The World Bank Third Highway Project (P118023) REPORT NO.: RES41709 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THIRD HIGHWAY PROJECT APPROVED ON MAY 25, 2010 TO MINISTRY OF FINANCE TRANSPORT EUROPE AND CENTRAL ASIA Regional Vice President: Cyril E Muller Country Director: Sebastian-A Molineus Regional Director: Lucio Monari Practice Manager/Manager: Karla Gonzalez Carvajal Task Team Leader(s): Nijat Valiyev The World Bank Third Highway Project (P118023) ABBREVIATIONS AND ACRONYMS COVID 2019 - Coronavirus disease 2019 IBRD-İnternational Bank for Reconstruction and Development IDA – İnternational Development Association MMU - Motorway Maintenance Unit PDO – Project development objective PIU – Project implementation unit RMU - Regional Maintenance Unit SLA – Service-Level Agreements USD – United States Dollars The World Bank Third Highway Project (P118023) BASIC DATA Product Information Project ID Financing Instrument P118023 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 25-May-2010 30-Jun-2020 Organizations Borrower Responsible Agency Ministry of Finance State Roads Agency Project Development Objective (PDO) Original PDO The Project Development Objective is "to contribute to a more efficient and safer Baku-Shamakhi road and higher quality roadservices as part of the upgrading to motorway standards, and to improve the management of the nascent motorway network." Current PDO “To contribute to a more efficient and safer Baku-Shamakhi and Yenikend-Shorsulu roads and higher quality road services as part of the general network upgrading to motorway standard, and to improve the management of the nascent motorway network.” OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-86020 28-Mar-2016 07-Apr-2016 29-Jun-2016 30-Jun-2020 140.00 73.84 66.16 IBRD-78890 25-May-2010 11-Aug-2010 08-Nov-2010 31-Dec-2019 171.60 171.60 0 IDA-47230 25-May-2010 11-Aug-2010 08-Nov-2010 31-Dec-2019 70.00 64.69 .19 The World Bank Third Highway Project (P118023) Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1. The Third Highway Project (“the Project”) is providing US$381.6 million in lending to the Republic of Azerbaijan through the IBRD loan (8602-AZ) approved on March 28, 2016 (currently active), IBRD loan (7889-AZ) approved on May 25, 2010 (closed on December 31, 2019), and IDA Credit (4723-AZ) approved on May 25, 2010 (closed on December 31, 2019). The proposed Project restructuring is based on the request of the Borrower dated April 28, 2020 (received on the same date) for the (i) extension of the project closing date to allow preparation of the proposed new Bank operation and (ii) cancellation of the remaining project savings. 2. The Project’s progress towards achievement of the PDO is rated Satisfactory and implementation progress is rated Moderately Satisfactory. The Project is overall on track to meet its development objectives. Implementation of all key project activities has been timely completed, except the sub-component on construction of road maintenance offices and depots for the three motorway maintenance units. As of early mid-May 2020, the total project loan disbursements stand at about USD310.1 million (82.4% of the total Bank commitments including additional financing). The project has about USD65 million of unallocated loan savings, mostly resulting from the fluctuation of the national currency exchange rate in 2015-2016 and cancellation of some of the procurement activities. The earlier internal government consultations and subsequent communications with the Bank team have resulted in cancellation of these funds, as explained below. 3. The largest component of the Project on Motorway Improvement has been fully completed. The last road reconstruction contract under the project for M4 section km 91-107 was finished in December 2019 and the road section was officially opened. At previous stages of the project, the full length of the M4 road from Baku to Shamakhi (between km 13-91) has been upgraded to dual carriageway under four construction contracts and fully taken over. Similarly, the construction of two M3 motorway sections between Yenikend and Shorsulu (km 31-80.6) and the new Kur river bridge (as well as parallel works to improve the old Kur river bridge structure) was also fully completed. All the constructed infrastructure is under normal operation now. The highway sections financed under the project represent key segments of the country's East-West and North-South transport/transit corridors. They also provide domestic connectivity for development of agriculture, tourism, and other important sectors of economy in Southern, Mountainous Shirvan, and other regions of Azerbaijan. The project has helped to improve the transportation costs and travel times along these corridors and had positive impact on road safety situation and reduction of fatalities and injuries. 4. The project has supported the sub-component for road data collection and related capacity building for the road agency. The last phase of this contract has been finalized and apparently resulted in significant improvement of the road agency’s ability to collect and process the road data. 5. The project has also supported a reform agenda of the government to improve management of the nascent motorway network, which was largely upgraded over the recent years. The related institutional development activities included (i) implementation of studies to identify the dedicated reform options for management and maintenance of motorways, (ii) support on making decisions on selection of policy alternatives, (iii) design and implementation of major structural changes to establish seven The World Bank Third Highway Project (P118023) regional motorway maintenance units and central motorway maintenance department, (iv) staff capacity building and trainings, and, finally, (v) introduction of performance based service level contracts for maintenance of selected motorway sections. 6. All seven regional units for maintenance of motorways established within the project are operational and the three priority Regional Maintenance Units along highways M2 and M4 have been operating under Service-Level Agreements (SLA) since January 2019. The project consultancies provided formal on-the-job trainings for the staff of Motorway Maintenance Unit (MMU) and Regional Maintenance Units (RMUs). The three RMUs have been capacitated to maintain the roads based on the service level requirements. The Road Agency has recently started making the payments to RMUs fully based on the SLA parameters, including the calculation and application of penalty points. The progress of the ongoing construction of the motorway maintenance facilities has been slow, partly related to the negative impact of COVID-19 and related lockdown on economic activities. The progress, however, has recently accelerated with the new work program aiming at completion of the contract by the end of June 2020. 7. As of mid-May 2020, all project PDO and Intermediate Results Indicators have been achieved. The Financial Management, Project Management, Counterpart Funding, Procurement, and Monitoring and Evaluation ratings of the Project are rated Satisfactory. Based on the latest financial management review by the Bank, the Borrower is in compliance with the financial management requirements and the Project does not have overdue financial audit reports. II. DESCRIPTION OF PROPOSED CHANGES 1. The proposed restructuring envisages (i) extension of the Project closing date until March 31, 2021 and (ii) cancellation of the loan savings in the amount of USD64 million. The restructuring will also update the costs of project components, disbursement estimates, and implementation schedule. These changes are specified below in more detail. 2. The Government of Azerbaijan have requested an extension of the project/loan closing date by nine months to allow for partial utilization of the available loan funds for preparation of the new investment project for rehabilitation of M3 Salyan-Bilasuvar road as a core activity supporting regional development in the southern part of Azerbaijan. This restructuring follows preliminary concurrence of the Bank with the request of the Government by its letter to the Minister of Finance dated May 1, 2020. The restructuring will extend the project/loan closing date by nine months, from June 30, 2020 to March 31, 2021. This is the second extension of the ongoing Additional Financing loan closing date. The first extension of the loan closing date extended the loan by six months from December 31, 2019 to June 30, 2020 to allow for the completion of civil works for regional road maintenance facilities. Thus, with the proposed restructuring, the extension of the subject loan will become fifteen months in total. The cumulative extension of the original Project, including Additional Financing project lifetime, will total to 72 months at the proposed project closing date. 3. During the extended time period the client plans to engage consultancy services to develop technical, environmental, and social documents required for preparation of a new regional connectivity project for rehabilitation of M3 Salyan-Bilasuvar road and associated local development activities. The new project will help the Government to revitalize economy of the region in the post-COVID-19 pandemic recovery period. Implementation of civil works and targeted local development activities will provide jobs and improved access to markets and services for project beneficiaries, helping them improve livelihoods and increase incomes. The Project is also expected to include Covid-19 preparedness and communication strategies targeting the local communities exposed to the spread of disease due to proximity of neighboring Iran heavily hit by the initial waves of coronavirus, as well as development of model COVID-19 protocols for the road construction sector. 4. The proposed extension period is estimated based on the assessment of time needed for completion of the new project preparation activities and associated maintenance of PIU. These activities will be implemented within Component 1 of the Project, which includes sub-component for designing priority road investments and Component 3 (Project Management). The time extension will be also used for completion of remaining construction works for regional road maintenance facilities under The World Bank Third Highway Project (P118023) Component 2. This will depend on the progress under this activity during May-June 2020 and development of COVID-19 pandemic situation. 5. The Government of Azerbaijan have also requested partial cancellation of the loan balance in the amount of about USD 65 million. The request is justified for efficiency purposes on the basis that commitment charge is being applied to the unwithdrawn loan balance. Based on the cost estimates of the new project preparatory activities agreed with the client, the proposed cancellation in this restructuring is USD64 million. 6. The Borrower has updated the project implementation schedule, which provides sufficient time for completion of the proposed remaining Project activities by the extended Closing Date. The revised implementation schedule envisages (i) finalization of procurement of consultancy services and subsequent preparation of respective technical feasibility, design, environmental, and social documents required for appraisal of the new project, (ii) completion of remaining civil works for construction of regional road maintenance facilities, if any. 7. Changes in the Loan Agreement. The proposed changes in the Loan Agreement include modifications in the Section IV B.2 of Schedule 2 of the Loan Agreement and in the Withdrawal Table under Section IV.A.2 of Schedule 2 to the Loan Agreement. The changes reflect the extension of the project closing date from June 30, 2020 to March 31, 2021 and the cancellation of USD 64 million in the loan funds. 8. The restructuring also records new distribution of costs between projects components. The breakdown of total Project costs at the approval of Additional Financing (8602-AZ) and revised costs are indicated in the Table 2. Table 2: Project Cost and Financing Project Components Project cost at WB Financing Revised Revised approval of at approval of Project cost WB Financing Additional Additional (million (million US$, Financing Financing US$) %) (million US$) (million US$) Component 1: Motorway 448.10 355.27 369.60 290.60 Improvement Component 2: Institutional 25.00 22.0 19.35 16.21 Development Component 3: Project 4.00 3.50 5.32 4.46 Management Front-end-fee (0.25%) 0.83 0.83 0.83 0.83 Total 477.93 381.60 395.10 312.101 1The revised total WB project financing amount, inter alia, reflects the reduced available USD equivalent of the IDA credit 4723-AZ due to SDR/USD exchange rate fluctuation. The World Bank Third Highway Project (P118023) III. SUMMARY OF CHANGES Changed Not Changed Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Disbursements Arrangements ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) The World Bank Third Highway Project (P118023) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component 1: Motorway Component 1: Motorway Improvement, including Improvement, including upgrading a 94 km section of upgrading a 94 km section of M4 448.10 Revised M4 Baku-Shamakhi and 48 km 369.60 Baku-Shamakhi and 48 km section of M3 Yenikend- section of M3 Yenikend-Shorsulu Shorsulu roads into a four-lane roads into a four-lane motorway. motorway. Component 2: Support for Component 2: Support for Motorway Maintenance Reform Motorway Maintenance (management and financing Reform (management and 25.00 Revised 19.35 Azerbaijan Motorways; financing Azerbaijan institutional development of the Motorways; institutional ARS) development of the ARS) Component 3: Project Component 3: Project Management and Institutional Management and Institutional Support to ARS including Support to ARS including 4.00 Revised 5.32 technical assistance and technical assistance and financing additional costs for financing additional costs for project implementation. project implementation. TOTAL 477.10 394.27 OPS_DETAILEDCHANGES_LOANCLOSING_TABLE LOAN CLOSING DATE(S) Original Revised Proposed Proposed Deadline Ln/Cr/Tf Status Closing Closing(s) Closing for Withdrawal Applications 30-Sep-2016, 31- IBRD-78890 Closed 31-Mar-2015 Dec-2019 IBRD-86020 Effective 31-Dec-2019 30-Jun-2020 31-Mar-2021 31-Jul-2021 30-Sep-2016, 31- IDA-47230 Closed 31-Mar-2015 Dec-2019 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE The World Bank Third Highway Project (P118023) CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation Disburs IBRD- 171,600,000.0 171,600,000.0 ing&Re USD 0.00 78890-001 0 0 paying Disburs IBRD- ing&Re USD 0.00 0.00 0.00 78890-002 paying LOAN IBRD- Disburs 140,000,000.0 RESTRUCTUR USD 64,000,000.00 28-Apr-2020 76,000,000.00 86020-001 ing 0 ING, COST SAVINGS IDA-47230- Disburs XDR 46,200,000.00 0.00 46,200,000.00 001 ing OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-86020-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: GO,W,CS,non-CS,TR,IOC 139,650,000.00 70,327,108.45 75,650,000.00 90.00 90.00 iLap Category Sequence No: 3 Current Expenditure Category: PREMIUM FOR CAPS/COLLARS 0.00 0.00 0.00 Total 139,650,000.00 70,327,108.45 75,650,000.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed The World Bank Third Highway Project (P118023) 2010 0.00 0.00 2011 0.00 0.00 2012 5,189,217.85 5,189,217.85 2013 5,193,995.29 5,193,995.29 2014 24,960,101.73 24,960,101.73 2015 64,747,779.37 64,747,779.37 2016 37,710,576.69 37,710,576.69 2017 75,000,000.00 49,614,581.83 2018 65,000,000.00 55,623,453.28 2019 65,000,000.00 41,187,510.50 2020 38,798,329.07 27,042,783.46 OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  Low Macroeconomic  Moderate Sector Strategies and Policies  Low Technical Design of Project or Program  Low Institutional Capacity for Implementation and  Substantial Sustainability Fiduciary  Moderate Environment and Social  Moderate Stakeholders  Low Other  Moderate Overall  Moderate .