PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: Project Name. Railway Infrastructure Rehabilitation Project Region

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1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: Project Name Railway Infrastructure Rehabilitation Project Region EUROPE AND CENTRAL ASIA Sector Railways (100%) Project ID P Borrower(s) NATIONAL RAILWAY INFRASTRUCTURE COMPANY National Railway Infrastructure Company 110 Maria Louisa Blvd Sofia, Bulgaria, 1233 Tel: (+359-2) Implementing Agency National Railway Infrastructure Company 110 Maria Louisa Blvd Sofia, Bulgaria, 1233 Tel: (+359-2) Environment Category [ ] A [ ] B [ X ] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 25, 2011 Date of Appraisal February 22, 2010 Authorization Date of Board Approval May 17, Country and Sector Background 1. The global financial crisis of had a severe impact on Bulgaria, but the buffers accumulated during the past decade helped mitigate the impact of the crisis, and growth started to recover in 2010, led by exports. Bulgaria entered into a deep recession with GDP declining by 4.9 percent in 2009 after a decade of sustained growth. Prior to the crisis, fiscal surpluses accumulated during the period had been saved into a fiscal reserve account which accounted for 12.1 percent of GDP in 2008, and total public debt (external and domestic) had declined by half during this period to 15.5 percent of GDP. Thus when the economic downturn led to significant worsening of fiscal revenues in 2009 and 2010, Bulgaria relied on domestic sources to finance emerging fiscal deficits. More stringent reserve requirements for banks in Bulgaria than in the rest of the European Union (EU) and other prudent banking regulations helped solidify the banking system in times of high volatility in the financial markets. 2. While sound macroeconomic management is crucial to restoring short and medium term economic stability, raising productivity to narrow the income gap, increase competitiveness, and facilitate convergence with the EU will remain Bulgaria s main challenge in the next few years. At roughly 40 percent of the EU s average GDP per capita in purchasing power parity terms, Bulgaria is starting its convergence to the living standards of the more advanced members of the EU from a less favorable position than most other new EU member states. Bulgaria also faces a demographic dilemma. Its population is declining at around 0.5 percent per year, its labor 1

2 participation and its employment rates are among the lowest in Europe, and the productivity of its labor force is low. Raising productivity will require improvements on several fronts. Because of the potential impact of the transport system on aggregate productivity, and on regional competitiveness, public intervention to improve the efficiency of the transport infrastructure and services is one of many development paths that the government is pursuing. 3. In the year leading up to EU accession, Bulgaria implemented coherent reforms that laid the foundations for a competitive railway industry and aligned the institutional and legal framework of the Bulgarian rail sector with those of the EU. The railway industry is vertically unbundled. The public railway infrastructure is managed by the National Railway Infrastructure Company (NRIC), and railway transport services are provided by the state-owned Bulgarian Railways Company (BDZ EAD) and several private rail freight operators. A track access charge system enables market access to rail infrastructure and allows some cost recovery. Public service contracts for passenger services make state contributions to the sector transparent. This industry structure provides the basis to develop transparent relationships between the state as policymaker, regulator, client, and owner on one hand, and the various rail service providers including NRIC and BDZ EAD on the other hand. Past reforms coincided with a sustained period of economic growth in Bulgaria and increased business for railways, which enabled the Government to increase its railway funding, decreased the sector s threat on Bulgaria s fiscal position which was a serious issue in the late 1990s and early 2000s and by the end of 2007, NRIC and BDZ EAD s accounts were still fragile but balanced, and historic arrears were cleared. 4. Past railway reforms were extensive, but they stopped short of addressing the sector s difficult and complex structural issues which continue to threaten the sector s sustainability and pose serious threats to Bulgaria s fiscal balances. Railways in Bulgaria suffer from low asset and staff productivity around one third of the EU s average productivity and from the legacy of an extensive railway network developed during the planned economy that has yet to be adjusted to current market conditions. This not only generates high fixed costs to the railway industry making it less competitive vis-à-vis road transport, but also leads to higher costs to taxpayers, and misallocation of scarce public resources. For example, the level of state financial contributions to railways has been in line with EU practices for new member states at about 0.4 percent of GDP, but they are predominantly used for operating subsidies mostly labor cost and little or no money for maintenance, renewals, or investment. State contributions increased in relative terms during the global financial crisis to 0.6 percent of GDP in 2009 and The global financial crisis of caused a major setback to the very fragile financial stability of Bulgaria s railway industry. Since mid-2008, the financial situation of railways in Bulgaria and in all EU countries significantly deteriorated due to the global financial crisis which led to a collapse in freight volumes and to the bankruptcy of one of BDZ EAD s major clients Bulgaria s largest metalworking company Kremikovtzi. The combined passenger and freight traffic in 2009 and 2010 contracted by more than 40 percent from 2007 levels. NRIC and BDZ EAD had severe short term cash problems in 2009 and 2010, including problems to fund their operations. As of December 2010, BDZ EAD has defaulted on its debt obligations and had significant short term account payables to debt holders, NRIC, and other suppliers. 6. While Bulgaria has made some progress in railway reform, the Government recognizes that deepening these reforms has become more urgent than ever, and it has developed a Government Railway Reform Program (GRRP) aimed at establishing a financially sustainable 2

3 railway sector. The Government recognizes that postponing decisions to make railways in Bulgaria a viable and flexible industry that adapts to the changing market demand will only increase the risk that railways in Bulgaria may suffer rapid decline and collapse, which would not only be costly to the economy as a whole, to businesses, and to taxpayers but also socially disruptive given the large workforce in railways and in the industries that rely on railway services. The GRRP therefore aims at establishing a financially sustainable railway sector in Bulgaria. To achieve the Government s goals for the railway sector, the GRRP adopts two sets of means that address two fundamental issues: (i) strengthening railway sector governance, and (ii) strengthening corporate governance, management, and performance of railway service delivery. The GRRP will be supported in the period until 2013 by a World Bank Development Policy Loan Program (DPL Program), and complemented by the proposed project. 7. The Government has planned a long term program of investments to provide conditions for the success of the GRRP s policy and institutional reforms. Strategic directions for railway development are laid out in the various transport policy and strategic documents: Strategy for the development of the transport system of the Republic of Bulgaria until 2020, which was adopted by the Council of Ministers on April 4, General Transport Master Plan for Bulgaria, which was approved in Sector Operational Program for Transport (SOPT), which was approved in October 2007 and it covers programs funder under the EU Cohesion Fund over the period for infrastructure of European importance. 8. The first phase of railway infrastructure investments until 2015 focuses on European transport corridors IV, VIII, and X between Sofia and Burgas on the Black Sea, Sofia and Dragoman (Serbian border), and Sofia and the Turkish border, respectively. The line between Plovdiv and the Turkish border has been modernized under the EU s Instrument for Structural Policies for pre-accession (ISPA) program for the section Plovdiv Svilengrad, and it is being modernized under the SOPT for the section Svilengrad Turkish border. Investments are about to start under the SOPT for the modernization of two sections between Sofia and Plovdiv (Sofia Elin Pelin, and Septemvri Plovdiv) and between Mihailovo and Burgas. Completing the rehabilitation of the final section between Sofia and Plovdiv (Elin Pelin Septemvri) and between Skutare and Mihailovo is envisaged under SOPT s next planning period Additionally, NRIC is preparing a portfolio of investments to be included under the next SOPT focusing on the north-south corridor IV between Vidin (Romanian border), Sofia, and Kulata (Greek border). In parallel to infrastructure development, NRIC has investment plans in maintenance equipment aimed at modernizing its maintenance activities necessary to preserve NRIC s network assets and ensure the sustainability of infrastructure investments. 2. Objectives 9. The Project Development Objective is to improve the quality and efficiency of railway infrastructure services in Bulgaria. The Project Development Objective will be achieved through investments in the mechanization of NRIC s infrastructure maintenance activities. These investments are expected to have network-wide impacts, and they will lead to decrease in infrastructure maintenance costs, increase in the overall productivity of NRIC, and improvement in the working conditions of NRIC s maintenance workers. 3

4 3. Rationale for Bank Involvement 10. The Government specifically requested World Bank s worldwide railway sector and economic policy expertise to help it implement the GRRP. The previous peak of the partnership between the World Bank and Bulgaria in the railway sector took place between mid-1990s and mid-2000s through an investment project and a series of Programmatic Adjustment Loans that greatly helped Bulgaria prepare institutional reforms necessary to meet EU accession requirements. After Bulgaria s EU accession, the Bank s support shifted to policy advice and dialogue. This past partnership provides the Government and the Bank with a solid foundation to work together to achieve the Government s current goals for the railways sector. The proposed project is also being prepared in parallel to a World Bank Development Policy Loan Program. World Bank partnership with Bulgaria on the railway sector s structural issues is complementary to the traditional partnership between Bulgaria and the European Commission and European institutions such as the European Investment Bank, who remain Bulgaria s main financiers for railway sector s investments, particularly through the structural funds. 11. The proposed Bank involvement is consistent with the country partnership strategy being developed concurrently and with the principles of cooperation between the Bank and Bulgaria outlined in the Memorandum of Understanding signed in August This memorandum outlines the wish of the government to receive Bank support through financing and technical assistance in key sectors including the restructuring of the railway industry. 4. Description 12. The total project cost is estimated at EUR 70 million including Value Added Tax (VAT) and contingencies to be fully covered by the proposed loan. The implementation period would be July 1, 2011 December 31, 2014, and the Closing Date would be June 30, The proposed project includes two components: 13. Component 1: Modernization of railway infrastructure maintenance activities. This component covers the procurement of equipment for maintenance and inspection of railway track and electrical systems. This will provide NRIC with the necessary tools to implement higher efficiency maintenance working procedures, thereby enabling NRIC to improve railway infrastructure quality, reduce its operating costs, enhance the safety of railway operations, and improve the working condition of railway infrastructure maintenance workers. The acquisition of this equipment is a necessary condition to achieve this efficiency and to reduce costs. The proposed parallel DPL Program is expected to provide complementary conditions to further increase NRIC s efficiency. The DPL Program will support the implementation of internal reorganization and the introduction of new maintenance practices, methods, and processes to enable NRIC to reap the most benefits of the infrastructure maintenance mechanization to be introduced under the proposed project. 14. Component 2: Support to project implementation. This component will support NRIC in connection with project implementation and management through: (a) Consultants services for the audits of the project. (b) Training to NRIC staff on project management, procurement and financial management. 4

5 5. Financing Source: (Euro million) Borrower 0.0 International Bank for Reconstruction and Development 70.0 Total Implementation 15. The Borrower will be NRIC, with a sovereign guarantee from the Republic of Bulgaria. NRIC will also be the Project Implementing Entity. Project implementation will rely on NRIC s existing structures. A Project Management Unit (PMU) has already been established under the Strategic Development and Investment Projects Department. Within NRIC, the PMU will have the overall responsibility for project implementation including planning, procurement, disbursement of funds, monitoring the use of funds, auditing arrangements, and reporting on the progress of implementation and use of project funds. 7. Sustainability 16. The proposed project is part of a comprehensive investment program developed by the government and NRIC and is in line with EU policies and directives for railways. There is strong commitment and ownership of the proposed project within NRIC and in the Government. 17. The sustainability of project objectives should also be ensured by the existing railway institutional framework in Bulgaria, and the Government Railway Reform Program. The track access charge regime provides a predictable source of revenues for NRIC to cover at least the direct costs of the usage of its infrastructure. The multi-annual infrastructure contract between the State and NRIC provides a medium-term vision for the targets to be met by NRIC and the financial resources to be made available by the State to NRIC. This should therefore provide NRIC with the financial resources to cover the operating and maintenance costs necessary to sustain project objectives. Additionally, the design of the project includes components aimed at significantly reducing NRIC s cost base. These include the introduction of intensive mechanization in NRIC s maintenance function, which should enable NRIC to make an efficient use of the limited financial resources available for maintenance and preservation. 8. Lessons Learned from Past Operations in the Country/Sector 18. While preparing this project, lessons learned from the previous railway projects have been incorporated. The Bank s wider experience with railway reforms across sectors and regions have also provided useful lessons that include: 19. Lesson 1: Railway reforms have proven to be difficult worldwide, requiring many years and strong political commitment to accomplish, and when World Bank support is requested by the Government, it should be tailored to enhance the chances for success. The complexity of railway reforms cannot be underestimated, and the risks to achieving the objectives of railway reform remain usually high. Therefore, when the Government requested the Bank to help it 5

6 implement the GRRP, it was agreed that Bank support will be used to initiate the implementation of the GRRP, which has a longer horizon, and that a Development Policy Lending Program would be the most suitable Bank instrument for such support. 20. Lesson 2: Policy reforms in capital-intensive sectors such as railways and in the context of a legacy of underinvestment should go in parallel with investments. Implementing the reforms envisaged under the GRRP without the accompanying investments will likely not lead to an improved quality of service for railway users. Similarly, delaying railway reforms would lay waste not only to past investments but also to ongoing and future investment programs. It was therefore important that the design of the proposed World Bank support to railways in Bulgaria pays particular attention to both reforms and investments. 9. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [ ] [ X ] Natural Habitats (OP/BP 4.04) [ ] [ X ] Pest Management (OP 4.09) [ ] [ X ] Indigenous Peoples (OP/BP 4.10) [ ] [ X ] Physical Cultural Resources (OP/BP 4.11) [ ] [ X ] Involuntary Resettlement (OP/BP 4.12) [ ] [ X ] Forests (OP/BP 4.36) [ ] [ X ] Safety of Dams (OP/BP 4.37) [ ] [ X ] Projects on International Waterways (OP/BP 7.50) [ ] [ X ] Projects in Disputed Areas (OP/BP 7.60) * [ ] [ X ] 21. For the purposes of World Bank Policies OP/BP 4.01 on Environmental Assessment, the proposed project has been classified as Category C, and therefore it does not require an environmental assessment. The proposed project does not involve any civil works, and it includes the provision and delivery of infrastructure maintenance equipment only. There are therefore no foreseen significant environmental impacts. The infrastructure maintenance equipment will comply with strict Bulgarian and EU technical and environmental standards. They will be operated by certified workers knowledgeable of relevant operation and control procedures, operation monitoring and quality control aspects in line with Bulgarian and EU legislation on railways safety. The equipment will be kept in designated maintenance facilities. Regular maintenance of the equipment is the responsibility of NRIC. 10. List of Factual Technical Documents 1. Bulgaria Railway Policy Note, World Bank, NRIC Business Plan, Republic of Bulgaria, Council of Ministers May. National Strategy for Integrated Development of the Infrastructure of the Republic of Bulgaria for the Period * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 6

7 4. Republic of Bulgaria, Council of Ministers February. Decision 66 for approval of a vision for a new Bulgarian railways development policy for the period February 2, Republic of Bulgaria, Ministry of Transport Strategy for Development of the National Transport System of the Republic of Bulgaria until Republic of Bulgaria, Ministry of Transport Sectoral Operational Program Transport Tebodin, ProRail, NEA, NRIC Study Reports. Asset Management Strategy for National Railway Infrastructure Company (NRIC). 8. Republic of Bulgaria, Ministry of Transport, Faber Maunsell-AECOM Preparation of A General Transport Master Plan For Bulgaria. Draft Reports Contact point Contact: Mohammed Dalil Essakali Title: Senior Infrastructure Economist Tel: (202) Fax: (202) mdalilessakali@worldbank.org For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) pic@worldbank.org Web: 7