The World Bank Sustainable Croatian Railways in Europe (P147499) REPORT NO.: RES56947 DOCUMENT OF THE WORLD BANK RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SUSTAINABLE CROATIAN RAILWAYS IN EUROPE APPROVED ON APRIL 30, 2015 TO HZ CARGO,HZ INFRASTRUCTURE,HZ PASSENGER TRANSPORT TRANSPORT EUROPE AND CENTRAL ASIA Regional Vice President: Antonella Bassani Country Director: Gallina Andronova Vincelette Regional Director: Charles Joseph Cormier Practice Manager/Manager: Shomik Raj Mehndiratta Task Team Leader(s): Victor A Aragones, Svetlana Vukanovic The World Bank Sustainable Croatian Railways in Europe (P147499) I. BASIC DATA Product Information Project ID Financing Instrument P147499 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 30-Apr-2015 31-Jul-2023 Organizations Borrower Responsible Agency HZ Cargo,HZ Infrastructure,HZ Passenger Transport Ministry of Sea, Transport and Infrastructure Project Development Objective (PDO) Original PDO The Project Development Objective (PDO) is to improve the operational efficiency and the financial sustainability of the public railway sector in Croatia. Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-85000 30-Apr-2015 06-May-2015 04-Aug-2015 31-Jul-2023 88.65 82.88 6.82 IBRD-85010 30-Apr-2015 06-May-2015 04-Aug-2015 28-Feb-2023 48.20 48.69 0 IBRD-85020 30-Apr-2015 06-May-2015 04-Aug-2015 30-Nov-2021 46.50 46.86 0 The World Bank Sustainable Croatian Railways in Europe (P147499) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No II. SUMMARY OF PROJECT STATUS AND PROPOSED CHANGES The Sustainable Croatian Railway in Europe (SUCRE) was approved by the Board on April 30, 2015 and it contained three loan agreements, Loan Agreement IBRD-85000 for HZ Infrastruktura d.o.o. (HZI), Loan Agreement IBRD-85010 for HZ Putnicki Prijevoz d.o.o. (HZPP), and Loan Agreement IBRD 85020 for HZ Cargo d.o.o. (HZC). The Project Development Objective (PDO) is to improve the operational efficiency and the financial sustainability of the public railway sector in Croatia. The HZPP loan was closed on February 28, 2023. The HZC loan was closed previously on November 30, 2021. The HZI loan will close on July 31, 2023. HZI and the Ministry of the Sea, Transport, and Infrastructure (MSTI) are working in the implementation of several activities, including; (i) drafting of the Multi-Annual Infrastructure Contract (MAIC), (ii) level crossings works, (iii) railway rehabilitation in the Savski – Marof line, (iv) the HZI restructuring study and restructuring implementation plan, and (v) finalization of the contract for study on the “Preparatory work for centralized traffic control and signaling modernization (i.e., ERTMS Implementation Plan (ERTMS IP)). The project has been restructured four times, including two extensions. The first project restructuring was done in June 2018 to enable the following: (i) reallocation of IBRD financing from Component D (“support to HZI Restructuring”) to Component A (“Project Coordination and Sector Policy Support); (ii) revision to the project results framework; and (iii) modification of component descriptions to enable HZP’s purchase of four Diesel Multiple Unit (DMU) train sets and to allow the rehabilitation of the Savski Marof Zagreb section of HZI’s network. The second restructuring undertaken in June 2019 enabled: (i) changes to the Project results framework for both PDO and intermediate level indicators; and (ii) extension of the closing date from May 30, 2020 to November 30, 2021. The third restructuring was done in August 2020 in order to: (i) reallocate financing across disbursement categories under the loan to HZPP (IBRD 5010) for additional purchase of a new Electric Multiple Unit (EMU) for passenger service delivery; and (ii) revise the project results framework. The fourth restructuring was done in November 2021 in order to: extend the closing date by 20-months for the loan to HZI (IBRD-8500-HR); extend the closing date by 15 months for the loan to HZP (IBRD-8501-HR); reallocate funds for the loan to HZI; and change a PDO level indicator. At the time of the fourth restructuring, the loan agreement with HZC (IBRD-8502-HR) had been fully disbursed and therefore was not extended. The project provides support to three entities covering different aspects of the public railway sector, infrastructure (HZI), passenger (HZP) and cargo (HZC). Although project activities support improving the operational efficiency and financial sustainability of all three entities, the PDO level indicators selectively focus on i) the operational efficiency of HZI and HZP (as measured by a decrease in operating expenses of HZP per train-km and an increase in the number of train-km operated by HZI employees); and ii) the financial sustainability of HZ Infrastructure and HZ Cargo (as measured by the signing by HZI & MSTI of a Multi-Annual Infrastructure Contract (MAIC), and the completion of a strategic partnership for HZC). Progress towards achievement of development objectives is currently rated as Moderately Satisfactory. With regard to the achievement of the PDO level indicators: The World Bank Sustainable Croatian Railways in Europe (P147499) • The project has made significant progress in enhancing operational efficiency of the 3 entities. SUCRE has successfully supported HZPP and HZC in renewing and rehabilitating their train fleets and supporting HZI to rehabilitate 237.30 km of rail lines (which in turn improves operations and safety in the network). PDO level indicators related to operational efficiency rely on train-km traveled, and were affected by the drop in passenger and cargo traffic due to COVID-19. HZPP made efforts to reduce operating costs from the beginning of the project. In 2018 and 2019, HZPP obtained an operating cost per train-km of 40.8 HRK and 40.6 HRK, respectively, and the current value is 50.1 (the target is 41.4). In normal operating conditions, HZPP would have achieved, by the loan closing date, even better performance than the targeted value of 41.4 HRK. Annual number of train-km operated per HZI employee indicator was highly affected by severe restrictions of number of trains imposed by Covid-19 and limited transport capacity on sections under modernization. • On financial sustainability, SUCRE has played a key role in strengthening the long-term financial standing of all three rail companies (HZI, HZPP, and HZC) by reducing labor costs by almost 10 percent since 2014. Under the SUCRE loan, the Public Service Obligation (PSO) was introduced allowing transparent use of public resources through a contractual relationship (and elimination of direct subsidies) and improved monitoring of HZPP services, increasing the financial sustainability of the sector. However, these achievements were not used as indicators of the achievement of the PDO. The two PDO level indicators measuring financial sustainability, the signing of the Multi-Annual Infrastructure Contract (MAIC) and the strategic partnership for HZ Cargo, have not yet been met. MSTI prepared MAIC, and the signing is expected by the loan closing date. HZC is engaged in a process of a strategic partnership. The government’s decision to compensate HZC after the separation of the railway holding and take over their debts allowed them to clean the company’s balance sheet. The next steps of the process include (i) the selection of the advisor, and (ii) issuing an open letter inviting interested parties to conduct due diligence on the company and receive a letter of intent along with their respective offers by September 2023. Proposed Changes Ministry of Finance requested a loan restructuring on May 18 , 2023, proposing the reallocation of the unused loan funds to the rehabilitation of Zagreb – Savski Marof line. The Saviski - Marof line is an important rail segment that connects Zagreb with its Eastern suburbs and with Slovenia. This line has been under modernization and reallocation of these resources is important and strategic. Furthermore, use of reallocated funds will maximize usage of SUCRE funds and current allocation to these project activities will not be completed by the loan closing date (level crossings, ERTMS study, HZI restructuring), while some of the unused available funds are due to cost savings (HZI restructuring study, MAIC, ERTMS). As a result, the HZI and MSTI would like to reallocate unused funds for the rehabilitation of the Savski - Marof Line. The requested reallocation is as follows; Part A funds to reallocate: €142,729.69 (require project restructuring) Part D funds to reallocate - Level crossings: €1,009,852.06 - Consulting services for ERTMS Study: €750,000.00 - Consulting services for the technical and business rationalization of HZI: €2,523,930.70 Total funds to reallocate: €4,426,512.45 Out of the total funds to reallocate, only € 142,729.69 needs formal project restructuring as funds would be reallocated from Category 1 to Category 7. All the funds in Part D are already in Category 7 and do not require project restructuring. The World Bank Sustainable Croatian Railways in Europe (P147499) It is important to note that World Bank Safeguards Policies and associated E&S management plans will continue to apply for the use of remaining funds after the loan closure. III. DETAILED CHANGES REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Current Current Actuals + Proposed Disbursement % Ln/Cr/TF Expenditure Allocation Committed Allocation (Type Total) Category Current Proposed IBRD- GD,Non- 85000-001 CS,CS,TRNG for 2,110,355.00 691,574.83 1,967,625.31 100.00 100.00 Currency: Part A EUR HZI Retrenchment 7,900,000.00 7,484,357.34 7,900,000.00 100.00 100.00 pymt for Part D GD,CW,Non- CS,CS,TRNG for 68,792,145.00 61,787,793.91 68,934,874.69 100.00 100.00 Part D FRONT END FEE 197,500.00 197,500.00 197,500.00 Total 79,000,000.00 70,161,226.08 79,000,000.00