The World Bank Second Urban Infrastructure Project (P132386) REPORT NO.: RES40426 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SECOND URBAN INFRASTRUCTURE PROJECT APPROVED ON MAY 22, 2014 TO UKRAINE June 25, 2020 WATER EUROPE AND CENTRAL ASIA Regional Vice President: Anna Bjerde Country Director: Alex Kremer Regional Director: Steven N. Schonberger Practice Manager/Manager: David Michaud Task Team Leader(s): Ivaylo Kolev, Sanyu S. Lutalo The World Bank Second Urban Infrastructure Project (P132386) ABBREVIATIONS AND ACRONYMS CTF Clean Technology Fund IBRD International Bank for Reconstruction and Development ISCB Institutional Strengthening and Capacity Building ISR Implementation Status and Results Report MOF Ministry of Finance PDO Project Development Objectives WB World Bank The World Bank Second Urban Infrastructure Project (P132386) BASIC DATA Product Information Project ID Financing Instrument P132386 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 22-May-2014 31-Oct-2020 Organizations Borrower Responsible Agency Ministry of Development of Communities and Territories Ukraine of Ukraine Project Development Objective (PDO) Original PDO The project development objective (PDO) is to improve the quality and efficiency of water, wastewater, and solid waste services in selected cities in Ukraine. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-83910 22-May-2014 26-May-2014 21-Nov-2014 31-Oct-2020 292.11 87.99 204.12 TF-17112 22-May-2014 26-May-2014 21-Nov-2014 31-Oct-2020 50.00 15.32 34.68 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Second Urban Infrastructure Project (P132386) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING 1.The Project Development Objective (PDO) is to improve the quality and efficiency of water, wastewater, and solid waste services in selected cities in Ukraine. The project was prepared in an accelerated fashion during civil unrests and riots, resulting in low readiness at approval and slow start of implementation. The project has experienced implementation delays, however, more recently there have been significant improvements with regard to individual activities, showing a positive trajectory. In parallel, the recently elected government has demonstrated a strong interest in working with the World Bank (WB) to deliver on the sector modernization agenda. However, it is obvious that a significant part of the envisaged activities cannot be delivered by the current loan closing date of October 31, 2020. 2.The PDO remains relevant and there is progress towards achieving project results. Implementation Progress (IP) has continued to improve since the last mission in December 2019. As of June 12, 2020, total disbursements under the IBRD loan and CTF loans co-financing reached $101.64 million (29.7 percent), while almost all the loan is committed (contracts signed). Construction works are ongoing but completion dates of several key contracts for large water supply and sanitation facilities extend beyond the current closing date, making it impossible to fully achieve the PDO. As a result, the PDO rating is Moderately Unsatisfactory, while IP is Moderately Satisfactory. Below is a summary of the implementation status of the three project components to date. a. Component 1 – Infrastructure Investment (Total cost: US$280 million IBRD and US$50 million CTF, of which US$98.1 million has been disbursed). Activities under this component support around 80 water supply, wastewater and solid waste management sub-projects in the 10 participating utilities. There has been significant progress since July 01, 2019: all investment packages are under implementation. However, after five years of implementation sub-projects in only three utilities namely: Kyiv, Kolomiya and Novovolynsk are close to subproject completion. Although all other utilities face implementation delays, most subprojects will be delivered before the current closing date of October 31, 2020. Despite the fact that COVID-19 is negatively affecting implementation, only 15 out of 80 subprojects, representing 60 percent of the total contracted amount, will not be completed by October 31, 2020. These subprojects, affecting 3 million people and two PDO result indicators, are implemented by 6 utilities, namely: Water Supply and Sanitation Companies serving Dnipro-Kirovograd (3 contracts), Kharkiv (1 contract), Ternopil (5 contracts), Vinnitsa (2 contracts) and Zhytomyr (3 contracts), as well as a solid waste company serving Kharkiv (1 contract). b. Component 2 – Institutional building (Total cost: US$7 million IBRD, of which US$1.3 million has been disbursed). Significant implementation delays have been experienced on key studies like the Development of the National Water and Wastewater Strategy and preparation of Feasibility Studies for future investments in the sector. The new Government has expressed a renewed commitment to complete all activities under this component, which is a positive sign for the implementation of the long-awaited modernization of the sector. A Utility Performance Improvement study was completed and will be used as a basis for the preparation of the Strategy and further actions to improve performance, not only in the project-financed utilities but also across the country. c. Component 3 – Project Management and Supervision (Total cost: US$5 million IBRD, of which US$ 2.2 million has been disbursed). While project management by the Central Project Management Unit (CPMU) has improved, there is need for further strengthening its capacity to provide technical advice to the utilities in relation to contract management. Performance of all utilities is satisfactory, and performance of the Borrower is improving despite the constant changes of Project Coordinator by the Ukrainian Government. There is a need for further optimization of CPMU staffing structure and roles, to ensure that it is fit for purpose to deliver on the remaining implementation activities, which is ongoing with the support of the new Project Coordinator. 3.Around seven months before project closure it can be estimated that only half of the loan will be disbursed (US$170 million) by the current loan closing date. Utilities are unable to access commercial finance and are therefore likely to stop The World Bank Second Urban Infrastructure Project (P132386) the remaining works1, leading to unfinished infrastructure and preventing about 3 million people from gaining access to improved services. A failure to engage with the Government on the sector strategy, due to the lack of required preparation time, will jeopardize the ongoing policy dialogue that is fundamental to addressing sector issues to ensure performance improvement and sustainability of water supply and sanitation services in the country. 4.Performance of the implementing entities in terms of fiduciary, safeguards, and monitoring and evaluation are summarized as follows: a. Fiduciary Performance. The current financial management rating of the Project is Moderately Satisfactory, and there are no outstanding audit reports. Although, there is an overdue Interim Financial Report as per the latest Implementation Status and Results Report (ISR), overall these have been submitted on time during implementation. The procurement rating is Moderately Satisfactory. b. Safeguards Performance. The current environmental and social safeguards rating is Moderately Satisfactory. All ESMPs except for Kharkiv Water and Vinnytsya subprojects have been cleared by the Bank and publicly consulted and disclosed. Abbreviated RAP’s for Kharkiv Solid Waste and Kharkiv Water subproject have been cleared by the Bank, publicly disclosed and consulted upon. A robust draft Project-level Resettlement Action Plan was submitted to the Bank on May 25, 2020 and the Bank has provided comments which are being incorporated by the Borrower. Submission delay was caused by design changes on subprojects. The GRM log is submitted as part of the Quarterly Project Progress Report. Consolidated project-level GRM log for the first Quarter of 2020 was submitted to the Bank and reviewed. c. On February 8, 2020 during reconstruction works on a sewerage pressure collector in Ternopil city a severe incident occurred resulting in two fatalities. The WB management was informed by the Borrower. New works under this subcontract have been stopped, special labor committee and police investigations are ongoing. CPMU shared information on the incident with all utilities, occupational health and safety training for all personnel performing works under UIP2 have been completed. Root Cause Analysis is being finalized; Safeguards Corrective Action Plan will be prepared by the Borrower with support from the WB team by the end of June 20202. 5. There are clear signals that with the appropriate actions, the project can be put back on track: i) implementation is improving and disbursements are picking up, now that almost all administrative barriers are passed; ii) two of the utilities that joined the project in the October 2016 restructuring, namely Chuguiv and Vinnitsa, cannot complete most of their subprojects in a foreseeable timeframe, and the government has agreed to cancel all of the associated activities; iii) the funds freed up by those cancelations would be partly canceled and partly used to cover limited cost overruns in four utilities (Kharkiv SW, Kirograd, Ternopil and Zhytomyr) to finish ongoing contracts due to completed design updates; and iv) the government has restarted the project-funded preparation of a Strategy for the sector, which requires a participatory approach and more time for involving all key stakeholders in setting up and agreeing on sector objectives, measures and targets to ensure performance improvement and sustainability. 6. On June 12, 2020, the Government sent to the Bank a formal request (No 19040-14/8-7/17594) for a partial cancelation, reallocation and closing date extension. In consideration of the fact that: (a) the project was affected by limited readiness at appraisal and a slow start of implementation, but is now largely on track, with almost all resources 1 This also considers COVID-19 impact on utility revenues. Recent Government decisions allowing customers to delay payment of utility bills and ban on disconnection of services for non-payment is drying up utilities cashflow. 2 Due to the ongoing emergency situation in Ukraine related to COVID-19, some delays are observed, and the Bank’s safeguards team is monitoring closely when the “non-critical” public services will be resumed, and ongoing national investigations completed for the RCA. The World Bank Second Urban Infrastructure Project (P132386) committed and works on-going, and has not been extended before; (b) keeping the current closing date would lead to unsatisfactory project development outcome with major contract cancelations; (c) ongoing COVID-19 pandemic situation in Ukraine is slowing down implementation progress; and (d) the client has agreed to cancel those activities that are most significantly delayed and would require a particularly long extension, and is committed to complete the rest within an extended period of 24 months at most, the team considers that a 24-month extension, combined with a cancelation of around US$15.5M (around 5 percent of the loan amount), and reallocation of US$14.3M (slightly below 5 percent of the loan amount: full amount of Chuguiv and partial amount from Vinnitsa) is the most appropriate to bring the project back onto a satisfactory track. II. DESCRIPTION OF PROPOSED CHANGES 7. In consideration of the context above and the Government’s request, this Restructuring Paper seeks approval to proceed with: a) Cancellation of a total of US$15,539,256.63, corresponding to a reduction of the IBRD loan of US$15,010,921.90 and of the CTF loan of US$528,334.73. The new IBRD amount is US$277,096,078.10 and the new CTF amount is US$49,471,665.27. b) Extension of the project closing date by twenty-four months, from October 31, 2020 to October 31, 2022. This will be the project’s first extension. c) Changes in the allocation of loan proceeds for individual Vodokanals under Component 1 as follows: i. Reduction of the loan amount allocated to Vinnitsa Vodokanal Utility by US$15,539,256.63, with a corresponding reduction of the loan amount from IBRD US$15,010,921.90 and from CTF US$528,334.73 under Component 1: Infrastructure Investment. ii. Reallocation of the loan amount allocated to Chuguiz Vodokanal Utility equivalent to US$4,987,500 (IBRD) under Component 1: Infrastructure Investment. iii. Reallocation of part of the loan amount allocated to Vinnitsa Vodokanal Utility equivalent to US$9,355,991.37, with a corresponding reduction of the loan amount from IBRD US$9,037,887.66 and from CTF US$318,103.71 under Component 1: Infrastructure Investment. iv. Reallocated amounts will go to: Kharkiv SW (US$6,243,491.37); Kirograd (US$2,600,000.00), Ternopil (US$2,000,000.00) and Zhytomyr (US$3,500,000.00) d) A revision to the Results Framework to adjust some of the intermediate indicators: i. remove Kramatorsk from operating cost coverage ratio indicator (the utility decided not to proceed with project implementation); ii. delete “Number utility companies implementing recommendations from Utility Performance Improvement Study” (the initial expectation for SIDA grant money never materialized); and iii. delete “Prepare new design standards for water supply and wastewater” (this was initially considered as an outcome of the sector strategy preparation, however, despite the recent Government commitment on strategic documents preparation there is no support for design changes). The World Bank Second Urban Infrastructure Project (P132386) All PDO indicators and targets do not change (some adjustment is proposed to OCCR to reflect that Kramatorsk financing was cancelled during 3rd restructuring) and remain achievable once the restructuring is completed. e) Adjustments to the disbursement projections and disbursement categories as needed to reflect the impact of the extension and cancellation. III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ PBCs ✔ Disbursements Arrangements ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ The World Bank Second Urban Infrastructure Project (P132386) Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Component 1: Urban Component 1: Urban 330.10 Revised 314.57 Infrastructure Improvement Infrastructure Improvement Component 2: Institutional Component 2: Institutional Strengthening and Capacity 7.00 Strengthening and Capacity 7.00 Building Building Component 3: Project Component 3: Project 5.00 5.00 Management and Supervision Management and Supervision TOTAL 342.10 326.57 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-83910 Effective 31-Oct-2020 31-Oct-2022 28-Feb-2023 TF-17112 Effective 31-Oct-2020 31-Oct-2022 28-Feb-2023 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation LOAN Disburs IBRD- 292,107,000.0 277,096,078.1 RESTRUCTUR ing&Re USD 15,010,921.90 12-Jun-2020 83910-001 0 0 ING, COST paying SAVINGS TF-17112- Disburs LOAN USD 50,000,000.00 528,334.73 12-Jun-2020 49,471,665.27 001 ing RESTRUCTUR The World Bank Second Urban Infrastructure Project (P132386) ING, COST SAVINGS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-83910-001 | Currency: USD iLap Category Sequence No: 1-A Current Expenditure Category: GD,CW,Non-CS,CS for Donetsk UC 0.00 0.00 0.00 81.50 81.50 iLap Category Sequence No: 1-B Current Expenditure Category: GD,CW,Non-CS,CS for Kharkiv UC 69,727,625.00 9,687,533.28 69,727,625.00 81.50 81.50 iLap Category Sequence No: 1-C Current Expenditure Category: GD,CW,Non-CS,CS for Kharkiv Waste 35,755,000.00 18,548,891.44 41,630,050.46 81.50 83.07 iLap Category Sequence No: 1-D Current Expenditure Category: GD,CW,Non-CS,CS for Kyiv UC 9,264,000.00 7,670,021.94 9,264,000.00 81.50 81.50 iLap Category Sequence No: 1-E Current Expenditure Category: GD,CW,Non-CS,CS for Kirovohrad UC 36,097,884.00 10,584,962.69 38,544,452.80 81.50 82.2 iLap Category Sequence No: 1-F Current Expenditure Category: GD,CW,Non-CS,CS for Ternopil UC 29,815,000.00 2,640,433.03 31,696,976.00 81.50 82.15 iLap Category Sequence No: 1-G Current Expenditure Category: GD,CW,Non-CS,CS for Zhytomyr UC 32,507,625.00 4,749,596.35 35,801,083.00 81.50 82.62 iLap Category Sequence No: 1-H Current Expenditure Category: GD,CW,Non-CS,CS for Vinnytsia UC The World Bank Second Urban Infrastructure Project (P132386) 39,473,116.00 1,681,679.49 15,952,640.84 96.60 99.57 iLap Category Sequence No: 2-A Current Expenditure Category: GD,CW,Non-CS,CS for Kramatorsk UC 343,000.00 343,000.00 343,000.00 100.00 100.00 iLap Category Sequence No: 2-B Current Expenditure Category: GD,CW,Non-CS,CS for Kolomiya UC 3,092,250.00 1,947,113.40 3,092,250.00 100.00 100.00 iLap Category Sequence No: 2-C Current Expenditure Category: GD,CW,Non-CS,CS for Ivano-Frankivsk 0.00 0.00 0.00 100.00 100.00 iLap Category Sequence No: 2-D Current Expenditure Category: GD,CW,Non-CS,CS for Cherkasy UC 12,309,000.00 7,979,483.46 12,309,000.00 100.00 100.00 iLap Category Sequence No: 2-E Current Expenditure Category: GD,CW,Non-CS,CS for Novovolynsk UC 5,985,000.00 4,767,612.41 5,985,000.00 100.00 100.00 iLap Category Sequence No: 2-F Current Expenditure Category: GD,CW,Non-CS,CS for Chuguiv UC 4,987,500.00 0.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: GD,CW,Non-CS,CS for CPMU 12,000,000.00 3,189,591.59 12,000,000.00 100.00 100.00 iLap Category Sequence No: 5 Current Expenditure Category: Interest Rate Cap & Collar Premium 0.00 0.00 0.00 iLap Category Sequence No: 6 Current Expenditure Category: UNALLOCATED 0.00 0.00 0.00 Total 291,357,000.00 73,789,919.08 276,346,078.10 The World Bank Second Urban Infrastructure Project (P132386) TF-17112-001 | Currency: USD iLap Category Sequence No: 1-A Current Expenditure Category: GD,CW,Non-CS,CS for Donetsk UC 0.00 0.00 0.00 18.50 18.50 iLap Category Sequence No: 1-B Current Expenditure Category: GD,CW,Non-CS,CS for Kharkiv UC 15,826,675.00 2,196,043.66 15,826,675.00 18.50 18.50 iLap Category Sequence No: 1-C Current Expenditure Category: GD,CW,Non-CS,CS for Kharkiv Waste 8,118,000.00 4,209,402.93 8,486,440.91 18.50 16.93 iLap Category Sequence No: 1-D Current Expenditure Category: GD,CW,Non-CS,CS for Kyiv UC 2,103,000.00 1,741,390.61 2,103,000.00 18.50 18.50 iLap Category Sequence No: 1-E Current Expenditure Category: GD,CW,Non-CS,CS for Kirovohrad UC 8,191,358.00 2,400,734.63 8,344,789.20 18.50 17.8 iLap Category Sequence No: 1-F Current Expenditure Category: GD,CW,Non-CS,CS for Ternopil UC 6,769,000.00 599,457.08 6,887,024.00 18.50 17.85 iLap Category Sequence No: 1-G Current Expenditure Category: GD,CW,Non-CS,CS for Zhytomyr UC 7,376,675.00 1,079,413.22 7,529,217.00 18.50 17.38 iLap Category Sequence No: 1-H Current Expenditure Category: GD,CW,Non-CS,CS for Vinnytisa UC 1,390,292.00 59,181.51 69,519.16 3.40 0.43 Total 49,775,000.00 12,285,623.64 49,246,665.27 The World Bank Second Urban Infrastructure Project (P132386) OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2014 0.00 0.00 2015 0.00 0.00 2016 4,585,670.00 5,000,000.00 2017 2,935,338.91 10,000,000.00 2018 20,000,000.00 20,000,000.00 2019 90,000,000.00 35,000,000.00 2020 115,000,000.00 40,000,000.00 2021 109,585,991.09 70,000,000.00 2022 0.00 146,567,743.37 . The World Bank Second Urban Infrastructure Project (P132386) . Results framework COUNTRY: Ukraine Second Urban Infrastructure Project Project Development Objectives(s) The project development objective (PDO) is to improve the quality and efficiency of water, wastewater, and solid waste services in selected cities in Ukraine. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline End Target To improve quality of wastewater services Volume (mass) of BOD pollution loads removed by the treatment 15,285.00 18,485.00 plant supported under the project (Tones/year) To improve quality of solid waste services Industrial or municipal solid waste recycled in Kharkiv 0.00 40,000.00 (Tones/year) To improve efficiency of water, wastewater and solid waste services Operating Cost Coverage Ratio: Kharkiv VK (Percentage) 0.76 0.86 Operating Cost Coverage Ratio: Zhytomyr (Percentage) 0.78 0.95 Operating Cost Coverage Ratio: Kharkiv MC (Percentage) 1.18 1.20 Operating Cost Coverage Ratio: Kirovograd (Percentage) 0.67 0.77 Operating Cost Coverage Ratio: Kramatorsk (Percentage) 0.74 0.85 Action: This indicator has been Marked for Deletion Operating Cost Coverage Ratio: Ternopil (Percentage) 0.92 0.97 The World Bank Second Urban Infrastructure Project (P132386) RESULT_FRAME_TBL_PDO Indicator Name PBC Baseline End Target Energy efficiency as measured by amount of energy used per m3 of wastewater treated in utilities participating in the project 0.90 0.60 (kWh per m3 of waste water treated) (Cubic Meter(m3)) Energy efficiency as measured by amount of energy used per m3 of water produced in utilities participating in the project (kWh 0.60 0.40 per m3 of water treated) (Cubic Meter(m3)) Tons of GHG emissions reduced or avoided (Tones/year) 0.00 475,392.00 PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name PBC Baseline End Target Component 1: Urban Infrastructure Improvement Piped household water connections affected by rehabilitation 0.00 550,000.00 works undertaken under the project (Number) Direct project beneficiaries (Number) 0.00 4,200,000.00 Female beneficiaries (Percentage) 0.00 50.00 Industrial and municipal waste disposal capacity created under 0.00 400,000.00 the project (Metric ton) Customers in project areas reporting improved water supply services, as measured through scorecards (rating 1-5) 40.00 60.00 (Percentage) Energy savings (GWh/yr) (Gigawatt-hour (GWh)) 0.00 470.00 Electricity Generation (GWh/yr) (Gigawatt-hour (GWh)) 0.00 210.00 The World Bank Second Urban Infrastructure Project (P132386) RESULT_FRAME_TBL_IO Indicator Name PBC Baseline End Target Component 2: Institutional Strengthening and Capacity Building Number of water utilities that the project is supporting (Number) 0.00 10.00 Rationale: Action: This indicator has been Revised Chuguiv decided to withdraw from project participation. Number of utility companies implementing recommendations of 0.00 7.00 Utility Performance Improvement Plan (Number) Rationale: This indicator was supposed to reflect SIDA grant financing for implementation of UPIP recommendations. However, SIDA Action: This indicator has been Marked for Deletion financing did not materialize. Utility companies using benchmarking systems (Number) 0.00 7.00 Prepare new design standards for water supply and wastewater No Yes (Yes/No) Rationale: This indicator was envisaged initially to reflect potential outcomes from WSS Strategy preparation. Although there is some Action: This indicator has been Marked for Deletion recent willingness for development of sector strategy there is no support for revision of design WSS standards. IO Table SPACE The World Bank Second Urban Infrastructure Project (P132386)