The World Bank Local and Regional Competitiveness Project (P154263) REPORT NO.: RES46752 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF LOCAL AND REGIONAL COMPETITIVENESS PROJECT APPROVED ON JANUARY 12, 2016 TO GOVERNMENT OF THE REPUBLIC OF NORTH MACEDONIA FINANCE, COMPETITIVENESS AND INNOVATION EUROPE AND CENTRAL ASIA Regional Vice President: Anna M. Bjerde Country Director: Linda Van Gelder Regional Director: Lalita M. Moorty Practice Manager/Manager: Mario Guadamillas Task Team Leader(s): Raha Shahidsaless The World Bank Local and Regional Competitiveness Project (P154263) I. BASIC DATA Product Information Project ID Financing Instrument P154263 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 12-Jan-2016 30-Jun-2021 Organizations Borrower Responsible Agency Cabinet of the Deputy Prime Minister for Economic Government of the Republic of North Macedonia Affairs Project Development Objective (PDO) Original PDO The Project Development Objective (PDO) is to enhance the contribution of tourism to local economic development and improve the capacity of the government and public entities to foster tourism growth and facilitate destination management. Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-A1779 14-Jan-2016 14-Jan-2016 28-Jul-2016 30-Jun-2021 19.11 11.84 6.74 The World Bank Local and Regional Competitiveness Project (P154263) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES Proposed restructuring: This restructuring entails an extension of the project closing date of three months, from June 30 2021 to September 30, 2021. This would be the third and last extension since the project was restructured twice. The first time in October 2019 to extend the project closing date for one year up to the end of December 2020, to change one PDO indicator and a number of intermediate objective indicators, and to revise the disbursement schedule. The second restructuring took place in December 2020 to extend the project closing date of six months, up to June 30, 2021. The proposed extension of the project closing date is needed to allow for the completion of the sub-projects financed by the project, which will not be completed by June 30, 2021, and for the completion of other project activities described below. The extension to the Administrative Agreement between the Bank and EU has been extended up to March 31, 2022, which would allow for the extension of the Project up to September 30, 2021. Project objectives, components and implementation progress: The Local and Regional Competitiveness Project (LRCP), which was approved by the Board on the 12th of January 2016 and became effective on July 28, 2016, is financed by an EU grant for EUR 18,000,000. The Project Development Objective (PDO) is to enhance the contribution of tourism to local economic development and improve the capacity of the government and public entities to foster tourism growth and facilitate destination management. The project includes 4 Components, of which the first one is Bank Executed (BE), while the other three are Recipient Executed (RE). The first Component (C 1) finances Technical Assistance for tourism development, while the second Component (C 2) finances the strengthening of destinations management and enabling environment, and the third one (C 3) finances subprojects/matching grants for municipal infrastructures, small and medium enterprises (SMEs) and qualified organizational entities (associations). The fourth and last Component (C 4) is about project management. The implementation of the LRCP slowed down significantly since the first quarter of 2020, due to the outbreak of the COVID-19 pandemic. However, LCRP implementation was affected by four other causes as well, which have been described in previous restructurings: (i) the project has gone through multiple changes in leadership within the government (four Deputy Prime Ministers in the span of the project life); (ii) for some months, the project faced challenges related to not having a signatory in place to sign procurement and contract extension documents. For a total of one year in the life of the project, the project was without a signatory (someone on behalf of the government who could sign contracts, payments and other important project documents); (iii) municipalities lacked capacity in project preparation (preparation of environmental and social safeguard plans), project implementation, and technical documentation, bills of quantities (listing of material and inputs needed for construction) are often of low qualify and affect the sub-projects design; and (iv) construction companies have often failed to comply with committed timelines (some due to challenges stemming from the health crisis). The World Bank Local and Regional Competitiveness Project (P154263) Implementation status per component: Component 1 of the project (Bank-executed) aims to provide project supervision and implementation support. Some activities under Component 1 were put on hold due to the COVID-19 crisis as per agreement between the World Bank, the EU and the client. These include the preparation of a tourism strategy and technical assistance to support the implementation of activities under Component 2. All activities under Component 2 were put on hold due to the Covid- 19 crisis as per agreement between the World Bank, the EU and the client. Under Component 3, a total of 63 sub-projects agreements were signed and their implementation was significantly slowed down by the pandemic and by some of the causes mentioned above. Of the 63 sub-projects agreements that were signed, 57 are active given that 6 sub-projects were canceled either by the beneficiaries or by the World Bank due to various reasons. The 57 subprojects can be broken down as it follows: 19 sub-grants were assigned to municipalities, 20 to associations, and 18 to micro and small enterprises. Of these 57 subprojects, 4 subprojects with municipalities have been completed, as well as 18 with associations and 15 with micro and small enterprises, for a total of 20 still ongoing. It is expected that most sub-projects still ongoing will be completed by the end of June. Finally, Component 4 aims to strengthen project management and implementation by the Project Implementation Unit and it continued to proceed moderately satisfactorily. Disbursement ratio: The EU Grant for the Recipient-executed Components 2, 3 and 4 amounts to EUR 15,760,000, of which to date, the World Bank has disbursed EUR 10,205,238. For the Recipient-executed part, to the amount of the EU grant the National Contribution of EUR 3,176,471 has to be added. Out of the Recipient-executed components the below have been spent by the Recipient: - Component 2. Strengthening destination management a nd enabling environment - EUR 293,490 (out of the total available budget of EUR 1,181,950); - Component 3. Investment in tourism-related infrastructure and linkages at destination - EUR 6,221,796 (out of a total available budget of EUR 13,260,000). In addition there were disbursements from the national contribution for EUR 2,417,955 for a total disbursement of the component of EUR 8,639,751; - Component 4. Strengthening project management - EUR 1,576,016 (out of a total available budget of EUR 1,318,050). The amount spent is higher than the originally-envisioned budget since the project was extended twice and additional resources were needed by the PIU for project management. During the 2019 restructuring, the World Bank and the PIU agreed that the PIU will be able to tap into the available resources under Component 2 to carry out its project management responsibilities under Component 4 (Components 2 and 4 are in the same expenditure category, namely Category 1). The remainder of the grant partly finances Administration fees and partly the Bank-executed activities under Component 1, which have almost completely disbursed with about USD 170,000 left as fund balance, which will be utilized for project supervision until the end of the project, as well as the preparation of the implementation completion report. Fiduciary and safeguards performance: The financial management and disbursement arrangements of the project have been rated consistently satisfactory. Similarly, the rating for procurement is maintained at Moderately Satisfactory. Also, so far there have been no issues related to social and environmental safeguards for the sub-projects implemented under Component 3. The World Bank Local and Regional Competitiveness Project (P154263) The project is in compliance with relevant financial management covenants, namely there are acceptable FM arrangements in place, the project submits quarterly interim financial reports on time, and there is no overdue audit of the project Rationale for restructuring: An extension of the project closing date of three months, up to September 30, 2021 is needed for several reasons. Primarily, it will allow for the completion of the subprojects that will not be completed by June 30, 2021. The following 7 sub-projects are the ones most at risk of not being completed by the current closing date: 1) Sub project: “Mount bike paradise”; Beneficiary: Municipality of Kocani; 2) Sub project: “Cultural values and tourism: from a lifestyle to a privilege of experience”; Beneficiary: Museum of the City of Skopje; 3) Sub project:” Kriva Palanka-Eastern gate of Macedonia”; Beneficiary: Municipality of Kriva Palanka 4) Sub project: “Prilep Lake - new adventures, new opportunities"; Beneficiary: Municipality of Prilep 5) Sub project: “Free Ride Mavrovo - All year round”; Beneficiary: Ski Centar Mavrovo; 6) Sub project: “Workshop of filigree – Vangel Dereban”; Beneficiary: Drushtvo za ugostitelstvo trgovija i uslugi NOVA CHVRGA uvoz-izvoz Ohrid DOOEL; and 7) Sub-project “The Cult of Water”; Beneficiary: Podgorski Ann. These 7 sub-projects amount to about Eur 3,000,000. The extension of the project closing is also needed to allow to: 1) use available funds to finance additional activities already agreed between the World Bank and the PIU for three municipal sub-projects that have already been completed. The additional activities which amount to about Eur 300,000, require a longer time than June 30, 2021 to be completed and they will benefit the Municipality of Krushevo, the Municipality of Vevchani, and the Municipality of Chair; 2) conduct promotional and visibility campaign activities, including raising awareness campaign on Destination Management and outcomes from the LRCPS Sub-Grant Scheme, as requested by the donor, consistent with the Terms of Reference agreed between the World Bank, the Donor and the PIU; 3) monitor and finalize civil works mainly for the municipalities sub-projects which will still be ongoing after June 30th, 2021; 4) finalize the administrative transfer of renovated buildings and purchased goods to the beneficiaries of the infrastructure sub-grants, and prepare a proper handover of any activities not completed to the Municipalities and the Cabinet; 5) visit all construction sites, ensure the proper closure of the subprojects, preparing sub-project closing reports in coordination with the beneficiaries for each financed sub-project; and 6) prepare the final data for the monitoring and evaluation (M&E) framework. Achievement of the PDO: At its closing, as per PDO, the project will have strengthened the contribution of tourism to local economic development as well as improved the capacity of the government and public entities to foster tourism growth and facilitate destination management even if in a smaller measure of what it could have happened in absence of the pandemic. However, the three PDO indicators, namely, "Additional private investment generated in tourism related activities at beneficiary destinations", "Increase in tourism-related jobs in beneficiary destinations" and "number of destination management partnerships formed" will not be fully achieved. The first two indicators have been severely affected by the COVID-19 pandemic which led to a decrease in private investments in tourism compared to what was planned, and to the loss of several jobs in tourism. The final values of both indicators will be measured at the end of the project through direct final surveys of beneficiaries. The third PDO indicator will not be achieved either as the The World Bank Local and Regional Competitiveness Project (P154263) underlining activities related to destination management organizations under Component 2 put on hold after COVID- 19 hit. Conversely, most of the intermediate indicators have already achieved their targets, and some even exceeded them. Memorandum of Understanding: To facilitate the process of project closing, the Cabinet and the Bank agreed to sign a Memorandum of Understanding (MOU) that will formalize current agreements and define the obligations of the Client with respect to subprojects activities already started which may not be completed by the project closing date. In particular, the government and the Bank agreed that up to September 30, 2021, there will be no new activities proposed or initiated under Component 2 and no new municipal, enterprise or association subprojects (“subprojects”) will be proposed or initiated under Component 3. The activities that were put on hold under Components 1 and 2 due to the COVID-19 health crisis will not re-initiate during or prior to the third extension period. The LRCP will finance eligible expenditures that are payable only for such goods, works non-consulting and consulting services that are included in the third extension period and delivered, performed, completed and accepted on or before the closing date of September 30, 2021 and in accordance with the provisions of respective contracts. The respective Municipalities have to ensure availability of funds from own or other resources as may be required for goods to be delivered and works, non-consulting and/or consulting services to be completed and accepted after the project closing date. Indeed, it was agreed that contracts expected not to be completed by the closing date of September 30, 2021, have to be revised to include a provision that goods, works, non-consulting and/or consulting services delivered, performed, completed and accepted after September 30, 2021, will be financed from respective Municipality’s or Government’s own resources, as the case might be. To the extent that any activities under Component 3 are not completed by September 30, 2021, the Cabinet, through the PIU, will amend the grant agreements with municipalities to include that the municipalities will undertake the overseeing of the environmental and social safeguards as per the respective Environmental and Social Management Plans (ESMPs) after September 30, 2021. To supervise these activities after September 2021, the Cabinet may need to retain some of the social and environmental safeguards staff of the PIU with government budget, until the completion of activities. III. DETAILED CHANGES LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications 31-Dec-2020, 30-Jun- TF-A1779 Effective 31-Dec-2019 30-Sep-2021 30-Jan-2022 2021 The World Bank Local and Regional Competitiveness Project (P154263)