Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB3088 Project Name Chile Ministry of Public Works Institutional Strengthening TAL Region LATIN AMERICA AND CARIBBEAN Sector Roads and highways (60%);General water, sanitation and flood protection sector (20%);General public administration sector (20%) Project ID P102931 Borrower(s) REPUBLIC OF CHILE Implementing Agency Ministry of Public Works Morande 56 Santiago de Chile Tel 56-2-449-4155 Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared April 25, 2007 Date of Appraisal Authorization March 13, 2007 Date of Board Approval June 14, 2007 1. Country and Sector Background In the early 1990s, the Government of Chile took stock of its infrastructure needs and estimated its infrastructure deficit at US$11 billion with additional losses due to lack of competitiveness of US$1.7 billion annually. 1 In determining how to respond to this need for massive investments and significant improvements in service delivery, the Government also recognized that the public sector did not have the resources to carry out the major works required, nor could it commit its budgetary resources exclusively to infrastructure investments given the country’s social investment needs. To help face this challenge, the Government first called on the private sector to take part in the building, maintenance and operation of major road works. Thus, the Chilean Concessions System was born, allowing the private sector to finance economically profitable projects and recover their investment primarily through direct charges to users. In the years since its inception, the concession program has expanded both in terms of sectors and design. Sectorally, Chile now has what may be the world’s most extensive concession program encompassing roads, ports, railroads, bridges, tunnels, reservoirs, jails and canals. In addition, the current list of projects to be concessioned includes hospitals and even public plazas and sports stadiums. Chile’s concession program uses a variety of structures to allocate risk and to achieve financial-economic equilibrium, including explicit transfers from government, revenue and volume guarantees, shadow tolls and entirely user fee-based contracts. To reflect these different risk-sharing arrangements, the Government has 1 See: Concesioneschile.com Page 2 experimented with bidding under least cost variables, least net present values and lowest cost subsidy requirements. As the figure below illustrates, the Ministry of Public Works’ concessions portfolio— including roads and highways, bridges, airports, dams, canals, prisons, and other public edifices—has risen from about 450 billion pesos in 1995 to over 1 trillion pesos in 2005 in real terms. More strikingly, the share of private sector participation in those yearly investment levels has risen from 9 percent to 65 percent over the course of the last decade. Figure 1: Growth in Chile’s Private Financing of Infrastructure, 1995 to 2005 0 200 400 600 800 1000 1200 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 B i l l i o n s o f P e s o s ( 2 0 0 5 ) Private Public Source: Cuenta de Gestión MOPWTT 2005 The public and private infrastructure expenditures graphed above represent about 2 percent of Chile’s GDP per year. 2 Those investments levels—in tandem with electricity sector unbundling, telecommunications liberalization, municipal water and sanitation privatizations, and a separate port concessioning program—represent a financial commitment to infrastructure services beyond that of any other country in Latin America. At between 5 and 7 percent of GDP per year, Chile’s total infrastructure investment levels—all sectors, public and private—are similar to the expenditure levels of East Asia’s higher performing economies. Chile’s average growth level over the last 15 years has also outpaced most of the rest of Latin America due to a convergence of strong economic policies, including this stable commitment to infrastructure investment. There is widespread agreement that a substantial part of Chile’s infrastructure deficit would not have been reduced over the past decade, concomitantly with the strengthening of public finances, without concessions and other public-private partnerships. The concessioning program in particular has attracted global attention due to its depth—larger than the public 2 Sectors covered by Ministry of Public Works include transport assets such as inter-urban roads, urban roads, highways, bridges, and airports; water resource infrastructure such as dams, storm drainage systems, and canals; rural infrastructure such as small water systems, ferry landings, and fishing ports; and public buildings such as jails, hospitals, and schools. Page 3 finance component of public works in recent years, and breadth —covering such varied sectors as highways, airports and jails. In addition to the growing concessions program, over the last two years the Government of Chile has announced a significant expansion in the public financing of infrastructure. The intent is to provide Chile’s regions and export products with greater access to markets and to further improve the levels of basic services for Chilean consumers. The administration recognizes that both its growing public investment and concessioning programs will require greater attention in terms of planning, contract design, project management and oversight in order for them to maximize their potential as contributors to higher growth levels. 2. Objectives The Project Development Objective is to assist the Government in achieving a sustainable and integrated approach to the planning of infrastructure; levels of service standards for infrastructure as well as model contracts and procedures that promote competition and assign risks appropriately; an integrated project management process; a regulatory framework for all of MOPW’s sectors of responsibility that increases consumer confidence in infrastructure service provision; and the legal and organizational separation of the areas of planning, contracting, execution and regulation of infrastructure provision. 3. Rationale for Bank Involvement The current administration has identified specific constraints to the operations and institutional structure of the MOPW that it believes will need to be addressed in order for Chile to reach a new level of efficiency and accountability in infrastructure investment. Those challenges include: Planning: • Lack of medium and long-term planning with an integrated geographic perspective oriented to the competitiveness of Chile’s productive sectors. • Low level of interaction with other relevant stakeholders in infrastructure sector and a lack of societal or consumer voice in project planning. • Investment programs which are contract-driven rather than integrated along a supply chain, leading to coordination difficulties and inefficient expenditures. Standards, Contracts and Competition: • Lack of explicit service standards embedded in concessions or public works due to an historic focus on input-driven rather than performance-based contracts. • Uneven levels of competition during bidding processes for either concessions or public works exacerbated by lack of information correlating outcomes to contract size, structure, design elements or bidding procedures Project Management: Page 4 • Low levels of accountability related to project outcomes due to an atomized approach to project management with different individuals responsible for each stage of project development. • Poor availability of information about project costs, contract management or design and construction issues. Oversight and Regulation: • Institutional inability to provide effective oversight of contracts and concessions according to agreed upon levels of service, let alone cost elements. • Lack of ability to consider consumer concerns or even to assure public access to information in the oversight of services. Organizational Reform: • An organizational structure that does not provide for clear separation of roles and responsibilities among the four major areas of activities—planning, contract design, project management and regulation. Measures to address these challenges make up the core components of the Institutional Strengthening Program for the Ministry of Public Works. The Government of Chile has requested that this reform initiative be supported with a Technical Assistance Loan (TAL) from the World Bank. The operation focuses on strategic interventions that reflect the Bank’s infrastructure lending and technical assistance program throughout many Middle Income Countries. Integrated planning, rational project management, appropriate public- private contract design, and regulatory structures that protect both consumers and investors are areas of core competence for the Bank. The Government of Chile has requested the Bank’s involvement in this initiative in order to leverage the Bank’s experience in logistics and territorial planning, the design and execution of public-private contracts, in project management and in the development of regulatory frameworks for infrastructure. In addition, the Bank offers a comparative advantage in its ability to draw upon global knowledge, sustain a policy dialogue, and exploit synergies with other operations and technical support including, but not limited to, the Infrastructure for Territorial Development Project, the TranSantiago Urban Transport DPL and TAL, and the fee-for-service technical assistance on the valuation of contingent liabilities in infrastructure. Finally, both the Ministry of Finance and the Ministry of Public Works were attracted by the synergies that could be gained from having both a DPL and a Technical Assistance Loan to finance the key components of Institutional Strengthening Program. The thematic and substantive linkage of the two projects provides an effective framework for monitoring and evaluating the implementation of the reform program. 4. Description The Ministry of Public Works represents, in many ways, a linchpin in the Chilean economy. Its own budget of US$1.25 billion makes it one of the largest financiers of construction in the country. The additional US$600 million to $1.1 billion per year in concession investments Page 5 that it leverages makes it the primary driver of public-private partnerships in the country. Its rural infrastructure programs provi de direct services for much of the country’s poor. Its efforts at monitoring contracts and concessions provide users with their primary source of protection. Perhaps most profoundly, the infrastructure network that it builds underpins the competitiveness of most major industries in Chile. With an economic mandate as broad and deep as that of the Ministry of Public Works, it is hard to understate the benefits of higher levels of efficiency in works; more service-oriented contracts; a better use of integrated planning to avoid white elephants and maximize the value of money for investment; and of greater transparency, oversight and consumer voice. Logistics costs represent a clear example of the scope of potential benefits from better transport planning and project implementation. The World Bank has estimated Chilean logistics costs as a share of GDP at 16 percent as compared to OECD countries/comparators who spend on average 10 to 11 percent of GDP. If better intermodal linkages through more effective planning and project implementation decreased the logistics burden by so much as 1 percent, that economic windfall alone would be approximately 20 times the cost of the proposed reform. More importantly, Chilean producers would benefit from the lower costs of transport services which would contribute to greater competitiveness, job creation and growth. Even though MOPW’s investments generally, and concessions in particular, have contributed to closing Chile’s infrastructure deficit, many economic analysts as well as the current Government believe that the leveraging of the private sector can be further improved as can the use of public resources for works projects. Concerns about bias and inefficiency in concession design and oversight have recently risen to the surface despite the outside world’s positive assessment of Chile’s concession program. In particular, the growing frequency and size of concession renegotiations through “complementary agreements” (convenios complementarios) is attracting increasing coverage in the Chilean news media. As the existing Concessions Law does not allow the Ministry or an oversight body to recalculate tariffs based on a regulatory accounting of costs, these renegotiations create uncertainty about the value for money being achieved in the investments. Interventions to correct these inefficiencies and concerns fall first and foremost to the Ministry of Public Works (MOPW) since it is the primary agency responsible for planning, developing and constructing public infrastructure in support of the economic and social development of the country. Moreover, the MOPW is in charge of the maintenance, operation and administration of these public works as well as the design and implementation of almost all concessions. From the administration’s perspective, the best way to address these concerns is to modernize the internal processes of the MOPW; assure that its investments are linked to regional and national plans for growth; reorient contracts toward outputs; strengthen the oversight capacity for all contracts and concessions; and increase the role of the consumer in every stage of project development and operation. MOPW’s institutional strengthening program therefore focuses on developing processes for integrated regional and supply chain planning, redesigning contracts to include service standards and strengthen competitive bid procedures; improving project management, and expand regulatory capacity of both contracts and concessions. Page 6 Components Component 1 - Integrated Planni ng: the objective is to enhance MOPW’s medium-term and long-term planning process of infrastructure investments, both at the national and sub- national level, while integrating a supply-chain approach and a territorial approach that will identify infrastructure bottlenecks and underpin the productive potential of each territory. Component 2 - Standards, Contracts and Competition: this component will establish a methodology for setting, evaluating and updating MOPW’s standards of service based on an international benchmarking of best practices in the use of output or performance-based contracts . This methodology will allow for the development of a Standards-of-Service Manual that assigns standards according to type of contract, sub-sector, cost or cost categories, and demand levels. In addition, this component will finance the development of a database of contracts and concessions which will be used to assess the variables of contract design and bidding process against their ability to generate competition and investment results. Based upon these analyses, model contracts will be developed for each primary type of contract and each sub-sector. Component 3 – Integrated Project Management: this component will design a new Project Management model building on MOPW’s existing conceptual design including technical aspects, procedures, human resources, and the establishment of information and software tools to accompany the new Project Management model. The fundamental aspect of the design of this model is that it will be applied through a dynamic process (a hands-on trial and error approach) since lack of experience and applicability of the proposals need validating through their trial in project execution. Component 4 - Strengthening of Regulation or Oversight (“Fiscalización”): despite the large portion of investments in Chile’s infrastructure that are undertaken by private concessionaires, there is currently no independent regulatory body overseeing road, bridge, airport or public building contracts. Chile’s current administration has taken the initiative in addressing these imbalances in the market by drafting a new law to create a Superintendent of Public Works and by instigating a process for redesigning new public works and concessions contracts according to output or performance-based criteria. This component will support the Superintendent in several key aspects related to its ability to monitor performance against services standards. These will include: (i) development of implementing rules and regulations that define the Superintendent’s scope of responsibilities; (ii) drafting of an operations manual, to lay out the procedures that comprise the process of Fiscalización and renegotiation; and (iii) designing economic and financial models and their accompanying regulatory accounting manuals for Public-Private Partnerships in airports and public buildings Component 5 – Organizational Reform: A full implementation in the change of processes envisioned in the first four components would result in new working relations, changes in the definition and relationship of entire working units, a revised matrix structure for project management and reporting, and the definition of new skill requirements. The MOPW Page 7 envisions contracting a reputable international firm with experience in organizational change and business process re-engineering to undertake the core institutional development work associated with MOPW’s reform. The Bank will finance a consultancy to provide a high- level definition of the alternative arrangements in accordance with the proposed legal changes. In addition, this component intends to separate institutionally and legally the areas of planning, contracting, execution and regulation of infrastructure provision in order to allow for a system of checks and balances according to a rational and transparent assignment of roles and responsibilities. The expected output is the passage of the laws that will define the primary responsibilities of the MOPW’s agencies, namely the Law for the Creation of the Superintendent of Public Works and the Amended Law on Concessions. 5. Financing Source: ($m.) Borrower 21.4 International Bank for Reconstruction and Development 11.7 Total 33.1 6. Implementation MOPW will be the project implementing entity. The Accounting and Finance Department, Dirección de Contabilidad y Finanzas (DCF) will be responsible for project financial management: accounting and financial reporting, budgeting, internal control, treasury operations and external audit. MOPW financial management system will be used for project financial management. Bank purpose reporting will be built upon information extracted from MOPW’s financial management system. 7. Sustainability Financial sustainability of this project is ensured through the disproportionate returns expected given the cost of the reform. Institutional sustainability of the reform is best assured through the legal and regulatory structure that this project intends to establish that will define the organization’s responsibilities and structure. It will be supported by the creation, within MOPW, of a Project Management Team devoted to the coordination and management of the reform program. Environmental sustainability, while not a requirement of the project per se, is a key area included in the Integrated Planning Component of the project which seeks to strengthen environmental assessment, environmental cost calculation, mitigation processes and public consultation processes. 8. Lessons Learned from Past Operations in the Country/Sector The design of this project takes into account the experiences gained and challenges felt by the three most recent infrastructure projects (Santiago Urban Transport DPL, Santiago Urban Transport Technical Assistance Loan and Infrastructure for Territorial Development Loan), Page 8 as well as infrastructure technical assistance loans implemented in other Latin American countries. These lessons may be summarized as follows: • Commitment of the Government to the Bank’s operations is crucial. Past projects have ensured this commitment from the start through close with the implementing agencies in project design. However, this does not always capture the political risks associated with reforms. Sufficient commitment to launch the Program and to initiate reform of internal processes and structures has come from the MOPW itself, with budgetary support from Ministry of Finance. The TAL’s link to the DPL helps to raise the political profile of the project and to spread the responsibility for success to other key Cabinet ministries— particularly the Ministry of Finance. Moreover, a policy-level statement from the President, who has explicitly called for the Institutional Strengthening of the Ministry, provides a basis for pursuit of the legislative underpinnings of the reform. Over the medium term, the reform itself has to become part of a broad-based discussion about the efficiency, efficacy and responsiveness of government to the demands of domestic and industrial consumers. • Stability of the implementation unit staff is essential. Some recent operations have been delayed due to frequent changes of the team in charge of the implementation. Rather than relying on a coordination unit staffed largely with consultants or outside contractors, the TAL will utilize, and further train, core MOPW staff for fiduciary, procurement and legal oversight rather than create a free-floating PIU. MOPW has already appointed the key members of the Project Management Team and they have begun training in Bank procurement and project management procedures. • Even with Chile’s deserved reputation for technical, legal, financial and economic skills, capacity building is required in public institutions in order for reforms to be implemented properly. The TAL specifically addresses this issue, reform by reform, with detailed plans for capacity building in the areas of planning, contract design, regulation and project management. • Creating consensus among the various stakeholders of a project is central to successful implementation. This lesson is particularly important for an initiative that involves different approaches to planning, and greater regulation and transparency of works contracts and concessions. Over the past year, the Government has begun the process of consultations with key stakeholders inside and outside of Government—particularly surrounding the creation of the Directorate for Oversight (Fiscalización) and in the preparation of the bills amending the Law on Concessions and creating the Superintendency of Public Works. Further consensus will be achieved on planned reforms through the organization of workshops and seminars with consumer groups, investment groups, construction associations, the relevant chambers of commerce and with the introduction of international best practices. Financing for this capacity and consensus building is included in the TAL. 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment ( OP / BP 4.01) [ ] [x] Page 9 Natural Habitats ( OP / BP 4.04) [ ] [x] Pest Management ( OP 4.09 ) [ ] [x] Physical Cultural Resources ( OP/BP 4.11 ) [ ] [x] Involuntary Resettlement ( OP / BP 4.12) [ ] [x] Indigenous Peoples ( OP / BP 4.10) [ ] [x] Forests ( OP / BP 4.36) [ ] [x] Safety of Dams ( OP / BP 4.37) [ ] [x] Projects in Disputed Areas ( OP / BP 7.60) * [ ] [x] Projects on International Waterways ( OP / BP 7.50) [ ] [x] 10. List of Factual Technical Documents N/A 11. Contact point Contact: Jordan Z. Schwartz Title: Senior Infrastructure Specialist Tel: (202) 458-0493 Fax: Email: Jschwartz3@worldbank.org 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: pic@worldbank.org Web: http://www.worldbank.org/infoshop * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas Page 10