The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) REPORT NO.: RES28863 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF URBAN DEVELOPMENT AND POOR NEIGHBORHOOD UPGRADING PROJECT APPROVED ON FEBRUARY 18, 2016 TO REPUBLIC OF CONGO SOCIAL, URBAN, RURAL AND RESILIENCE GLOBAL PRACTICE AFRICA Regional Vice President: Makhtar Diop Country Director: Ahmadou Moustapha Ndiaye Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Manager/Manager: Meskerem Brhane Task Team Leader: Dina Nirina Ranarifidy, Patrice Joachim Nirina Rakotoniaina The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) ABBREVIATIONS AND ACRONYMS IBRD International Bank for Reconstruction and Development FEF Front End Fee GDP Gross Domestic Product MTR Mid Term Review PIU Project Implementation Unit The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID Financing Instrument P146933 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 18-Feb-2016 18-May-2021 Organizations Borrower Responsible Agency Ministry of Territorial Planning, Equipment and Large- Republic of Congo Scale Works Project Development Objective (PDO) Original PDO The project development objectives are to: (1) improve access to infrastructure and basic services for people living in selectedunplanned settlements in Brazzaville and Pointe Noire; and (2) strengthen government and municipal capacity for urban upgrading. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-85880 18-Feb-2016 07-Dec-2016 07-Apr-2017 18-May-2021 80.00 0 80.00 The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) 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. Project status 1. The Republic of Congo Urban Development and Poor Neighborhood Upgrading Project (P146933) was approved by the WorldThe BankWorld Bank Board of Directors on February 16, 2016. After an initial delay, the loan agreement was signed on December Urban Development and Poor Neighborhood Upgrading Project (P146933) 7, 2016, and the project was declared effective on April 7, 2017. 2. Like most projects in the Congo portfolio, the project was designed using a smaller proportion of IBRD to national resources. The project was initially appraised in April 2015 for a total of US$ 250 million (with US$ 170 government financing and US$ 80 million in IBRD funding). However, in view of the macroeconomic situation at that time, the government requested its financing amount be revised downwards US$ 40 million, for a total project amount of US$ 120 million, approved in February 2016. 3. The project is rated Satisfactory both for overall implementation progress and for progress towards the Project Development Objective (PDO) in the June 2017 Implementation Status and Results Report (ISR). This rating reflects the government’s efforts in speeding up the loan ratification process, and its commitment all the way through effectiveness, but also the PIU’s proactive handling of procurement activities. 4. However, this progress has not been sustained due to financial constraints confronting the country. The project is now facing a 4-month lag from the expected first disbursement as the government has not been able to pay the front-end fee (FEF) amounting US$ 200,000, thus hampering any project disbursement, and significantly delaying the course of activities. Rationale for restructuring 5. To address the implementation delay, the Government has requested an amendment to the current loan agreement to allow the front-loading of IBRD resources until government financing becomes available. The government also expressed its willingness to reconsider its choice with respect to the payment of the front-end fee (FEF), and requested the amount be financed out of the loan proceeds. 6. The country is currently facing a severe economic and financial crisis: a decline of state revenues (from 44.5 percent of GDP in 2013 to 29.5 percent of GDP in 2017) has prompted the government to drastically reduce spending, and revise its financial commitments. Such situation has increased the country risk rating for both Political/Governance and Macroeconomics from Substantial to High. The World Bank recently conducted the identification of a Development Policy Financing (DPF) series in response to the government’s request for help with its financing gap. 7. With this situation and the lack of funds for the FEF, the project has not been able to receive its first advance (US$ 2 million) that would have allowed the recruitment of key personnel and the launching of the priority activities. In view of the overall uncertainty of the financial situation, the front loading of IBRD resources is the most sustainable solution to allow for the commencement of activities, and to expedite disbursements. The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) II. DESCRIPTION OF PROPOSED CHANGES 8. Project expenditures are proportionally divided between the share of IBRD resources (66,7%) and the counterpart share (33,3%). In other words, for every US $100 spent, $67 are paid with the IBRD resources and $33 with government financing. However, at this time, the Government is not able to release its share. Against this background, the proposed restructuring will advance 80 per cent of available IBRD resources, and pay 100 per cent of eligible expenditures until the mid-term review in December 31, 2019 to allow for project activities to proceed. The disbursement calendar for the counterpart funds will be revised accordingly. 9. The following changes are being proposed as a level 2 restructuring: (i) payment of all eligible expenditures using 80 per cent of IBRD resources to implement priority investment work until December 31, 2019 (Mid Term Review), then the remaining 20 per cent, in complement to the government share from January 1, 2020 onwards; (ii) deduction of the FEF out of the loan proceeds; (iii) revision of the disbursement calendar for counterpart funds; (iv) Political/Governance and Macroeconomic risks upgraded from Substantial to High; (v) payment of PIU staff salary (all consultants) out of the loans proceeds under Component C; 10. Frontloading of Bank resources. This change will allow the preparation and implementation of activities of priority investment program which has been designed to provide rapidly visible results on the ground, until Government financing becomes available. Paragraph 2, Section IV of the project Loan Agreement (8588-CG) will be amended as follows: Proposed Amount of the Percentage of Expenditures Category Loan Allocated to be Financed (expressed in USD) (inclusive of Taxes) (1) Goods, works, non-consulting 79,800,000 100% through December 31, 2019 or services, consultants’ services, until disbursements under this Training and Operating Costs for Category reach an aggregate amount the Project of 63,800,000, whichever occurs first; and 66.7% thereafter (2) Front-end Fee 200,000 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07(b) of the General Conditions TOTAL AMOUNT 80,000,000 11. The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) 11. Revision of Payment Schedule of Counterpart Funds. As per the terms of the loan agreement, the government is expected to (i) make the necessary arrangements to disburse at least 40 percent of its expected counterpart contribution to the expenditures under the Project by no later than the date of the MTR (ii) pay the remaining 60 percent no later than at the completion of the project. In view of the financial constraints confronting the government, it is proposed to amend Paragraph 3 Project counterpart funds Section I as follows: Share of Government Equivalent in US$ Deadline by which the amount shall be deposited in as per the initial loan million the Project Counterpart Funds Account agreement Up to the date of this amendment 40% 16 No later than MTR (December 2019) letter 60% 24 ‘’by completion of activities'' As of the date of this amendment 40% 16 by January 15, 2020 letter 30% 12 by December 31, 2020 30% 12 by May, 18 2021 (project closing date) 12. Change in Political/Governance and Macroeconomic respective risks. In spite of elections held peacefully, and the progress made in the drafting of the new National Development Plan (NDP), institutions remain weak, often unable to release standard reports in timely fashion. This is coupled with a lack of consensus on the implementation approach to the Government’s broader reform program, ministries dealing with development partners in an uncoordinated manner. Further, the drastic fall of state revenues (from 44.5 percent of GDP in 2013 to 29.5 percent of GDP in 2017) is very likely to significantly hamper economic growth and lead to social tensions. In view of this situation, the risks for both Political/Governance and Macroeconomic are upgraded from Substantial to High. In order to mitigate financing risks, the team will coordinate closely with the CMU to assess the macroeconomic and political situation and the likelihood of counterpart financing becoming available. If it does not look likely, the team and CMU will decide whether to restructure the project to meet the existing funding amounts or whether additional financing may become available to allow project activities to be completed by closing. 13. Payment of PIU staff salary out of the loan proceeds. It was agreed upon during project negotiations that salaries of PIU staff would be covered by the government. In view of their current financial constraints, it is proposed that these costs be paid out of the loan proceeds to allow for the PIU to properly function, and remunerate the staff which has already been recruited. Such change however will not trigger any amendment to the loan agreement since the PIU staff is recruited on consultant contracts. Therefore, their salaries will be paid out under Component C Project Management, Coordination and Evaluations, as “consultant services” expenses. The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) I. SUMMARY OF CHANGES Changed Not Changed Reallocation between Disbursement Categories ✔ Change in Disbursements Arrangements ✔ Change in Disbursement Estimates ✔ Change in Overall Risk Rating ✔ Other Change(s) ✔ Change in Implementing Agency ✔ Change in DDO Status ✔ Change in Project's Development Objectives ✔ Change in Results Framework ✔ Change in Components and Cost ✔ Change in Loan Closing Date(s) ✔ Cancellations Proposed ✔ Change in Safeguard Policies Triggered ✔ Change of EA category ✔ Change in Legal Covenants ✔ Change in Institutional Arrangements ✔ Change in Financial Management ✔ Change in Procurement ✔ Change in Implementation Schedule ✔ Change in Economic and Financial Analysis ✔ Change in Technical Analysis ✔ Change in Social Analysis ✔ Change in Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-85880-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: GD, WRK, NCS, CONS, TR, OP COST 80,000,000.00 0.00 79,800,000.00 66.70 100 iLap Category Sequence No: 2 Current Expenditure Category: Front End Fee 0.00 0.00 200,000.00 100 Total 80,000,000.00 0.00 80,000,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2016 1,000,000.00 0.00 2017 13,000,000.00 0.00 2018 15,000,000.00 1,800,000.00 2019 19,000,000.00 20,000,000.00 2020 20,000,000.00 25,000,000.00 2021 12,000,000.00 17,000,000.00 2022 0.00 0.00 OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  Substantial  High Macroeconomic  Substantial  High Sector Strategies and Policies  Moderate  Moderate The World Bank Urban Development and Poor Neighborhood Upgrading Project (P146933) Technical Design of Project or Program  Moderate  Moderate Institutional Capacity for Implementation and  Substantial  Substantial Sustainability Fiduciary  Substantial  Substantial Environment and Social  Moderate  Moderate Stakeholders  Moderate  Moderate Other Overall  Substantial  Substantial Additional information The two changes below are a consequence of the payment of the FEF out of the loan proceeds: (i) Reallocation between disbursement categories. US$ 200,000 is deducted from Category 1 to cover the Front-End Fee amount. Please note the system only allows to enter one financing percentage per category. Category 1 should be read as follows: out from the 79,800,000, 100% will be covered through December 31, 2019 or until disbursements under this Category reach an aggregate amount of 63,800,000, whichever occurs first; and 66.7% thereafter. (ii) Other changes: removal of disbursement condition Subsequently to the payment of the FEF out of the loan proceeds, the related disbursement condition is removed from the loan agreement.