (0.77) (0.00) (38.00)

LIB = Limited Intemational BiddingIS = International ShoppingCP = Commercial PracticesDC = Direct Contracting

Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies.21Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff

of the project management office, training, technical assistance services, and incremental operating costs related to (i)managing the project, and (ii) re-lending project funds to local government units.

Project Financing by Component (in USS million equivalent)Percentage of Appraisal

Component Appraisal Estimate j Actual/Latest Estimate [__________ Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF.

Tram Track Renewal 28.10 0.00 24.20 22.67 0.00 20.84 80.7 0.0 86.1Bus Replacement 6.50 0.00 3.30 11.67 0.00 6.91 179.5 0.0 209.4Automatic Vehicle 1.80 0.00 1.60 2.36 0.00 1.30 131.1 0.0 81.3MonitoringTechnical Assistance 1.60 0.00 0.00 0.98 0.00 0.05 61.3 0.0 0.0

Co.F = Counterpart Financing (BKV)

- 28 -

Annex 3. Economic Costs and Benefits

The following tables provide the assumptions and results of economic evaluation for each of the three maininvestment components: Tables la, lb and 1 c for the bus component; Table 2 for the tramway trackreconstruction component, and Table 3 for the automatic vehicle monitoring system.

BUDAPEST URBAN TRANSPORT PROJECTTABLE la: ECONOMIC EVALUATION OF THE BUS COMPONENT: WITHOUT-PROJECT SCENARIO

BUS AGE CATEGORIES (YEARS)I 0-1 1-2 2-3 j 3-4 4-5- 5-6 6-7 ! 7-8 8-9 9-10 l10-11 1 11-12 12-13 i >13

,Unit oper.cost (HUF 000) ! I 4 Annuall-200_ 4747 4747. 4747i 5637, 5637 5637, 5934, 5934 16527 7121_ 7418; 8308 8604, 8901 operating1-400 3854 3854 3854 3854 4577 4577 4577 4818 4818 5059 5059 5541 5541: 5541 cost

No. of buses i . 0 1 25 (HUF mn)1 1999 1-200 0 0 0 0 o I 25 80 94 43. 234, 84 167, 316 9172

i1-400 0 0' 0l 3 156 1171 111| 16 0 0 0' 30t 0 0 201212000. 1-200' 0 0. 0 0 0 0 1' 25 80 43' 24 84, 443 9075

-4000 80 - 94-- ~~~I-- 2341 4' 44 050- 0:- 3- 0 0~~ -- -i ~-~- X ------ t------ - - -1561 -- 117! i1- 16 0 ot 30.' - - 0- 203-9--

2001: 1-200 0 0 00 0o 0o 1 25 80- 94 43 234 510 85961-400 0 0 0 0 0o 3' 156: 117' 111 16' 0 0 0 30 2073

! 2002 1-200+ ° ° ° °}0 0' 0 1 25. 80' 94, 43' 667. 78761-400 70 0° °i 0, 0 0 3' 156 117 ii11 16! 0 01 30 2408

2003- 1-200' 0 0 01 0' 0 0 0, 0 0 1 25 80i 94 515 6250* 1-400 170 70 0, 0 0 0] 0 3 156 117 111 16 0, 30 3099

2004 1-200, _ 0 0 0 0 0 0 0' 0 0 0, 1 25 80 439 4811I-400 150 170 70. 0O 0 0 0, 0 3 156: 117 11i, 16 30 3769

2005 1-200' 0 0, 0° 0 0 0 0 0 0 0 0 1 25' 349 3330. 1-400 150 150. 170: 70' 0 0' 0 0' 0 3 156 117' 111, 46 4404

2006, 1-200 0 0 0 0' 0 0 0 0 0, 0 0 1 249 2225- 1-400' 100' 150' 150 1701 70 0' 0 0 0 0 3 156 117 157 4915

2007 1-200 0 0 0 0 0 0 0' 0 0'' - 0 135 12021-400 100 100' 150 150, 170 70 0 0 0 0 0 3 156 274 5425

2008. 1-200 0 0 0: 0 0 0 0 0 0 0 0' 0' 0' 0 a1-400- 110 100 100; 1501 150 170 70 0 0 0 0' 0 3 442 6024

Residual value (HUF mn)6554.2 5416.7' 4875.0j 6500.0, 5687.5 5525.0 1895.8 0.0 0.0 00, 0.0; 0.0 0.0 0.0

Notes: . j _ : ,1-200 is lkarus bus model 200 (the former mainstay of BKV fleet) ' ' i 1-400 is Ikarus-made bus model 400, which is taking over as the mainstay of the fleet.Capital cost for this scenario, for any given year. is the number of buses in 0-1 age category times unit capital cost of HUF 65mn,

which is a weighted average price of standard-size and articulated buses for the model 1-400.

- 29 -

BUDAPEST URBAN TRANSPORT PROJECT _TABLE 1b: ECONOMIC EVALUATION OF THE BUS COMPONENT: WITH-PROJECT SCENARIO

BUS AGE CATEGORIES (YEARS)''' -- o ~'~~-0-1[---1-2-'-2-3-- -364 -4-5 - !66-r)7 7-8T 8-9 9-10 10-11 11-12 -12-13-->13

Unit oper.cost (HUF 000) j Total1-200 4747 4747 4747 5637 5637 5637 5934 5934 16527, 7121 7418. 8308 8604 8901 operadIng1-400 3854 3854 3854 3854' 4577 4577 4577 4818, 4818 5059 5059 5541 5541 5541 -cost

No. of buses ------ (HUFmn)

i999 ½ 200 0' 0; 0 _ 25 80t 9- 4 4 _234 84 _167-256 8-400 60W 0 f 3. 156 117 i1 16, 0 0 0 30 0 0 2244

200' I-2000 0 0 1 25 80 94 43 234 84 391t 8612' --400 - 5 60 0 0 3 156 117 ill! 16 0 0 0 30 0 2292

;'~' 2001 1-200 0i 0 0 l:oT2-ol 0-1-400 501 5~0 & 0 60~o if 25 80 94 43 234 3572' i 400W 501 5 60' 0 0 3 156 1171 1111 16 0 0 0 30 2517

2002 1-200 01 0 oj 0 0 0o 00; 1 25 80 94 43 48' 6283i-400 70150 560h 0 0 3 156 117j 111i 160 0 0 30 2851

2003 200 b 0- b 0i 1 25; 80 94 332 4621_;400 1701 70 50 5; 60 0- 0 3 156! 117 111 16 0 303586

2004 1-200 0 0 0 I 0 0 0 0 0 0 1 25-60 270 33071 1400 0' 170 70j 501 5 60. 3 156' 117' 111 16 30 4259

2005 1,200 01 0 0 0l 0 0. 0 0l 0 0 0 1 25 1911 9241i400 1501 150 170k 70i 50 5 60 0; 0- 156 -1171 _11 46, 4930

2006 1-200 0* 0 0 - 0 0 0 0 0 0 0 0 i i6. 10411400 100i 150 15W 170' 70 50 5 60 0 0 3 156 117 157 5456

2007 1-200 0-0- 0 0. 0 0 0 0 0 0 0 0 12 i07

i400 10' 100 150dt i50o 170 70 50 5- 60 0 3 156 274 59672008, 1-200 b' 0 0 0 0 0 0 b° 0 0 0 0 0° 0

-400 0 100 100; 150. 150 170 70 50, 5.60 0 0 3 427 6085Resdual value (HUF mn) -.

0.0 5416.7 4875.0 6500.0 5687.55525.0 1895.8 1083.3 81.3 1650.0 0.0 0.0 0.0 0

CNotes: i i ; ' ' ' N -200 is lkarmbus model200 1 -o - ; -

ii400s arus-madebus mncol 400li 1 - ' 1 i;Capaia costs for this scenario, for any given year. is the number of buses in 0-1 age category times the weighted average unt capital cost

of HUF 65mn, except for years 1999-2000, where the historic costs are used for th 1 15 vehicles bought under the PFijec -

- 30 -

~~~ f ~~r ( =- BUDAPEST URBAN TRANSPORT PROJECT

*i !

Table lc: ECONOMIC EVALUATION OF THE BUS COMPONENT__ ___ __I_ _ ~~~I - - , --

Results (in HUF mn) __

* Annual Operating Costs - Capital costs Cash flow iJiwithout Project with Project net net net

1999i 11184.0' 10882.0! 302.0 21218' -1819.82000; 11114.0 10904.0 210.01 -600.1

i_20011 10669.01 9645.0 1024.0 2009.4i -985.ii 2002 10284.0 9134.01 1150.0 0.0 - 15.

2003 9349.0 8207.0; 1142.0: 0.0 1142.0.2004 8580.0 7566.0 1014.0; 0.0 1014.020054 77340i 6854.0- 880.0 0.0- 880.0t 2006& 7140. 06497.0 643.0, 0.0 643.0:20071 6627.0, 60740 - 553.0' _0.0 553.0:-i ~ o2008& 6024.0, 6085.0 -61.0 -7150 01 2349.4

'Residual value - 4739.6 3l ,. r - --------- --------------1-- ~------------ 4739.6---+---------

_ - _ _|. _ ___ _t= _ _- --fr _ _Internal rate-of-return (%) -_ _ 17.2%Notes: - t1 |_ _ - --

Annual operating costs are those shown in Tables 1a and lb.Capital costs are based on the number of buses shown in Tables la and lb in 0-1 age category,for any given year, and a unit cost. For with-Project option, unit costs are the historic ones.For without-Project scenario, a weighted average unit price of HUF 65 mn was used.Only net capital costs are shown to underline the difference between the two scenarios.

-31 -

Table 2BUDAPEST URBAN TRANSPORT PROJECT

Economic Evaluation of Tram Track Renewal Program(HUF 000, net of taxes, at 2000 prices)

t#- --W-With Project if Without ProjectA B C D E F G H I

Year Reconstruction Maintenance Repair Maintenance Net Cash FlowHV sections LV Sections HV Sections LV Sections HV Sections LV Sections

1996 1,851,026 55,000 30,000 1,254,000 0 140,000 30,000 - 512,0261997 1,355,239 35,000 30,000 809,400 0 70,000 30,000 - 510,8391998 1,055,548 30,000 10,000 491,300 0 60,000 30,000 - 514,2481999 866,367 30,000 10,000 650,000 0 60,000 40,000 - 156,3672000 1,613,224 50,000 1,000 750,000 0 80,000 40,000 - 794,2242001 - 60,000 1,000 0 0 100,000 40,000 79,0002002 70,000 2,000 0 1,500,000 110,000 0 1,538,0002003 80,000 2,000 0 0 140,000 2,000 60,0002004 80,000 2,000 0 0 150,000 2,000 70,0002005 80,000 2,000 0 0 150,000 2,000 70,0002006 80,000 2,000 375,000 0 140,000 2,000 435,0002007 100,000 2,000 243,000 0 70,000 2,000 213,0002008 100,000 9,000 148,000 0 60,000 2,000 101,0002009 100,000 2,000 195,000 0 60,000 2,000 155,0002010 - 3,370,702 100,000 4,000 225,000 0 80,000 2,000 3,573,702

Internal Rate of Return: 11.3%

Notes:The maintenance and repair pattems and amounts estimated by BKV track section.The approach is to compare aggregate expenditures in each option, needed for keeping the track in operable state.No consideration is given to potential savings in vehicle operating costs or benefits to passengers and the community.Column B gives total investment costs for the reconstruction of 34.6 km of track under the Project (in 2000 terms)The residual value in column B is based on a 25-year life.HV refers to sections with high traffic volumes, typically with large-panel tracks.LV refers to sections with low traffic loads, typically open-type track.

- 32 -

Table 3BUDAPEST URBAN TRANSPORT PROJECT

ECONOMIC EVALUATION OF AUTOMATIC VEHICLE MONITORING SYSTEM(HUF 000, net of taxes, at 2000 prices)

----------- Benefits-------------------4AVM Costs Fleet Supply Staff Net

Year Capital Operating Reduction Reduction Saving Benefits1996 37907 -379071997 552232 -5522321998 83053 47965.5 -131018.51999 0 44038.5 81345 11781 49087.52000 34776 44038.5 81345 11781 14311.52001 44038.5 987563 81345 11781 1036650.52002 44038.5 81345 11781 49087.52003 44880 81345 11781 482462004 45441 81345 11781 476852005 46282.5 81345 11781 46843.52006 47124 81345 11781 460022007 47965.5 81345 11781 45160.52008 48526.5 81345 11781 44599.52009 49368 81345 11781 437582010 50209.5 81345 11781 42916.52011 51051 81345 11781 420752012 51612 81345 11781 415142013 54136.5 81345 11781 38989.5

Internal Rate of Return: 17%

Notes:The calculation assumes a given level of service.The fleet reduction is estimated at 20 vehicles.The term "supply" refers to vehicle-km of service.Staff savings are based on an average cost of HUF 4mn per year.

- 33 -

Annex 4. Bank Inputs

(a) Missions: __

Stage of Project Cycle No. of Persons and Specialty Performa ce Rating(e.g. 2 Economists, I FMS, etc.) Implementation Development

Month/Year Count Specialty Progress Objective

Identification/PreparationNovember 1992 1 Principal Transport EconomistFebruary 1993 3 Principal Transport Economist,

Financial Analyst, TransportEngineer

May/June 1993 7 Task Team Leader, FinancialAnalyst, Operations Officer,Urban Transport Specialist,Operations Assistant, RailwayEngineer, Institutional Specialist

Appraisal/NegotiationOctober 1993 10 Task Team Leader, Financial

Analyst, EnvironmentalEconomist, Urban TransportSpecialist, OperationsOfficer, Railway Engineer,Transport Economist,Financial Consultant,Research Assistant,Transport Division Chief

March 1995 7 Task Team Leader, TransportEconomist, Urban TransportSpecialist, Financial Analyst,Transport Engineer, Lawyer

SupervisionNovember 1995 3 Engineer, Economist, S HS

Financial AnalystJuly 1996 3 Task Team Leader - Economist, S HS

Financial Analyst, EngineerNovember 1996 2 Financial Analyst, Transport S S

SpecialistMay 1997 3 Task Team Leader - Economist, S S

Financial Analyst, UrbanTransport Specialist

November 1997 3 Task Team Leader - Economist, S SUrban Transport Specialist,Financial Analyst

July 1998 2 Task Team Leader - Economist, S SUrban Transport Specialist

July 1999 3 Task Team Leader - Economist, HS UUrban Transport Specialist,Environmental Economist

December 1999 2 Task Team Leader - Economist, HS UFinancial Analyst

July 2000 3 Task Team Leader - Urban HS S

- 34 -

Transport Specialist,Environmental Economist,Transport Sector Manager

November 2000 2 Task Team Leader - Urban HS STransport Specialist,Environmental Economist

June 2001 1 Task Team Leader - Urban HS STransport Specialist

ICROctober 2001 1 Task Team Leader - Urban HS S

Transport Specialist

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate

No. Staff weeks US$ ('000)Identification/PreparationAppraisal/Negotiation 457Supervision 509ICRTotal 966

The costs are only available on aggregate basis for identification through negotiations, and for supervisionthrough the ICR. Staff weeks are not available.

- 35 -

Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

O Macro policies O H OSUOM O N * NA

Oi Sector Policies O H *SUOM O N O NAO Physical * H OSUOM O N O NA0 Financial 0H *SUOM ON ONAO Institutional Development 0 H * SU O M 0 N 0 NAO Environmental O H OSU*M O N O NA

SocialO Poverty Reduction O H OSUOM O N * NAOI Gender OH OSUOM O N * NAO Other (Please specify) O H OSUOM O N * NA

O Private sector development 0 H 0 SU * M 0 N 0 NAOI Public sector management 0 H 0 SU O M O N 0 NAF; Other (Please specify) * H OSUOM O N O NAThe "other" category refers to the positive impactof the Project on the competitiveness of publictransport services in Budapest relative to theautomobile

- 36 -

Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

O Lending OHS OS OU OHUO Supervision *HS OS OU O HUO Overall O HS OS O u O HU

6.2 Borrowerperformance Rating

O Preparation *HS OS OU OHUO Government implementation performance 0 HS 0 S 0 U 0 HU1O Implementation agencyperformance 0 HS 0 S 0 U 0 HUE Overall OHS OS OU O HUThe ratings are for BKV as implementation agency, whereas the "Government" is a composite of the

Municipality of Budapest and Ministry of Finance, weighted more heavily towards the former.

- 37 -

Annex 7. List of Supporting Documents

1. Republic of Hungary: Budapest Urban Transport Project, Staff Appraisal Report, Report No.12567-HU, The World Bank, Washington, D.C., May 17, 1995.

2. Hungary: Budapest Urban Transport Program, Implementation Completion Report, Budapest TransportCompany and Municipality of Budapest, November 2001

- 38 -

Additional Annex 8. Finances of Budapest Transport Company (BKV), 1995-2000

This annex includes a set of 7 tables and a figure, which support the discussion of the BKV's financialperformance in Section 5. The first 6 tables present the operating and financial statistics of BKV during theperiod of the Project, including a history of fare changes. Table 7 shows the revenues and expenditures ofthe Municipality of Budapest in three annual "snapshots" (1995, 1999 and 2000). Figure 1 illustrates thechange in the sources of BKV's revenues over 10 years, in current terms.

In reviewing BKV's financial indicators, it should be noted that major changes in the organization structureand accounting system of the company were implemented during this transitional period. In 1996 BKV wastransformed into a joint stock company. As part of this progress, fixed assets were revalued resulting in a120% increase in gross fixed assets value and a substantial increase in the annual depreciation charge.However, no subsequent reevaluation of fixed assets was permitted under Hungarian accounting laws toallow for inflation. Thus the assets were not revalued during the last four years when the cumulativeinflation totaled 63%. In addition, BKV's non-core activities were transformed into subsidiary companies.This resulted in a change in the allocation of operating expenses between various expenditure headingswhen BKV's accounts and the subsidiary companies accounts were consolidated. For example, wages ofmaintenance staff were transferred to services costs when the maintenance operation was established as asubsidiary. This makes it difficult to compare the evolution of operating costs during the project. Also, asnoted in Section 4, the Government and MoB had substantially reduced the level of subsidies in real termsto BKV. The resulting cash flow problem meant a substantial reduction in the level of repair andmaintenance of the fleet. In parallel with this reduction in expenditure, BKV reduced the percentage ofoperating costs capitalized as representing major overhauls, from 16% in 1994 to 2% in 2000.

While these changes had a substantial impact on BKV's accounts and tend on balance to overstate theresults achieved, the financial ratios shown below are believed to represent fairly the general trend and levelof progress made in achieving the financial objectives of the project.

Table IHungary- Budapest Urban Transport Project

Operational statistics for Budapest Transport Company (BKV)

1994 1995 1996 1997 1998 1999 2000

Staff (fulltime) 19,231 18,570 17,140 15,075 14,092 13,591 13,103Fleetowned 3,536 3,417 3,254 3,166 3,130 3,119 3,072Fleet in peak service 2,647 2,505 2,421 2,392 2,371 2,354 2,330Fleet utilisation (%) (a) 75 73 74 76 76 75 75Vehicle-km (thousand) (b) 213,040 200,234 188,242 186,985 184,552 182,153 178,825Place-km (million) (b) 24,774 23,166 21,845 21,678 21,422 21,201 20,812Commercial speed (km/h) 17.5 17.3 17.3 17.3 17.1 16.9 16.8

Passengers (million) (c) 1,530 1,520 1,445 1,419 1,392 1,399 1,428Passenger km (million) (c) 6,668 6,605 6,235 6,059 5,918 5,963 6,089Load factor (%) 27.0 29.0 29.0 28.0 28.0 28.0 29.3

(a) In 2000, the utilisation factor ranges from 78.8% for buses to 68.5% for the metro(b) 1999 and 2000 data include services supplied by sub-contractors(c) For reference, in 1990, BKV carried 1,686 million passengers (7,440 million passenger-km)

- 39 -

Table 2Hungary- Budapest Urban Transport Project

Income Statements for Budapest Transport Company (BKV)HUF Million (current prices)

1994 1995 1996 1997 1998 1999 2000(a)

RevenuePassenger Revenue 8,490 10,204 13,460 16,804 18,753 22,564 25,260Other Income 1,302 2,088 2,324 5,246 4,000 3,397 7,615Government Price Subsidy 5,835 7,485 9,441 10,995 12,606 13,550 14,538Government Special Subsidies 2,000 2,300 2,000 0 0 0 0Municipal Operating Subsidy 9,250 9,504 10,794 11,567 12,995 14,204 14,200Total Revenue 26,877 31,581 38,019 44,612 48,354 53,715 61,613

Operatin, ExpenditureWages and Salaries 15,148 17,317 19,785 21,338 23,821 26,030 28,164Fuel 3,909 5,010 5,998 7,372 8,111 9,124 10,679Services 2,434 1,796 1,330 3,026 3,063 1,934 1,785Materials 4,134 3,969 5,607 5,214 4,956 9,724 10,436Other Expenditure 1,685 2,611 5,762 4,399 6,169 6,002 5,732Extraordinary Expenditure 788 1,691 530 2,868 2,289 1,479 2,226Depreciation 4,380 5,405 8,778 9,580 9,868 10,150 10,825Expenditure Capitilized -4,465 -4,047 -3,145 -2,450 -1,376 -1,551 -1,796Total Operating Expenditure 28,013 33,752 44,645 51,347 56,901 62,892 68,051

Operating ProfitlLoss -1,136 -2,171 -6,626 -6,735 -8,547 -9,177 -6,438

Interest on L/T Loans 88 90 94 124 173 251 421

Net Profit/Loss -1,224 -2,261 -6,720 -6,859 -8,720 -9,428 -6,859

Cost Recovery (b) 35% 36% 35% 43% 40% 41% 48%Loan Target 37% 41% 43% 45% 47% 50%

Operating Ratio 104% 107% 117% 115% 118% 117% 110%Capital Grant from MoB 5,618 6,320 1,758 2,154 5,470 4,988Adjusted Operating Ratio (c) 104% 91% 101% 111% 113% 106% 102%Loan Target 100% 100% 100% 100% 100% 100%

(a) These are final financial results for 1994, whereas the Staff Appraisal Report shows the provisional results.(b) Cost recovery in the preceding years was 33% in 1991, 32% in 1992, and 33% in 1993.(c) This adjustment consists of treating capital grants from MoB to BKV as operating subsidies.

For further details, see Section 4.01 (F) in the main text.

-40 -

Table 3Hungary- Budapest Urban Transport Project

Income Statements for Budapest Transport Company (BKV)HUF Millions (in December 31, 2000 prices)

1994 1995 1996 1997 1998 1999 2000

CPI increase (%) 18.8 28.2 23.6 18.3 14.3 10.0 9.7Cumulative CPI increase 100.0 128.4 158.5 187.5 214.0 235.4 258.5Inflatorfor 12/31/2000 as base (a) 2.828 2.301 1.824 1.505 1.293 1.152 1.049

RevenuePassenger Revenue 24,010 23,479 24,551 25,290 24,248 25,994 26,498Other Income 3,682 4,804 4,239 7,895 5,172 3,913 7,988Government Price Subsidy 16,501 17,223 17,220 16,547 16,300 15,610 15,250Government Special Subsidy 5,656 5,292 3,648 0 0 0 0Municipal Operating Subsidy 26,159 21,869 19,688 17,408 16,803 16,363 14,896Total Revenue 76,008 72,668 69,347 67,141 62,522 61,880 64,632

Operating ExpenditureWages and Salariees 42,839 39,846 36,088 32,114 30,801 29,987 29,544Fuel 11,055 11,528 10,940 11,095 10,488 10,511 11,202Services 6,883 4,133 2,426 4,554 3,960 2,228 1,872Materials 11,691 9,133 10,227 7,847 6,408 11,202 10,947Other expenditure 4,765 6,008 10,510 6,620 7,977 6,914 6,013Extraordinary Expenditure 2,228 3,891 967 4,316 2,960 1,704 2,335Depreciation 12,387 12,437 16,011 14,418 12,759 11,693 11,355Expenditure Capitilized -12,627 -9,312 -5,736 -3,687 -1,779 -1,787 -1,884Total Operating Expenditure 79,221 77,663 81,432 77,277 73,573 72,452 71,385

Operating Profit/Loss -3,213 -4,995 -12,086 -10,136 -11,051 -10,572 -6,753

Interest on L/T Loans 249 207 171 187 224 289 442

Profit/Loss -3,461 -5,203 -12,257 -10,323 -11,275 -10,861 -7,195

Performance indicatorsCost Recovery 35% 36% 35% 43% 40% 41% 48%Operating Ratio 104% 107% 117% 115% 118% 117% 110%

(a) costs and revenues are assumed to be uniformly distributed over the year, whereas the inflator is based on theend-year assumption

- 41 -

Table 4Hungary- Budapest Urban Transport Project

Cash Flow Statements for Budapest Transport Company (BKV)HUF Millions (current prices)

1994 1995 1996 1997 1998 1999 2000

Profit/Loss before Depreciation. 3,244 3,234 2,152 2,845 1,321 973 4,387Less Debt Service

Interest 68 279 94 124 173 251 421Repayment 18 148 321 131 30 30 571

Total Debt Service 86 427 415 255 203 281 992

Increase/Decrease in Working 997 1104 -690 -1213 -6257 -3913 -2358Capital Other Than Cash

Net intemal Cash Generation 2,161 1,703 2,427 3,803 7,375 4,605 5,753

InveatmentsWorld Bank Projert 14 862 1,504 1,103 2,339 2,148Other Investments 9,351 9,138 7,955 12,575 12,460 12,732

Total Investments 2,391 9,365 10,000 9,459 13,678 14,799 14,880

Surplus/Deficit from Operations -230 -7,662 -7,573 -5,656 -6,303 -10,194 -9,127

Long-term BorrowingWorld Bank 74 15 862 1,504 1,103 2,339 2,148Other 435 2,070 2,196 2,840 3,000 2,543 1,032

Total Borrowing 509 2,085 3,058 4,344 4,103 4,882 3,180

GrantsMunicilality 1,499 24 1,434 1,340 2,154 5,470 4,988Other 5,829 2,986 457 696

Total Grants 1,499 5,853 4,420 1,340 2,154 5,927 5,684

Total Borrowing and Grants 2,008 7,938 7,478 5,684 6,257 10,809 8,864

Cash Surplus/Deficit 1,778 276 -95 28 -46 615 -263

Cash at Beginning of Year -1653 125 401 306 334 288 903Cash at End of Year 125 401 306 334 288 903 640

Debt Service coverage (times) 37.7 7.6 5.2 11.2 6.5 3.5 4.4

- 42 -

Table 5Hungary- Budapest Urban Transport Project

Balance Sheets for Budapest Transport Company (BKV) as of December 31.HUF Millions (current prices)

1994 1995 1996 1997 1998 1999 2000

ASSETSCurrent AssetsCash 125 401 306 334 288 903 640Accounts Receivable 733 2,480 3,065 3,725 4,592 3,973 3,906Inventory 3,205 1,963 2,749 1,782 2,069 1,986 1,690Other 530 258 124 160 161 286 1,247

Total 4,593 5,102 6,244 6,001 7,110 7,148 7,483

Fixed AssetsGross Fixed Assets 74,707 83,862 184,409 191,271 201,050 213,261 224,196Lees Depreciation 33,558 37,995 8,410 17,565 26,743 36,001 46,027Net Fixed Assets 41,149 45,867 175,999 173,706 174,307 177,260 178,169Work in Progress 2,238 3,068 1,251 3,462 4,708 3,769 4,504

Total 43,387 48,935 177,250 177,168 179,015 181,029 182,673

Total Assets 47,980 54,037 183,494 183,169 186,125 188,177 190,156

LIABILITIESCurrent LiabilitiesProvisions -154 231 150 437 486 412 426Accrued Expenses 240 855 1,801 2,284 4,076 9,008 14,799Current Liabilities 1,832 2,151 1,671 1,516 2,948 2,159 4,493Accounts Payable 1,470 4,238 4,934 5,045 7,141 8,320 6,967

Total 3,388 7,475 8,556 9,282 14,651 19,899 26,685Long-term LiabilitiesOther 0 316 88 300 184 43 238Long-term Loans 627 257 1,171 5,428 9,697 14,764 16,311

Total 627 573 1,259 5,728 9,881 14,807 16,549

Equity 43,965 45,989 173,679 168,159 161,593 153,471 146,922

Total Liabilities 47,980 54,037 183,494 183,169 186,125 188,177 190,156

RATIOSCurrent Ratio 1.4 0.7 0.7 0.6 0.5 0.4 0.3Long-term Debt Equity Ratio 1.4 1.2 0.7 3.3 5.8 8.8 10.1

-43 -

Table 6Hungary- Budapest Urban Transport Project

Budapest Transport Company (BKV)Fare increases January 1, 1995 - June 30, 2001

Average CumulativeDate implemented Increase Increase

1-Mar-95 33.0% 33%

31-Jan-96 39.0% 85%

1-Jan-97 27.9% 136%

1-Sep-97 14.0% 170%

1-Aug-98 7.1% 189%

1-Jan-99 14.0% 229%

1-Jan-00 6.0% 249%

1-Jan-01 6.0% 270%

-44 -

Table 7Municipality of Budapest

Summary of Revenue and Expenditure in 1995, 1999, and 2000

Revenues

1995 1999 2000

HUFbn % HUF bn % HUF bn %

Transfers from State 61.1 51 82.6 33 77.5 28

Municipal Revenue 41.6 35 120.8 48 140.0 51

VAT 1.7 1 0.0 0 0.0 0

Other Funds 3.3 3 44.1 18 52.9 19

Total Revenue 107.6 90 247.5 99 270.5 98

Loans 11.8 10 2.3 1 5.7 2

Total Funds Available 119.4 100 249.0 100 276.2 100

Expenditures

Current Expenditure 81.3 71 131.2 55 137.9 53

Capital Expenditure 24.7 21 58.2 24 73.1 28

Other Expenditure 9.2 8 49.8 21 49.2 19

Total Expenditure 115.4 100 239.2 100 260.2 100

Surplus/Deficit 3.9 3 9.8 4 16.0 6

Note: numbers may not add up due to rounding

-45 -

Figure 1. Sources of BKV Revenues, 1991-2000

30 1 -1

-4-State Price Supplement __252

25 - _ and Subsidy

-- Tariff revenues 2.5

20 --*-MOB Subsidy Z

15_c1~~~~~~~~~~~~~~~~~~~~~~~~14

10 i ri.1 . i r^ 14

5 .

0_ w 7 v 4 S o 7 9 46 -

I C 4 4 U , LI :3 I

- 46 -