The World Bank Sustainable Croatian Railways in Europe (P147499)
Total Page:16
File Type:pdf, Size:1020Kb
The World Bank Sustainable Croatian Railways in Europe (P147499) REPORT NO.: RES27033 Public Disclosure Authorized RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SUSTAINABLE CROATIAN RAILWAYS IN EUROPE APPROVED ON APRIL 30, 2015 TO Public Disclosure Authorized HZ INFRASTRUCTURE,HZ CARGO,HZ PASSENGER TRANSPORT TRANSPORT & DIGITAL DEVELOPMENT EUROPE AND CENTRAL ASIA Public Disclosure Authorized Regional Vice President: Cyril E Muller Country Director: Arup Banerji Senior Global Practice Director: Jose Luis Irigoyen Practice Manager/Manager: Juan Gaviria Task Team Leader: Jean-Francois Marteau Public Disclosure Authorized The World Bank Sustainable Croatian Railways in Europe (P147499) ABBREVIATIONS AND ACRONYMS Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. DMU Diesel Multiple Unit DO Development Objectives EBRD European Bank for Reconstruction and Development EMU Electric Multiple Unit ERR Economic Rate of Return EU European Union EUR Euro HRK Croatian Kuna HZ Croatian Railways HZC HZ Cargo HZI HZ Infrastructure HZP HZ Passenger Transport IBRD International Bank for Reconstruction and Development IP Implementation Progress IT Information Technology MSTI Ministry of Sea, Transport and Infrastructure SOE State Owned Enterprise TENT-T Trans-European Transport Network in Europe VAT Value Added Tax 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 The World Bank Sustainable Croatian Railways in Europe (P147499) 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_CURRENTPDOSummary 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 29.91 58.44 IBRD-85010 30-Apr-2015 06-May-2015 04-Aug-2015 31-May-2020 48.20 18.76 29.76 IBRD-85020 30-Apr-2015 06-May-2015 04-Aug-2015 31-May-2020 46.50 29.60 16.83 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No Note to Task Teams: End of system generated content, document is editable from here. The World Bank Sustainable Croatian Railways in Europe (P147499) 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 January 17, 2017 to provide funding for the rehabilitation of the railway line Savski Marof - Zagreb and consultancy support for the operational restructuring of HZ Infrastructure. In addition, the restructuring would enable the use of World Bank funding for new Diesel Multiple Units (DMU) trains for HZ Passenger Transport, as requested by the Republic of Croatia in a complementary request dated August 28, 2017. The restructuring entails (i) modification of the Intermediate Outcome Indicators for the project, (ii) modification of the project description, and (iii) revision of disbursement estimates and reallocation between disbursement categories. The restructuring does not modify the safeguard category or trigger new safeguard policies. The processing and acceptance of the government’s proposal for restructuring took significant time as the Bank requested formal evidence of government commitment to the proposed reforms supported by the restructuring, including a letter of sector policy (under preparation) and the inclusion of rail reform in its National Reform Program (adopted in March 2018). 2. The Project’s progress towards the achievement of the Project Development Objectives (PDO) is Moderately Satisfactory. The progress has been steady for the past two years of the Project implementation, with Moderately Satisfactory ratings for DO since June 2016. The IP was downgraded to Moderately Unsatisfactory at the end of 2017 because of slow implementation of project activities and insufficient progress in companies’ restructuring. Recently, the Ministry of Sea, Transport and Infrastructure (MSTI) has started the preparation of a letter of sector policy that include reforms that would support each company’s restructuring and insure their timely implementation. It has also started to reinforce the capacity of the ministry to coordinate the project. All project audits for the three borrowers are current and satisfactory. 3. This is the first restructuring for the Sustainable Croatian Railways in Europe Project, and it is expected that with the restructuring and the implementation of the proposed measures and the Sector Policy Letter , the project status will become satisfactory. The proposed changes would directly improve the project capacity to support preparation and implementation of restructuring programs for HZ Infrastructure and HZ Passenger Transport by reinforcing funding for capacity building and technical assistance, improving safety and reliability of transport, modernizing and increasing availability of train sets, and decreasing companies’ operating costs. Overall the modification of investment will allow an increased impact on service quality. The restructuring would also improve the capacity of MSTI to finalize its strategy on the future of HZ Cargo and in sector coordination. 4. As of May 10, 2018, the following percentages of loan proceeds have been disbursed: 34.08 percent of loan proceeds for HZ Infrastructure (EUR 26.92 million) and 37.1 percent of loan proceeds for HZ Passenger Transport (EUR 15.95 million),and 63.8 percent for HZ Cargo (EUR 26.5 million) and major contracts for infrastructure emergency investments, rolling stock rehabilitation and institutional development have been signed. The project is rated satisfactory on financial management and the implementing agencies submit satisfactory audit reports on a timely basis. 5. The Borrower has requested the Bank to include partial funding for the rehabilitation of the railway line Savski Marof – Zagreb, a priority section of the TEN-T network that was not eligible for EU funding, instead of several smaller railway line rehabilitations of a lesser importance which were eligible for financing under the loan. In addition, HZ The World Bank Sustainable Croatian Railways in Europe (P147499) Infrastructure wishes to use a higher share of loan proceeds for consultancy support for implementation of its operational restructuring. For HZ Passenger Transport, a change in component description would enable financing of new DMU trains instead of rehabilitation of old locomotives and thus directly support implementation of its restructuring program. Finally, while starting the preparation of the letter of sector policy, the MSTI has requested to increase the amount allocated to coordination and overall sector restructuring, including a financial advisor to help finding a strategic partner for HZ Cargo, and to correspondingly reduce the size of the loan directly benefiting HZI. 6. For HZ Infrastructure, the rehabilitation of the Savski Marof – Zagreb line would reduce maintenance costs, and would translate into reduced operating costs for operators. During the Initial Project appraisal, the Bank had carried out a prioritization of all sections of the network. The Savski Marof – Zagreb line was assessed among the two first priority for rehabilitation together with lines inside Zagreb. It is of strategic importance as a part of the TEN-T corridor and worsening condition of the infrastructure with substantial speed restrictions (60 km/h). The total value of the Savski Marof – Zagreb line is EUR 37.6 million, of which the Bank would finance EUR 29.5 million of works and equipment and HZ Infrastructure would finance EUR 8.1 million of works. The detailed design and procurement documentation are finalized, and works duration is currently estimated to take two years, which remains to be confirmed at contract signing. The Savski Marof – Zagreb line had not been nominated for the Bank financing during appraisal as it was deemed possible to finance with EU funds. As it was later confirmed that the EU funds were not able to cover the line rehabilitation, HZ Infrastructure requested to include it in the Project due to its urgency and their inability to secure large funds from commercial sources. 7. In addition, the loan restructuring would reallocate funds to support the implementation of a comprehensive restructuring plan that was initiated by the new management team appointed in 2016-2017. The restructuring would improve sustainability as it should tackle system inefficiencies, including procurement, maintenance and traffic management, and diminish the company’s reliance on the state budget. A company’s diagnostic and a time-bound restructuring plan were prepared (first phase). The company has already started implementing cost savings measures, including removal of sidings at marshalling yards aimed at minimizing marshalling activities, partial restructuring of its