The World Bank Road Upgrading and Development Project (P149955) REPORT NO.: RES40864 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF ROAD UPGRADING AND DEVELOPMENT PROJECT APPROVED ON SEPTEMBER 30, 2015 TO PUBLIC ENTERPRISE FOR STATE ROADS TRANSPORT EUROPE AND CENTRAL ASIA Regional Vice President: Anna M. Bjerde Country Director: Linda Van Gelder Regional Director: Lucio Monari Practice Manager/Manager: Karla Gonzalez Carvajal Task Team Leader(s): Ioannis Dimitropoulos The World Bank Road Upgrading and Development Project (P149955) ABBREVIATIONS AND ACRONYMS BMS Bridge Management System EUR Euro FY Fiscal Year ICB International Competitive Bidding PDO Project Development Objective PESR Public Enterprise for State Roads RUDP Road Upgrading and Development Project USD US Dollar The World Bank Road Upgrading and Development Project (P149955) BASIC DATA Product Information Project ID Financing Instrument P149955 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 30-Sep-2015 31-Dec-2020 Organizations Borrower Responsible Agency Public Enterprise for State Roads Public Enterprise for State Roads Project Development Objective (PDO) Original PDO The Project Development Objectives are to improve transport connectivity for road users along Corridor VIII between Skopje and DeveBair, and to improve the asset management and planning functions of Public Enterprise for State Roads. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-85250 30-Sep-2015 06-Oct-2015 30-Dec-2015 31-Dec-2020 90.95 33.10 59.67 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Road Upgrading and Development Project (P149955) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. The Road Upgrading and Development Project (RUDP) was approved on September 30, 2015 and declared effective on December 2015, with a closing date of December 31, 2020. The Project Development Objectives are to improve transport connectivity for road users along Corridor VIII between Skopje and Deve Bair, and to improve the asset management and planning functions of Public Enterprise for State Roads. The project consists of two Components (Parts): Part I: Construction of Corridor VIII: Construction of the express road along the east section of the Corridor VIII between Rankovce and Kriva Palanka. Part II: Establishment of Bridge Management System and Institutional Support: Strengthening of the Borrower’s institutional capacity to manage and maintain the Guarantor’s bridge assets through, inter alia, the creation of a Bridge Management System (BMS), including the development of a bridge maintenance and investment plan; and support to the Borrower’s capacity development and Project implementation through, inter alia, (a) the provision of technical assistance to strengthen the technical capacity of the Project Management Team (PMT) and (b) the carrying out of (i) independent technical audits of the civil works carried out under Part I; (ii) a beneficiary satisfaction survey; and (iii) mid-term and impact evaluation surveys. 2. During 2016 and 2017, progress on project activities including the necessary land acquisition along the planned expressway route was very limited due to the political crisis, during which widespread protests led to early elections. After the early elections, PESR managed to complete the land acquisition, the construction bidding process and selection of contractors for Component I works by December 2017, with construction contracts awarded in May 2018. However, implementation was further delayed later, on both Components. On Component I (Construction) initial contractor mobilization was slow for both construction lots, and performance remained poor especially in one of the two (lot 1); this has led to physical progress percentages of 30% (lot 1) and 46% (lot 2) by the end of November 2020. On Component II (BMS), PESR’s procurement delay resulted in the contract being awarded only in the summer of 2020. Therefore, no project activity could be concluded within the current loan closing date. Moreover, of the original commitment amount of EUR 83m (approx. USD 91m equivalent), 34% has been disbursed through mid-December 2020, whereas the project’s implementation progress (IP) and Project Development Objective (PDO) have been downgraded to Moderately Unsatisfactory in ISRs since June 2019. Lastly, during 2020, in particular the second calendar quarter, the combination of the covid-19 pandemic with the pre-election period exacerbated implementation delays. 3. Following consideration of alternative options (including closing the project now, extending it without Lot 1 or reaching an acceptable plan for full PDO achievement) and discussions with the Bank, the Borrower has concluded on an Action Plan for the project’s implementation, acceptable to the Bank and, to be included in the Project Operation Manual. Correspondingly, in a letter dated December 7th, 2020 (and later reiterated in the letter of December 22nd, 2020), the Borrower has requested an extension of the loan closing date by 24 months, from the current closing date of December 31, 2020, as well as a cancellation of EUR 10m (approx. USD 12.1m equivalent) from the loan, The World Bank Road Upgrading and Development Project (P149955) corresponding to Component I (Construction) savings. In its letter of December 22nd, 2020, the Borrower confirmed agreement with the Action Plan which calls for termination of one non-performing construction contract (lot 1) and rebidding of remaining works. Through this restructuring, it is possible, if properly and efficiently managed by PESR, to achieve the PDO as well as fully disburse the revised loan amount by the new closing date extension. 4. The Action Plan is based on the following assumptions regarding the critical activities of RUDP: Construction (Component I): Lot 1 – Up to seven months for resuming works and sixteen months for completion. Lot 2 – Targeted completion by December 2021. Bridge management system (main part of Component II): Launch of procurement of the software, hardware and data collection linked activities by February 2021. Estimated completion of consultancy and linked activities by May 2022. The assumptions were based on the Bank team’s assessments of information provided by PESR and its supervision engineering and bridge management system consultants, and represent achievable timelines for completion of the activities. The detailed Action Plan is annexed to this Restructuring Paper. 5. The World Bank team confirms the general adequacy of the project’s fiduciary management (financial management and safeguards) and the fact that, as of the date of this restructuring, there are no outstanding audit reports. Following the August 2020 implementation mission, the Borrower is working on introducing improvements in its accounting and internal controls framework, as well as updating the Biodiversity Management Plan, which are agreed to be concluded by January 31, 2021. In the June 2020 ISR, all safeguards ratings were Moderately Satisfactory; Monitoring and Evaluation and Financial Management ratings were Satisfactory; and Project Management and Procurement ratings were Moderately Unsatisfactory. All legal covenants have been complied with. 6. The proposed restructuring has no impact on the safeguards instruments, as there is no change in the project Components and the original instruments and policies continue to apply. The Borrower remains committed to the project and the Development Objectives remain achievable. B. Rationale for Restructuring 7. From June 2019 onwards, the Bank continuously communicated to the Borrower (PESR) the need to address the project’s slow implementation progress. In particular on the lot 1 (Rankovce area), the contractor failed to achieve sufficient mobilization or to make progress in time-critical work on structures; moreover, the said contractor ceased being present on site for the most part of 2020 to date. PESR examined various options for addressing the poor construction progress and in February 2020 hired a claims/contract expert to focus on possible solutions for the lot 1 works. Following iterative discussions and correspondence in subsequent months, the Borrower’s proposal in October 2020 called for assignment of the lot 1 contract to the main contractor of lot 2. As this option is not in line with the World Bank Procurement Guidelines applicable to this situation (non-performing contract), the only viable option for the works to be completed with the Project financing is to rebid the remaining works and extend the project closing date to allow for the related process and the construction works completion. The World Bank Road Upgrading and Development Project (P149955) 8. Given the circumstances, International Competitive Bidding (ICB) procedure is the recommended option for the rebidding. According to the latest estimates provided by the project team, it would take seven to nine months from contract termination to have a new signed contract for Lot 1, also depending on the timely and efficient procurement process by PESR. To mitigate the risk of delays, the Bank’s project team recommends intensifying procurement capacity of PESR (incl. market research, updating of bidding documentation based on market sounding, and evaluation of bids with additional support of international experts). II. DESCRIPTION OF PROPOSED CHANGES C. Cancellation of 10 million EUR of savings 9. Given that the sum of the lot 1 and lot 2 construction contracts is EUR 58 m (approx. USD 70 m equivalent), as opposed to the initially-projected construction amount of EUR 78m (approx. USD 85.5 m equivalent on approval, or USD 94 m as per current exchange rate), and estimating that 10 million EUR (USD 12.1 m equivalent) would be a reasonable contingency amount for works on the two lots, the Borrower has requested cancellation of 10 million EUR (USD 12.1m equivalent) from the loan. The remaining undisbursed balance with the said contingency should be sufficient to complete the remaining works within the loan financing. Other than the cancellation, which affects entirely category 1 of eligible expenditures (goods, works, services, training and operating costs) -reducing it from EUR 82,792,500 to EUR 72,792,500- there is no other reallocation among categories. Estimated disbursements for the extension period are in the order of EUR 20 m for each additional fiscal year. Table 1 – Projected disbursements FY21 FY22 FY23 Projected disbursements EUR 20m EUR 20m EUR 8m by FY (USD 24.2mn equivalent) (USD 24.2mn equivalent) (USD 9.7mn equivalent) D. Extension of the Project’s closing date 10. In order to reflect construction progress rates achieved as of end November 2020, and ensure that funding is available for both lots, as well as for all activities of the second Component (including Bridge Management System consultancy; hardware and software purchase; structures data collection), PESR has requested an extension of the closing date by twenty-four months, from the current closing date of December 31, 2020 to December 31, 2022. 11. There is no modification to the PDO as a result of the proposed changes. With respect to the Results Framework, the end target values -for improved market accessibility index, freight volume served, reduced vehicle operating cost and bridge maintenance investment program based on new system- remain the same, with only the end target date shifted to match the new Loan Closing Date. Accordingly, the intermediate result indicator values -for length of constructed road, number of direct project beneficiaries with gender balancing, degree of satisfaction from road condition, citizen input, completion of bridge condition survey, digitization of structures, and preparation of bridge maintenance investment plan using the system- also remain unchanged with new target dates. The World Bank Road Upgrading and Development Project (P149955) 12. The Borrower and the Bank estimate that, subject to commitment from the Borrower and continuous implementation support from the Bank, this extended period will allow the proper completion of all construction works and all design, other consultancy and goods purchase activities being financed by the Project. The Action Plan calls for immediate contract termination and initiation of rebidding of lot 1, with an estimated restart of works within seven to nine months, namely September 2021 or earlier. As the time for constructing the remainder of lot 1 has been estimated at sixteen months, full completion is achievable by the extended closing date. It will also allow full implementation of lot 2 works and of the Bridge Management System including data collection. Moreover, the Action Plan calls for support by the Bank to PESR to intensify its procurement capacity as well as enhanced monitoring/steering arrangements with weekly progress meetings and regular higher-level reviews. ANNEX: Detailed Action Plan Action Time Comments Initiate termination of lot 1 contract No later than Dec 28, 2020 By PESR Inclusion of this Action Plan to No later than Jan 15, 2021 By PESR Project Operation Manual Revised work program and contract By PESR monitoring plan for lot 2 No later than Jan 31, 2021 Completion of pending RUDP By PESR (follow-up from Aug safeguards and FM issues 2020 mission) Valuation of works and estimation By PESR / current supervising Target Jan 20, 2021 of Bill of Quantities (BoQ) for engineer, assuming no new No later than Jan 31, 2021 rebidding designs Market analysis and international Target Jan 20, 2021 Bank-supported (consultant) bidders’ awareness for Southeast No later than Jan 31, 2021 in cooperation with PESR Europe Launch of Bridge Management Target Feb 15, 2021 System (BMS)-linked activities’ By PESR No later than Mar 15, 2021 procurement Lot 1 new bidding documents Target Jan 31, 2021 Discussion of drafts prepared for Bank review No later than Feb 28, 2021 beforehand Release Request for Proposals for Target Mar 15, 2021 Adjusting ToR from earlier Technical Audit consultancy No later than Apr 15, 2021 consultancy Award of Supervising Engineer No later than May 15, 2021 Not to be funded under RUDP contract for Lot 1 (PESR budget) Lot 1 Bank review, resubmission and Target Feb 15, 2021 Key milestone clearance – launch procurement No later than Mar 31, 2021 Target Mar 31, 2021 Lot 1 Bid / proposal submission No later than Jun 15, 2021 Target Apr 30, 2021 Lot 1 Bid Evaluation No later than Jul 15, 2021 Bank’s No-Objection and issue of Target May 15, 2021 notification of award for lot 1 No later than Jul 31, 2021 Signing of contact and works Target May 31, 2021 commencement for lot 1 No later than Sep 1, 2021 The World Bank Road Upgrading and Development Project (P149955) To complement technical Technical Audit contract award No later than Aug 15, 2021 oversight Target Dec 31, 2021 Lot 2 completion Current estimate No later than May 31, 2022 Target May 31, 2022 BMS & linked activities completion Current estimate No later than Sep 30, 2022 Target Sep 30, 2022 Assuming 16 months net Lot 1 works completion No later than Dec 31, 2022 remaining works duration Weekly starting on Jan 15, Borrower’s and Bank’s Project Technical progress meetings 2021 teams High-level meetings of Bank and For example, from Bank CM, Every 2 weeks starting on Jan client to check status of from Borrower Deputy Prime 15, 2021 procurement process for Lot 1 Minister may co-chair. Quarterly starting on Jan 15, Project progress review Revisiting RUDP status 2021 III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ The World Bank Road Upgrading and Development Project (P149955) Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Construction along Corridor VIII: Construction along Corridor 85.50 Revised 73.40 Rankovce - Kriva Palanka VIII: Rankovce - Kriva Palanka Institutional and Project Institutional and Project 5.50 5.50 Implementation Support Implementation Support TOTAL 91.00 78.90 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications IBRD-85250 Effective 31-Dec-2020 31-Dec-2022 30-Apr-2023 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE The World Bank Road Upgrading and Development Project (P149955) CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation LOAN IBRD- Disburs RESTRUCTUR EUR 83,000,000.00 10,000,000.00 31-Dec-2020 73,000,000.00 85250-001 ing ING, COST SAVINGS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-85250-001 | Currency: EUR iLap Category Sequence No: 1 Current Expenditure Category: G,W,non-CS,CS,TR,OC 82,792,500.00 23,840,972.37 72,792,500.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: PREMIUM FOR CAPS/COLLARS 0.00 0.00 0.00 Total 82,792,500.00 23,840,972.37 72,792,500.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2016 7,000,000.00 0.00 2017 10,000,000.00 0.00 2018 20,000,000.00 11,935,757.00 2019 20,000,000.00 3,943,902.00 2020 20,000,000.00 8,794,256.00 The World Bank Road Upgrading and Development Project (P149955) 2021 14,000,000.00 20,000,000.00 . The World Bank Road Upgrading and Development Project (P149955) . Results framework COUNTRY: North Macedonia Road Upgrading and Development Project Project Development Objectives(s) The Project Development Objectives are to improve transport connectivity for road users along Corridor VIII between Skopje and DeveBair, and to improve the asset management and planning functions of Public Enterprise for State Roads. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Improve transport connectivity for road users along Corridor VIII between Skopje and Deve Bair Volume of freight along Corridor VIII (tones, section 43.80 45.00 Rankovce - Kriva Palanka) (Number (Thousand)) Action: This indicator has been Revised Market accessibility index along Corridor VIII (section 138.50 265.60 Rankovce - Kriva Palanka) (Number) Action: This indicator has been Revised Vehicle operating cost for road users, in Euro per vehicle-km, 1.12 0.92 along the project road section. (Number) The World Bank Road Upgrading and Development Project (P149955) RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Action: This indicator has been Revised Improve the Borrower's asset management and planning function Bridge maintenance and investment program developed No No No No Yes Yes based on Bridge Management System (BMS). (Yes/No) Action: This indicator has been Revised PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Construction along Corridor VIII: Rankovce - Kriva Palanka Roads constructed, non-rural 0.00 0.00 4.00 11.00 18.00 24.64 (Kilometers) Action: This indicator has been Revised Direct project beneficiaries 6,181.00 24,964.00 (Number) Action: This indicator has been Revised Female beneficiaries 49.00 49.00 (Percentage) The World Bank Road Upgrading and Development Project (P149955) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Percentage of beneficiaries expressing satisfaction with 52.00 70.00 condition of the project roads (Percentage) Action: This indicator has been Revised Citizen Input to PESR during Citizen committees Final Citizen’s preparation and construction formed engagement report of the project. (Text) Action: This indicator has been Revised Institutional and Project Implementation Support Bridge condition survey No Yes completed (Yes/No) Action: This indicator has been Revised Digitize all bridge structures as part of the larger digitized No Yes national road reference system (Yes/No) Action: This indicator has been Revised Preparation of bridge maintenance and investment No Yes plan using the established BMS (Yes/No) The World Bank Road Upgrading and Development Project (P149955) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline Intermediate Targets End Target 1 2 3 4 Action: This indicator has been Revised IO Table SPACE The World Bank Road Upgrading and Development Project (P149955)