Document of The World Bank FOR OFFICIAL USE ONLY Report No: RES18786 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SOUTH KARAKALPAKSTAN WATER RESOURCES MANAGEMENT IMPROVEMENT PROJECT IBRD-83890/IDA-54900 JUNE 12 2014 TO THE REPUBLIC OF UZBEKISTAN APRIL 7 2015 Water Global Practice Central Asia Country Unit EUROPE AND CENTAL ASIA This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. 2 ABBREVIATIONS AND ACRONYMS BVO Basin Water Organization ESAMP Environmental and Social Assessment and Management Plan IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association FCC Field Coordination Council KPCC Karakalpak Project Coordination Council MAWR Ministry of Agriculture and Water Resources MOF Ministry of Finance MTP Machine Tractor Park PDO Project Development Objective PIU Project Implementation Unit RAP Resettlement Action Plan RPF Resettlement Policy Framework SKWRMIP South Karakalpakstan Water Resources Management Improvement Project TPM Third Party Monitoring UNS Agency Responsible for Lower Amu Darya Pumping Stations UzAgMesh Uzbekistan Agricultural Machinery Company Regional Vice President: Laura Tuck Country Director: Saroj Kumar Jha Senior Global Practice Director: Junaid Kamal Ahmad Practice Manager/Manager: Dina Umali-Deininger Task Team Leader: IJsbrand Harko de Jong 3 REPUBLIC OF UZBEKISTAN SOUTH KARAKALPAKSTAN WATER RESOURCES MANAGEMENT IMPROVEMENT PROJECT CONTENTS A. SUMMARY 5 B. PROJECT STATUS 6 C. PROPOSED CHANGES 6 4 DATA SHEET Uzbekistan SOUTH KARAKALPAKSTAN WATER RESOURCES MGMT IMPROVEMENT (P127764) EUROPE AND CENTRAL ASIA Water Report No: RES18786 Basic Information Investment Project Project ID: P127764 Lending Instrument: Financing Regional Vice President: Laura Tuck Original EA Category: Partial Assessment (B) Country Director: Saroj Kumar Jha Current EA Category: Partial Assessment (B) Senior Global Practice Junaid Kamal Ahmad Original Approval Date: 12-Jun-2014 Director: Practice Dina Umali-Deininger Current Closing Date: 30-Sep-2021 Manager/Manager: Team Leader(s): IJsbrand Harko de Jong Borrower: Ministry of Finance Responsible Ministry of Agriculture and Water Resources Agency: Restructuring Type Form Type: Full Restructuring Paper Decision Authority: Country Director Approval Restructuring Level 2 Level: Financing ( as of 11-Nov-2014 ) Key Dates Approval Effectiveness Original Revised Project Ln/Cr/TF Status Signing Date Date Date Closing Date Closing Date Not P127764 IBRD-83890 12-Jun-2014 29-Oct-2014 30-Sep-2021 30-Sep-2021 Effective Not P127764 IDA-54900 12-Jun-2014 29-Oct-2014 30-Sep-2021 30-Sep-2021 Effective Disbursements (in Millions) % Cancelle Disburse Undisbur Project Ln/Cr/TF Status Currency Original Revised Disburse d d sed d Not P127764 IBRD-83890 USD 18.29 18.29 0.00 0.00 18.29 Effective 5 Not P127764 IDA-54900 USD 242.50 242.50 0.00 0.00 230.73 Effective Policy Waivers Does the project depart from the CAS/CPF in content or in other significant Yes [ ] No [ X ] respects? Does the project require any policy waiver(s)? Yes [ ] No [ X ] A. Summary of Proposed Changes Restructuring is proposed to waive the following effectiveness condition of a signed agreement between the Ministry of Finance and Uzpakhtasanoat regarding the ownership, operation and maintenance of cotton harvesting mechanization: the Recipient shall enter into an agreement (or two agreements if necessary) with Uzpakhtasanoat (and/or any other entity agreed upon by the Recipient and the Association), in form and substance satisfactory to the Association, which shall define, inter alia, the terms of providing cotton harvesting equipment and services and other associated equipment to be purchased under Part 2.3 of the Project to Uzpakhtasanoat (and/or any other entity agreed upon by the Recipient and the Association), including the obligation of Uzpakhtasanoat (and/or any other entity agreed upon by the Recipient and the Association) to make available said equipment and services in the Project Area for the purposes of cotton harvesting mechanization, all in accordance with the criteria set forth in the Project Operational Manual. Change in Implementing Agency Yes [ ] No [ X ] Change in Project's Development Objectives Yes [ ] No [ X ] Change in Results Framework Yes [ ] No [ X ] Change in Safeguard Policies Triggered Yes [ ] No [ X ] Change of EA category Yes [ ] No [ X ] Other Changes to Safeguards Yes [ ] No [ X ] Change in Legal Covenants Yes [ X ] No [ ] Change in Loan Closing Date(s) Yes [ ] No [ X ] Cancellations Proposed Yes [ ] No [ X ] Change to Financing Plan Yes [ ] No [ X ] Change in Disbursement Arrangements Yes [ ] No [ X ] Reallocation between Disbursement Categories Yes [ ] No [ X ] Change in Disbursement Estimates Yes [ ] No [ X ] Change to Components and Cost Yes [ ] No [ X ] Change in Institutional Arrangements Yes [ ] No [ X ] Change in Financial Management Yes [ ] No [ X ] Change in Procurement Yes [ ] No [ X ] Change in Implementation Schedule Yes [ ] No [ X ] Other Change(s) Yes [ ] No [ X ] Appraisal Summary Change in Economic and Financial Analysis Yes [ ] No [ X ] Appraisal Summary Change in Technical Analysis Yes [ ] No [ X ] Appraisal Summary Change in Social Analysis Yes [ ] No [ X ] 6 Appraisal Summary Change in Environmental Analysis Yes [ ] No [ X ] Appraisal Summary Change in Risk Assessment Yes [ ] No [ X ] B. Project Status The Project was approved by the Board on June 12, 2014, and the Loan and Financing Agreements were signed on October 29, 2014. On February 26, 2015 the effectiveness deadline was extended from February 26, 2015 to March 26, 2015, and on March 26, 2015 the effectiveness was extended from March 26, 2015 to April 7, 2015. On April 7, 2015, four out of the five effectiveness conditions have been met, as follows: (i) A revised final Project Operational Manual satisfactory to the Bank received a no objection on April 7, 2015. The revised Project Operational Manual reflects the composition of the Project Implementation Unit (PIU) as contained in the Presidential Resolution No. 2324, signed on March 24, 2015, regarding the project. (ii) The PIU has been staffed with the professionals indicated in the (revised) Project Operational Manual (all in numbers and with experience and terms of reference satisfactory to the Bank) and the PIU has updated its accounting software in accordance with the technical requirements and specifications set forth in the Project Operational Manual; (iii) The Loan and Financing Agreements have been duly executed and delivered and an acceptable Legal Opinion for the Credit and Loan was issued by the Ministry of Justice on March 27, 2015. (iv) In addition, in accordance with Bank policies, dated covenants whose dates fell before the new effectiveness deadline of March 26, 2015 became conditions of effectiveness. There were two such dated covenants that became additional effectiveness conditions. The following additional effectiveness condition was met: the Recipient shall establish and thereafter maintain until completion of the Project the Karakalpak Project Coordination Council (KPCC) and the Field Coordination Council (FCC), both with functions, composition and terms of reference set forth in the Project Operational Manual and satisfactory to the Association in order to assist with the Project’s implementation. C. Proposed Changes Development Objectives/Results Project Development Objectives Original PDO The project development objective (PDO) of South Karakalpakstan Water Resources Management Improvement Project (SKWRMIP) is to restore irrigation and improve water management in the project area in a sustainable and financially efficient manner. Change in Project's Development Objectives Change in Legal Covenants Explanation: Restructuring is proposed to waive the effectiveness condition of a signed agreement between the Ministry of Finance and Uzpakhtasanoat regarding the ownership, operation and maintenance of cotton harvesting mechanization for the following reasons: The following additional effectiveness condition has not been met yet: the Recipient shall enter into an agreement (or two agreements if necessary) with Uzpakhtasanoat (and/or any other entity agreed upon by the Recipient and the Association), in form and substance satisfactory to the Association, which shall 7 define, inter alia, the terms of providing cotton harvesting equipment and services and other associated equipment to be purchased under Part 2.3 of the Project to Uzpakhtasanoat (and/or any other entity agreed upon by the Recipient and the Association), including the obligation of Uzpakhtasanoat (and/or any other entity agreed upon by the Recipient and the Association) to make available said equipment and services in the Project Area for the purposes of cotton harvesting mechanization, all in accordance with the criteria set forth in the Project Operational Manual. The reasons for not meeting this effectiveness condition are as follows: (i) As part of its efforts to mechanize cotton harvesting by 2020, the Government of Uzbekistan established the Uzbekistan Agricultural Machinery company (UzAgMesh) that will be responsible for owning and sub-leasing the cotton harvesting machines. UzAgMesh is a specialized entity, dedicated to owning and sub-leasing agricultural machinery, which, in the opinion of the Government, is the preferred mechanism as compared to transferring ownership of the harvesters to Uzpakhtasanoat, the association of cotton ginneries that has as its main mission the ginning of cotton. In view of this, the Presidential Resolution referred to above proposes to hand-over the cotton harvesters to UzAgMesh instead of Uzpakhtasanoat. It should be noted that no discussions between the Ministry of Finance (MOF), the Ministry of Agriculture and Water Resources and UzAgMesh regarding an agreement for cotton harvest mechanization had been held prior to the signing of said Presidential Resolution. (ii) Under the newly proposed arrangements, Uzpakhtasanoat will become responsible exclusively for owning and operating pre-cleaning equipment and not for procuring harvesters, as originally agreed with the Bank. This pre-cleaning equipment is necessary to maintain the quality of the mechanically harvested cotton at the same level as the manually harvested cotton. The mechanically harvested cotton, in fact, contains more foreign matter, which reduces this quality (and therefore the price), and the pre-cleaning equipment is aimed at removing this foreign matter. According to the proposal received by the Bank, UzAgMesh will become responsible for owning, operating and maintaining cotton harvesters. In particular, it will sub-lease these harvesters to smaller companies (Machine Tractor Parks, MTPs) that will provide mechanized cotton harvesting services to farmers. (iii) The Government of Uzbekistan committed to procuring, through its own resources, 160 harvesters before the 2015 cotton harvest, and an additional 70 harvesters before the 2016 cotton harvest. Project funds will therefore no longer be used to procure the originally agreed 230 harvesters. Procurement of the 160 harvesters by the Government in underway, and delivery is scheduled for July 2015. Pre-cleaning equipment for Uzpakhtasanoat will be procured as soon as the project has become effective. A contract between the MOF and Uzpakhtasanoat relating to the pre-cleaning equipment was received by the Bank on March 26, 2015 for review and no objection. However, the Bank reviewed the contract and found that it was a preliminary draft that only refers to the ownership and management of pre-cleaning equipment that the project will provide to Uzpakhtasanoat. Hence a revised version will have to be prepared and submitted to the Bank for its no objection. (iv) Since the Government of Uzbekistan intends to hand over to UzAgMesh the mechanized cotton harvesters, a separate contract between MOF and UzAgMesh would need to be prepared. The Bank is of the opinion that the said contract, irrespective of its source of financing, needs to be submitted to the Bank for review and no objection, in compliance with the Loan and Finance Agreements. The Bank has not yet received a draft of this contract. The contract with UzAgMesh is necessary to ensure that cotton harvest mechanization is implemented successfully. The contract will need to specify, inter alia, the arrangements for operation and maintenance of the harvesters (including recruitment of operators), define detailed arrangements for payment of the mechanized harvesting services, as well as the fee level. In addition, the contract needs to contain a detailed cotton harvest mechanization plan that will be implemented on an annual basis prior to and during the agricultural season. In this respect it should be noted that the Bank has not undertaken an assessment of UzAgMesh’ capacity to successfully implement cotton harvest mechanization, and therefore the Bank is not in a position to determine UzAgMesh’ ability to comply with the necessary requirements for ensuring 8 adequate project implementation and compliance with Bank’s policies and rules. The team proposes to conduct such assessment prior to agreeing with the Government on transferring cotton harvesters to UzAgMesh. In the opinion of the team, the Ministry of Finance is willing to work with the Bank on the preparation of this contract. It is further noted that this effectiveness condition was originally a dated covenant. The team wishes to emphasize that waiving of the effectiveness condition carries a significant risk, as the proposed company UzAgMesh is unknown to the Bank and its capacity to implement cotton harvest mechanization in compliance with the Loan and Financing Agreements as well as Bank’s policies has not been assessed to date. At the same time, declaration of project effectiveness is important in view of the 2015 cotton harvest. Farmers need to be trained and agronomic practices need to be put in place prior to the harvest to ensure successful cotton harvest mechanization. Project funds are required to finance the associated activities, which requires the project to become effective. In order to ensure timely signing of the contract before the 2015 cotton harvest, the team proposes that the Bank formally communicates to the Government that the contracts between the MOF and UzAgMesh and between the Ministry of Finance and Uzpakhtasanoat are signed before issuing the bidding documents to the prequalified prospective bidders of the first construction contract under the project (ICB-1: Bustan and Right bank Canal, Pakhta-Arna). This is expected to happen before May 30, 2015. The proposed waiver to the aforementioned effectiveness condition is therefore requested. Finance Ln/Cr/T Date Recurre Frequen Agreement Description of Covenant Status Action F Due nt cy Reference The Project Operational 4.01.(a) Manual has been Remedy on IBRD- amended, suspended, Not yet No Project Yearly 83890 repealed or waived due Change Operational without the Association’s Manual prior approval. The Association has received evidence, that it 4.01.(b) considers credible, of the IBRD- Remedy on Not yet No use of child or forced Yearly 83890 child or forced due Change labor in connection with labor the Project activities or within the Project Area. The Recipient shall operate and maintain the PIU until completion of A.1. Section I, the Project with staff Schedule 2. (including the IBRD- Not yet No Operation and professionals specified in Yearly 83890 due Change maintenance Section 5.01(b) of this of PIU Agreement), resources and terms of reference satisfactory to the Association. 9 Not later than 30 days after the Effective Date, the Recipient shall establish and thereafter maintain until completion of the Project the KPCC A.2. Section I, and the FCC, both with IBRD- Schedule 2. 07-Jan- Not yet No functions, composition 83890 KPCC and 2015 due Change and terms of reference set FCC forth in the Project Operational Manual and satisfactory to the Association in order to assist with the Project’s implementation. The Recipient, through MAWR, shall carry out the Project in accordance A.3. Section I, with this Agreement and Schedule 2. the Project Operational IBRD- Compliance Manual and shall not Not yet No Yearly 83890 with amend, suspend, due Change Agreement abrogate, repeal or waive and POM any provision of said Manual without the prior written approval of the Association. The Recipient shall ensure that the Project is implemented in C.1.(a)Section accordance with I, Schedule 2. applicable environment IBRD- Compliance Not yet No and social standards and Yearly 83890 with the laws due Change practices and in on child and compliance with forced labor applicable laws and regulations on child and forced labor. Without limitations to the provisions of paragraph (a) above, the Recipient C.1.(b)Section shall, at the beginning of I, Schedule 2. the cotton harvesting IBRD- Compliance season during each year Not yet No Yearly 83890 with the laws of Project due Change on child and implementation, instruct forced labor any involved local authorities within the Project Area to ensure strict compliance with 10 applicable laws and regulations on child and forced labor while organizing cotton harvesting. The Recipient, through the PIU, shall carry out Parts 1.1(i) and 1.1(iii) of the Project in accordance C.2. Section I, with the ESAMP, the Schedule 2. RPF and the RAP(s), and IBRD- Not yet No Environmental shall not amend, suspend, Yearly 83890 due Change and Social abrogate, repeal or waive Standards any provision of said Plans or Framework without the prior written approval of the Association. The Recipient, through the PIU, shall carry out Part 1.1(ii) of the Project in accordance with the C.3. Section I, Bustan RAP, and shall IBRD- Schedule 2. Not yet No not amend, suspend, Yearly 83890 Resettlement due Change abrogate, repeal or waive and ESAMP any provision of said Plan without the prior written approval of the Association. Without limitation to the provisions of Section C.2 of this Schedule, for purposes of Parts 1.1(i), C.4. Section I, 1.1(ii) and 1.1(iii) of the Schedule 2. IBRD- Project and prior to the Not yet No Resettlement Yearly 83890 contracting of works for due Change and ESAMP each proposed site, the (part 1) Recipient, through the PIU, shall: (a) submit to the Association for its prior approval: (i) the proposed design and site for said works C.4. Section I, and, where required by Schedule 2. the respective ESAMP, IBRD- Not yet No Resettlement RPF and local legislation, Yearly 83890 due Change and ESAMP as applicable, any related (part 2) environmental licenses and permits required under local legislation 11 and site-specific RAP(s) (including any procedures for valuation, Compensation and other assistance to be provided), said site- specific plans and licenses and permits; and (ii) the proposed contract for said works to ensure that the provisions C.4. Section I, of the ESAMP and said Schedule 2. site-specific plans are IBRD- ESAMP, RPF, adequately included in Not yet No Yearly 83890 RAP and local said contract; and (b) due Change legislation ensure that such works (part 3) are carried out in accordance with the respective ESAMP, RPF and RAP. The Recipient shall not commence any works for a specific part of the C.5. Section I, Project Area requiring IBRD- Schedule 2. resettlement and/or land Not yet No Yearly 83890 Resettlement acquisition under the due Change and ESAMP Project until the respective RAP for said part of the Project Area is fully implemented. The Recipient, through the MAWR, shall carry out, in a manner acceptable to the Association and under the terms and conditions set forth in the Project C.6. Section I, Operational Manual, the IBRD- Schedule 2. Not yet No following activities to Yearly 83890 Dam Safety due Change improve the performance (part 1) and safety of the Tuyamuyun Dam: (i) prepare, prior to the second dam safety inspection to be carried out during the last year of project implementation C.6. Section I, (or at any other date IBRD- Not yet No Schedule 2. agreed upon by the Yearly 83890 due Change Dam Safety Recipient and the 12 (part 2) Association), a dam safety plan; (ii) replace eight radial gates on the spillway; (iii) carry out routine maintenance works; (iv) carry out a bathymetric survey of the reservoir; (v) install a seismograph at the dam’s site; and (vi) carry out reinforcing works for the Sultansanjar embankment. The Recipient shall take all necessary actions to enable the TPM Consultant to perform its activities in accordance with the applicable terms C.7. Section I, of reference, including Schedule 2. IBRD- but not limited to Not yet No TPM and Yearly 83890 allowing and facilitating due Change Feedback for the TPM Consultant Mechanism to visit and monitor the Project Area, collect relevant data and communicate with Project stakeholders and beneficiaries. The Recipient shall: (a) review and discuss with the Association monitoring reports prepared by the TPM Consultant; and (b) promptly take any C.8. Section I, actions, as may be Schedule 2. requested by the IBRD- Not yet No TPM and Association upon its Yearly 83890 due Change Feedback review of said reports, Mechanism with respect to compliance with the undertakings relating to child and forced labor as set forth in this Agreement, the Project Operational Manual and the ESAMP. IBRD- C.9. Section I, The Recipient: (a) shall Not yet No Yearly 83890 Schedule 2. and shall cause respective due Change 13 TPM and local authorities to fully Feedback collaborate with the TPM Mechanism Consultant in developing (part 1) an effective feedback mechanism in connection with the Project activities, as set forth in the TPM Consultant’s terms of reference; (b) shall review biannual reports of the TPM Consultant on grievances C.9. Section I, received, redress Schedule 2. mechanism and any IBRD- TPM and feedback provided; and Not yet No Yearly 83890 Feedback (c) shall promptly due Change Mechanism implement or cause (part 2) relevant local authorities to implement the recommendations provided in said reports. The Recipient shall have its Financial Statements audited in accordance with the provisions of Section 4.09 (b) of the General Conditions. Each B.3. Section audit of the Financial II, Schedule 2. Statements shall cover IBRD- Not yet No Audited the period of one fiscal Yearly 83890 due Change Financial year of the Recipient. Statements The audited Financial Statements for each such period shall be furnished to the Association not later than six months after the end of such period. The Recipient shall ensure that: (a) the Restored Area shall not 1. Section V, be subject to the Schedule 2. Recipient’s procurement IBRD- Restored Area cotton quota established Not yet No Yearly 83890 and Cotton on a yearly basis by the due Change Production following Recipient’s Area Tumans: Beruni; Ellikala; and Turtkul; and (b) the Cotton Production Area shall not expand 14 throughout the Project’s implementation. Upon completion of the activities under Part 1.1 of the Project, the Recipient shall: (a) dismantle the pumping stations currently 2. Section V, managed by the UNS IBRD- Schedule 2. within a timeframe Not yet No Yearly 83890 Pumping agreed upon with the due Change stations Association; and (b) take appropriate actions to abolish the UNS and complete its closure within a timeframe agreed upon with the Association. 3. For the purposes of the UNS closure referred to in paragraph 2 above, the Recipient shall: (a) ensure that as many UNS Staff as possible will 3.(a), (b) continue to be employed IBRD- Section V, under terms and Not yet No Yearly 83890 Schedule 2. conditions acceptable to due Change UNS closure the Association; (b) develop a Retrenchment Action Plan in accordance with the Retrenchment Framework, satisfactory to the Association, and (c) carry out retrenchment of the UNS Staff in accordance with the provisions of the Retrenchment Action 3.(c) Section IBRD- Plan, including providing Not yet No V, Schedule 2. Yearly 83890 Severance Payments to due Change UNS closure the eligible UNS Staff in accordance with the terms and procedures set forth in the Retrenchment Action Plan. 4. Section V, Not later than December IBRD- Schedule 2. 31, 2015 (or any other 31-Dec- Not yet No 83890 Flow date agreed upon by the 2015 due Change measuring Recipient and the 15 (part 1) Association), the Recipient shall install real-time flow measuring stations at the off-take from the Amu Darya River into the Project Area and in each of the two escape canals releasing water from the Project Area into the Amu Darya River, and thereafter shall: (a) monitor water abstractions and release 4. Section V, flows during Project Schedule 2. implementation; and (b) IBRD- 31-Dec- Not yet No Flow share the related data 83890 2015 due Change measuring with the Amu Darya (part 2) BVO based on the frequency and criteria set forth in the Project Operational Manual. Not later than December 31, 2014 (or any other date agreed upon by the Recipient and the Association), the Recipient shall enter into 5. Section V, an agreement (or two Marked IBRD- Schedule 2. 31-Dec- Not yet agreements if necessary) for 83890 Uzpakhtasano 2014 due with Uzpakhtasanoat Deletion at (part 1) (and/or any other entity agreed upon by the Recipient and the Association), in form and substance satisfactory to the Association, which shall define, inter alia, the terms of providing cotton harvesting equipment and 5. Section V, services and other Marked IBRD- Schedule 2. associated equipment to 31-Dec- Not yet for 83890 Uzpakhtasano be purchased under Part 2014 due Deletion at (part 2) 2.3 of the Project to Uzpakhtasanoat (and/or any other entity agreed upon by the Recipient and the Association), IBRD- 5. Section V, including the obligation 31-Dec- Not yet Marked 16 83890 Schedule 2. of Uzpakhtasanoat 2014 due for Uzpakhtasano (and/or any other entity Deletion at (part 3) agreed upon by the Recipient and the Association) to make available said equipment and services in the Project Area for the purposes of cotton harvesting mechanization, all in accordance with the criteria set forth in the Project Operational Manual. 17