The World Bank Sustainable Croatian Railways in Europe (P147499) REPORT NO.: RES36822 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SUSTAINABLE CROATIAN RAILWAYS IN EUROPE APPROVED ON APRIL 30, 2015 TO HZ INFRASTRUCTURE,HZ CARGO,HZ PASSENGER TRANSPORT TRANSPORT EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Arup Banerji Senior Global Practice Director: Guangzhe Chen Practice Manager/Manager: Karla Gonzalez Carvajal Task Team Leader: Jean-Francois Marteau, Dominic Pasquale Patella The World Bank Sustainable Croatian Railways in Europe (P147499) ABBREVIATIONS AND ACRONYMS DMU Diesel Multiple Unit DO Development Objectives EMU Electric Multiple Unit EU European Union EUR Euro HRK Croatian Kuna HZ Croatian Railways HZC HZ Cargo HZI HZ Infrastructure HZPP HZ Passenger Transport IBRD International Bank for Reconstruction and Development MSTI Ministry of Sea, Transport and Infrastructure SOE State Owned Enterprise TENT-T Trans-European Transport Network in Europe VAT Value Added Tax The World Bank Sustainable Croatian Railways in Europe (P147499) BASIC DATA Product Information Project ID Financing Instrument P147499 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 30-Apr-2015 31-May-2020 Organizations Borrower Responsible Agency HZ Infrastructure,HZ Cargo,HZ Passenger Transport Ministry of Sea, Transport and Infrastructure Project Development Objective (PDO) Original PDO The Project Development Objective (PDO) is to improve the operational efficiency and the financial sustainability of the public railway sector in Croatia. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-85000 30-Apr-2015 06-May-2015 04-Aug-2015 31-May-2020 88.65 33.32 55.07 IBRD-85010 30-Apr-2015 06-May-2015 04-Aug-2015 31-May-2020 48.20 27.45 21.39 IBRD-85020 30-Apr-2015 06-May-2015 04-Aug-2015 31-May-2020 46.50 36.49 10.04 The World Bank Sustainable Croatian Railways in Europe (P147499) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The Sustainable Croatian Railways in Europe Project (“the Project”) is providing EUR 163.5 million in lending to three public enterprises controlled by the Republic of Croatia through three IBRD loans (8500-HR, 8501-HR, 8502-HR) approved on April 30, 2015. The proposed Project restructuring was prepared in response to a request from the Republic of Croatia dated May 20, 2019, which requested an extension of the closing date for the project as well as modifications in the results framework to better reflect the nature of the proposed sector reforms. The restructuring entails: (i) extension of the closing date from May 31, 2020 to November 30, 2021, (ii) modification or replacement of several Outcome and Intermediate Results Indicators for the project, and (iii) revision of disbursement estimates and reallocation between disbursement categories. The restructuring does not modify the safeguard category or trigger new safeguard policies. There are no overdue audits and financial management arrangements remain adequate. 2. A first project restructuring was done in June 2018, to increase amounts allocated to HZI restructuring, advisory services to Ministry of Transport,to HZPP for the purchase of four DMU train sets, and allow the rehabilitation of the Savski Marof Zagreb section of the HZI network, which is among the most used segments both for freight and passengers on one of the main international corridors. 3. Since the previous restructuring, the levels of disbursement, commitments and procurement progress have been substantial (over 50 percent disbursed, and commitments to exceed 90 percent after award of the main ongoing civil works contract). However, progress in the procurement of the main civil works contract has been delayed and would require additional implementation time for completion. There are also some delays impacting other activities under the HZPP and HZC loans. Since June 2018 the following activities advanced, albeit some at a slower pace than expected: (i) purchase of four DMU train sets – on track to be delivered by the closing date; (ii) bidding documents for rehabilitation of the Savski Marof – Zagreb line have been prepared and tender was launched; (iii) contracts for HZC financial advisory and for the railway sector’s asset management have started; (iv) the Public Service Obligation Contract (PSO) study has been completed and the contract signed; and (v) the tender for support to the HZPP management for restructuring has been launched. The World Bank Sustainable Croatian Railways in Europe (P147499) 4. The most problematic delays include the HZI restructuring as well as additional consulting services for HZI and for the Ministry of Sea, Transport and Infrastructure. This is primarily as a result of the time and effort needed to prepare and adopt a letter of sector policy which is discussed by relevant Ministries and could serve as the roadmap for substantial investment and operational changes in the sector, including HZI operations and the way the Ministry of Sea, Transport and Infrastructure oversees the sector. During the project’s mid-term review which finished in January 2019, the borrowers agreed on several specific actions to advance implementation and make progress on the letter of sector policy preparation. A short-term action plan was agreed and targets have been met. The letter of Sector Policy is now being discussed between ministries prior to submission to the Cabinet. However, the accumulated delays mean that the following activities, which are critical for the achievement of the development objective, will not be finalized by the current project/loans closing date: (i) Rehabilitation of the Savski Marof – Zagreb line (HZ Infrastructure); (ii) Rehabilitation of Wagons (HZ Cargo); and (iii) Support to the management for restructuring (HZ Passenger Transport). 5. The proposed restructuring would allow enough time to complete all activities in a satisfactory manner and to support the implementation of the letter of sector policy, including through support for consulting services to the Ministry of Sea, Transport and Infrastructure and the companies. 6. The current project ratings are moderately unsatisfactory for the Development Objective and Implementation , however, much progress has been made since the mid-term review. The client has provided much stronger supervision at ministerial and board levels to support each of the companies on a daily basis. Several actions were agreed during the mid-term review and have mostly been achieved: (i) confirmed list of working groups assigned to preparation of the Sector Policy Letter and first draft to be submitted to the Bank by mid-March 2019 (status: done) (ii) tender for rehabilitation of Savski Marof – Zagreb section to be launched before mid-March 2019 (status: done) (iii) Draft Sector Policy Letter to include quantified increase of the train services with a shift towards higher demand lines (status: draft produced and now being discussed) (iv) The procurement for several technical supports to MSTI should significantly progress by mid-March 2019 including the signing of contract for financial advisor service for HZI and a launch of procurement for a sector strategy (status: done) (v) HZI should start a reorganization that can allow staff redeployment, combining with existing staff retrenchment (including natural attrition) within Q2 and Q3 2019, with an expected level of 150 employees being removed contractually out of the Company by end year (status: started) The World Bank Sustainable Croatian Railways in Europe (P147499) 7. Given these improvements in implementation, and the fact that the proposed extension would allow sufficient time for all activities to be completed in a satisfactory manner, both ratings would be upgraded upon completion of the proposed project’s restructuring. II. DESCRIPTION OF PROPOSED CHANGES 1. The PDO, as well as most PDO indicators are still relevant for the project, but the current orientation of the sector restructuring has modified the Government’s goals for HZ Cargo and requires an adjustment. HZ Cargo is now pursuing a strategic partner as opposed to continuing to operate as an SOE. In addition, the new rail law has changed the types of programming and financing documents required for infrastructure development. Finally, while most of the intermediate results indicators will be met, some required minor revisions due to delays and/or adjustments to the institutional setting. Given the proposed extension, target dates have also been extended. The following changes are proposed: (a) Outcome indicators: (i) The indicator related to planning and programming of investment consisted in having a “Prioritized Railway Sector Development and Infrastructure Maintenance Program” developed has been changed to “Introduction and signing of the multi-annual infrastructure contract”. Since the project start both HZI and MSTI have developed programs that partially covered these areas, but the delivery of which has been hampered by delays in the overall sector strategy. As part of the Sector Policy Letter discussions, it was agreed to replace this program by the introduction and signing of the multi-annual infrastructure contract, which is an EU requirement not yet met by Croatia. This contract would provide a medium-term visibility of investments to be carried out by HZI. A draft has been developed and will undergo review prior to implementation. Introduction and signing of the multi-annual infrastructure contract are planned for January 2020. (ii) The main indicator for HZC related to its viability ratio. This indicator will be replaced with “Completion of a strategic partnership for HZ Cargo (transaction finalized)”. Given that HZC can only be viable with the injection of capital by external partners, this indicator is more appropriate. The indicator will be considered having been met once the transaction is finalized e.g. transfer or addition of shares is completed. (iii) Two additional Outcome indicators related to productivity in HZI require minor adjustment of targets as follows: “Number of HZI million train-km per track-km (changed from 9,063 to 8,300) and “Number of annual train-km operated by HZI employee” (changed from 3,834 to 4,500). (b) Intermediate results indicators: The structure of the intermediate results indicators comprises quantitative indicators related to direct implementation of activities (retrenchment, rolling stock, km of sections rehabilitated) complemented by productivity indicators for each company. Indicators were already reviewed and adjusted during the June 2018 restructuring and as such no substantial modification is required at this time. The indicators to be revised are: “Number of HZI staff retrenched” (from 1,098 to 900), “Number of HZP staff retrenched (from 731 to 771), “Percentage of assets The World Bank Sustainable Croatian Railways in Europe (P147499) with resolved legal titles” (from 40% to 30%), “Number of HZC rolling stock rehabilitated (from 2166 to 2161) and “Percentage of affected workers who participated in the social mitigation programs, reporting satisfaction with the programs, including gender disaggregated data” (from 65% to 20% -- due to very low demand since project inception). (c) Change in the loans closing date: The Government has requested an extension of 18 months from May 31, 2020 to November 30, 2021 for all three loans. This is the first closing date extension. This extension is necessary to allow enough time to complete all activities in satisfactory manner. (d) Change in disbursement estimates: The disbursement profiles are modified to reflect the use of the project funds by the revised closing date. I. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Loan Closing Date(s) ✔ Disbursement Estimates ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Components and Cost ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ The World Bank Sustainable Croatian Railways in Europe (P147499) Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-85000 Effective 31-May-2020 30-Nov-2021 30-Mar-2022 IBRD-85010 Effective 31-May-2020 30-Nov-2021 30-Mar-2022 IBRD-85020 Effective 31-May-2020 30-Nov-2021 30-Mar-2022 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2015 0.00 0.00 2016 30,000,000.00 30,000,000.00 2017 29,465,544.80 29,465,544.80 2018 37,702,363.00 37,702,363.00 2019 37,371,330.00 37,371,330.00 2020 18,860,763.00 30,950,000.00 2021 0.00 46,735,000.00 2022 0.00 8,831,000.00 . The World Bank Sustainable Croatian Railways in Europe (P147499) . Results framework COUNTRY: Croatia Sustainable Croatian Railways in Europe Project Development Objectives(s) The Project Development Objective (PDO) is to improve the operational efficiency and the financial sustainability of the public railway sector in Croatia. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 To improve the operational efficiency and the financial sustainability of the public rail sector Prioritized railway sector development and infrastructure No Yes Yes maintenance program developed (Yes/No) Action: This indicator has been Marked for Deletion HZP operating expenses per train-km (in HRK) 45.00 44.60 45.60 44.00 42.50 41.40 41.40 41.40 (Number) Action: This indicator has been Revised HZC viability ratio 0.78 0.95 0.81 0.86 1.00 1.09 1.09 (Number) The World Bank Sustainable Croatian Railways in Europe (P147499) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 Action: This indicator has been Marked for Deletion HZI million train-km per 9,965.00 9,938.00 9,830.00 9,829.00 8,200.00 8,300.00 8,300.00 8,300.00 track-km (Number) Action: This indicator has been Revised Number of annual train- km operated per HZI 4,032.00 4,150.00 4,232.00 4,460.00 4,400.00 4,500.00 4,500.00 employee (Number) Action: This indicator has been Revised Introduction and signing of the multi-annual No Yes infrastructure contract (Yes/No) Action: This indicator is New Completion of a strategic partnership for HZ Cargo No Yes (transaction finalized) (Yes/No) Action: This indicator is New PDO Table SPACE The World Bank Sustainable Croatian Railways in Europe (P147499) Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 Project Coordination and Sector Policy Support Percentage of affected workers who participated in the social mitigation programs reporting 0.00 20.00 satisfaction with the programs including gender disaggregated data (Percentage) Action: This indicator has been Revised Percentage of assets with resolved legal titles 0.00 30.00 (Percentage) Action: This indicator has been Revised Support to HZ Passenger Transport Restructuring Number of HZP staff 0.00 398.00 518.00 620.00 674.00 731.00 771.00 771.00 retrenched (Number) Action: This indicator has been Revised Number of HZP rolling stock rehabilitated 0.00 0.00 1.00 6.00 12.00 12.00 12.00 (Number) Action: This indicator has been Revised The World Bank Sustainable Croatian Railways in Europe (P147499) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 DMUs and diesel 0.00 0.00 1.00 4.00 4.00 4.00 4.00 4.00 locomotives (Number) Action: This indicator has been Revised EMUs and electric locomotives 0.00 0.00 0.00 2.00 8.00 8.00 8.00 rehabilitated (Number) Action: This indicator has been Revised HZP commercial revenues per employee 0.26 0.25 0.24 0.26 0.21 0.21 0.21 0.21 (in HRK) (Number) Action: This indicator has been Revised HZP four new DMU trains 0.00 0.00 0.00 0.00 0.00 4.00 4.00 (Number) Action: This indicator has been Revised Support to HZ Cargo Restructuring Number of HZC staff 0.00 500.00 500.00 500.00 880.00 910.00 910.00 910.00 retrenched (Number) Action: This indicator has been Revised Number of HZC rolling stock rehabilitated 0.00 711.00 1,220.00 1,718.00 1,863.00 2,161.00 2,161.00 2,161.00 (Number) The World Bank Sustainable Croatian Railways in Europe (P147499) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 6 Action: This indicator has been Revised Wagons (Number) 0.00 694.00 1,194.00 1,678.00 1,850.00 2,150.00 2,150.00 Action: This indicator has been Revised Locomotives 0.00 0.00 0.00 7.00 7.00 11.00 11.00 11.00 (Number) Action: This indicator has been Revised Support to HZ Infrastructure Restructuring Number of HZI staff 0.00 260.00 470.00 470.00 500.00 700.00 900.00 900.00 retrenched (Number) Action: This indicator has been Revised Number of kms of line sections rehabilitated or 0.00 19.60 149.80 172.30 258.78 306.25 306.25 306.25 improved (Kilometers) Action: This indicator has been Revised Fatalities per 10 million 10.00 7.00 train-km (Number) IO Table SPACE The World Bank Sustainable Croatian Railways in Europe (P147499)