The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) Project Information Document (PID) Concept Stage | Date Prepared/Updated: 19-Feb-2021 | Report No: PIDC29972 Feb 19, 2021 Page 1 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Parent Project ID (if any) Project Name Panama P174535 Support to Panama PPP Program Development for Recovery (P174535) Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) LATIN AMERICA AND Oct 18, 2021 Dec 15, 2021 Transport CARIBBEAN Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Republic of Panama Secretaría Nacional de Asociaciones Público Privadas (SNAPP) Proposed Development Objective(s) The Project Development Objective is to improve the quality of infrastructure services in East Panama through more efficient asset management and increasing the capacity of Government institutions to design and manage PPPs. PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 125.00 Total Financing 125.00 of which IBRD/IDA 10.00 Financing Gap 0.00 DETAILS -NewFinEnh2 Private Sector Investors/Shareholders Equity Amount Debt Amount Government Contribution 10.00 Commercial Debt 70.00 IBRD 10.00 Guaranteed 35.00 Non-Government Contributions 30.00 Unguaranteed 35.00 Private Sector Equity 30.00 Feb 19, 2021 Page 2 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) Total 40.00 70.00 Payment/Security Guarantee Financed by Commercial Loans/LC and with IBRD Guarantee 15.00 Total 15.00 Environmental and Social Risk Classification Concept Review Decision Moderate Track II-The review did authorize the preparation to continue B. Introduction and Context Country Context 1. Panama’s exceptional growth over the past decades has not been accompanied by similar progress on social and institutional dimensions. Panama is one of the few countries in Latin America and the Caribbean (LAC) which has made progress in converging to the income per capita of more developed countries over the past two decades1. However, the benefits of such growth has been shared unevenly and poverty has remained high, at approximately 13 percent (at US$ 5.5/day, purchasing power parity 2017) in 2019, particularly in rural areas, where poverty surpasses 30 percent and among Indigenous Peoples where it exceeds 44 percent. In terms of Governance, the strength of most Panamanian institutions is also below that of countries with similar levels of income.2 2. Panama has been hit particularly hard by the COVID-19 pandemic, which will likely aggravate the development challenges of the country and intensify long-standing inequalities. Panama has reported one of the highest cases per capita of COVID-19 infections in LAC. As of February 9st, 2021; 7,633 cases per 100,000 habitants have been reported and 5,531 deaths have been registered (132 per 100,000 habitants). As a result of the pandemic, Poverty is expected to increase by at least 3.4 percentage points, bringing the poverty rate from 13 percent to 16.4 percent of the population.3 Low skilled workers are expected to be hit particularly hard given the impact of the COVID-19 pandemic on transport, tourism, construction, logistic and commerce, which all together employ close to 60 percent (1,200,000 people) of all formal workers and generate work for about 70 percent of the informal workers. 3. The contraction of the economy and the large spending pressures generated by the COVID-19 crisis are expected to contribute to a fiscal deterioration compounding the challenges to recover. The economy is expected to contract by 8.1 percent in 2020 and to rebound to 5.3 percent in 2021 before gradually converging towards an estimated 4 percent potential growth. The overall fiscal deficit is expected to exceed 7 percent of GDP in 2020, bringing the public debt close to 60 percent of GDP in 2020. Panama suffers from long-term declining revenues due to fragilities in tax administration and generous tax exemptions. Expenditures, which have been growing historically in real terms, jumped because of the 1 From 11 percent of the United States’ Gross Domestic Product (GDP) per capita in 2000 to 24 percent in 2019. 2 These results are taken from Panama’s Rapid Institutional Analysis . 3 Poverty is defined using the US$5.5 per capita per day poverty line at 2011 purchasing power parity prices. Source: WB estimations. Feb 19, 2021 Page 3 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) pandemic. Although expenditure will retract partially after the COVID-19 crisis phases out, expenditures will still be pressured in the medium term due to higher debt service and social expenditures. As a result, it is expected that primary deficits will be eliminated only by 2023, reducing the fiscal space for public investment. In this context, public and private partnerships (PPPs) provides for a relevant alternative to public financing and management of infrastructures. Sectoral and Institutional Context The role of the transport sector for the economy and the development 4. Transport plays a critical role in the economy and represents a large share of GDP. In 2015, total investment in infrastructure reached 4.5 percent of GDP according to Infralatam , mainly focused on the transport and logistics sectors (4.3 percent). The country growth has built substantially on transport both for freight, with around 40 percent of the GDP tied to the Canal of Panama, and passenger transport, with the successful development of the Panama air hub over the past years. Transport also happens to be the largest infrastructure investment sector from 2009 to 2015 and the sector most prone to attracting private financing, with close US$2 billion between 1994 and 2018. 5. However, those sizeable investments were focused mainly on limited number of areas around the canal and the most dynamic areas of the capital city and acute challenges remain in terms of access to basic services particularly for remote populations. The sector lacks a broad development strategy and an encompassing vision with limited coordination between the transport modes and between short vs. long distance transport. Several entities, with different institutional status, somehow co-manage the sector without comprehensive coordination mechanism and without a single government tutelage. This setup suffers from significant governance shortcomings, which translates into negative consequences, such as: (i) road building and maintenance is implemented based on ad-hoc requests and without a countrywide masterplan driven by transport demand; (ii) there are significant missing links in the rural roads network, with Panama’s Rural Access Index showing the poorest result in Central America and only 23 percent of the rural population within 2 km of an all-season road in 2019; (iii) the country is plagued by a deteriorating road safety record; and (iv) formal urban transport services are heavily subsidized in wealthy neighborhoods, while the rest of the city, often the poorest areas, is served by a widely informal transport system at more expensive and unregulated tariff. 6. Roads, which constitute the backbone of the country’s national transport sector, faces significant challenges. The WBG 2015 Panama Systematic Country Diagnostic (SCD) identifies roads as the weakest link in Panama’s successful logistics network. The country ranks 51st for the quality of road infrastructure (WEF, 2019), and road density (190 miles of roads per one square kilometer of territory) is, together with that in Nicaragua, the lowest in Central America. The country has 11,258 kilometers (6,996 miles) of roads, but only 3,783 kilometers (2,350 miles) are paved. Due to Panama’s geographic location and the concentration of logistics around the Canal zone, 71 percent of all main routes are short-haul and truck utilization is low, with a high percentage (50 percent) of empty backhauls and one of the highest wait times in Central America (0.05h/km) (SCD, 2016). The road network can limit trade growth, and logistics costs can reach 50 percent of the final price of traded goods (Mandri-Perrott and Marcelo, 2016). 7. Rural areas are disproportionally affected by unsafe road conditions which leads to higher number of fatal crashes. Road crashes in rural areas are much more likely to be fatal or serious due to higher speeds, weaker compliance, and remoteness from emergency response. This is a compound driver of rural poverty, with crashes known to drive poor families into poverty.4 Road crashes disproportionately impact the poorest members of society (and thus again exacerbate inequity) who are more likely to be victims of crashes for many reasons including unsafe roads in poor areas, less access 4 Aeron-Thomas, et al. (2004) The involvement and impact of road crashes on the poor: Bangladesh and India case studies. TRL report PPR 010. Feb 19, 2021 Page 4 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) to safe transport options, more risk by being vulnerable road users (pedestrians, cyclists, and motorcyclists) because cars are too expensive. Road crash deaths are estimated to cost Panama 4.7 percent of GDP each year5. 8. Poor road conditions represent one of the main barriers for women and vulnerable groups to access basic services and markets for their products. Terrestrial access to rural and indigenous populations is sporadically cut off in many places for several months every year, limiting these communities’ access to schools, health centers, markets and jobs . An assessment carried out by the World Bank6 showed that lack of infrastructure and access to different markets are preventing many indigenous entrepreneurs, especially women, to sell their products and preventing the achievement of their financial self-sufficiency. In addition, female are more dependent on shared transportation, making them more exposed to theft or sexual violence, particularly during the rainy season when tertiary roads are inaccessible. 9. In this context, the Ministry of Public Works recently embarked on a plan to modernize the road sector. The strategy aims at improving the management of the road network through a large program of Performance-Based contracts7 on the main trunk network (2000 km) and the construction of key missing links under the new PPP law to be implemented on the next 10 years. By fostering employment and improving connectivity tapping on private sector financing and management, this plan is a cornerstone of the Government strategy for the economic long-term recovery. The PPP Agenda 10.The enhancement of the institutional framework for private participation in the execution of public services opens opportunities to provide climate resilient, safe, and equitable infrastructure services. Panama had awarded a total of 35 infrastructure projects to the private sector under concession contracts until 2019 (investments of US$7.9 billion8), 5 of them were in the transport sector and 2 were road projects (US$507 million). However, those contracts were awarded in an ad-hoc way under an obsolete legislation on administrative concession9. Main flaws included: institutional vacuum with no structured organization and ad-hoc management with no planning, the concessions being launched in an autonomous way by each entity; absence of integrated fiscal management and policy of risk assignment; no regulatory framework for the management of contracts by level of services, the involvement of key stakeholders, the processing of unsolicited proposals, the assessment of value for money and the assessment and allocation of risks. Other important flaws included a relative instability of political commitments and the broad lack of capacity and procedures to structure a sound PPP program relying on bankable projects and to manage contracts. 11.The new framework targets long term PPP to ensure continued investments in transport service delivery. Its main building blocks include: (i) the adoption in September 2019 of a PPP law and its regulation in December 2020, which benefited from the WBG’s advice and was inspired by international best practices; (ii) the establishment of a National Secretariat of PPP (SNAPP, Secretaria Nacional de Asociaciones Publicas Privadas); and (iii) the development of an initial PPP pipeline primarily based on transport operations. Private sector involvement will not only preserve scarce budget 5 World Bank (2019). Guide for Road Safety Opportunities and Challenges: Low- and Middle-Income Countries Country Profiles. Washington, DC., USA: World Bank. http://documents.worldbank.org/curated/en/447031581489115544/pdf/Guide-for-Road- Safety-Opportunities-and-Challenges-Low-and-Middle-Income-Country-Profiles.pdf 6 World Bank, 2018. Panama: Economic Empowerment of Indigenous Women. Report No AUS0000725. 7 A contractual management approach introduced to the MOP by the World Bank in 2019 8 https://infrascope.eiu.com/ 9 As highlighted in the WB Policy Note on PPP in Central America (2018), the prevailing regulation on concession in Panama was one of the most outdated in the region. Feb 19, 2021 Page 5 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) resources and smoothen the costs of infrastructure service over time on selected economically viable projects, it will also improve efficiency of service delivery10. 12.The 2019 PPP Law sets forth the terms and provisions required to attract competitively the most qualified investors. The new PPP Law has been drafted with WB advice and is inspired by International best practices. The new framework streamlines the institutional organization and improves governance by defining clear roles and responsibilities and including quality control filters; it establishes clear framework and processes at all stages of the Project cycle, including appraisal methods and technical criteria applicable; it requires an orthodox fiscal risk assessment, planning and management system for fiscal sustainability; it improves transparency and rules of the game for the private sector interventions at all stages of the project cycle. 13.PPP is a key pillar of the government’s recovery strategy. Attracting the private sector for infrastructure will help accelerate the provision of key services especially in the declining Panamanian fiscal space environment. While PPPs were already a priority for the government before COVID-19, the pandemic has strengthened its commitment to the agenda given the additional strains on budgets. Responding to the growing unemployment stemming from the health and economic crisis, particularly among low-skilled workers, the PPP program will primarily support construction, rehabilitation and operation of key infrastructure offering employment opportunities to a large number of low skilled labor while tapping on private sector financing, thus limiting direct impact on public finance, and sharing risks more evenly between the state and the private sector. The expected benefits of such program include, among others11: reduced public capital investment particularly important given the deteriorating fiscal situation, more efficient completion of the works resulting in increased benefits for users, improved long-term quality of the outputs efficiencies, better life cycle management of assets, improved cost-effectiveness, and risk transfer. Mobilizing private financing and private O&M instead of relying on upfront public investments, will allow planning of work and spreading payments over a longer period of time better tuned to the maintenance needs of the infrastructure and creating budgetary certainty. Relationship to CPF 14.The project is linked to Pillar 1 in the World Bank Group’s FY15-21 Country Partnership Framework12. Creating climate resilient, safe and equitable road infrastructure access is core to the World Bank Partnership framework, as this impacts the country’s capacity to increase economic productivity, reduce poverty and foster private investments. Fostering private investments into existing and new growth sectors and addressing major bottlenecks to growth are critical to achieving these objectives. Specifically, the CPF seeks to contribute to fostering high levels of investment and increasing connectivity and accessibility through better transport and urban planning and stronger local institutions. In addition, the proposed Project is aligned with the recently approved Panama Pandemic Response and Growth Recovery Development Policy Operation (P174107). This operation is the first of two in a programmatic series of two loans which includes reforms for fiscal consolidation and increased transparency and efficiency of public procurement, including the regulatory and institutional frameworks for PPPs. These reforms are considered critical for attracting private finance in a context of declining fiscal space. 10 For example, when appropriately procured and managed, performance-based contracts in road management are in average 20 to 30% less costly than traditional road maintenance for better outcome – WB TP 31, April 2010, The Experience of Brazil in Performance Based Contracts. 11 World Bank, 2016; Guasch, 2004 12 Report No. 93425-PA Feb 19, 2021 Page 6 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) 15.The project is closely aligned with the ‘World Bank Group COVID-19 Crisis Response Approach Paper – Saving Lives, Scaling-Up Impact and Getting Back on Track.’13 Project investments and technical assistance will support activities in line with the objectives of Pillar 2: ‘Protecting Poor and Vulnerable People’. Specifically, the operation w ill support employment, productivity and mobility for vulnerable households. The program will improve and expand access conditions to the poor and remote regions in the East of Panama; the Darien, that are inhabited by fragile populations, including indigenous peoples. Investments in infrastructure will also increase traffic from and to rural areas where people are often unable to get to work or reach hospitals. These measures will help protect poor and vulnerable groups from the impact of COVID-19, through improved quality of infrastructure, road rehabilitation and maintenance, and the creation of much needed employment opportunities for vulnerable populations largely affected by the COVID-19 crisis. Furthermore, the program will support activities in line with Pillar 4: ¨Strengthening Policies, Institutions and Investments for Rebuilding Better’. With the proposed operation, the WBG will foster sustainable growth and job creation through public-private joint interventions and partnerships that can channel resources at larger scale. Public-private partnership schemes, that pool and leverage resources and share and mutualize risks, can play a key role in addressing the challenges ahead. Specifically, the project will support the development of the institutional framework required to unfold the PPP program. C. Proposed Development Objective(s) 16.The MPA program Development Objective is to deliver climate resilient, safe and equitable road infrastructure service for all in the project area Developing infrastructure reaching out lagging areas, whether within or outside large cities will improve access to basic services to the most vulnerable. Improving the connectivity of the country through transport infrastructure will link producers to markets and workers to jobs. 17.The first phase Project Development Objective is to improve the quality of infrastructure services in East Panama through more efficient asset management and increasing the capacity of Government institutions to design and manage PPPs. Key Results (From PCN) • Enhanced connectivity: Improved transport and logistics efficiency as measured by reduced transit time for users (disaggregated by gender); • Improved reliability: share of transport (pas.km or ton.km) undertaken in good conditions • Increased participation of the private sector in the financing and management of infrastructure as measured by Private Capital Mobilized (PCM in US$ million); • Improved quality of infrastructure as measured by indexes such as IRI or visual condition indexes; • Improved road safety (percent of populated areas covered by speed management measures); • Reduced travel time to schools and health centers/hospitals (disaggregated by gender and vulnerable groups); • Improved road asset management capacity D. Concept Description 18.The proposed MPA of a technical assistance loan and a series of tentatively three guarantees. The first phase will start up the program with a technical assistance to strengthen institutional capacity combined with an IBRD guarantee(s) for the first project of the Government road program, the first Performance Based Contract introduced in the country under the Project. The following phases will support follow-up PPP projects in the road sector through guarantees in support to the Government program. 13 The World Bank Group, June 2020. Feb 19, 2021 Page 7 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) 19.The first phase of the MPA program consists of a combined technical assistance loan (TAL) of US$10 million and IBRD guarantees for the Performance Based Contract (PBC) of the Panamerican East of up to US$[50] million. 20.In the first phase of the MPA, IBRD would provide up to US$[50] million of payment and/or loan guarantees to cover certain GoP’s payment obligations guarantees for the PBC of the Panamerican East and help Panama build a successful track record. While Panama is rated as investment grade (BBB+/BBB/Baa1 respectively by S&P, Fitch, and Moody’s), there is no strong track record for PPPs and project financed transactions under the new regulatory framework. Detailed market sounding conducted in October 2020 indicated that the untested regulatory regime for PPPs could deter investors (see further market sounding description below). IBRD guarantees would continue to be structured during preparation of each MPA phase based on (i) GoP’s objectives (including competitive pricing, attracting institutional investors, and timebound coverage), (ii) specific risks identified for each project, and (iii) further market sounding with sponsors, lenders, and institutional investors. The guarantees offered under the MPA program could include payment guarantees and/or loan guarantees. 43. The guarantees would be optional and offered during the bid process. 21.Scaling up private participation would allow the GoP to secure the financial and technical capacity needed to transform transport infrastructure services into a greater contributor to inclusive and sustainable growth. Private sectors participation in infrastructure is far from its potential in most countries of the sub-region because of inadequate and/or obsolete regulatory frameworks. The example of Panama, where the program is expected to support the Government’s post-COVID economic recovery plan through the mobilization of private sector financing to accelerate the country’s road infrastructure program while fostering employment, could spur regulatory reforms dearly needed in the countries of the region. Long term engagement of the private sector will improve the quality of infrastructure services and bring efficiencies in asset management focusing on socially inclusive projects. The proposed WBG support, which builds on several years of close engagement on PPPs, will help the Government of Panama (GoP) achieve sustainable infrastructure delivery and optimize the use of public resources. 22.Component 1: Institutional Strengthening of MEF, audit court and structuring of SNAPP. This component would include: (i) the consolidation of the institutional framework with the implementation of the SNAPP, including its organizational and personnel structure, strategic planning, internal processes, and management tools; (ii) the strengthening of the institutional capacities of the different entities that participate in the structuring, evaluation and execution of projects; (iii) the development and formalization of policies, standards and parameters for the structuring and contracting of PPP projects, as well as the processes and tools for the evaluation and approval of said projects, including their fiscal impact; (iv) the support for the development of a pilot project that allows the application of standards reflecting international experience and good practices in PPPs; (v) the strengthening of the capacities of the financial system to support the development of PPPs, including mechanisms and instruments through which various actors can participate in project financing, as well as strengthening of the capacities to evaluate and manage these assets and pertinent prudential measures; and (vi) the development and strengthening of environmental and social management capacity of SNAPP as well as the line ministries involved in the PPP program. 23.Component 2: Planning and pipeline. This component would support the PPP planning and monitoring capacity include and the structuring and financing of a revolving fund for the preparation of PPP Projects. This would encompass (i) technical assistance to the Government in the PPP program pipeline development and capacity building in PPP monitoring and evaluation, (ii) support to a specific Technical assistance for the structuring of the fund detailing the institutional set- up, the body of regulation and governance requirements and operational procedures and (iii) the financing of the fund for an amount of US$5 million would be managed by SNAPP. Feb 19, 2021 Page 8 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) 24.Component 3: Support to Panama’s first PPP, the Panamerican East Performance Based Contract (PBC). This component would support the rehabilitation and maintenance of the Panamerican road East of Panama city through guarantee(s) to the private sector in charge of the country’s first performance -based contract. The “Panamerica Este�, 246 km from Pacora to Yaviza, is the main Eastern highway of the country and carries traffic of about 1400 vehicles per day with 17 percent of trucks on average. While maintenance of the road itinerary during the whole duration of the contract is envisioned, only the central section of about 97 km requires rehabilitation, which mainly consists of spot structural repairs, shoulder sealing, safety barriers, rumble strips, cleaning and repair of bridges and drainages, recovery of the road surface through patch and overlay with traditional bituminous concrete. The Project would introduce a fundamental change of paradigm in the way the road contracts have been managed thus far involving a transfer of responsibility for the achievement of pre-determined standards of quality to the contractor. The Bank introduced the concept of the PBC to the authorities late 2019 which decided to test it for the Panamerican East based on demonstrated positive outcome worldwide, involving notably an overall lower cost of 20 to 30percent for an improved service. The WB has been actively supporting the Ministry of Public Works (the contract counterparty and paying entity) in the preparation of the project and bidding documents. The PBC bidding process is to be launched first trimester of 2021 with an expected investment of US$100 million and expected monthly payment about US$2 million. The WB support in the design of the first PBC has triggered the interest of the Government to embark more widely on PBCs to manage the main road network of the country. 25.Contingency Emergency Response Component (US$0.00 million). This component would finance public and private sector expenditures on a positive list of goods, both domestic and imported, and/or specific works, goods, services (including audit costs) and emergency operation costs required for Panama's emergency recovery. A CERC Operational Manual will apply to this component, detailing financial management, procurement, safeguard and any other necessary implementation arrangements. Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Areas OP 7.60 No Summary of Screening of Environmental and Social Risks and Impacts . . CONTACT POINT World Bank Eric R. Lancelot Program Leader Borrower/Client/Recipient Feb 19, 2021 Page 9 of 10 The World Bank SUPPORT TO PANAMA PPP RECOVERY AGENDA (P174535) Republic of Panama Implementing Agencies Secretaría Nacional de Asociaciones Público Privadas (SNAPP) Saleh Asvat Secretario sasvat@presidencia.gob.pa FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects APPROVAL Task Team Leader(s): Eric R. Lancelot Approved By APPROVALTBL Country Director: Andrea C. Guedes 17-Mar-2021 Feb 19, 2021 Page 10 of 10