The World Bank Peru Lima Metro Line 2 Project (P145610) REPORT NO.: RES41563 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF PERU LIMA METRO LINE 2 PROJECT APPROVED ON SEPTEMBER 15, 2015 TO REPUBLIC OF PERU TRANSPORT LATIN AMERICA AND CARIBBEAN The World Bank Peru Lima Metro Line 2 Project (P145610) Regional Vice President: J. Humberto Lopez Country Director: Marianne Fay Regional Director: Franz R. Drees-Gross Practice Manager/Manager: Bianca Bianchi Alves Task Team Leader(s): Sofia Guerrero Gamez, Georges Bianco Darido The World Bank Peru Lima Metro Line 2 Project (P145610) ABBREVIATIONS AND ACRONYMS AATE Autoridad Autónoma del Sistema Eléctrico de Transporte Masivo de Lima y Callao (Autonomous Authority of Electric Mass Transportation Systems of Lima and Callao) ATU Autoridad de Transporte Urbano para Lima y Callao (Transport Authority for Lima and Callao) CD Country Director EDI Estudios detallados de ingeniería (final engineering designs) ESF Environmental and Social Framework GoP Government of Peru IBRD International Bank for Reconstruction and Development ICSID International Centre for Settlement of Investment Disputes IP Implementation Performance MEF Ministerio de Economía y Finanzas (Ministry of Finance) MS Moderately Satisfactory MTC Ministerio de Transporte y Comunicaciones (Ministry of Transport) MU Moderately Unsatisfactory OSITRAN Organismo Supervisor de la Inversión en Infraestructura de Transporte de Uso Público (Supervisory Agency for Investment in Public Use Transport Infrastructure) PDO Project Development Objective S Satisfactory U Unsatisfactory WB World Bank FM Financial Management M&E Monitoring and Evaluation The World Bank Peru Lima Metro Line 2 Project (P145610) BASIC DATA Product Information Project ID Financing Instrument P145610 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 15-Sep-2015 31-Dec-2021 Organizations Borrower Responsible Agency Ministry of Transport and Republic of Peru Communications,AATE,Autoridad de Transporte Urbano Project Development Objective (PDO) Original PDO The PDO is to provide a major east-west axis (Ate-Lima-Callao) of the Lima-Callao Metropolitan Region with a modern and integrated mass transit system that will improve accessibility to jobs and services in the area of influence of Lima Metro Line 2 and the Gambetta branch of Line 4. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-85170 15-Sep-2015 12-Apr-2016 03-Nov-2016 31-Dec-2021 300.00 70.00 230.00 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Peru Lima Metro Line 2 Project (P145610) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project progress 1. The Lima Line 2 Metro Project is a highly complex project that has been under implementation since 2014. The project was approved by the Bank in September 2015 and has disbursed US$70 million, accounting for 23% of the Bank loan. The project is being implemented through a concession contract with a private consortium to design, build, operate and maintain the 35km urban rail line. The Bank’s US$300 million loan for the project has been supporting the Government of Peru’s (GoP) financial contribution to the project. The total project cost is US$5,836 billion, including US$1.2 billion financed by the private concessionaire. The Bank’s involvement in the project came after major financial, legal and technical structuring had been completed. 2. The Project’s physical progress stands at 32% and financial progress stands at 27% as of May 2020. Addenda 2, December 2018, to the concession contract with no changes in cost and no major changes on scope, have allowed some additional implementation progress, but project indicators continue to indicate very slow progress to date. Concept Review Meeting Negotiations Bank Approval Signing Midterm Initial/current Closing Date 28-Aug-2014 21-Jul-2015 15-Sep-2015 12-Apr-2016 August 2019 31-Dec-2021/05- June-2020 B. Project performance 3. The project has been rated Moderately Unsatisfactory or lower for PDO and IP since 2017 due to numerous challenges and significant delays, which continue to affect implementation and delay disbursements. These include: (1) contractual and design disagreements between the project’s private concessionaire and government counterparts, which have generated disputes in the interpretation of the contract and claims pending resolution with the International Centre for Settlement of Investment Disputes (ICSID); (2) project institutional complexity including fragmented responsibilities over decision-making, as well as high turnover of government officials and project staff; (3) limitations of supervision arrangements on the client side; (4) delays in securing the approval of final engineering designs (known as EDIs) which are crucial in order to apply all safeguards obligations; and, (5) delays in implementing other contractual obligations such as land acquisition and utilities diversions with proper social and environmental mitigation measures. 4. In addition, on March 15, 2020, the President of Peru announced a mandatory country-wide lockdown due to the COVID-19 pandemic, thereby closing borders, restricting domestic travel and forbidding nonessential business operations (excluding health facilities, food vendors, pharmacies and financial institutions). Since March 16, 2020, the civil works under the project have been stopped and the Concessionaire has had limited personnel at the work sites for security purposes and fence maintenance. It is expected that project activities will resume slowly after the lockdown ends but delays to implementation will be significant and cumulative. 5. The project ratings were gradually downgraded since 2016. The current ratings for Progress towards achievement of Project Development Objective (PDO), Implementation Performance (IP), implementation through the concession agreement and project management are Unsatisfactory. For Financial Management (FM) and procurement, the rating is Moderately Unsatisfactory, and for counterpart funding and M&E, it is Satisfactory. C. Rate of actual IBRD disbursements compared with estimates. The World Bank Peru Lima Metro Line 2 Project (P145610) Estimated disbursements Actual disbursements 2016 US$25 mill December 2016 US$40 million 2017 US$150 mill August 2017 US$30 million 2018 US$125 mill 6. The accumulated US$70 million IBRD disbursed in August 2017 corresponded to the physical progress achieved until August 2017 on Phase 1A of the civil works and the manufacturing of the trains. Actual disbursements have been well below projections primarily due to the very slow implementation progress of the project and the availability of other financial resources, including the country’s own budget priorities and loans from other international financial institutions. 7. The signing and declaration of effectiveness of the loan took 14 months, which also affected the initial WB loan disbursement projections. In addition to the slow implementation progress, addenda 2 to the concession contract allowed changes in the payment mechanisms to prioritize the concessionaire’s financing for the project and delay public contributions which were supported by the Bank loan. The last IBRD disbursement was made in August 2017, and there was no projection of further disbursement of IBRD loan resources in the near-term. D. Financial reporting requirements including submission of audits. 8. The project submitted interim financial reports (IFRs) in compliance with Bank’s requirements. The financial audit reports have been submitted in a timely fashion, and audit reports show Unmodified Opinion (clean opinion) on the financial statement of the project. The project has showed adequate financial management arrangements in terms of staff, accounting and financial reporting. However, in the last two years, the lack of budget allocation and use from IBRD source and changes in the institutional arrangements have adversely impacted the level of disbursement of project funds. E. Compliance with applicable safeguards. 9. Despite recent improvements in the implementation of the environmental and social management instruments, the project continues to face significant challenges to be in compliance with Bank safeguards policies, including: i) needed update to EIAs; ii) environmental health and safety risks; iii) increase in the number of land acquisitions due to design modifications in EDIs; iv) compensations for economic displacement; v) impacts to the community due to street closures and area wide enclosures for construction or for staging areas for works; and, vi) the need for a project integrated GRM system. F. Compliance with legal covenants. 10. The Project complied with all the legal covenants (i) Finance Agreement: Section I.A.1 (Institutional Arrangements). The Borrower, through MTC (through AATE) shall maintain at all times during the execution and until completion of the Project a structure with key staff and responsibilities acceptable to the Bank, as described in the Operations Manual, including management and coordination of the Project (including coordination with Co-financers), coordination of the strategy for citizen engagement and communications and, the oversight of grievance redress mechanism (ii) Finance Agreement: Section I.A.2 (Institutional Arrangements). The Borrower, through MTC, AATE and OSITRAN, shall adopt and carry out the Project in accordance with a manual (the Operational Manual), satisfactory to the Bank, which shall include supervision and reporting requirements for the carrying out of the The World Bank Peru Lima Metro Line 2 Project (P145610) Project, including the following: (i) the description of Project implementation activities and institutional arrangements of the Project, including details regarding the respective roles of MTC, AATE and OSITRAN; ii) the Project administrative, accounting, auditing, reporting, financial (including cash flow aspects), and disbursement procedures; iii) the Safeguard Instruments; iv) the monitoring indicators fro the Project; v) organization and staffing of the finance and administrative units of MTC and AATE; vi) detailed process and procedures for budget preparatino and approval, including coordinatino between MTC, AATE and OSITRAN; vii) harmonized financial reporting, including content and format of the joint financial statements; viii) harmonized auditing arrangements, including single set of audit terms of reference; and 1) terms of reference for the hiring of the itnernatioanl consulting firm that will assist OSITRAN in the supervision fo the technical aspects fo the Lima Meetro Line 2 Concession Agreement. In the event that any provision of the Operational Manual shall conflict with this Agreement, the terms fo this Agreement shall prevails. (iii) Finance Agreement :Section I.A.3 (Institutional Arrangements).The Borrower, through MTC shall, not later than 6 months after the Effective Date: (a) prepare and furnish to the Bank a plan already approved for the institutional strengthening of AATE and other national agencies involved in the planning, implementation and supervision of the future Lima Metro network, including the consolidation of teams with adequate capacity to manage and report on, inter alia> (i) status and chagnes to the concession Agreement; (ii) loan disbursements; (iii) physicla and financial rpogress of the project; (iv) monitoring evaluation, and reporting of the Project; (v) social and environmental safeguards; (vi) coordinated strategy for social participation and communication; (vii) monitoring mechanisms for dispute resolution; and (b) provide for adequate financing of measures included in said plan. (iv) Finance Agreement: Section I.A.4 (Institutional Arrangements).The Borrower, through AATE shall, not later than 6 months after the Effective Date: (a) prepare and furnish to the Bank an approved plan, including an implementation schedule, for the multi-modal integration of transport services and accessibility for the initial phase of the Lima Metro Line 2 (Phase 1A and 1B of the Project), and (b) provide for adequate financing of measures included in said plan. (v) Finance Agreement: Section I.A.5 (Institutional Arrangements). The Borrower, through MTC and AATE shall, not later than 6 months after the Effective Date, enter into a tripartite framework agreement, under terms and conditions acceptable to the Bank, with the Municipalities of Lima and Callao to establish commitments on, inter alia: (i) plans and mechanisms for the physical integration of the Lima Metro Lines 1, 2, and the Metropolitano BRT and other bus systems; (ii) studies for the establishment of an integrated single fare ticket between Metro Lines 1, 2 and Metropolitano BRT; (iii) the reorganization of the feeder bus routes and regulation of public tranpsort services aroudn Lima metro Line 2; and (iv) plans for the imporvement of public spaces and facilities for pedestrian, bicycles and traffic management around stations conforming Lima Metro Line 2. (vi) Finance Agreement: Section I.A.6 (Institutional Arrangements). The Borrower shall cause OSITRAN to select and contract, and thereafter maintain throughout the Project, a supervision firm, independent from the Borrower (Independent Supervision Agency) with experience and qualifications acceptable to the Bank, for the provision of supervision support to OSITRAN, particularly focused on the design, construction, social- environmental and safety management aspects of the Proejct, all in accordance with the specifications included int eh Operational Manual. (vii) Finance Agreement: Section I.A.7 (Institutional Arrangements). The Borrower shall promptly inform the Bank, following the procedures established in the Operational Manual, of any material modifications to the Lima Metro Line 2 Concession Agreement, including, without limitations, (i) a material extension of the stipulated time for performance of the Concession Agreement; (ii) substantial modifications of the scope of the terms and The World Bank Peru Lima Metro Line 2 Project (P145610) conditions of the Concession Agreement that in the opinion of the Bank materially affects the obligations set forth in the Loan Agreement; (iii) modifications or amendments to the Concession Agreement that singly or jointly result in an increase fo the original value of the Concession Agreement by more than 15% and (iv) a proposed terminatino of the Concession Contract. G. Reasons for cancellation 11. After several months of discussions with government counterparts, the World Bank received a letter dated April 29, 2020 from the Minister of Finance (MEF) formally requesting the cancellation of the remaining US$230 million undisbursed from the loan. The letter included documentation from the Minister of Transport and Communications (MTC) explaining that the World Bank’s loan was no longer needed to finance the project, while also recognizing the valuable technical support the WB had provided to the project to date. The Borrower’s rationale for the cancellation of the project is that IBRD funds have not been needed by the project since August 2017 (date of the last IBRD disbursement) while the Borrower has continued to pay non-negligible commitment charges for the Loan. The Borrower, being aware of the Bank staffing and resource limitations, requested the Bank to rather concentrate its support for the transport sector in (i) the strengthening of the newly created Urban Transport Authority (ATU); and, (ii) the structuring of the projected Metro Lines 3 and 4. Additionally, the Borrower considered that differences in the safeguards classification of the project could result in unwanted additional project implementation delays going forward. On May 29 the World Bank received a letter from the MEF confirming its agreement to accelerate the project’s Closing Date and Disbursement Deadline Date to May 31, 2020. Due to the date (Friday May 29) that the confirmation was received and the minimum time required for the internal Bank processing and clearance of the cancellation, the effective Closing Date and Disbursement Deadline Date for the project was set as June 5, 2020. II. DESCRIPTION OF PROPOSED CHANGES 12. Based on the government request, the restructuring proposes: (i) Cancel the remaining US$230 million (ii) Advance the closing date and disbursement deadline date to June 5, 2020 III. SUMMARY OF CHANGES Changed Not Changed Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Implementation Schedule ✔ Implementing Agency ✔ The World Bank Peru Lima Metro Line 2 Project (P145610) DDO Status ✔ Project's Development Objectives ✔ Results Framework ✔ Components and Cost ✔ Disbursements Arrangements ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ 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) 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-85170 Effective 31-Dec-2021 05-Jun-2020 05-Jun-2020 OPS_DETAILEDCHANGES_CANCELLATIONS_TABLE The World Bank Peru Lima Metro Line 2 Project (P145610) CANCELLATIONS Value Reason Current Cancellation New Ln/Cr/Tf Status Currency Date of for Amount Amount Amount Cancellation Cancellation BORROWER' S REQUEST IBRD- Disburs 300,000,000.0 230,000,000.0 USD 29-Apr-2020 70,000,000.00 FOR 85170-001 ing 0 0 COUNTRY REASONS OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-85170-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: GO,CW,NCS and CS 300,000,000.00 69,999,994.73 70,000,000.00 100.00 100.00 Total 300,000,000.00 69,999,994.73 70,000,000.00 .