The World Bank Transport Connectivity and Asset Management Project (P132833) Document of The World Bank FOR OFFICIAL USE ONLY REPORT NO.: RES29377 RESTRUCTURING PAPER nly ON A PROPOSED PROJECT RESTRUCTURING OF TRANSPORT CONNECTIVITY AND ASSET MANAGEMENT PROJECT MAY 9, 2016 TO DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA SEPTEMBER 19, 2017 Transport and ICT Global Practice South Asia Region 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. i The World Bank Transport Connectivity and Asset Management Project (P132833) ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank AG Attorney General DBM Design, Build, and Maintain DBMOT Design, Build, Maintain, Operate, and Transfer EA Environmental Assessment EIRR Economic Internal Rate of Return EOI Expression of Interest ESMF Environmental and Social Management Framework FA Financing Agreement IRI International Roughness Index MC Monitoring Consultant nly MTR Midterm Review NPV Net Present Value OPRC Output and Performance-Based Road Contract PDO Project Development Objective PMU Project Management Unit RAMS Road Asset Management System RAP Resettlement Action Plan RDA Road Development Authority RPF Resettlement Policy Framework Regional Vice President: Annette Dixon Country Director: Idah Z. Pswarayi-Riddihough Senior Global Practice Director: Jose Luis Irigoyen Practice Manager/Manager: Karla Gonzalez Carvajal Task Team Leader: Amali Rajapaksa ii The World Bank Transport Connectivity and Asset Management Project (P132833) SRI LANKA Transport Connectivity and Asset Management Project CONTENTS I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1 B. Rationale for Restructuring 2 II. DESCRIPTION OF PROPOSED CHANGES A. Proposed Changes 4 The World Bank Transport Connectivity and Asset Management Project (P132833) BASIC DATA Product Information Project ID Financing Instrument P132833 Specific Investment Loan Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 09-May-2016 30-Jun-2026 Organizations Borrower Responsible Agency Democratic Socialist Republic of Sri Lanka Roads Development Authority Project Development Objective (PDO) Original PDO The Project Development Objective (PDO) is to strengthen the Road Development Authority’s (RDA) capacity for asset management and improve the road service delivery on the selected corridor. The selected corridor means the road section from Ja-Ela to Chilaw on National Highway A003 in Sri Lanka. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IDA-57880 09-May-2016 30-Jun-2026 125.00 0 127.98 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Transport Connectivity and Asset Management Project (P132833) iii The World Bank Transport Connectivity and Asset Management Project (P132833) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. While the project was approved by the Board on May 9, 2016, the Financing Agreement (FA) of the project has not yet been signed and therefore the project has not been made effective. The delay of over 16 months in signing the FA has been due to the legal clearance from the Attorney General (AG) not being made available based on his interpretation of an inconsistency between the FA and the National Thoroughfares Act No. 40 of 2008. 2. The activities under Component 1 that supports the institutional strengthening have commenced implementation. Given that this project is 100 percent financed by IDA, this component will be supported through retroactive finance under the project. However, progress of Component 2 that includes the implementation of the Output and Performance-based Road Contract (OPRC) has been limited due to the nly decision made at negotiations that no procurement in advance of the effectiveness will be carried out. The status of each component is discussed in the following paragraphs. Component 1: Institutional Strengthening and Capacity Building for Asset Management 3. Road Asset Management System (RAMS). The Road Development Authority (RDA) is debugging the Pavement Management System (a module within the overall asset management system) with the assistance of the system developer. In addition, the core team for the operation and management of the asset management system has been identified and is seeking various levels of approval within the Government. Furthermore, after many rounds of discussions, the RDA management is evaluating the option of creating an Asset Management Unit within the RDA to make the system of asset management more sustainable. 4. Financial Management System. The existing financial management system used by the Project Management Unit (PMU), which was established under a previous World Bank-financed project, will be continued for this project with some modifications. The project is discussing the changes with the system administrator. 5. User Satisfaction Survey. The survey has been carried out and the composition of the User Satisfaction Index has been finalized based upon several rounds of consultations within the RDA and the Ministry of Higher Education and Highways. The RDA is finalizing the baseline and future estimated values for the User Satisfaction Index. 6. Operational Manual. The Operational Manual, incorporating procurement, financial management, and project implementation, was approved by the World Bank on June 29, 2016, and has met the covenant indicated in the FA. 7. Road Policy. The Ministry of Highways is formulating a Road Policy for national, provincial, and rural roads where an initial draft has been prepared based on several rounds of consultations carried out with several levels of decision makers in the Government and other stakeholders. It is expected that the road sector strategy for national roads would follow the overall policy. 8. PMU. All the staff positions within the PMU other than the procurement specialist and one project engineer have been filled. However, the procurement is being carried out by a senior procurement 1 The World Bank Transport Connectivity and Asset Management Project (P132833) specialist of the RDA who is familiar with the World Bank procurement process as it requires more in- depth understanding and is working with both the World Bank-financed PMU and the Asian Development Bank (ADB) PMU to also ensure standardization of bid documents for the RDA. 9. Monitoring Consultant (MC). The procurement of the MC who will monitor the OPRC contract has commenced and the internal approval for the Expressions of Interest (EOIs) is being sought within the RDA. The EOI will be issued after the FA is made effective. Component 2: Piloting the Implementation of Road Asset Management Principles 10. OPRC for works and services. The World Bank’s standard bidding document for the OPRC has been used by the RDA for both the World Bank-financed and ADB-financed contracts where several rounds of discussions with the relevant stakeholders have been held, including creating awareness for contractors. The bidding document for the World Bank-financed project is being finalized. In the nly meantime, one contract for a project financed under ADB assistance has been issued. 11. Removal of black spots on the corridor. A topographic survey has been carried out in the location of the six black spots where the RDA has already carried out a highway design to identify the land requirements to address the six black spots. This would help expedite land acquisition once the contractor is on board and the detailed design has been completed. 12. Safeguards. The project was originally approved as a ‘specified project’ under the 2013 regulations to the Land Acquisition Act that allows the project to meet the World Bank’s safeguards requirements without any gaps. However, at a subsequent meeting of the Cabinet of Ministers, several objections were raised in granting the ‘specified’ status to this project as there were several other projects seeking the same status. The Cabinet of Ministers has been of the view that a single regulation applicable to all projects with reference to the 2008 regulations should be formulated, which will deter each project being approved on a case-by-case basis. Therefore, it has been decided that the underlying regulatory framework of the project relating to compensation for land acquisition and resettlement would be changed from 2013 regulations to 2008. The present Resettlement Action Plan (RAP) is therefore being revised to address the gaps between 2008 regulations and World Bank’s safeguards policies and will be followed up by a round of consultations with the affected parties. B. Rationale for Restructuring 13. The restructuring of the project is being carried out for the following two reasons: (a) To remove any perceived inconsistencies between the FA and the Thoroughfares Act No. 40 of 2008 (b) To address the changes arising out of the delay in implementation (a) To remove any perceived inconsistencies between the FA and the Thoroughfares Act No. 40 of 2008 14. The AG, who is the sole authority empowered to interpret the Sri Lankan law has concluded that the FA is inconsistent with the National Thoroughfares Act No. 40 of 2008, and as a result, either the said 2 The World Bank Transport Connectivity and Asset Management Project (P132833) Act or the FA needs to be amended. The inconsistency interpreted by the AG is that of terminology relating to the ‘Operation’ and ‘“Transfer’ included in the FA. 15. The National Thoroughfares Act No. 40 of 2008 under section 12 allows a private party to carry out the operation and transfer within a user-fee highway, which is being interpreted by the AG as the private party having the right to ‘collect toll’ (as seen in the present expressways) and ‘transfer ownership’ from the RDA. Hence, as per the said Act, these activities are not permissible under the corridor of the project as it is not a user-fee highway. 16. The FA included the terminology ‘Design, Build, Maintain, Operate and Transfer (DBMOT)’. The term ‘operation’ was used to capture the responsibility of the contractor to carry out activities to ensure that the road is kept free of obstructions. The term ‘transfer’ was meant to signify that the site will be returned to the RDA upon the conclusion of the contract. This terminology was descriptive and the types of functions carried out by the contractor do not form part of the contract itself. The allocation of nly functions and risks under the OPRC proposed in this project will be based on what is currently being carried out by the RDA under all non-user-fee highways and is not a new exercise. The World Bank’s standard OPRC format is being used in this project and any function and risk unsuitable for this particular corridor can be amended at the stage of finalizing the OPRC. 17. Hence, neither of the instances indicated by the AG under ‘operation’ and ‘transfer’ (collecting toll and/or transfer of ownership) is envisaged in the implementation of the OPRC. Nevertheless, to ensure conformity with the National Thoroughfares Act No. 40 of 2008, the terminology was phrased as Design, Build and Maintain (DBM) instead of Design, Build, Maintain, Operate and Transfer (DBMOT) as the OPRC could function exactly how it was envisaged even without ‘operation’ and ‘transfer’ in the terminology. It was further clarified that the contractor is not remunerated for ‘operation’ and the OPRC format will indicate that no transfer of ownership is being made. Ministry of Higher Education and Highways has requested indication that in this case “Build” means “rehabilitation” of the road. 18. This change has no bearing on the FA, which is an agreement between the Government of Sri Lanka and IDA. However, for the AG to be certain that neither of the said activities would be carried out by the contractor, the definition of OPRC in the FA has been expanded to explicitly exclude any activity that is not permissible under the National Thoroughfares Act No. 40 of 2008. (b) To address the changes arising out of the delay in implementation 19. Due to the delay in signing since May 9, 2016, the implementation of the project has been delayed and will require the following changes. 20. OPRC format period. The original FA included a 10-year contract length within the project period. However, as no extension to the closing date is requested to address the delay in commencement of the project, a reduced contract period is envisaged. As the OPRC needs to be further vetted by the AG subsequent to the signing of the FA and in view of the four-month bidding period required, the contract length is likely to be seven to eight years. Therefore, the period of the OPRC format to carry out design, rehabilitation, improvement, routine, and periodic maintenance works of Ja Ela-Chilaw corridor has been deleted from the FA. It will provide the RDA with the flexibility to decide the contract length based on actual delay and will be decided in consultation with the World Bank during implementation. 3 The World Bank Transport Connectivity and Asset Management Project (P132833) 21. Disbursements. As the awarding of the OPRC has been delayed due to the delay in reaching effectiveness, a corresponding delay would be seen in the disbursements as indicated under section II.A. Proposed Changes. 22. Monitoring indicators. The following indicators that relate to the OPRC format have been revised to reflect the delay in implementation. (a) Reduction in average roughness on the selected corridor(s) (number). This relates to the timing of the reduction in the roughness of the road that would be treated through the interventions in the OPRC format. Hence, due to the delay in construction, the reduction in the International Roughness Index (IRI) commences later than anticipated. (b) Roads rehabilitated, non-rural (kilometers) (core). This relates to the timing of the number of kilometers to be rehabilitated through the contract. Hence, due to the delay in nly implementation, the rehabilitation commences later than anticipated. II. DESCRIPTION OF PROPOSED CHANGES A. Proposed Changes 23. The restructuring seeks management approval for the following changes. (a) Changes to the FA - to address the perceived inconsistencies between the FA and the National Thoroughfares Act No. 40 of 2008 (i) Changing DBMOT to DBM 24. Original definition. “DBMOT” means design, build, maintain, operate, and transfer. 25. Revised definition. “DBM” means design, build and maintain contract whereby: (i) the contractor undertakes the responsibility for the engineering design of the road, the rehabilitation, improvement and emergency works required throughout the life of the contract, and the periodic and routine maintenance works to meet safety, quality and performance standards; (ii) RDA remains responsible for the relocation of utilities, and the acquisition of land and resettlement and/or payment of compensation to any Affected Persons; (iii) the contractor is remunerated based on achieving agreed outputs and levels of service. (ii) Additional comfort offered through the definition of the Output and Performance based Road Contract (OPRC): 26. Original definition. “OPRC” means output and performance-based road contract. 27. Revised definition. “OPRC” means output and performance-based road contract whereby the outputs are remunerated based on a lump sum price meeting pre-agreed levels of service and excludes any activity that is construed as operation not permissible under the Recipient’s National Thoroughfares Act (No. 40 of 2008), as approved/amended to the date of this Financing Agreement.” 4 The World Bank Transport Connectivity and Asset Management Project (P132833) (iii) Changes to the wording of Legal Covenants 28. The restructuring does not require any amendments to the Legal Covenants. However, in order to reflect the above changes made in the FA, references made to DBMOT in the Legal Covenants will be changed to DBM. These wording changes have been reflected in the following covenants.  Appointment of the Monitoring Consultant for Monitoring of the contract  Intermediate review report  Mid-Term review Report (iv) Changes to the wording of Results Indicators nly 29. In light of the above changes made to the wording of the FA, wording of the following results indicator will be changed as indicated to reflect the changes made in the FA:  Original wording. Number of DBMOT contracts for national roads contracted  Revised wording. Number of DBM contracts for national roads contracted (b) Changes to address the delay in implementation (i) Length of the OPRC Format  Original contract length: 10 years  Revised: To exclude the period of the OPRC format (ii) Disbursements 30. See table 1 for the original and revised disbursement schedules. Table 1. Expected Disbursements (US$, millions) during the Ten-Year Implementation Period of the Project Fiscal Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Original Estimates Annual 2.00 19.00 28.00 24.00 13.00 5.00 5.00 5.00 22.00 2.00 Cumulative 2.00 21.00 49.00 73.00 86.00 91.00 96.00 101.00 123.00 125.00 Revised Estimates Annual 0.00 3.00 16.00 31.00 31.00 15.00 5.00 4.00 10.00 10.00 Cumulative 0.00 3.00 19.00 50.00 81.00 96.00 101.00 105.00 115.00 125.00 (iii) Monitoring Indicators 5 The World Bank Transport Connectivity and Asset Management Project (P132833) 31. See table 2 on the original and revised estimates of IRI during the period of the OPRC format. Table 2. Project Development Objective Indicators during the Ten-Year Implementation Period of the Project Cumulative Target Values Indicator Name End Baseline YR1 YR2 YR3 YR4 YR5 YR6 YR7 YR8 YR9 Target Original Estimates Reduction in average roughness on 3.16 3.16 2.98 2.48 2.08 2.28 2.48 2.68 2.88 3.08 2.50 the selected corridor(s) (number) Revised Estimates Reduction in average roughness on 3.16 3.16 3.32 3.28 2.95 2.69 2.18 2.38 2.58 2.78 2.50 nly the selected corridor(s) (number) 32. See table 3 on the original and revised timing for completion of rehabilitation during the period of the OPRC format. Table 3. Intermediate Results Indicators during the Ten-Year Implementation Period of the Project Cumulative Target Values Indicator Name End Baseline YR1 YR2 YR3 YR4 YR5 YR6 YR7 YR8 YR9 Target Original Estimates Roads rehabilitated, non-rural 0.00 0.00 12.00 38.00 58.00 58.00 58.00 58.00 58.00 58.00 58.00 (kilometers) (core) Revised Estimates Roads rehabilitated, non-rural 0.00 0.00 0.00 16.00 39.00 58.00 58.00 58.00 58.00 58.00 58.00 (kilometers) - (core) (c) Changes to the Appraisal Summary - changes to the Appraisal Summary are seen in the following areas (i) Economic Analysis 33. The economic analysis has been modified—to the extent possible—to accommodate the shortening of the OPRC period. Two scenarios are considered—one in which the OPRC is for seven years and another in which the OPRC lasts eight years. In the economic analysis, four possible OPRC alternatives were considered, and these alternatives are modified to arrive at reasonable approximations for the net present value (NPV) under these two scenarios. (a) Seven-year OPRC scenario. For this scenario, alternative 3 (which was considered at the appraisal stage) serves as a reasonable approximation. Alternative 3 allows for a six-year 6 The World Bank Transport Connectivity and Asset Management Project (P132833) design period for rehabilitation or reconstruction.1 This alternative ensured that a terminal serviceability at 20 years is an IRI of 4.0 m/km. Given the six-year design period of alternative 3, this alternative acts as a lower bound on the NPV under a seven-year OPRC (if the second and third interventions in alternative 3 happen as planned). The NPV for alternative 3 is US$53.5 million. The NPV and economic internal rate of return (EIRR) for a seven-year OPRC will be greater than US$53.5 million and 21 percent, respectively. (b) Eight-year OPRC scenario. To estimate the NPV for this scenario, alternative 4 is modified (which was considered and was the optimal choice at appraisal). Alternative 4 allowed for a 15-year design period for rehabilitation or reconstruction, with an intervention at year 9 extending the design period for additional 11 years (to complete the analysis period of 20 years). The terminal serviceability at 20 years is an IRI of 4.0 m/km. This alternative is modified; intervention at year 9 is changed to be at year 8.2 As before, benefits are assumed to accrue for 20 years. Under this scenario, the NPV is US$57.61 million and EIRR is 23.19 nly percent. 34. At appraisal, the NPV for the project was estimated to be US$57.7 million and the EIRR was 23.3 percent. Under the two scenarios that are considered, the NPV is US$53.5 million (seven-year OPRC) and US$57.6 million (eight-year scenario) using a 12 percent discount rate. Thus, the project remains viable. (ii) Social Analysis 35. There are no changes to the safeguards policies triggered. Although the road corridor is known (existing), the detailed engineering design is yet to be prepared. Social and environmental impacts intrinsic to rehabilitation and maintenance works under the project are localized and readily mitigated. A framework approach was adopted under the project with the detailed design to be carried out by the OPRC contractor considering the prevailing conditions of the road. The Environment and Social Management Framework (ESMF) and the Resettlement Policy Framework (RPF) establish clear guidelines and methodologies for providing environmental and social baseline conditions of the road corridor and identification and assessment of environmental and social impacts and provide guidance on environmental management planning as well as the resettlement and rehabilitation principles to be applied in the preparation of the RAP. 36. In line with the ESMF and the RPF, the RDA had prepared an RAP assuming that the special status for priority projects (under the 2013 regulations) would be granted for this project, which would have allowed for an expedited land acquisition process, better entitlements/payments, and a stronger Grievance Redress Mechanism. Following the cabinet decision in June 2017, this project will have to follow the regular procedures for all projects (under the 2008 regulations), and the RAP is being revised accordingly. Consultations will be carried out on the revised RAP before finalization and will be disclosed publicly in-country and in the World Bank's InfoShop. 37. The environmental safeguard instruments and procurement and financial management arrangements designed for the original project continue to be applicable for the restructured project. 1 Before completion of this first period, a second intervention is required in year 5, with additional 6 years’ design period (for a total of 11 years’ design period) and a third intervention is required in year 10 for another 10 years’ design period (to complete the analysis period of 20 years). The terminal serviceability at 20 years is an IRI of 4.0 m/km. 2 Data for one of the years is estimated through linear interpolation. 7 The World Bank Transport Connectivity and Asset Management Project (P132833) I. SUMMARY OF CHANGES Changed Not Changed Change in Results Framework ✔ Change in Disbursement Estimates ✔ Change in Overall Risk Rating ✔ nly Change in Implementation Schedule ✔ Change in Economic and Financial Analysis ✔ Change in Social Analysis ✔ Change in Implementing Agency ✔ Change in DDO Status ✔ Change in Project's Development Objectives ✔ Change in Components and Cost ✔ Change in Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Change in Disbursements Arrangements ✔ Change in Safeguard Policies Triggered ✔ Change of EA category ✔ Change in Legal Covenants ✔ Change in Institutional Arrangements ✔ Change in Financial Management ✔ Change in Procurement ✔ Other Change(s) ✔ Change in Technical Analysis ✔ Change in Environmental Analysis ✔ 8 The World Bank Transport Connectivity and Asset Management Project (P132833) IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_RESULTS_TABLE RESULTS FRAMEWORK Project Development Objective Indicators PDO_IND_TABLE Reduction in average roughness on the selected corridor(s) Unit of Measure: Number Indicator Type: Custom Baseline Actual (Current) End Target Action Value 3.16 0.00 2.50 No Change Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 Increased user satisfaction on the corridor - Baseline and Target to be decided by July 31, 2016 and data will be gender disaggregated Unit of Measure: Percentage Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 0.00 No Change Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 Percentage of the value of new investments on existing road links selected by the RDA using the asset management system. Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action 20% of the value of 70% of the value of investments are the investments Value selected by the RDA 0 No Change selected by the RDA using the pavement using the RAMS management system Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 Intermediate Indicators IO_IND_TABLE Number of DBM contracts for national roads contracted Unit of Measure: Number Indicator Type: Custom 9 The World Bank Transport Connectivity and Asset Management Project (P132833) Baseline Actual (Current) End Target Action Value 0.00 0.00 4.00 Revised Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 Reduction in the number of accidents on the corridor (Total number of accidents on the corridor each year to be reported) The actual number of traffic crashes was 379 in 2015 Unit of Measure: Percentage Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 15.00 No Change Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 Asset management system fully operationalized Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Continuous data collection and System developed, not updating of all 10 Value Yet to commence No Change yet operational modules through the asset management system. Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 Roads rehabilitated, Non-rural Unit of Measure: Kilometers Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 0.00 58.00 No Change Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 Road Sector Strategy and Policy developed and approved Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action No comprehensive Road Sector Strategy Road Sector Policy being Value strategy available at and Policy developed No Change drafted. present. and approved. 10 The World Bank Transport Connectivity and Asset Management Project (P132833) Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 Asset Management Unit created for coordination of asset management activities. Unit of Measure: Text Indicator Type: Custom Baseline Actual (Current) End Target Action Asset management A separate Asset unit coordinating Value Management Unit is Yet to be created. asset management No Change currently not in place contracts and asset management system. Date 01-Jul-2016 10-Jul-2017 30-Jun-2026 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2016 0.00 0.00 2017 2.00 0.00 2018 19.00 3.00 2019 28.00 16.00 2020 24.00 31.00 2021 13.00 31.00 2022 5.00 15.00 2023 5.00 5.00 2024 5.00 4.00 2025 22.00 10.00 2026 2.00 10.00 OPS_DETAILEDCHANGES_SORT_TABLE 11 The World Bank Transport Connectivity and Asset Management Project (P132833) SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  Moderate  Substantial Macroeconomic  Moderate  Moderate Sector Strategies and Policies  Moderate  Moderate Technical Design of Project or Program  Moderate  Moderate Institutional Capacity for Implementation and  Substantial  Substantial Sustainability Fiduciary  Substantial  Substantial Environment and Social  Moderate  Substantial Stakeholders  Low  Low Other Overall  Moderate  Substantial 12