PUBLIC SIMULTANEOUS DISTRIBUTION DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK PANAMA SUPPORT FOR THE DEVELOPMENT OF TERRITORIAL CONNECTIVITY IN PANAMA'S CENTRAL AND WESTERN REGIONS (PN-L1147) LOAN PROPOSAL This document was prepared by the project team consisting of: Manuel Rodríguez, Project Team Leader (TSP/CCO); Sergio Deambrosi, Alternate Project Team Leader (INE/TSP); Ana María Pinto, Edgar Zamora, Reinaldo Fioravanti, and Tania Alonso (INE/TSP); Alejandra Caldo (TSP/CPN); Carmen Albertos (SCL/GDI); José Luis de la Bastida and Pilar Larreamendy (VPS/ESG); Sandra López and Daniela Zuloaga (CSD/CCS); Ignacio Barragán (LEG/SGO); Raúl Sánchez (SPD/SDV); and Ezequiel Cambiasso, Christian Contín Steinemann, and David Ochoa (FMP/CPN). This document is being released to the public and distributed to the Bank’s Board of Executive Directors simultaneously. This document has not been approved by the Board. Should the Board approve the document with amendments, a revised version will be made available to the public, thus superseding and replacing the original version. CONTENTS PROGRAM SUMMARY I. DESCRIPTION AND RESULTS MONITORING ................................................................ 1 A. Background, problem addressed, and rationale ............................................ 1 B. Objectives, components, and cost .............................................................. 12 C. Key results indicators ................................................................................. 14 II. FINANCING STRUCTURE AND MAIN RISKS ............................................................... 15 A. Financing instruments ................................................................................ 15 B. Environmental and social risks ................................................................... 15 C. Fiduciary risks ............................................................................................ 16 D. Other risks and key issues .......................................................................... 16 III. IMPLEMENTATION AND MANAGEMENT PLAN ............................................................ 17 A. Summary of implementation arrangements ................................................ 17 B. Summary of results monitoring arrangements ............................................ 19 APPENDIXES Proposed resolution - ii - ANNEXES PRINTED ANNEXES Annex I Summary Development Effectiveness Matrix Annex II Results Matrix Annex III Fiduciary Agreements and Requirements LINKS REQUIRED 1. Multiyear execution plan and annual work plan 2. Monitoring and evaluation plan 3. Environmental and social management report 4. Procurement plan OPTIONAL 1. Ex ante economic analysis 2. Technical annex to program PN-L1147 3. Veraguas connectivity and productivity annex 4. Sociocultural analysis of the Besikó district – Ngäbe-Buglé Indigenous Region 5. Analysis of fiduciary institutional capacity 6. Analysis of technical and socioenvironmental institutional capacity 7. Annual maintenance plan of the Ministry of Public Works (2016) 8. Climate change annex to the program - iii - ABBREVIATIONS AADT Annual average daily traffic B/. Balboas CGR Controlaría General de la República [Office of the Comptroller General] DNC Dirección Nacional de Contabilidad [National Accounting Office] ESMP Environmental and Social Management Plan ESMR Environmental and Social Management Report ICB International competitive bidding INEC National Institute of Statistics and Censuses IRR Internal rate of return MOP Ministry of Public Works NCB National competitive bidding RED Roads Economic Decision [model] TSA Treasury Single Account UME Unidad de Mantenimiento por Estándares de Servicio [Unit for Maintenance through Service Standards] PROGRAM SUMMARY PANAMA SUPPORT FOR THE DEVELOPMENT OF TERRITORIAL CONNECTIVITY IN PANAMA'S CENTRAL AND WESTERN REGIONS (PN-L1147) Financial Terms and Conditions Borrower: Republic of Panama Flexible Financing Facility (a) Amortization period: 20 years Executing agency: Ministry of Public Works (MOP) Disbursement period: 4 years Grace period: 4.5 years (b) Source Amount (US$) % Interest rate: LIBOR-based IDB (Capital Ordinary): 87,000,000 100 Credit fee: (c) Inspection and supervision fee: (c) Total: 87,000,000 100 Weighted average life: 12.25 years Approval currency: United States dollar Program at a Glance Program objective/description: The program’s objective is to help increase productivity in the central and western regions of Panama by providing infrastructure and contributing to the development of safe, reliable, and affordable transport services, as well as ensuring that these services are available to provide access to markets and for the use of the Ngäbe-Buglé indigenous communities. Its specific objectives are to improve levels of service and make the road segments included in the program more accessible by (i) reducing average vehicle operating costs (US$ per vehicle-kilometer) and travel times (minutes per vehicle/project); (ii) reducing the time it takes residents of Ngäbe-Buglé communities to reach basic health care services; and (iii) enhancing the managerial capacity of the MOP to establish standards related to: climate change resilient infrastructure; road safety improvement; and the integration of infrastructure into the sociocultural environment of indigenous communities. Special contractual conditions precedent to the first disbursement of the loan proceeds: the executing agency will have presented evidence that the operational units of the MOP responsible for technical, legal, financial, social and environmental management, and procurement matters have assigned the personnel needed to support the program coordination office and ensure proper execution of the program (paragraph 3.4). Special contractual conditions for execution: (i) prior to completion of the works envisaged under the program, the MOP will have included these works in the corresponding maintenance contracts by level of service once the post-execution maintenance period for the works has concluded (paragraph 3.5); and (ii) during program execution, the executing agency agrees to fulfill, to the Bank’s satisfaction, the terms and conditions set out in Annex B of the program’s environmental and social management report (ESMR) and in its environmental and social management plan (ESMP). Exceptions to Bank policies: None. Strategic Alignment Challenges:(d) SI PI EI Crosscutting themes:(e) GD CC IC (a) Under the terms of the Flexible Financing Facility (document FN-655-1), the borrower has the option of requesting changes to the amortization schedule, as well as currency and interest rate conversions. The Bank will take operational and risk management considerations into account when reviewing such requests. (b) Under the flexible repayment options of the Flexible Financing Facility, changes to the grace period are permitted provided that they do not entail any extension of the original weighted average life of the loan or the last payment date as documented in the loan contract. (c) The credit fee and inspection and supervision fee will be established periodically by the Board of Executive Directors as part of its review of the Bank’s lending charges, in accordance with the applicable policies. (d) SI (Social Inclusion and Equality); PI (Productivity and Innovation); and EI (Economic Integration). (e) GD (Gender Equality and Diversity); CC (Climate Change and Environmental Sustainability); and IC (Institutional Capacity and Rule of Law). I. DESCRIPTION AND RESULTS MONITORING A. Background, problem addressed, and rationale 1.1 Macroeconomic context. For the past 10 years, Panama has been one of the world’s fastest growing economies. Between 2010 and 2017, it achieved an average annual growth rate of 6.9%, more than double the regional average.1 For 2018, its projected growth rate remains at 5.4%, the highest in Latin America,2 in a context of macroeconomic stability, with moderate inflation and a fiscal deficit under control. As regards the external sector, while the current account deficit remains high (5% of GDP in 2017), it is financed by foreign direct investment. The Panamanian economy is largely dominated by the logistics and transport sector, which in 2017 accounted for 24.9% of total GDP growth,3 while the agricultural sector contributed only 1%. 1.2 Poverty. Official poverty statistics in Panama show that the overall rate has fallen by 4.6%4 between 2012 and 2015, which is more than in the rest of Central America,5 largely as a result of the strong economic growth of the past decade. The figures for 2015 show 23% of the population—or 905,257 people—living in poverty.6 Of them, 404,969 were living in extreme poverty,7 that is to say, 10.3% of the Panamanian population. The situation is most dire in the indigenous regions, where 84.6% of the population lives in poverty, 65% of which in extreme poverty.8 These areas typically comprise remote communities, where access to such basic services as education and health care is limited and gender inequality9 blatant. 1.3 Road network. Road density in Panama (27 km per 100 km2) is higher than the average for Latin America (22 km per 100 km2),10 and in terms of kilometers of paved roads per 100,000 inhabitants, Panama, with 171, performs well compared to such neighboring countries as Mexico (118), Nicaragua (54), and Guatemala (48). In Central America, it is surpassed only by Costa Rica (227).11 Panama’s road network12 comprises 4,117 kilometers of urban roads and 15,902 kilometers