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THE WORLD BANK GROUP -- nfoShop Public Disclosure Authorized Initial Project Information Document (PID) Project Name CROATIA-RIJEKA GATEWAY PROJECT Region Europe and Central Asia Region Sector Roads and highways (45%); Ports; waterways and shippinig (45%); Central government administration (10%) Project ID P043195 Supplemental Project Borrower(s) PRA, HC, HAC Implementing Agency PRA, HC, HAC Address Port of Rijeka Authority (PRA) Address Riva 1 Street, Rijeka 51 000 Public Disclosure Authorized Contact Person. Mr Bojan Hlaca, Director General Tel 385-51-212 974 Fax 385-51-213 112 Email Lucka-uprava-ri@ritel hr Croatian Roads (HC) Address Voncinina 3, Zagreb 10001 Contact Person Mr Vladimir Bizjak, President of the Management Board Tel 385-1- 472-2580 Fax 385-1-472-2581 Email [email protected] hr Croatian Motorways (HAC) Address. Voncinina 2, Zagreb 10001 Contact Person Mr Stanko Kovac, President of the Management Board Public Disclosure Authorized Tel 385-1-469-4400 Fax: 385-1-469-4500 Email stanko kovac@hac hr Environment Category A Date PID Prepared March 25, 2003 Auth Appr/Negs Date May 17, 2003 Bank Approval Date June 24, 2003 1. Country and Sector Background Croatia has achieved a great deal in the transport sector since independence: war damage has been repaired, a body of law generally suitable to govern the transport sector of a sovereign State has been created, and a number transport enterprises have been privatized. Sector issues were assessed by the Bank in Republic of Croatia- Policy Directionsfor Transport(Report No. 19447-hr, June 15, 1999), and as part a comprehensive diagnosis of strategic development and sector policy issues and recommendations prepared for the new Govemment (4 Policy Agendafor Reform and Growth February Public Disclosure Authorized 14, 2000). The main sector issues and Government strategy are summarized below: 2 PID Economic Role of Rileka Port Transport plays an important role in international trade which has become more significant since independence and in reestablishing potentially profitable transit traffic. The Government has recognized the key role of Rijeka Port by declaring that Rijeka and Ploce are the two strategic ports (the latter primarily serves Bosnia and Herzegovina, BiH). Rijeka Port's physically protected position and natural depth of 25 meters makes it the only port in the North Eastern Adriatic Range (NEAR) capable of handling the largest vessels. However, between 1980 and 1997, the Port of Rijeka lost almost 70 percent of its total throughput in general and bulk cargo. While the total Northern Adriatic market (Rijeka, Koper, Trieste excluding liquid bulk traffic) increased from about 16 million tons in 1990 to 23 million tons in 2001, Rijeka's share of the market declined from 35% to 12%. Annex II provides a detailed SWOT analysis of the three competing ports. The main reasons for the decline in traffic at Rijeka are the wars in Croatia and BiH which resulted in high insurance rates for using the port, the loss of traffics to/from the forner Republic of Yugoslavia (FRY), restructuring of the economies of the region resulting in a decline of bulk traffic, inefficient operations at Rijeka, and poor land connections. Several considerations support the reestablishment of the port of Rijeka as the natural gateway for Croatia and Central Europe: (i) peace and political stability within the Balkans, reenforced by the signing in 2001 of a memorandum of understanding on Trade Liberalization and Facilitation by eight heads of State under the Stability Pact; (ii) Rijeka's competitive advantage as the only deep water port in the northern Adriatic which gives it a significant cost advantage for bulk and other volume traffics; (iii) Rijeka's historical role as the primary gateway for Hungary, reenforced by Hungarian policy statements and investments in Rijeka; (iv) the resumption of traffic to/from FRY; (v) increasing involvement of the private sector in port operations, e.g., the container terminal recently concessioned to LR, which has a technical assistance agreement with an international private operator (Contship Italia); (vi) the improvement in land connections, i.e. the construction of motorways financed by the EBRD, improvements in railway efficiency supported under the ongoing Railway Modernization and Restructuring Project (RMRP) and customs improvements supported by the Bank under the Trade and Transport Facilitation in Southeast Europe (TTSFE) Project, and (vii) rationalization of the Croatian port system by concentrating international traffic at Rijeka and Ploce. Finally, it is worth underlining that the Rijeka Gateway project will improve one of the main Trans-European corridor (Corridor Vb), which is critical for both Serbia-Montenegro and Bosnma-Herzegovina for which Rijeka constitutes the main natural access to the Adriatic. Privatization of Port Operations The Government has taken a number of steps to reform port operations, including adopting a new port law, creating a landlord port authority at Rijeka, and initiating port concessions with consultant assistance financed under a PHRD grant. However, the Government granted Luka Rijeka (LR, port operating company) a global 12 year priority concession to operate the port in 2000. LR, directly through the priority concession or indirectly through joint ventures in the concession for the Container Terminal and in other potential projects, controls most Rijeka port operations. However, its financial capacities are quite limited, due to low levels of activity, accumulated debt and overstaffing. In such a situation, this public monopoly cannot meet the demand for performance, quality and competitiveness according to standard international benchmarks, and has limited capacity or incentive to become more efficient. The Bank has agreed to the proposal made by the Ministry of Maritime Affairs, Transport and Communications (MMATC) to privatize LR during the priority concession. This would be achieved by putting up for sale a majority of the shares of the various Successor Companies ('daughter' companies) to be created in accordance with the priority concession Private investors would be selected -- through public competitive bidding -- according to their experience in port operations, technical and financial capacity and commitment to develop port activity in Rijeka. In order to implement this, the following questions have been examined further under studies financed 3 PID under a PHRD (Japanese) grant and the Project Preparation Facility (PPF): (i) organization of operations, (ii) creation of profit and cost centers for each terminal operation and other activities, (iii) further transformation into daughter companies, (iv) privatization of the mother company and/or independent (sets of) subsidiaries, (v) human resource strategy, (vi) analysis of the status of the accumulated debt, and (vii) transfer of the various terminals and corresponding Successor Companies to private operators The conditions under which the various terminals will be transferred to private concessionaires have also been examined. This includes the following: (i) review of general objectives and of contractual targets (traffic levels, performances, quality etc.), (ii) respective responsibilities and commitments of the Port of Rijeka Authority (PRA) and of the concessionaires regarding maintenance and development of infra- and superstructure, (iii) equipment, (iv) extension of the concessions to allow new investment plans, (v) revision of port tariffs, light dues, and (vi) periodic review of performance. Real owinership rights during the concession remain an obstacle to private finanicing, and following the Port Privatization Workshop held in March, 2002, MMATC is preparing appropriate amendments to the Maritime Domain and Seaports Act. The agreed tine frame for the privatization of the port operations -- expressed in tons operated by the private sector/total port tonnage per year -- is as follows: from 0% in 2004 to 30% in 2005, 50% in 2006, and 80% in 2008. Redundant Port Stalt The labor restructuring strategy will be to work out all the details of involuntary departure with the union prior to announcing a well publicized voluntary program under a limited time offer (two months) with an incenitive of 1,000 Kuna per year of service to a maximum of 25 years for eligible workers. Voluntary departure will be targeted to two groups, the large group of workers who are often absent due to illness, who are on the protected list and who therefore cannot be made redundant under labor legislation and to surplus white-collar workers. Workers considered vital to the continuing operation of LR, workers who are eligible to retire, and workers who are eligible for pre-retirement departure will not be eligible for departure with enhanced severance. The IBM business plan calculations for staffing levels in Successor Companies, and the RMG estimates of approximately 70 remaining staff in a residual Luka Rijeka suggest a surplus of staff in the range between 687 and 776 workers. LR Management has accepted a staff surplus in the range between 550 and 650. The LR Social Program will mitigate the negative impact of the severance program which will be implemented in two phases (i) departure of 380 staff on a voluntary basis by the end of 2004; and (ii) departure of 400 staff during the period 2005-20067 Based on this level of severance the cost of labor restructuring measures will be in a range between USD 5.9 and USD 7.0 million in a low to medium cost scenario and between USD 6.8 and USD 8.0 million in a medium to high cost scenario. The Croatian Employment Service (CES) has discussed with Luka Rijeka management arrangements to offer the services of the Mobility Center (MC) in Rijeka, which has to date been assisting HZ workers in on a pilot basis. The Ministry of Labor in Croatia is the beneficiary of a EU program to assist the CES build on the pilot Mobility Center initiative, including funding of Euro 1.5 million for a labor redeployment fund. The LR restructuring project will build on the number of lessons learned from the HZ experience in terms of labor redeployment.