The World Bank Sustainable Croatian Railways in Europe (P147499) REPORT NO.: RES41346 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: Anna M. Bjerde Country Director: Gallina Andronova Vincelette Regional Director: Lucio Monari Country Manager: Elisabetta Capannelli Practice Manager/Manager: Karla Gonzalez Carvajal Task Team Leader(s): Dominic Pasquale Patella The World Bank Sustainable Croatian Railways in Europe (P147499) ABBREVIATIONS AND ACRONYMS DMU Diesel Multiple Unit EMU Electric Multiple Unit EU European Union EUR Euro HRK Croatian Kuna HZ Croatian Railways HZC HZ Cargo d.o.o. HZPP HZ Putnicki prijevoz d.o.o HZI HZ Infrastruktura d.o.o. / MSTI IBRD International Bank for Reconstruction and Development MSTI Ministry of Sea, Transport and Infrastructure NGEU Next Generation European Union PDO Project Development Objective 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 30-Nov-2021 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 (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-85000 30-Apr-2015 06-May-2015 04-Aug-2015 30-Nov-2021 88.65 48.23 40.04 IBRD-85010 30-Apr-2015 06-May-2015 04-Aug-2015 30-Nov-2021 48.20 42.38 6.22 IBRD-85020 30-Apr-2015 06-May-2015 04-Aug-2015 30-Nov-2021 46.50 41.42 5.08 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 I. PROJECT STATUS A. Progress towards achieving the Project Development Objective 1. Overall progress towards the Project Development Objective remains Moderately Satisfactory but there is a risk that long awaited reforms may be further delayed or would not materialize during the life of the Project. Achievement of the Project Development Objective is highly dependent on two key results that have yet to be achieved, specifically: (i) signing of a multi-annual infrastructure contract that would govern HZI’s program of infrastructure investment and management; and (ii) completion of a strategic partnership for HZC. These are captured in the Project’s results framework as PDO indicators. The multi-annual infrastructure contract is strategically important because it can enhance governance of the capital program needed to address Croatia’s infrastructure obsolescence challenges which are at the core of high operating costs. Similarly, a strategic partnership for HZC is important to capturing the business synergies needed improve both the company’s viability and the overall competitiveness of railway freight in Croatia. These key items are captured in the Government of Croatia’s draft Railways Letter of Sector Policy (LSP), which aims to guide institutional reforms and modernization investments in the sector. The LSP is currently under review with the Cabinet of Ministers and pending signature by the Prime Minister. The date of approval has been affected by political economy considerations and parliamentary elections that were held on July 5, 2020. While piecemeal reforms remain possible in the absence of an overarching Government decision, their combined impacts may be insufficient to affect the railway sector’s operational efficiency and financial sustainability. The Project’s design is not contingent on the Letter of Sector Policy being signed but its absence would heighten high risk around achievement of the PDO given the implied lack of commitment to sector reforms – particularly around the two PDO level results noted above. 2. While approving the Letter of Sector Policy would give a positive signal, Croatia’s railway clearly needs more than policy reforms to improve operational efficiency and financial sustainability. The foremost challenge to achieving results is that Croatia’s railway is underdeveloped and ineffective at attracting demand relative to other modes of transport. Aside from the stated objective of the Project, Croatia’s own Transport Development Strategy (2017-2030) identifies rail transport as critical to achieving objectives around environmentally sustainable transport, public mobility, international connectivity, and integration with the EU single market. However, the key actions needed to achieve these objectives were not introduced. Approximately 84% of land-based passenger-kilometers traveled in Croatia and 82% of tonne-kilometers for freight move via road-based modes. Road-dependent transport accordingly accounts for 96% of Croatia’s transport sector CO2 emissions. Railways connectivity with neighboring countries remains poor and only 5% of Core TEN-T railways network lines in Croatia have been completed. A key uncertainty in achieving the Transport Develop Strategy’s aims and the Project’s expected results chain is the extent to which the railway’s operational efficiency and the financial sustainability can noticeably improve without a step change to the effectiveness of railway services. Croatia’s fiscal decisions have not and currently do not prioritize rail investment which would be needed to achieve this. There are three key limiting constraints that this imparts on the sector:  Low railway quality vs. highly developed roads deprive the railway of demand: The World Economic Forum’s Global Competitiveness Report ranks the quality of Croatia’s railway infrastructure 70th out of 101 countries considered whereas Croatia’s roads were ranked 19th best in the world. This imbalance reflects a clear priority given to roads since independence. Between 1995-2017 Croatia invested approximately EUR 11.7 billion in its road network vs. EUR 1.6 billion in its railway network (7 times less in rail). On average, between 2011 and 2016, EU member states invested EUR The World Bank Sustainable Croatian Railways in Europe (P147499) 110,349 per km of railway network whereas Croatia invested EUR 23,065 (4.7 times less per km). This large and historic imbalance of investment between roads and rail has understandably achieved the exact opposite of the Transport Development Strategy’s stated objectives and there is an acute need to rebalance investment towards rail if those objectives are to be met.  High operating costs due to obsolescence constrain the plausible financial improvement that is possible: The Companies’ cost structures are highly incumbered by obsolete assets which “bake in” high labor requirements and poor financial performance. Approximately 58% of railway track-kilometers predate Croatia’s independence in 1991. Approximately 30% of track kilometers date from pre-1980. Only about 10% of Croatia’s network has been rehabilitated since EU accession. Croatia’s railway is still configured for legacy traffic from the former Yugoslavia era and includes excessively complex and costly infrastructure configurations that no longer serve an operational thesis. Obsolescence drives high requirements for labor and correspondingly high fiscal costs.  Underinvestment limits ability to provide effective rail services even where demand is most robust: Suburban lines around Zagreb offer the highest levels of competitiveness for railway services as indicated by the highest levels of passenger demand and cost recovery in Croatia. However, infrastructure on key suburban lines is single track which limits the frequency of rail service that can be provided in this key market. At the same time, HZPP lacks the modern EMU / DMU rolling stock fleet with bidirectional operating capabilities that would be necessary to provide dense services with rapid turn arounds at the terminus of suburban routes. The legacy of underinvestment in markets where the railway does offer competitiveness leaves latent demand which the railway would otherwise be able to capture. 3. COVID-19 is affecting Croatia’s railway companies unevenly and future needs remain uncertain. During the COVID- 19 pandemic, Croatia temporarily closed passenger rail services operated by HZPP. HZPP continued to receive its pre-agreed Public Service Obligation subsidy under “force majeure” clauses of the contract with MSTI but was not able to earn fares revenues during this period. Services subsequently reopened in May 2020 with additional mitigations to reduce crowding, sanitize trains, and protect passengers. Croatia’s Cargo market was lightly affected by COVID-19 (even showing a small increase in demand). The infrastructure network saw reduced use due to suspended passenger services but it should be noted that track access charge is a relatively small component of HZI’s financial viability. Greater impacts of COVID-19 were felt in the delivery of HZI’s capital program. Most notably, work on the IBRD-financed contract for rehabilitating the Savski Marof- Zagreb section was suspended. This was restarted in May 2020. It remains unclear what additional needs COVID-19 impacts will create in the sector. The Ministry of Finance has not requested restructuring or other actions of the World Bank at this time. 4. Investment needs are large and affordability is a key concern amidst COVID-19 fiscal constraints but the Next Generation EU program and the European Green Deal may offer opportunities. The World Bank’s indicative estimates suggest that Croatia’s indicative railway investment needs include: (i) EUR 4.4 billion for rehabilitation works to fully renovate lines that have medium to high levels of demand; (ii) EUR 727 million for rolling stock modernization; (iii) EUR 796 million for modernization of signaling and traffic control; and (iv) EUR 469 million for urgent maintenance works to address safety concerns and preserve legacy assets. At the same time the Government of Croatia’s fiscal space is extremely limited for supporting railways investment. The Bank’s estimates suggest that COVID-19 related impacts have widened Croatia’s budget deficit to 10% of GDP and driven a projected 9.3% decline in GDP for 2020. Prior to the COVID-19 recovery package approved by the European Parliament on July 21, 2020 it was expected that European Union funds had the approximate potential for supporting EUR 2-4 billion of Croatia’s railway investment needs. However, the scale of support that Croatia may now access from the Next Generation EU (NGEU) program that is leading the EU’s fiscal response to COVID-19 has significantly increased potential funding. The NGEU combined with the European Green Deal offers a potential opportunity to accelerate investment. One such opportunity that has been identified in the draft Letter of Sector Policy is signaling modernization and use of centralized traffic control which has a strong business case based on preliminary analysis. 5. Despite overall challenges there is a leading opportunity to prepare for future improvements in operational efficiency and financial sustainability using Project interventions. The railway sector in Croatia is at a key inflection point with respect to its demographic characteristics and the potential to apply technologies that would fundamentally transform future cost The World Bank Sustainable Croatian Railways in Europe (P147499) structures and service quality. Specifically, more than 40% of HZPP’s workforce (747 people) are over 50 years old, and more than 53% of HZI’s workforce (2,651 people) is over 51 years old. The next 10-15 years will see the majority of railways staff in Croatia enter natural retirement. At the same time, the European Railway Traffic Management System (ERTMS) that has been developed for interoperability across EU railways offers the ability to deploy railways signaling and traffic control technology that could reduce the labor intensity needed to operate of Croatia’s railway infrastructure by 90% or more. ERTMS, combined with modern rolling stock would both transform operational efficiency and the financial characteristics of railway operations. Croatia’s railway companies are not currently positioned for deploying an ERTMS modernization program. However, the project is supporting initial steps towards enabling such a program to develop including a technical assistance activity to prepare functional specifications that Croatia would adopt for its ERTMS deployment. B. Implementation progress Past restructurings 6. The project has undergone two restructurings to date. A first project restructuring was done in June 2018 to enable the following: (i) reallocation of IBRD financing from Component D (“support to HZI Restructuring”) to Component A (“Project Coordination and Sector Policy Support” which is led by MSTI); (ii) revision to the project results framework; and (iii) modification of component descriptions to enable HZPP’s purchase of four DMU train sets and to allow the rehabilitation of the Savski Marof- Zagreb section of HZI’s network. Specific modifications to the Project’s Results Framework undertaken during this first restructuring included: (i) deletion and replacement of the Project’s Citizen Engagement indicator; (ii) conversion of an existing intermediate indicator into a new PDO indicator (“HZI million train-km per track-km”); (iii) deletion of three intermediate indicators; and (iv) addition of two new intermediate indicators (one of which being the new Citizen Engagement indicator); (iv) revision of target values for selected indicators at the PDO and intermediate level. Disbursement estimates were updated at the time of this restructuring. 7. A second restructuring was done in June 2019 to enable the following: (i) changes to the Project results framework for both PDO and intermediate level indicators; (ii) extension of Project Close from May 30, 2020 to November 30, 2021 to allow for completion of rehabilitation works along the Savski Marof – Zagreb section. Specific changes to the Project’s Results Framework included: (i) deletion of two PDO level indicators; (ii) addition of two new PDO level indicators; (iii) revision of target values for selected indicators at the PDO and intermediate level. Disbursement estimates were revised at the time of this restructuring. 8. The Project is an advanced stage of implementation with about 84% of funds either disbursed or committed to active contracts. This current restructuring accordingly aims at three things: (i) enabling a scale up of HZPP’s rolling stock modernization program with remaining funds under loan number IBRD85010; (ii) adding an intermediate indicator on preparing a signaling and traffic control modernization program which is strategically relevant to achieving the PDO; and (iii) addressing needs in the Project’s Results Framework around citizen engagement and attribution. Component 1 (MSTI): Component 1: Project Coordination and Sector Policy Support 9. The objective of this component is to assist the MSTI to enhance its institutional capacity as coordinator and to improve governance / overall management of Croatia’s railway sector. The Component has two key areas of focus, including: (i) support to an Asset Management assignment aimed at clarifying legal titles and optimizing returns from financial / physical assets across Croatia’s public railways companies; and (ii) assistance to MSTI for project coordination and sector policy. This later focus has sought to improve definition of railway services obligations with HZP and HZI and support preparation of a railway sector development and infrastructure maintenance plan. 10. Key outputs of Component 1 to date during implementation include:  Development of an initial Public Service Contract that was signed in December 2018 between MSTI and HZPP to govern delivery of passenger rail services. 11. Ongoing Component 1 activities that are underway include: The World Bank Sustainable Croatian Railways in Europe (P147499)  An assignment to conduct legal and financial due diligence of assets for Croatia’s public railway companies remains underway. This work has produced its second deliverable which is being reviewed by MSTI and the Companies;  A Financial Advisory assignment to support the Government of Croatia’s decision on HZC’s future (divestiture, strategic partnership, or insolvency proceedings). The second deliverable of this assignment has completed, and the activity is ready for a 3rd and final phase to support a transaction that would be initiated upon a decision from MSTI. Component 2 (HZPP): Support to HZ Passenger Transport Restructuring 12. The objective of the Component 2 is to support HZPP to improve its operational and financial efficiency in order to deliver better services in a financially sustainable way. The main elements of this component include: (i) retrenchment of staff; (ii) rolling stock investment to improve efficiency of the fleet; (iii) IT modernization and integration; and (iv) technical assistance to adapt business processes and develop capacity. 13. Key outputs of Component 2 to date during implementation include:  Retrenchment of 376 staff and payment of corresponding severance packages;  Purchase of four new Diesel Multiple Unit (DMU) trainsets has completed;  Various contracts to provide spares for rolling stock maintenance and rehabilitation have completed;  12 trainsets have been rehabilitated under the Project. 14. Ongoing Component 2 activities that are underway include:  An assignment designed to integrate business process modernization and software in support of HZPP’s management systems has been developed and is under procurement. This includes work to identify and purchase software for HZPP’s fleet and crew management functions; Component 3 (HZC): Support to HZ Cargo Restructuring 15. The objective of this component is to support HZC to increase its operational efficiency and financial situation to deliver better services in a financially sustainable way. This includes: (i) retrenchment; (ii) periodic maintenance of rolling stock, (iii) IT modernization and integration, and (iv) capacity building in management and restructuring. 16. Key outputs of Component 2 to date during implementation include:  Retrenchment of 1,305 workers has been completed;  Rehabilitation of a subset of HZC’s electric locomotive fleet (Series 1141) has completed and modernized 7 locomotives. 17. Ongoing Component 2 activities that are underway include:  Three different sets of Contracts for wagon spare parts (Monoblock wheels, Axles, Bearings, Brake pads) have been procured. Two of them are completed. The third is ongoing and is supplying spares to HZC’s current maintenance program. Component 4 (HZI): Support to HZ Infrastructure Restructuring and Enabling Investment to Increase the System efficiency 18. The objective of this component 4 is twofold: (i) to support HZI in improving its operational efficiency and financial sustainability through restructuring, and (ii) to contribute to restoring the physical infrastructure’s condition including safety and improving its clients’ operating conditions. Component 4 activities relate to HZI’s cost structure (esp. labor) and financing (including retroactive financing) of emergency rehabilitation or safety measures. Component 4 also includes technical assistance to improve operational efficiency. The World Bank Sustainable Croatian Railways in Europe (P147499) 19. Key outputs of Component 4 to date during implementation include:  The portion of IBRD-financed works for rehabilitation of Ogulin-Moravice (Corridor Vb) has completed;  Works to improve Borongaj, Rijeka-Brajdica, and Vinkovci railway stations has completed;  Repairs to cuts on the Zagreb Main Station – Rijeka line have been completed;  Upgrading of cuts on Rijeka-Sapjane- State Border line has been completed;  World Bank financing has supported voluntary retrenchment of 185 employees from HZI and its maintenance subsidiary; and  Replacement of switches, electrical and support systems on the international and national corridors which were covered under retroactive financing. 20. Ongoing Component 4 activities that are underway include:  Works for rehabilitating the Zagreb - Savski Marof line have mobilized. This is the project’s largest civil works contract (EUR 48.4 million in total of which EUR 27.7 million from IBRD);  Design work for 50 level crossings to improve railway / road safety has been finalized. Procurement for goods and related services of 50 crossings has completed and works are underway. C. Safeguards 21. Environmental: The project’s rating for compliance with environmental impacts of OP/BP 4.01 is “satisfactory.” The Bank’s regular supervision activities have not identified any instances of non-compliance in application of OP/BP 4.01 (Environmental Assessment). Social / involuntary resettlement: The project rating for compliance with OP 4.12 is “satisfactory.” Rehabilitation works to date have been carried out on publicly owned land. Similarly, works under the Savski Marof-Zagreb line modernization project will occur on publicly owned land. Regular supervision has not identified any instances of non-compliance in relation to OP 4.12 (Involuntary Resettlement). Risks associated with land acquisition on the project remain low. D. Fiduciary 22. Financial management: Semester project financial reporting is currently delayed due to the ongoing COVID-19 situation. In addition, on March 22, 2020 Croatia suffered a 5.3 magnitude earthquake near Zagreb. This forced physical displacement of Government offices and staff as many were located in historic buildings that require retrofit and strengthening measures to address quake damage. The next project end entity audit report was due June 30, 2020. However, a Government- authorized extension for financial reporting during the COVID-19 pandemic has delayed submission of audited financial statements until end August 2020. The Project’s rating for Financial Management and Counterpart Funding are both “satisfactory.” 23. Procurement: The Project received one procurement related complaint during 2019 concerning the Transaction Advisory Assignment for HZC. HZC was responsive and took necessary actions as requested by the Bank. The tender for rehabilitation works along the 17.848 km Savski Marof-Zagreb line was canceled in September 2019 due to receipt of only one bid which was substantially higher than estimated costs. HZI took the needed action as requested by the Bank to revise tender specifications, update the cost estimate, and modify the project procurement plan. The tender was relaunched on October 11, 2019 and a contract was signed in February, 2020. Performance of procurement units within HZC, HZI, and HZPP and their compliance with relevant World Bank guidelines remains “satisfactory”. 24. Monitoring and evaluation under the project results framework: The Project’s results framework requires revision and updates to reflect actual implementation progress. Changes are proposed in this restructuring and discussed below. The World Bank Sustainable Croatian Railways in Europe (P147499) 25. Disbursement: As of May 31, 2020, combined disbursement of IBRD financing against the three loans comprising SUCRE was EUR 101,538,871 representing 62% of the committed amount. The disbursement against each individual IBRD loan to support individual PIUs is shown in the table below. Table 1 Disbursement status on May 31, 2020 (loans IBRD 8500, 85010, 85020) Committed but not Planned but Total disb. IBRD loan % Loan PIU yet disbursed* uncommitted [EUR] amt. [EUR] disbursed [EUR] [EUR] HZ Infrastruktura IBRD85000 40,504,499 79,000,000 51% 30,400,920 8,094,581 d.o.o. / MSTI HZ Putnicki prijevoz IBRD85010 37,806,590 43,000,000 88% 1,404,123 3,789,287 d.o.o IBRD85020 HZ Cargo d.o.o. 36,077,359 41,500,000 87% 3,945,182 1,477,458 Cumulative total 101,538,871 163,500,000 62% 35,750,225 13,361,327 II. RATIONALE FOR THE RESTRUCTURING 26. HZPP’s rolling stock modernization program is necessary to reduce operating costs and enhance service quality. It also aligns with the Project Development Objective. The Bank’s analysis of HZPP’s proposed program of rolling stock investment implies that approximately EUR 700-800 million would be needed to meet estimated rolling stock renewal needs by 2030. At present, HZPP’s fleets only contains 28 modern DMU and EMU trainsets. The balance of the fleet consists of legacy loco-hauled trains which impose serval disadvantages in the company’s operations. Firstly, they require two locomotive drivers for operations (one more than modern EMU / DMUs) which imposes additional labor costs per train-km. Secondly, they have higher levels of energy consumption (electricity or diesel) which results in higher operating costs and greater cumulative emissions. Thirdly, loco-hauled trains require more complex infrastructure and greater human resources for run-around or, alternatively, the use of two locomotives. HZI’s ability to simplify infrastructure during renewals as well as its ability to modernize signaling and traffic control systems is limited by the configuration of HZPP’s fleet. Importantly, Croatia’s rolling stock fleet is expected to remain relatively small for the foreseeable future which makes standardization of the fleet particularly important for simplicity of the supply chain and maintenance practices. The proposed restructuring would support this by scaling up HZPP’s existing contract with its rolling stock supplier for the purchase of one additional EMU. 27. Signaling modernization and centralized traffic control are critical to improve the operational efficiency and the financial sustainability of the public railway sector in Croatia. Obsolete signaling and traffic control requires more than 2,500 additional staff to operate HZI’s infrastructure (i.e. manually) at an extra cost of EUR 45-50 million per year. This single cost category accounts for more than 1/3 of the operating subsidies that HZI receives from the Government of Croatia. Developing a national program of signaling modernization and centralized traffic control offers the potential for capturing significant future advancements in operational efficiency and financial sustainability of Croatia’s infrastructure. A technical assistance activity to develop the foundations for such a program is in the Project’s procurement plan and the proposed restructuring would add a corresponding Intermediate Indicator to the Project Results Framework. 28. The Project’s Results Framework has critical gaps that must be addressed in order to improve monitoring and evaluation of results and comply with the World Bank’s requirements for Citizen Engagement. The restructuring will revise the Project’s results framework to: (i) address gaps in the attribution of project indicators that are affecting project quality; and (ii) revise the project’s citizen engagement indicator to make use of HZPP’s existing methodology for customer outreach which has broader reach; (iii) update target indicator values to reflect envisaged activities that will occur prior to Project Close; and The World Bank Sustainable Croatian Railways in Europe (P147499) (iv) add an indicator relating to preparations for Croatia’s program of signaling modernization and centralized traffic control as described above. Changes to the project results framework are summarized below for each individual indicator. 29. HZC’s financial position remains precarious. The financial situation of HZC is extremely precarious and untenable. Audited financial statements for 2018 indicate that HZC’s Debt Service Coverage Ratio (DSCR) was 0.7 which implied a risk to meeting debt service obligations. HZC continued to generate losses that indicates a threat to the continuation of the operations as accumulated losses have exceeded 55% of share capital. A Government decision on HZC’s future is critical. While there is a need for project restructuring to address HZC’s situation, the Bank has not received a request from the Ministry of Finance for such changes. Restructuring actions relating to HZC are accordingly not included in this restructuring paper at this time. II. DESCRIPTION OF PROPOSED CHANGES A. Reallocation of financing across disbursement categories under IBRD 85010 30. The restructuring will enable additional purchase of a new EMU for passenger service delivery. The Ministry of Finance’s request from April 14, 2020 has requested restructuring of IBRD 85010 so that the amounts allocated to disbursement category two (retrenchment) and disbursement category three (“Goods, works, non-consulting services, consultants' services and Training”) equal EUR 8.0 million and EUR 35.0 million respectively. To achieve this, EUR 8,095,006 of financing under the loan will be reallocated from disbursement category two (retrenchment) to disbursement category three. This change will support the purchase of one additional EMU and will also cover an existing overdraw on disbursement category three. The change reflects the need to modernize HZPP’s fleet as well as limited potential for additional retrenchment until new trainsets are delivered (likely 2023-2024). B. Revisions to the Project’s results framework 31. The proposed restructuring will amend indicators in the Project’s results framework as follows:  Delete PDO indicator “HZI million train-km per track-km”: This PDO indicator would be deleted from the Project’s results framework to address a critical gap in attribution. Specifically, the numerator (train-km) reflects demand for rail services which is primarily dependent on factors beyond the scope of the current operation. For example, such factors include macro-economic conditions, the level of track access charge, pricing of road transport, and integration with other complementary modes of transport (e.g. ports). The Project is not financing interventions or supporting sector reforms that can credibly affect these variables within the period of implementation. While the project is supporting rehabilitation of the Savski Marof-Zagreb railway line, the scale (22 km; 1.3% of the network), the timing of these works is not envisaged to affect overall railway demand in Croatia during implementation. Secondly, the numerator (track- km) is dependent on the size of Croatia’s railway network. The Project is not supporting increases or decreases in network size.  Delete intermediate indicator “HZP commercial revenues per employee (in HRK)”: this indicator would be deleted from the Project’s results framework to address an attribution gap. Specifically, the numerator is dependent on two critical factors that are outside of the Project’s control, namely: (i) the actual level of demand for railway passenger transport; and (ii) the pricing of railway passenger transport. Demand for passenger transport is substantially dependent on the service delivery mandate (i.e. timetable) that HZPP is obliged to execute under its Public Service Contract with MSTI. While the Project supported the Public Service Contract’s development, it did not finance interventions relating to the modification of service timetables that would affect demand. In addition, the pricing of alternative modes, integration with other forms of public transport, and macro-economic factors substantially affect demand in ways that are beyond the scope of the operation. Similarly, while HZPP may propose pricing, approving fares falls solely under the purview of MSTI and may also be affected by intenerated fares arrangements with urban public transport operators. For example, HZPP was directed to develop an integrated fare offering in 2017 with Zagrebački Električni Tramvaj (ZET) which operates urban public transport services in Zagreb. This offering has been positive for beneficiary mobility and the environmental sustainability of transport in Zagreb – all of which aligns with Croatia’s Transport Development The World Bank Sustainable Croatian Railways in Europe (P147499) Strategy and best practice in the EU. However, it also reduced revenues from HZPP’s suburban passenger transport due to the need for funding the discount offered to passengers who make integrated trips. For these reasons, the indicator would be deleted from the Project’s results framework.  Revise the intermediate indicator “HZP four new DMU trains”: this indicator would be restructured to “HZPP five new trainsets” as the restructuring would reallocate IBRD financing between disbursement categories towards the purchase of an additional EMU trainset for HZPP to complement the 4 that have been procured to date under the Project.  Revise target values for intermediate indicator “Number of HZP staff retrenched”: the target value for this indicator would be revised to 376 as the restructuring would allocate IBRD financing from the disbursement category that support HZPP’s retrenchment program to expenditures on rolling stock. No further retrenchment of HZPP staff would be financed under the current loan to HZPP.  Delete intermediate indicator “Percentage of affected workers who participated in the social mitigation programs reporting satisfaction with the programs including gender disaggregated data”: this indicator would be deleted from the project’s results framework as for the following reasons: (i) the data collection methodology envisaged for the indicator was not integrated with the actual contracts for human resources consultancies that the project financed to support retrenchment of HZPP and HZC employees. These contracts have closed and data collection was not completed; (ii) the number of individuals who participated in social mitigation programs was also smaller than envisaged such that the potential sample of respondents is unlikely to be representative of overall satisfaction with retrenchment processes.  Addition of new intermediate indicator for Citizen Engagement “Customers reporting perception of service improvement over past two years”: the proposed restructuring will make use of HZPP’s regular customer survey activities and deploy a new indicator using HZPP’s measurement of “customers reporting perception that service has improved in the last 2 years.” The project will compare results from this forthcoming survey (planned for end 2020) with results from the last survey (2018) to identify needs for modifications to operations. For the purpose of indicator measurement, the % satisfaction will be taken directly from HZPP's survey of customers in the Zagreb area where demand for passenger rail is densest and the use of modernized rolling stock is greatest.  Addition of new intermediate indicator “preparatory work for centralized traffic control and signaling modernization”: this indicator will measure completion of the first phase in preparatory work to develop Croatia’s national program of centralizing traffic control and signaling (ERTMS level 2/3) that will inform HZI’s future capital program. Preparatory work may include, among other things, development of functional specifications, priorities, and rollout plan for deployment of a mobile communications solution and associated ERTMS level 2, 3, or ETRMS Regional technologies that will modernize signaling and traffic control on Croatia’s network. HZI and the Bank have developed a draft Terms of Reference for an initial study and a modification to the Project’s procurement plan will initiate procurement and subsequent delivery. The World Bank Sustainable Croatian Railways in Europe (P147499) III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Implementation Schedule ✔ Other Change(s) ✔ Technical Analysis ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Economic and Financial Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ The World Bank Sustainable Croatian Railways in Europe (P147499) IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-85010-001 | Currency: EUR iLap Category Sequence No: 2 Current Expenditure Category: HZP Retrenchment pymt for Part B 16,100,000.00 8,004,993.70 8,004,993.70 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: GD,CW,Non-CS,CS,TRNG for Part B 26,792,500.00 28,882,238.73 34,887,506.30 100.00 100.00 Total 42,892,500.00 36,887,232.43 42,892,500.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2015 0.00 0.00 2016 30,000,000.00 0.00 2017 29,465,544.80 45,091,235.00 2018 37,702,363.00 15,619,013.00 2019 37,371,330.00 25,070,237.00 2020 30,950,000.00 15,758,387.00 2021 46,735,000.00 33,435,934.00 2022 8,831,000.00 48,375,194.00 2023 0.00 0.00 . 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 PBC 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 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) 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 Marked for Deletion 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 4,500.00 employee (Number) Introduction and signing of the multi-annual No Yes infrastructure contract (Yes/No) The World Bank Sustainable Croatian Railways in Europe (P147499) RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Completion of a strategic partnership for HZ Cargo No Yes (transaction finalized) (Yes/No) PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name PBC 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 Rationale: been Marked for No data collection mechanism was established under the project's design for this indicator prior to or after the last restructuring. Deletion Percentage of assets with resolved legal titles 0.00 30.00 (Percentage) Support to HZ Passenger Transport Restructuring The World Bank Sustainable Croatian Railways in Europe (P147499) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Number of HZP staff 0.00 398.00 518.00 620.00 674.00 731.00 376.00 376.00 retrenched (Number) Rationale: Action: This indicator has The target value for this indicator would be revised to 376 as the restructuring would allocate IBRD financing from the disbursement category that support HZPP’s been Revised retrenchment program to expenditures on rolling stock. No further retrenchment of HZPP staff would be financed under the current loan to HZPP.This Number of HZP rolling stock rehabilitated 0.00 0.00 1.00 6.00 12.00 12.00 12.00 12.00 (Number) DMUs and diesel 0.00 0.00 1.00 4.00 4.00 4.00 4.00 4.00 locomotives (Number) EMUs and electric locomotives 0.00 0.00 0.00 2.00 8.00 8.00 8.00 8.00 rehabilitated (Number) HZP commercial revenues per employee 0.26 0.25 0.24 0.26 0.21 0.21 0.21 0.21 (in HRK) (Number) Rationale: This indicator would be deleted from the Project’s results framework to address an attribution gap. Specifically, the numerator is dependent on two critical factors that are outside of HZPP’s control, namely: (i) the actual level of demand for railway passenger transport; and (ii) the pricing of railway passenger Action: This indicator has transport. Demand for passenger transport is substantially dependent on the service delivery mandate (i.e. timetable) that HZPP is obliged to execute under its been Marked for Public Service Contract with MSTI. While the Project supported the Public Service Contract’s development, it did not finance interventions relating to the Deletion modification of service timetables that would affect demand. In addition, the pricing of alternative modes, integration with other forms of public transport, and macro-economic factors substantially affect demand in ways that are beyond the scope of the operation. Similarly, while HZPP may propose pricing, approving fares falls solely under the purview of MSTI and may also be affected by intenerated fares arrangements with urban public transport operators. For example, HZPP was directed to develop an integrated fare offering in 2017 with Zagrebački Električni Tramvaj (ZET) which operates urban public transport services in The World Bank Sustainable Croatian Railways in Europe (P147499) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Zagreb. This offering has been positive for beneficiary mobility and the environmental sustainability of transport in Zagreb – all of which aligns with Croatia’s Transport Development Strategy and best practice in the EU. However, it also reduced revenues from HZPP’s suburban passenger transport due to the need for funding the discount offered to passengers who make integrated trips. For these reasons, the indicator would be deleted from the Project’s results framework. HZP five new trainsets 0.00 0.00 0.00 0.00 0.00 4.00 4.00 5.00 (Number) Rationale: This indicator would be restructured to “HZPP five new trainsets” as the restructuring would reallocate IBRD financing between disbursement categories towards Action: This indicator has the purchase of an additional EMU trainset for HZPP to complement the 4 that have been procured to date under the Project. been Revised . Customers reporting perception of service 4.44 10.00 improvement over past two years (Percentage) Rationale: the proposed restructuring will make use of HZPP’s regular customer survey activities and deploy a new indicator using HZPP’s measurement of “customers Action: This indicator is reporting perception that service has improved in the last 2 years.” The project will compare results from this forthcoming survey (planned for end 2020) with New results from the last survey (2018) to identify needs for modifications to operations. 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) 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 PBC Baseline Intermediate Targets End Target 1 2 3 4 5 6 Wagons (Number) 0.00 694.00 1,194.00 1,678.00 1,850.00 2,150.00 2,150.00 2,150.00 Locomotives 0.00 0.00 0.00 7.00 7.00 11.00 11.00 11.00 (Number) Support to HZ Infrastructure Restructuring (Action: This Component has been Revised) Number of HZI staff 0.00 260.00 470.00 470.00 500.00 700.00 900.00 900.00 retrenched (Number) 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) Fatalities per 10 million 10.00 10.00 9.00 9.00 8.00 7.00 7.00 7.00 train-km (Number) Preparatory work for centralized traffic control No Yes and signaling modernization (Yes/No) Rationale: this indicator will measure completion of the first phase in preparatory work to develop Croatia’s national program of centralizing traffic control and signaling (ERTMS level 2/3) that will inform HZI’s future capital program. Preparatory work may include, among other things, development of functional specifications, Action: This indicator is priorities, and rollout plan for deployment of a mobile communications solution and associated ERTMS level 2, 3, or ETRMS Regional technologies that will New modernize signaling and traffic control on Croatia’s network. HZI and the Bank have developed a draft Terms of Reference for an initial study and a modification to the Project’s procurement plan will initiate procurement and subsequent delivery. IO Table SPACE The World Bank Sustainable Croatian Railways in Europe (P147499) . The World Bank Sustainable Croatian Railways in Europe (P147499) The World Bank Sustainable Croatian Railways in Europe (P147499) Annex 1