Document of The World Bank FOR OFFICIAL USE ONLY Report No: 74406-YF RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF BOR REGIONAL DEVELOPMENT PROJECT IDA CREDIT NO. 4326-YF (BOARD APPROVAL DATE: JUNE 20, 2007) AND IBRD LOAN NO. 7464-YF (BOARD APPROVAL DATE: JUNE 20, 2007) TO THE REPUBLIC OF SERBIA DECEMBER 19, 2012 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. ABBREVIATIONS AND ACRONYMS BRDP Bor Regional Development Project IDA International Development Association IBRD International Bank for Reconstruction and Development MERD Ministry of Economy and Regional Development MEDEP Ministry of Energy, Development and Environmental Protection MFE Ministry of Finance and Economy PCC Project Coordination Committee PMU Project Management Unit RTB Bor Publicly owned copper mining and production industry, based in Bor, Serbia Regional Vice President: Philippe Le Houérou Acting Country Director: Gerard A. Byam Sector Manager: Kulsum Ahmed Task Team Leader: Frank van Woerden 2 SERBIA BOR REGIONAL DEVELOPMENT PROJECT RESTRUCTURING PAPER A. SUMMARY In its letter of September 7, 2012, the Government of Serbia requested the International Development Association (the Association) and the World Bank (the Bank) to consider the following changes: (a) a partial extension of the project closing date from September 30, 2012 until September 30, 2015 to allow for completion of activities under Project Part 11 (Environmental Management and Remediation; $30.9 million equivalent allocated from the Credit/Loan) and Project Part 3 (Project Implementation Support; $1.14 million equivalent allocated from the Loan), (b) reallocation to Project Part 1 of the remaining Loan proceeds from Project Part 2 (Socio-Economic Regeneration; $10.56 million equivalent originally allocated from the Loan) which will not continue. These requested changes require a comprehensive restructuring of the Project which could not be accomplished before the original Closing Date of September 30, 2012. It was for the purpose of these requested changes that the Project’s Closing Date was initially extended with three months until December 31, 2012, to allow time for the related comprehensive restructuring. During the restructuring process, the Government of Serbia informed the Bank about recent developments regarding the future of the sites that have been prepared for remediation under the Project. With expressions of interest received from potential investors, in particular the project sites with mine tailings facilities may have possibilities of redevelopment for commercial purposes. Although formal steps have not yet been taken in this regard, continuation of remediation under the Project of these sites was considered premature under these recent developments. It is on this basis that the Government of Serbia decided to cancel the remediation works under Part 1 of the Project, leaving the construction of the tunnel under Field 2 of the Veliki Krevelj tailings facility as the only remaining main investment under the Project. This decision was confirmed in a letter to the Bank on November 19, 2012 and in a following letter of December 3, 2012 the Government confirmed to the Bank that the extension of the Project’s Closing Date until September 30, 2015 would be for the implementation of the Veliki Krevelj tunnel only. Accommodating the further reduced scope of the project, the Project restructuring cannot be completed before December 31, 2012 and it is for this purpose that as presented in this paper, the Project’s Closing Date will be extended for three months until March 31, 2013, to allow sufficient time for the comprehensive restructuring and incorporate the further reduced scope of the Project. 1 Project Parts 1, 2 and 3 are terms used in the Financing Agreement and Loan Agreement for the Bor Regional Development Project, where the Project Appraisal Document uses the terminology Component A, B and C (Project Part 1 is equivalent to Component A etc). In this Restructuring Paper the terms Project Part 1,2 and 3 will be used instead of Component A, B and C. 3 B. PROJECT STATUS Since project approval in June 2007 and subsequent signing of the Financing and Loan Agreements in July 2007, the Project experienced significant implementation delays. First, due to government changes and a slow parliamentary ratification process, the project became effective only in December 2008. Further delays occurred with partial suspension of disbursements under Project Part 1 when an implementation covenant - related to resolution of the RTB Bor’s copper smelter in an environmentally sustainable manner, thus mitigating one of the highest sources of pollution in the region - failed to be met in December 2009 due to failed attempts of the privatization process for RTB Bor. This suspension came into effect in February 2010 and was lifted in mid-December 2010 after the Government of Serbia decided to cancel privatization attempts and entered into financing arrangements for investments in new copper smelting technology. Project Part 1 - Environmental Management and Remediation This component is designed to support operations to remediate and stabilize waste and mine tailings disposal areas and replace a water collector to secure the safe discharge of river water underneath one of the mine tailings disposal areas. Project Part 1 consists of two sub-components: 1(a) Management of Environmental Liabilities and 1(b) Remediation of Urgent Environmental Hazards. The responsibility for implementation of Project Part 1 is with the Ministry of Energy, Development and Environmental Protection (MEDEP).2 During 2009 and before the suspension, further delays occurred due to lack of implementation capacity and it was decided to recruit a dedicated Component Coordinator to support MEDEP together with an International Technical Advisor. With these enforcements, procurement steps for design contracts were initiated but could not be concluded before the suspension came into effect which halted implementation progress for Project Part 1 over the course of calendar year 2010. Immediately following the lifting of the suspension, design contracts were signed and after the winter period site investigations could commence in early 2011. From this point in time onwards, progress under Project Part 1 has increased. Design work was concluded and bidding documents prepared in early 2012. The Environmental and Social Impact Assessments (ESIAs) for the two main works contracts were prepared in the first half of 2012 with all national permitting and authorization requirements obtained as well in this period. Also, the project area properties and mining concessions were transferred from RTB Bor to the state and placed under stewardship of the Mining and Minerals Institute, and arrangements with RTB Bor were concluded regarding their cooperation to enable remediation works implementation and their responsibilities to investigate and maintain their facilities adjacent to the project area in view of dam safety aspects. The procurement of the remediation works has also been concluded up to the point where winning bidders have been selected and the implementing agency is ready to sign the contract as soon as the project is extended to allow for implementation of the works. All these and some 2 During project preparation and implementation, Environmental Protection has been under different ministries including the Ministry of Environment and Spatial Planning; the Ministry of Environment, Mining and Spatial Planning; and currently under MEDEP. For consistency, throughout this paper, the term MEDEP will be used. 4 other actions - which reflect conditions to successfully implement the remediation works of the project with an estimated value of Euro 20 million - were concluded on July 20, 2012. The completion of this complex set of actions which involved many parties was an impressive turn-around on the client side in project implementation. A more recent development has been the interest of commercial parties in the exploitation of the mine tailings facilities in the Project area. Although firm arrangements have not yet been made for redevelopment of the mine tailings sites, the Government felt hesitant about investments in remediation considering the possibility that these investments would not achieve the intended objective if these sites would be redeveloped in the future. In order not to further delay the project restructuring, the Government decided in November 2012 to cancel the site remediation works under the Project and request the Bank for a project extension until September 30, 2015 to implement the replacement of the Veliki Krevelj collector only. Project Part 2 - Socio-Economic Regeneration This Component was designed to contribute to one of the project objectives of “fostering new sources of economic growth and job creation in the region�. Project Part 2 consisted of two sub-components – 2(a) Labor Redeployment and Employment Support and 2(b) Private Sector Development – and was designed to serve two mutually reinforcing goals: i) support the improved labor redeployment programs and employment services aimed at RTB Bor redundant workers and unemployed population of the Bor region; and ii) promote the development of the private sector in the region. The responsibility for implementation of Project Part 2 was with the Ministry of Economy and Regional Development (MERD). With project effectiveness delayed until December 2008, implementation of Project Part 2 was significantly affected by the financial crisis. Specifically, the prospects for privatization of RTB Bor faded with the global crisis, and the local landscape started to change with significant pressure on the local market and already weak and underdeveloped private sector which made implementation more difficult. Also, in addition to lower than expected demand for certain activities, the limited local capacity to implement complex projects added to the challenges. Specifically, the delays and slow implementation were also related to slow preparation and procurement of new activities, processing of bidders complaints, slow evaluation process by evaluation committees, and/or overall slow project and procurement administration due to lack of efficient coordination between the Project Management Unit (PMU) and MERD. Of the Euro 7.811 million allocated for Project Part 2 from the IBRD loan, only Euro 3.590 million, or around 46%, have been fully utilized. The entire budget for temporary employment programs (i.e. public works) was fully expended, and due to a high demand additional $260,000 were approved and utilized. In total, by the closing date, it is expected that nearly 850 unemployed people will have benefited from the temporary employment activities. 5 As of June 2012, nine training programs for 526 unemployed have been successfully completed, while virtually no progress was recorded with implementation of business development services. The programs for unemployed included development of transferrable skills in area of IT; bookkeeping; welding; English language; and so forth. Additional four trainings for 105 people will be finalized by the end of September, bringing the total number of beneficiaries to 631. The cited reasons for lack of progress with business development services were low demand, though the preparation and procurement of proposals was slow and inefficient. The reconstruction works of the future location of the Business Incubator in Majdanpek have been successfully completed. The registration of the incubator, selection of tenants, and procurement of necessary equipment is still pending, and the government is expected to proceed with the support to the incubator in the medium term. The expansion of existing Business Incubator in Bor was dropped due to inability of the client and local government to identify adequate location. At the same time, the incubator was supported with limited training and equipment. In light of challenging market conditions, the disbursements under the microfinance program have remained low. As of June 2012, the OBS has disbursed only 53 loans in the total amount of over Euro 345.2 thousand out of the available Euro 2.5 million. Despite the listed challenges, it is also important to highlight the achievements under Project Part 2 as mentioned above. However, four years into effectiveness the disbursements under Project Part 2 have remained limited. As there were no new prospects of improved demand and/or increase in project implementation capacity, it is proposed to cease with further implementation of Project Part 2. C. PROPOSED CHANGES  Closing date The closing date for Serbia Bor Regional Development Project, Loan 7464-YF and IDA Credit No 4326-YF, P092999 will be extended from December 31, 2012 until March 31, 2013. The proposed extension is necessary to allow for the comprehensive project restructuring that is required to incorporate the proposed changes to the Project as requested by the Government of Serbia in its letters of September 7, 2012; November 19, 2012; and December 3, 2012. This will be the second extension of the project and would represent a cumulative extension of six months from the original Closing Date. There are no outstanding audits under the Project. 6