Document of

The World Bank

Report No: 28520-CL

FOR OFFICIAL USE ONLY

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED

SANTIAGO URBAN TRANSPORT DEFERRED DRAWDOWN

SECTOR ADJUSTMENT LOAN

IN THE AMOUNT OF US$75 MILLION

AND A PROPOSED

SANTIAGO URBAN TRANSPORT SECTOR ADJUSTMENT LOAN

IN THE AMOUNT OF US$25 MILLION

TO THE REPUBLIC OF CHILE

April 28,2004

Finance, Private Sector and Infrastructure Department Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without World Bank authorization.

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AAA B2B BOT CAI CAS CDM Ceq CNG co co2 Committee of Ministers CONAMA

CPAR DDO EMP EPA FMS GDP GEF GHG GIS IADB IBm IFC IPCC JEC LMF MIDEPLAN MINVU MOPTT NGO NOx PCF

PDO PMlO PPm ROSC

CONAMA-RM

PDF-B

CURRENCY EQUIVALENTS US$ 1 .OO : Ch$600 (+/- Variable)

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Analytical and Advisory Services Business-to-Business Build-Operate-Transfer Clean Air Initiative Country Assistance Strategy Clean Development Mechanism Carbon Equivalent Compressed Natural Gas Carbon Monoxide Carbon Dioxide Committee o f Ministers for urban transport in Metropolitan Santiago (established through Presidential Order No OOldated April 7, 2003) National Commission for the Environment Metropolitan Region CONAMA Country Procurement Assessment Review Deferred Drawdown Option Loan Environmental Management Plan Environmental Protection Agency (USA) Financial Management Specialist Gross Domestic Product Global Environment Facility Green House Gases Geographical Information System Inter American Development Bank International Bank for Reconstruction and Development International Finance Corporation Intergovernmental Panel for Climate Change Full-day-at-school policy (Jornada Escolar Completa) Monetary and Financial Law Ministry o f Planning Ministry o f Housing and Urban Development Ministry o f Public Works, Transport and Telecommunications Non Governmental Organization Nitrous Oxide Prototype Carbon Fund Project Development Facility Block B Project Development Objective Particulate Matter Parts per mill ion Reports on the Observance o f Standards and Codes

FOR O F F I W USE ONLY

SEA SEIA SECTRA SEREMITT

SERVIU sox TAL TRANSANTIAGO- PTUS

SE TRANSANTIAGO-

Strategic Environmental Assessment System o f Environmental Impact Assessments Executive Secretariat of the Transport Commission, MOPTT Ministry o f Transport and Telecommunications Regional Service Regional Service for Public Roads and Urban Development, MINVU Sulfur Oxides Technical Assistance Loan Santiago Urban Transport Plan

Executive Secretary in charge o f the implementation of Transantiago- PTUS

Vice President: David De Ferranti Country Director: Axel van Trotsenburg

Sector Director: Danny Leipziger Sector Manager: Jose-Luis Irigoyen

Sector Leader: Juan Gaviria Lead Economist: James Parks

Task Team Leadermask Manager: Pierre Graftieaux

This document has a restricted distribution and m a y be used b y recipients only in the performance of their official duties. I t s contents may n o t be otherwise disclosed without W o r l d Bank authorization.

FOR OFFICIAL USE ONLY

Table of Contents Page

I . THE SETTING ....................................................................................................................... 1 Economic Context ...................................................................................................... 1 Recent Performance and Prospects .............................................................................. 3

11 . URBAN PUBLIC TRANSPORT AND ENVIRONMENT ....................................................... 6

A . B .

A . Background ............................................................................................................... 6 B . C . Existing Regulatory Arrangements .............................................................................. 7 D . Existing Service Provisions ......................................................................................... 8 E . Existing Industry Structure and Private Sector Involvement .......................................... 8 F . Environmental Conditions ......................................................................................... 10 H . Problems to be addressed by the Reform .................................................................... 11

111 . THE NEW GOVERNMENT STRATEGY FOR URBAN PUBLIC TRANSPORT AND ENVIRONMENT .......................................................................................................................... 12

Government Urban Transport Strategy ....................................................................... 12 A.l. General outline o f the strategy ...................................................................................... 12 A.2. Route restructuring ................................................................................................... 14 A.3. Reallocation o f road space in favor o f public transport ........................................... 14 A.4. Fare integration ........................................................................................................ 15 A.5. System finance ......................................................................................................... 15 A.6. Institutional reform .................................................................................................. 16

Poverty Impact ......................................................................................................... 18 IV . BANK ASSISTANCE STRATEGY IN TRANSPORT AND ENVIRONMENT ................. 19

Bank Assistance Strategy .......................................................................................... 19

Link with CAS ......................................................................................................... 19 V . THE PROPOSED OPERATION ............................................................................................. 23

A . Bank Assistance Instruments ..................................................................................... 23 B . Objectives and Results to be Reached under the Proposed Loans ..................................... 27 C . Results Monitoring ....................................................................................................... 29 D . Environmental and Social Concerns .......................................................................... 34

D.l. Environmental Guidelines for Infrastructure Works ................................................ 34 D.2. Resettlement Issues .................................................................................................. 35 D.3. Strategic Environmental Assessment ....................................................................... 36

E Fiduciary Arrangements ............................................................................................ 36 E.l. Flow of Funds and Audit Arrangements .................................................................. 36 E.2. Financial Management ............................................................................................. 36

Benefits and Risks .................................................................................................... 37 F.l. Benefits .................................................................................................................... 37

Existing Institutional Framework ................................................................................. 7

A .

B . C .

A .

Economic Evaluation o f Reform Program .................................................................. 16

A . 1 . A.2.

Government requesdmotivation ............................................................................... 19

F .

F.2. Risks ......................................................................................................................... 37 Annex 1: Fund Relations Note ...................................................................................................... 41

Annex 3: Letter of Development Policy ........................................................................................ 51 Annex 2: Policy Matrix ................................................................................................................. 44

Annex 4a: Chile . Key Economic Indicators ................................................................................. 57

Annex 4b: Chile - Key Exposures Indicators ................................................................................ 60 Annex 5: Chile at a glance ............................................................................................................. 61 Annex 6: Coverage o f the future bus system ................................................................................. 63 Annex 7: Emissions distribution for MPlo and NO, ...................................................................... 64 Annex 8: Possible Carbon Funding Concept ................................................................................. 66 Annex 9: TAL Project Information Document .............................................................................. 69 Annex 10: Oversupply and concentration of bus routes on the Alameda ...................................... 72 Annex 1 1 : Participation Plan ..... . ............. .................... .. ................... ....,........... .. .. ..... ........ ........... 74 Annex 12: Environmental and Social Concerns ............................................................................ 79

Appendix 12.a: Manual on Environmental and Land-use Management, and Public Participation for Infrastructure Projects (Summary) ..... ..................... ............. ............... .......... . 90 Appendix 12.b: Strategic Environmental Assessment of Santiago's Urban Transport Plan 2000-2010 (Transantiago-PTUS) ............................................................................................. 99

Annex 13: Transantiago timetables : main infrastructure works related with the implementation of Transantiago-PTUS ................... ............ , .......................... ........... . . ...... ...... ................... ..... .......... 105 Annex 14: Statement o f Loans and Credits ................................................................................. 106

This operation was prepared by a World Bank team composed o f Judy Baker, Antonio Blasco, Margarita de Castro, Elena Correa, Elisabeth Goller, Kenneth Gwilliam, Andre's Mac Gaul, Gerhard Menckhoff, Luz Meza-Bartrina, Slobodan Mitnc, Zeinab Partow, Juan-Andre's Lopez- Silva. The team i s led by Pierre Graftieaux. The team would l ike to express appreciation to our counterparts in the Ministry o f Finance, Transantiago, SECTRA, MINVU, SERVIU, MOPTT and CONAMA for their commitment to this program.

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

REPUBLIC OF CHILE

SANTIAGO URBAN TRANSPORT SECTOR ADJUSTEMENT LOANS

Loans and Program Summary

Borrower

Implementing Agency

Poverty Category

Amount

Terms

Commitment Charge

Front-End Fee

Objectives

Benefits

Republic o f Chile.

Ministry o f Finance, MTT through the executive secretariat o f the Committee o f Ministers for Urban Transport for the City o f Santiago, Transantiago-SE.

Not Applicable.

Total amount o f the two-loan operation : US$ 100 million, consisting o f A single-tranche sector adjustment loan with a DDO feature: US$75 million; and a two-tranche sector adjustment loan : US$25 million.

Single tranche SECAL with DDO : US Dollar Fixed Spread Loan, 20 year maturity including 10 years grace, disbursement-linked. Two-tranche SECAL : U S Dollar Fixed Spread Loan, 7.5 year maturity including 5.5 years grace, commitment-linked.

Single tranche SECAL with DDO : 1% of the undisbursed amounts, beginning 60 days after the loan agreement i s signed, i s payable during the period while the DDO i s not exercised. Two-tranche SECAL: 0.75% of the undisbursed balance.

Single tranche SECAL with DDO : a front end fee o f 1% of each withdrawn amount w i l l be paid to the Bank from the loan proceeds only upon drawdown. Two-tranche SECAL, : 1% o f loan amount.

The main development objectives o f the proposed Sector Adjustment Loans for Santiago w i l l be to improve the level of transport services to the residents (particularly low income residents) and businesses, reduce resource costs, and increase environmental quality. The specific objectives are to:

(i) Reduce transport costs in their financial, travel time and environmental dimensions and increase transport efficiency;

(ii) Improve the coordination o f public sector activities in land use, transport planning, infrastructure investment, traffic management, and bus franchising;

(iii) Address urban poverty through improving access to jobs and economic opportunities;

(iv) Enhance social inclusion through improved access to schools, health facilities, and wider social interaction.

(i) Efficiency improvements which w i l l contribute to the city economy and hence economic growth;

Risks

(ii) Resource savings from transferring the bus flows in major corridors to an exclusive space, the reduction o f bus vehicle-km on the street system, the rationalization o f the route network, and the reduction o f revenue r isks from operators;

(iii) Environmental improvements (higher air quality and lower noise) due to better- quality buses and fewer bus-km;

(iv) Increased quality o f service for passengers who live in the catchment areas of the metro extensions and the new metro line;

(v) Increased comfort, safety and reliability for passengers on the bus network;

(vi) Comprehensive coverage of bus feeder routes particularly in poor neighborhoods. T h i s w i l l help to address problems o f social exclusion for the poor;

(vii) Savings stemming from the implementation o f a unified fare system, i.e. passengers not having to pay when transferring among bus and metro lines;

(viii) Reduced use o f ‘road space’ by car drivers contributing to a reduction in congestion and more equitable distribution o f road space.

The risks o f this program are deemed modest. Chile’s excellent track record in economic management, program implementation and transparency make the satisfactory completion o f the program highly likely. Nevertheless, some issues deserve special attention. These include:

(i) Some users may sustain increases in waiting and access times which offset the benefits that they obtain in improved trunk travel times;

(ii) Existing transit workers and operators may become opposed to a change in the status quo and wi l l oppose resistance to the proposed public transport reforms;

(iii) Some o f concession tenders for bus services are unsuccessful;

(iv) Potential vulnerability to negative external events including less favorable commodity prices, higher intemational interest rates, adverse regional developments, as well as domestic factors such as contingent fiscal liabilities derived from minimum pension demands, external indebtedness of the corporate sector, energy supply risks.

Financing Plan Not Applicable

Net Present Value Not Applicable

Project I.D. No. PO824 12

.. 11

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR TWO PROPOSED

SANTIAGO URBAN TRANSPORT SECTOR ADJUSTMENT LOANS

1. This memorandum proposes an adjustment operation comprising a single-tranche Sector Adjustment Loan (SECAL) for US$ 75.00 million with a DDO feature and a two-tranche Sector Adjustment Loan (SECAL) for US$25.00 million to Chile. The loans would support an ongoing and broad program o f reforms in the urban transport sector in the Metropolitan Area of Santiago. The loans are supported by a technical assistance loan (Report No: 28521-CL) to be discussed on the same date as the above-mentioned SECALs that could help facilitate the achievement o f reforms targeted for second tranche release and that w i l l provide technical follow-up, monitoring and strengthening o f the implementation of the Santiago Urban Transport Reform.

I. THE SETTING

A. Economic Context

2. Chile’s macroeconomic policies and strong fundamentals have, to a large extent, insulated it from regional crises and have allowed continued growth in recent years, albeit at lower rates than in the mid-1990s. Economic performance continues to outpace that o f the rest o f the L A C region, and compares well with growth rates o f the world’s top performing region, East Asia and the Pacific. In per capita terms, GDP growth has averaged 4% per year since 1990, versus 1% for the L A C region during the same period.

3. This performance i s sustained by sound fundamentals and an ambitious structural reform agenda. The country’s fiscal position i s structurally sound, and public external debt i s low, standing at 12% in 2003.’ A flexible exchange rate and inflation targeting are implemented by an independent central bank, and the financial sector i s healthy and solvent, having weathered well the economic slowdown since 1998 as well as various emerging market crises. Chile’s significant advances in negotiating free trade agreements have helped bolster its external sector, and a strong program o f structural reforms at both the macro- and micro- levels aims to ensure continued strong growth. Reflecting these generally positive conditions, Chile’s country risk premium has declined to 100 basis points, the lowest of any Latin American country, and keeps decreasing.

4. To buttress i t s foundations for growth, Chile has continued to promote an impressive reform agenda to tackle the domestic obstacles to rapid growth and to place itself in a stronger position to reap the benefits of a global upturn. I t i s within this context of supporting Chile’s competitiveness and growth, and addressing the problems o f poverty and inequality, that the Government i s promoting an ambitious transport plan for Santiago. The l i s t o f other structural reforms, many already approved and under implementation, covers a gamut o f topics, including: state modemization and transparency, regulatory reforms to spur investment and growth, enhanced financial regulation and supervision, labor market measures, not to mention the recent flock o f Free Trade Agreements (FTAs) negotiated and signed with Chile’s main trading partners.

’ Public sector debt has increased slightly in recent months and i s projected to stand at about 11.8% by the end of 2003. Both Government and IMF estimates, however, indicate that the debt-to-GDP ratio i s currently at i t s peak and project that it wi l l follow a declining trend in coming years.

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The administration has also emphasized its commitment to improving the quality o f education and health services - coverage i s already at high levels - and has several initiatives in place in these areas. The elimination of extreme poverty i s a flagship endeavor o f the administration, and a comprehensive program to attain this goal i s underway.

5. The objective of the transport plan i s to transform Santiago into a highly competitive world city. Cities such as Santiago are increasingly involved in trading patterns on a global scale, which makes their efficient functioning a key to growth o f the country as a whole. The industrial and commercial activities that are primarily located-and serviced, marketed, and financed-in the Santiago area account for 47% of the country’s GDP, making the city a key engine o f growth for Chile. This in turn means that Santiago’s transport system and i ts efficiency i s an important ingredient o f national growth.

6. Quality transport services and infrastructure enhance the productivity and competitiveness of cities through numerous avenues. A t the macroeconomic level, they generate growth by facilitating trade, both nationally and internationally, and by increasing access to the gamut of amenities and services crucial to the development o f human capital, including health and education. Cross-country studies indicate that investment in transport raises growth by increasing the social return to private investment without crowding out other productive investment. At the microeconomic level, transport improvements lower the price of labor, capital and technology inputs, thereby contributing to productivity gains; they also increase access to markets and hence the diversification of outputs. The quality o f transportation infrastructure and public transport services affects the location decisions made by f i r m s and individuals and the efficiency o f the labor market.

7. The sustained rate of Chilean economic growth has, however, led to a rapid expansion o f Santiago, placing increasing pressure on i t s transport infrastructure and services, and raising associated accessibility problems. Urban sprawl i s making the journey to work excessively long and costly for many urban dwellers, and especially so for some o f the very poor. Rising incomes, accompanied by increasing car ownership, have also led to increased congestion and traffic- generated air pollution, and threaten to overwhelm the existing transport infrastructure. Car ownership and the number of person-trips have increased by 175% and 70%, respectively, over the last fifteen years.

8. The Government’s transport program for Santiago i s thus a response to the challenges raised by the city’s rapid growth, and by the need to ensure that Santiago i s well-positioned to meet the demands o f an increasingly global economy. The plan aims to reduce transport costs - not only in a financial sense, but in terms o f time and environmental damage as well - and increase transport efficiency, enhancing Santiago’s productivity, competitiveness and contribution to Chile’s economic growth. B y improving the coordination o f public sector activities in land use, transport planning, infrastructure investment, traffic management, and bus franchising, the plan would make i t possible for Santiago to reconcile high mobility with high quality o f urban life. The plan i s also a partial response to some o f the more intractable problems associated with urban poverty, not only in terms o f access to economic opportunity, but also in terms of the broader dimensions of social inclusion through improved access to schools, health facilities, and wider social interaction.

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B. Recent Performance and Prospects

9. Over the past five years, the rate of economic growth in Chile has declined to an average 2.4% per year, from 7.8% in 1990-97. This i s the result o f generally less favorable external, as well as domestic, conditions. A volatile external environment played an important role in the country’s subdued performance during the late 1990s and early 2000s, particularly the global decline in foreign direct investment flows, the economic slow-down experienced by Chile’s trading partners, falling commodity prices (especially copper) and more recently the crisis in Argentina, uncertainty in Brazil and the intemational political instability that resulted in higher oil prices (petroleum represents about 11 % of total imports).

10. On the domestic front, the combination o f fiscal and monetary policies in 1998-99 i s likely to have contributed to the slow-down, while the maturing of the wave o f reforms o f the 1990s has meant that the impetus to economic growth that they provided early in the decade may have waned somewhat. In addition, a set of domestic constraints to more rapid growth has emerged, including the need for improvements in human capital development, increasing the flexibility o f the labor market, improving the environment for small and medium enterprises as well as removing some regulatory bottlenecks in key sectors such as electricity and telecommunications. Large increases in social spending have made a key contribution to poverty reduction, along with sustained rapid growth in the early and mid-l990s, but also contributed to public sector deficits that appeared later in the decade. Official funding for education, in particular, has been rising rapidly, reaching US$2.8 bil l ion in 2002, over 90 % more than in 1994 in real terms.

11. The economy began to revive towards the end of 2002, and by December 2003 growth stood at an estimated 3.2% as compared to a year earlier. T h i s growth was sustained largely by an expansion of exports as a result of somewhat greater dynamism in the intemational economy, greatly improved copper prices, the entry into force o f the I T A with the EU, and by some strengthening in domestic demand helped along by Chile’s currently expansive monetary policy. In order to bolster flagging consumer confidence and domestic demand, and in the absence o f inflationary pressures, the central bank reduced interest rates various times from 6.5% in early 2002 to 1.75% in January 2004, although the effect o f monetary loosening on aggregate demand may be delayed by the sluggishness o f commercial banks in passing on lower interest rates to small borrowers. The national unemployment rate i s trending downwards slightly, and averaged 8.5% during 2003.

Box 1 : Selected Economic Indicators

2000 2001 2002 2003e 2004pr

Growth (%)

GDP at market prices 4.3 3.2 2.1 3.2 4.5

Exports of Goods & Services 11.9 -3.9 -0.7 15.0 20.0

Imports of Goods & Services 16.0 -4.0 -2.9 13.0 20.0

Real Exchange Rate (- = apprec.) -2.5 9.5 6.5 -15.4 -7.0

3

CPI inflation, e-o-p 4.5 2.6 2.8 1.1 2.5

Share of GDP (%)

Current Account Balance -1.0 -1.7 -0.8 -0.7 -0.2

Central Government Balance -0.9 -0.9 -1.4 -1.4 -0.5

Structural Balance 0.1 0.8 0.7 0.7 1 .o

Total External Debt 48.7 55.7 60.8 58.4 57.0

Public Sector External Debt 7.4 8.4 10.8 11.8 10.5

percent (%)

Unemployment, average 9.2 9.2 9.0 8.5 8.0

Source: Ministry o f Finance, Central Bank o f Chile, IMF and Bank Staff estimates

12. The peso appreciated sharply (by 15%) in relation to the U S dollar in 2003, with the exchange rate strengthening from Ps722:US$1 in January, to below Ps6OO:US$1 in December. The rebound i s a result o f the dollar’s general weakness, o f the sudden increase in the price o f copper, and o f a strengthening economy, and particularly the prospect for continued improvements in GDP growth in 2004-05 and strong exports. The appreciation o f the peso, in conjunction with lower prices of durable goods as a result o f efficiency gains due to improvements in distribution networks, led to a decline in the inflation rate to 1.1 % at the end of 2003, well below the Central Bank’s 2-4% band.

13. As already noted, the growth o f both exports and imports accelerated during 2003, and they are estimated to have grown by 16 and 13%, respectively. The result was a merchandize trade surplus and an estimated current account balance o f -0.8% of GDP in 2002. International reserves stood at US$ 15.9 billion at the end o f 2003, more than twice covering Chile’s short-term external debt.

14. On the fiscal front, Chile has been able to implement a counter-cyclical fiscal policy since 2000, which permits deficits in years o f slower growth that are recouped when the economy i s stronger. Under this policy, the Government keeps i t s expenditure to a level that would yield a fiscal surplus o f 1% of GDP if output were expanding at its “potential”* and copper prices were at their long-term average. In 2003, the actual deficit i s estimated to have reached 0.7% of GDP, which translates into a structural balance o f 0.8% o f GDP, in line with the rule. Despite a growth in expenditures (by about 5%, year-on-year), these results were assisted by a surge in copper prices that compensated for the decline in tariff and VAT revenues associated with the implementation o f the recently signed free trade agreement (FTA) with the EU.3 Despite high projected copper prices, the Government estimates that the public sector wi l l attain a small deficit

The use of the term “potential” GDP in this case does not coincide with the usual technical understanding o f the term. The methodology used to project GDP for use in Chile’s Structural Balance Rule does not result in an estimate o f the potential output o f an economy functioning at full capacity. Rather i t i s an extrapolation o f actual trend GDP in previous periods, enriched by additional information on domestic and external variables.

The impact o f the FTA with the US wi l l not be felt until 2004.

4

of 0.5 % o f GDP in 20044(although still consistent with a 1% structural surplus), as a result of ongoing priority social spending programs and the decline o f revenue from import tariffs as a result of Chile’s Free Trade Agreements. While the degree o f revenue fall associated with the FTAs i s uncertain, particularly as the FTA with the US has only been in force since January lst 2004, estimates are that the loss could be on the order of 0.2% o f GDP per year.

15. From the fiscal perspective, it should be noted that while the total Transantiago infrastructure program i s quite large, amounting to nearly US$ 700 million, the public investment portion i s small. The public investment component i s projected at US$ 7 1.4 mill ion including expropriations. O f this, i t i s estimated that US$ 30-35 million would be spent in each of 2004 and 2005; this represents only 0.05 % of annual GDP, and 0.2 % o f public spending. The remainder i s to be provided by the private sector, which i s expected to finance over 70% o f the infrastructure investment and 100% of the investment in rolling stock. In addition, the Government would provide an explicit guarantee with a maximum value of about US$ 33 mill ion (UF 1.2 million) to the Transantiago financial administration concessionaire who would be responsible for fare collection and all payments to operators (as well as for the provision and maintenance o f the smartcard system and i t s hardware). The guarantee could be triggered only after other resource provisions required from the concessionaire are exhausted. Namely, the concessionaire would f i rs t be required to make a capital payment o f UF 1.2 million (plus any accumulated surplus) into a stabilizing reserve fund to address short run mismatches between revenues and payment obligations. In addition, the selected concessionaire would also have to demonstrate access to a line o f short-term credit or overdraft (sobregiro) of the same amount. Should there be evidence that the reserve fund i s low in resources for more than a certain number of days, the concessionaire would then be required to utilize a medium-term (18 month) line o f credit - evidence for which also needs to be provided by the selected concessionaire - to cover the reserve deficit. Only after these avenues have been exhausted could the State guarantee be ~ a l l e d . ~ As a result, while the maximum nominal guarantee amount represents about 0.05 % o f annual GDP, the resulting probable loss for the Government would be significantly lower.

16. Reflecting i t s strong policies and performance, Chile issued US$ 1 bil l ion in ten-year bonds in early 2003, at a spread o f 163 basis points, the lowest o f any ten-year issue made by the country in the past. Since then, Chile’s sovereign spreads have declined further, to below 100 basis points in December. Chile’s foreign-currency debt rating was raised by Standard & Poor’s from A- to A in January 2004, and i s now four notches above that o f Mexico, Latin America’s only other investment grade-rated country. Despite this, FDI flows are estimated to have amounted to only 2% o f GDP in 2003, similar to their level a year earlier. This i s a significant decline from the 1990s, when FDI flows into Chile represented 6.4% o f GDP per year, malung an important contribution to financing the country’s rapid economic growth. The decline in capital inflows over recent years reflects investors’ risk aversion following the Brazil devaluation and Argentine debt default6; moreover, investment in copper mining, which had accounted for about a

Recently, the government has projected that under a new methodology for calculating the public sector deficit and if higher copper prices are maintained, the balance in 2004 may actually be in equilibrium or slightly positive.

For more comprehensive treatment o f the Chilean Government’s guarantees to other infrastructure concessions, see World Bank, Chile: Management o f Contingent Liabilities from Transport Concessions, 2003.

The impact of the Argentine crisis o f 2001-02 on Chile, beyond its effect in worsening the general climate for FDI in Latin America, has been significant but not overwhelming. The Argentine collapse came after a long period o f deterioration which allowed Chile to prepare for the worst by adopting a floating exchange rate regime in 1998 and running a tight fiscal policy. Exports o f Chilean goods to Argentina have fallen,

5

third of total FDI in the 1990s, has been slowed by weak (though recently strengthened) copper prices. For 2004, FDI inflows are expected to recover somewhat, helped by Chile’s FTAs and the initiatives to turn Chile into a platform for regional headquarters of multinational corporations.

17. With interest rates at historic lows and confidence levels high, GDP growth i s projected to increase to between 4 and 5% in 2004, propelled by strong domestic demand and a buoyant external sector. Export growth w i l l be helped by a strengthening world economy, continued high copper prices, as well as by Chile’s improved access to EU and U S markets. Imports are also projected to rise, despite the decline in oi l prices, reflecting the recovery in domestic demand. The Central Bank forecasts negative consumer price inflation in early 2004, rising again towards the middle o f the year to end the year near the bottom of the 2-4% inflation-targeting band. Chile’s sustained solid macroeconomic and fiscal performance has been recognized in the IMF’s annual Article IV process.

18. While, as the above suggests, the prospects for Chile are quite positive, it should be noted that the economy continues to remain vulnerable to negative external events including less favorable commodity prices, higher intenational interest rates, adverse regional developments, as well as domestic factors such as contingent fiscal liabilities derived from minimum pension demands, high external indebtedness of the corporate sector, energy supply r isks stemming from recent failures in the transmission regulation and Argentina’s own potential supply difficulties. Nevertheless, the low levels of net public indebtedness, prudent policies and healthy financial sector imply that the Government i s well prepared to mitigate the adverse effects if these r i sks were to materialize.

11. URBAN PUBLIC TRANSPORT AND ENVIRONMENT

A. Background

19. Greater Santiago has about 5.3 million people, l iving in 36 municipalities. This i s close to 40% of the country’s population. The city’s growth has slowed down to about 1.4% per annum, but the built-up area i s expanding rapidly. Economic output o f the Santiago region (almost coincidental with the urban area) i s close to half of gross domestic product (47%) and Santiago can be viewed as the economic growth engine o f the country. Unemployment i s high as i s income inequality. Spatial patterns reflect this, with low-income communities in the south and north-west of the city, and higher-income communities in the north-east.

20. Santiago i s served by a road and public transport system, which i s generally well managed and continuously being improved. Modem traffic engineering techniques - including a real-time computer controlled signal system - are used to manage the street network. The 40-km metro, the f i r s t section o f which was inaugurated in 1975, i s an example o f efficient mass transit management and serves 747,000 passenger trips per day. Most public transport passengers, about 4.5 mill ion per day (2001), travel on some 7,700 buses which are mostly owned by individuals or very small companies. There are suburban railway lines, route taxis (colectivos) and regular taxis. As a result o f Chile’s sustained rate o f economic growth, there has been an increase o f car ownership in Santiago from 320 cars per 1000 households in 1977 to 560 cars per 1000 households in 2001.

and incoming tourism from Argentina dropped by about half. Losses o f Chilean firms with investments in Argentina are estimated to have taken 0.2 points off GDP growth in 2002.

6

B. Existing Institutional Framework 21. There i s currently no elected metropolitan Government, and the Intendente (Governor), appointed by the national Government, has neither the human nor the financial resources to manage major functional programs. This leaves the national Government as the effective manager o f services, such as transport, which transcend the functions or capabilities o f the individual municipalities.

22. The key national institutions active in urban transport are the Ministry of Housing and Urban Development and Public Goods (MINVU) - for urban streets and regional land use plans; the Ministry o f Public Works (MOP) - for roads o f regional and national importance; the Ministry o f Transport and Telecommunications (MTT) - for transport regulations, including bus and route- taxi franchising; Chile’s Interministerial Transport Agency (SECTRA) under the Ministry of Development and Planning (MIDEPLAN) - for strategic transport modeling and planning ; and the National Environmental Commission (CONAMA), linked directly to the Presidency - for the management o f urban air quality.

23. At the urban area level, a Committee o f Ministers on Urban Transport for Santiago was created by the President in March 2002, to implement the Urban Transport Plan for Santiago 2000-201 0 (Transantiago). The committee i s presided by the Minister of Public Works, Transport and Telecommunications; its Vice-president i s the Minister of Housing; and the other permanent members are the Executive Director o f CONAMA; the Chief Executive o f METRO; the Sub- Secretary o f Transport; the Executive Director o f SECTRA; the Intendente o f the Metropolitan Region ; and the Head of Concessions of the Ministry o f Public Works. The Executive Secretary o f the Committee i s Transantiago-SE.

C. Existing Regulatory Arrangements

24. The system for bus regulation was last reformed in 1992 and franchises were awarded for a 1 0-year period, recently extended until Transantiago i s operational. At that time the decision was made that, in order to protect the environment o f the city, all services which crossed the center would be subject to competitive tendering. Total bus supply was limited and the conditions for selection o f successful bids included the quality of the vehicles offered as well as the fare required.

25. Under that system, 77% of bus services - those which cross the central areas o f the city - are presently provided under competitively tendered franchises. The remainder are provided under conditions o f free entry subject only to qualitative standards. Inevitably, routes overlap substantially.

26. The franchises are granted for individual routes, calling for between 22 and 40 vehicles per route. They are awarded to “empresas administrativas” which may then subcontract operations on the franchises to smaller units or individual owner operators. Most services are provided under such sub-contracting. Some vehicle owners employ two drivers per vehicle to keep the vehicle in service for at least 16 hours per day. Many other drivers, and some of the owner operators may work for between 12 and 15 hours per day. The drivers typically are paid a fixed minimum salary o f CL$ 11 1,000 per month (approx. US$ 185 ) plus 18%. In addition they receive a percentage of the collected revenues. I t i s believed that because of the lack o f secure ticketing and revenue recording arrangements many drivers further supplement their incomes substantially by not turning in the full revenue collected, to take their monthly income to CL$ 300,000 (approx. US$ 500 ) to CL$400,000 (approx. US$ 665) per month. Because o f the nature of part o f that income the average real earnings are not f irmly known.

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27. At present, the criteria for selection of successful bidders i s formula based, with fares (flat fares being required) being the most significant component, but quality o f vehicle entering the equation. However, there i s a cap announced on the fares that w i l l be acceptable, which has recently been bid by all bidders. This suggests either that there i s effective collusion (in the tendering o f contracts in Santiago in 1998, there was only one bidder for 76% of route contracts and 97% of bids coincided with the maximum allowed tariff according to the bidding documents see Sanhueza and Castro, 1999), or that the formula does not give sufficient weight to fares to make them an effective competitive instrument.

D. Existing Service Provisions

28. There are presently 387 urban routes o f which nearly three quarters cross the central area. The density o f the network permits the majority of trips to be made directly on one service. Only about 8% o f bus trips involve taking more than one vehicle (and paying more than one fare), though transfers do occur in the metro system and between buses (particularly metrobuses which feed metro stations) and the metro. The bus fare i s a flat fare, (presently 290 pesos, i.e. around US$ 0.48 ) with children in the first eight grades o f schooling carried free and senior schoolchildren and university students carried at one third the full fare.

29. The combination of the fragmentation of ownership, overlapping franchises, the form of labor contracts and the lack o f effective supervision o f performance under the franchises has some striking effects on operational behavior. Drivers are induced to race for passengers, and to keep their vehicles on the road for the whole day, even where the license stipulates lower off- peak than peak frequencies. As a consequence there i s over-provision o f capacity off-peak and additional air pollution that could be avoided without deteriorating the quality o f the bus services.

E. Existing Industry Structure and Private Sector Involvement

30. At present, some 7,700 buses operated by about 20,000 persons can be categorized as follows: single bus owners account for 31% of the fleet; operators with 2 to 4 buses accounting for a further 37%; 18% of the buses are in companies with between 5 and 20 vehicles and only 14% in companies with more than 20 buses. Each “empresa administrativa” arranges with smaller companies to provide the services. Almost all operators are members o f one of the four trade associations which look after the members’ interests. These associations offer various services to members, including organizing bulk insurance contracts, and even offer a comprehensive medical service to bus owners and their families’.

31. Bus services are entirely operated by the private sector and metro services by the public sector. This wi l l not change under the proposed reform. However, i t i s now proposed that terminals, revenue collection services, the public transport management and information center and part o f the segregated busways w i l l be concessioned to the private sector who w i l l build, maintain and transfer said busways, thus significantly increasing the private sector role in urban public transport in Santiago. In the Bogota Transmilenio system, worldly considered as a global best practice, the services are all privately operated but private sector involvement does not go as

~

I t i s worth mentioning here that one o f the hypotheses to explain the appearance o f a cartel and why deregulation did not lead to lower tariff, i s precisely that the associations were able to offer insurance and legal services at cheaper rates than what the market would offer. Thus an independent operator that did not follow the associations’ tariff policy would face significantly higher insurance and legal costs (Estache and G6mez-Lobo).

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far as it w i l l in Santiago since in Bogota the basic infrastructure was constructed on public account.

Box 2 : Transmilenio

TransMilenio i s a bus-based mass transit system which operates in Bogota since December 2000. I t consists o f the following main components: (i) infrastructure which includes segregated busways, stations and terminals, all owned by an autonomous public entity; and (ii) an innovative public-private partnership arrangement under which buses, fare collection system, operation and control systems are all owned and operated by the private sector. TransMilenio S.A., i s responsible for overall administration of the system.

Some o f the main features o f the system are: (i) articulated buses with a 160 passenger capacity; (ii) passengers pay their fares before entering the stations, using electronic cards; (iii) special feeder buses (40-80 passenger capacity) which provide intermodal connections without requiring the payment o f an extra fare; (v) busways designed for both express service and local service; (vi) each aaiculated bus i s connected to a control center, where the frequency, position and speed are controlled; and (vii) the concessionaires for the operation include operators already providing bus services, and domestic and international investors.

Transmilenio has substantially changed the transport sector o f the city: (i) I t has catalyzed the modernization o f the public transport industry in Bogota and to offer efficient and high quality services, applying modem business principles; (ii) it has created a new model to replace the “Guerra del centavo” (“war for a penny”) that came about as a result o f the traditional payment system to drivers based on the number o f passengers moved per day by each bus.

In i t s over three years of operations, TransMilenio system shows the following achievements: high number of passenger per bus, high ridership (900,000 daily passengers), commercial success, no public subsidies except for the initial fixed-infrastructure investment (all costs are financed from the bus fares which i s equivalent to about US$ 0.40 per trip), 38% average travel time reduction, much improved traffic safety, etc.

Transantiago has many features in common with Transmilenio but as well substantial differences, the most important ones being: (i) Transantiago i s a city-wide reform, implemented in one shot all over the Metropolitan Area and not gradually corridor after corridor; (ii) the bus system complements an extended subway network; (iii) every part o f the Metropolitan Area w i l l be served as well by locallfeeder services, and not only the catchment areas of the trunk routes terminals, but said services wi l l not be for free; (iv) part of the infrastructure i s expected to be privately funded; (v) all buses on the trunk routes w i l l not necessarily be brand new depending on the proposals made by the bidders; (vi) trunk services buses are not captive to segregated busways and w i l l operate further in the outlying areas; (vi) passengers w i l l validate their smartcard onboard and not in physically segregated stations.

32. The reasoning behind the different approach in Santiago i s primarily concerned with the availability o f public funds for completing the segregated busways. The metro constructions presently underway, including the extensions to lines 2 and 5 and the construction o f the new line 4 involve public sector investment estimated at US$ 1600 mill ion over a period o f 5 years. The public sector costs o f the public/private participation tol l roads i s also US$ 120 mill ion for the Costanera Norte, the f i rst toll road of seven to be opened over the next years.

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F. Environmental Conditions

33. Air quality in the metropolitan region i s bad, but improving. CONAMA collects data automatically from a network of 9 monitoring stations for air quality (7 fixed, 2 mobile) located at different sites within the city. The stations measure concentrations o f PMlo, 03, NO2. SO2, and hydrocarbons (methane and non-methane). The number of days of pollution alert, emergency or pre-emergency has fallen steadily from 79 days per annum in 1997 to 25 days in 2003, but has now reached a plateau and has even started to slightly increase again, which now calls for more profound and structural actions:

Number of days of pollution alert, emergency or pre-emergency Total Episodios Constatados

1397(*)-2003

I 1997 1998 2999 2000 2001 2002 2003

source SESMA-CONAMA * data related to 1997 cover only April-December

34. More detail, including details o f global gas emissions i s contained in the Project Appraisal Document o f the GEF Air Quality and Sustainable Transport Project for Santiago (Project Report Number: 26848-CL), approved by the World Bank Board in November 2003. There i s considerable spatial variation in quality, with the worst conditions to be found in poorer areas such as Pudahuel and El Bosque and the least bad in richer areas such as Las Condes and Providencia. O f particular concern i s that the fraction o f fine particulates (PM2.5) which i s believed to be most damaging to health, i s very high. The annual average values in Santiago are nearly twice the norms proposed for this grade of particulate proposed in Europe and the US (from 20-25 micrograms per cubic meter.) In relation to the national standards' the region was declared as saturated in respect o f total suspended particulates, breathable particulate matter, carbon monoxide and ozone.

35. According to the CONAMA emissions inventory o f October 2000, buses were responsible for about 50% of the total ambient levels o f respirable particulate matter generated by the transport sector and about 25% of the total level. The bus-generated proportions were even higher for NO,, and a l i t t le lower for SO,. In contrast, gasoline powered private cars and trucks were responsible for the majority o f CO emissions (see Table 1). Chemical analysis o f particulates as a basis of source attribution, not used in the inventory, suggests an even higher proportion of the more damaging small particulate matter can be attributed to transport.

'See Anuario de calidad del aire. Region Metropolitana, 1999-2000.

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Table 1. Emissions inventory: October 2000 (tons per annum, and % o f total)

Source : CONAMA

36. The present bus fleet operating in Santiago i s almost exclusively diesel powered ranging in emission standard from Euro 1 (EPA91) to Euro 3 (EPA98), with recent purchases being exclusively Euro 3 standard. Thanks to heavy investment in bus replacement during the last decade, in 2003 about 20% of the buses were Euro 3 standard. With the present maximum sulfur content of diesel at 300 ppm, (and average nearer to 200 ppm) and a Government policy of making 50ppm sulfur available by June 2004, Euro 3 (EPA98), which incorporates catalytic converters and particulate traps, wi l l be the ininimum standard required for new buses under the proposed franchising system for trunk routes. The continuation o f use of Euro 2 (EPA94) vehicles i s likely to be permitted, but discouraged by the bidding criteria, for the feeder systems.

37. The published objective o f the Government i s to reduce the level o f bus emissions o f PMlo by 75% and NO, by 40% between 1997 and 2005, conservatively assuming no increase of the public transport modal share in spite o f the substantial improvements to be implemented. NO, i s not only a precursor of ozone, the concentration o f which exceeds the norm with high health impacts, but also o f PM2.5. There i s substantial scope for air quality improvement associated with the change in technology proposed in the project but it i s estimated than more than half the emission reduction wi l l be associated with the reduction in vehicle kilometers and the increase in bus average capacity and commercial speed. For greenhouse gas emissions, the reduction w i l l depend on reductions in fleet and vehicle kilometers, on improved driving cycles resulting from reduced bus congestion; and on the introduction of hybrid vehicles which may require up to 30% less fue l per km. Going for Euro I11 or Euro I V technology does not impact greenhouse gases emissions compared to Euro 111.

H. Problems to be addressed by the Reform

38. The main problems of Santiago’s urban transport system are the following:

(i) explosive increase in the number o f trips, especially car trips which more than tripled (~223%) between 1991 and 2001, while the population o f the metropolitan area increased by 28%. The number o f car-km i s growing faster s t i l l since average trip length i s increasing steadily due to decreasing densities and the expansion o f the urban built area;

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steady and steep decrease of public transport modal share, which has been going down from 83.4% o f motorized trips in 1977 and 70.5% in 1991, to 51.9% in 2001 according to comprehensive origin-destination surveys;

high traffic congestion on city streets;

relatively low satisfaction of passengers with aspects o f the public bus system;

low levels of safety. Almost a quarter o f deaths on the city’s roads occur in accidents in which a bus i s involved. One death every three days i s in an accident involving a bus. Although some progress has been achieved, i t has been hampered by a system o f payment per passenger that encourages bus drivers to race;

high air and noise pollution, especially particulate matter related, caused in part by high bus frequencies that could be easily reduced, considering the low levels of occupancy o f off-peak bus services;

low affordability o f transport for some o f the very poor, especially those who have to use more than one public transport vehicle per trip and who consequently pay more than one fare per trip;

(viii) neglect o f non-motorized transport, resulting in unpleasant conditions for walking and cycling - potential alternative modes that could replace the car for short trips and thus reduce congestion and pollution;

economically inefficient overlapping and concentration o f bus routes along the main roads of the city center, which generates not only local oversupply but also congestion. 80% of bus routes pass through the 7 main arteries o f the city;

tortuous bus itineraries elsewhere, whereby buses weave in and out of main arteries to cater for relatively minor pockets of demand (the average length of a route i s 63 kilometers).

111. THE NEW GOVERNMENT STRATEGY FOR URBAN PUBLIC TRANSPORT AND ENVIRONMENT

A. Government Urban Transport Strategy

A.l. General outline of the strategy

39. To improve the quality o f l i fe in Chilean cities along with their competitiveness, the Government o f Chile has embarked on an ambitious nation-wide urban program in anticipation of the 200* anniversary of Chile’s independence (Bicentenario, 2010). In the case o f Santiago, probably the most powerful and significant tool to reach those objectives i s the 2000-2010 Urban Transport Plan which aims at turning Santiago into a highly competitive world city (“ciudad de calidad mundial”) through tackling the above-mentioned problems. President Lagos gave priority to this comprehensive Urban Transport Plan which i s expected to deeply change the way the inhabitants o f Santiago move around, through measures partly inspired by international successes such as the Transmilenio public transport system in BogotB. One key principle fed the definition of the broad objectives of the Plan: public transport vehicles and private vehicles share and compete against each other for use of limited road space. Since public transport vehicles are more space-efficient and cleaner per passenger-km, they should be given priority. The ultimate objective i s to reverse public transport declining trend and keep i t s share at the current level.

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40. The key reforms of this program, now in early stages o f implementation, are as follows:

allocate and manage road space so as to maximize social gain through traffic management schemes that give priority to public transport vehicles, such as the implementation of exclusive public transport axes during peak hours, and the establishment o f physically segregated bus lanes reserved full-time for public transport vehicles;

replace the current approach to tendering bus services, where less-than-formal operators take both cost and revenue risks, by gross-cost contracting o f 15 relatively large contracts each requiring between 200 and 500 vehicles;

provide incentives to operators to bring in high-standard bus vehicles (easy-to- board low-floor “city” buses, meeting at least Euro 3 emission standards);

reconfigure the bus route network into a two-tier system, the first tier consisting o f trunk lines, operating as far as possible on segregated busways, and the second consisting of collection/distribution lines (services tendered separately)’;

introduce a unified fare system, including metro as well as bus services, with fares set to achieve financial equilibrium for the system as a whole without increasing the current average fare level;

separate fare collection as a competitively awarded concession;

commission a public transport management and information center to control the system-wide bus flow;

set up coordinated transport and infrastructure planning mechanisms at the metropolitan level;

provide training, certification, and other transition assistance for those transit workers who may lose their jobs;

coordinate land use and urban transport policies;

improve conditions for cyclists and pedestrians;

rationalize freight-related traffic and improve i t s environmental performance; and

promote a culture o f rational private car use so that trip makers perceive the real costs o f car travel, possibly through London-type congestion pricing schemes.

41. These policies and reforms w i l l be buttressed by a comprehensive infrastructure program, the main features of which are: (a) the doubling o f the current length o f the subway system; (b) the construction of limited-access, urban toll roads as a public-private partnership; (c) the gradual development over a period of 15 years of a system o f approximately 300 kilometers o f segregated busways, interchange stations, terminals, and underpasses, constructed and operated on a commercial basis by the private sector under concessions.

42. The bulk o f the short-term investment in the busway systems and terminals i s intended for private sector finance through concessioning, while public sector finance w i l l mainly focus on metro extensions, bus stops and part o f the infrastructure maintenance.

See Estache and G6mez-Lobo.

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A.2. Route restructuring

43. The proposed route restructuring wi l l establish a trunk and feeder network, incorporating bus and metro services. I t i s proposed that 5 trunk contracts w i l l be put out to competitive tender, requiring a fleet of over 2500 large vehicles (capacity between 80 and 160 persons) for these routes. Transantiago intends that all axes with passenger flows in excess o f 2500 passengers per hour and per direction wil l have trunk service status. The services w i l l be structured to connect through a number o f interchange stations. There w i l l also be interchange with the Metro. I t i s estimated that the proportion of total trips in the system (including the metro) requiring a transfer w i l l rise from the present 30% to about 80%.

44. In addition there wi l l be 10 area contracts for the provision o f feeder services. These w i l l be operated by over 3500 vehicles o f capacity between 40 and 80 persons. While there may be some overlapping o f the trunk routes, the feeder routes w i l l be contracted as area monopolies. The purpose of this structure i s to avoid the currently fierce competition on the road as a means o f improving the discipline and safety o f operations. Competition w i l l happen at the time o f the bidding process, when potential concessionaires submit their bids and are selected on a least-cost basis, the final user fare being a reflection o f the winner’s proposals.

A.3. Reallocation of road space in favor o f public transport

45. The long term vision of Transantiago i s to carry the trunk services predominantly on segregated busways. Exclusive public transport axes now reserved for buses during peak-hours wi l l be gradually turned into permanent segregated busways over the next 15 years. The immediate objective i s to have two corridors, amounting to 19 kilometers, in service from the outset o f the restructured route service patterns. These busways, except that on Alameda which wi l l imply minor investments (US$ 1.5 million), and the associated terminals w i l l be privately financed. Only the investment in improving the present bus priority in Alameda i s to be undertaken immediately on public budget. The long-term objective, to be met over the next 15 years, i s to complete a 300-km of segregated busways.

46. In addition to this, the rationalization o f public transport supply to be promoted by the implementation o f Transantiago, along with the inauguration of seven tol l roads, i s expected to relieve congestion in a number o f secondary streets that irrigate the central municipalities. As a consequence, less capacity should be required and some road space w i l l be freed and hence available to be recovered in the form of bike lanes, wider sidewalks, tree-lined low-speed streets, pedestrian areas, etc. Engineering studies to expand the pedestrian areas o f Santiago are being financed under the GEF Santiago Air Quality and Sustainable Transport Project. Moreover, the proposed Technical Assistance Loan w i l l fund a broad public participation process with local NGOs, neighborhood organizations, shop owners associations and other stakeholders such as bus operators associations to discuss and decide on how to make the most out of this unique opportunity to improve the urban environment before cars flood back these streets.

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A.4. Fare integration

47. In the current system, the average fare paid by public transport users i s 346 pesos (April 2003 data). Metro users pay 370 pesos during peak hours and 290 during off-peak hours. Bus users pay 290 pesos per trip leg. 12.3% of bus users have to use at least two vehicles per trip (metro+bus or bus+bus or shared taxi+bus or any other combination o f those except metro+metro since transfers on the metro system are free), which means they pay two fares per trip, i.e. around 600 pesos, except those who benefit from the Metrobus system services (combination o f a feeder bus service and the metro) who pay 490 pesos. Passengers who need to use two buses are mainly those l iving in the low-income outlying suburbs which are poorly accessible.

48. I t i s proposed to integrate all bus and metro fares in a single system. In the proposed system, passengers using only local feeder services wi l l be charged a fare o f 250 pesos, while those interchanging and/or using the metro w i l l pay 350 pesos. One o f the objectives i s to keep the average fare at or below the current level. The effect o f these fares i s that (i) users who now pay two fares w i l l pay substantially less (ii) most former bus users w i l l pay slightly more than at present but w i l l be offered the possibility to travel on the metro network, the image and performance o f which i s excellent, and (iii) a few - making shorter journeys - wi l l pay less than at present, most probably a majority o f housewives and students whose trips are for local errands or school-related. The most obvious beneficiaries o f this fare structure reform are then those users who pay two fares in the current system, 60% of which are in the lowest income category, i.e. those households earning less than CLP 450,000 per month (approx US$ 750). It i s estimated that these households spend up to 10% of their income on transport expenses. Fare integration w i l l reduce their travel expenses by 40%. The other substantial positive social impact o f the new fare scheme i s that it w i l l open up the high-quality metro network, so far used mainly by the middle- class, to any public transport user, especially the low-income ones.

A.5. System finance

49. The system i s planned to be financially self sufficient. A maximum acceptable price per bus- km for the trunk routes and per carried passenger for the feeder routes w i l l be pre-stated. Both fares and contract payments are to be subject to revision according to sub-sector specific cost indicators. It i s proposed that there should be a “buffer fund’’, to be fed by required initial capital contributions by the franchisees and concessionaires (including the metro) and from any accumulated surpluses. The final guarantor would be the Government which would guarantee borrowing to keep the system in balance. The objective o f this guarantee i s to reduce the level o f risk perceived by operators who would otherwise request a risk premium, which would in turn impact fares negatively.

50. All contracts for the operation services (bus and metro) w i l l be on a gross cost basis. For trunk buses the decision criterion for selection o f successful bidders w i l l be mainly the required payment rate per vehicle kilometer (bus or metro-car), while for feeder services it w i l l be the required payment rate per passenger.

51. The environmental quality o f the capacity offered w i l l impact the concession period: the lower the emissions, the longer the concession, with an upper limit o f 16 years for the trunk routes. The scheme works as if concessionaires were given a type o f bond that allows them to emit a fixed amount o f pollutants over the concession period. Those who offer lower levels o f emissions wi l l reach the emission ceiling later and wi l l hence be awarded longer-term

15

concessions. There i s a strong incentive to use only hybrid or electricity-powered vehicles for the bus services to be offered in Santiago CBD (so-called “area lo”).

52. For the metro, the rate w i l l be calculated on the basis o f the initial costs per car kilometer. All w i l l be subject to regular review to deal with inflation.

53. Revenue collection i s to be concessioned to a special purpose agency which would be responsible for the provision and maintenance of the smartcard system and i t s hardware. This would be compatible with the existing Multivia card system. On-vehicle readers would be on the account o f the bus franchisees. Initial responsibility for the system, before the letting of the smartcard concession, would rest with Metro. A commercial contract would also be let to a banking organization to handle cash management.

A.6. Institutional reform

54. The Transantiago plan calls for a substantial program o f institutional reform. As mentioned above, operators wi l l have to merge and corporatize if they are to win contracts under the new system. Infrastructure, ticketing and cash management franchisees have to be formed.

55. Above all, the system requires co-ordination of public sector activities in land use and transport planning, infrastructure investment, traffic management, and bus franchising. Hitherto, these functions have been performed in a fragmented fashion, usually by agencies o f central Government. While there i s some sensitivity about engaging in institutional reform to decentralize these strategic functions, the creation of a special purpose agency to develop the plan has been a step in the right direction. It i s proposed that this should be further developed within the auspices o f the project, assisted by technical preparation under the parallel Technical Assistance Loan, to ensure the sustainability and continuation o f the current institutional structure.

B. Economic Evaluation of Reform Program

56. Formal economic evaluation has been undertaken of the system as planned. This involved the use of a large transport planning model ESTRAUS, to estimate likely flows on the public and private transport networks under different scenarios, together with more specific models to assist in public transport network design (MDTP), the economic effects (MODEC), and environmental effects (MODEM). The models are quite sophisticated, and Chileans transport planners are known to possess high technical sk i l l s in modeling.

57. The economic evaluation compared the performance of the base system as it would be in 2005 if the frequencies on the current network were optimized” with the final scenario (Scenario 9) of the design study. This scenario assumed the restructuring o f the bus services into trunk and feeder services on a road network including the first tranche o f segregated busways and transfer stations. The completion o f the urban road concessions and metro extensions currently under construction was included in the base and the Scenario 9 network.

58. The travel assignment model used a fixed trip matrix, and while allowing for the rerouting o f car trips in response to changes in the road network performance, i t did not attempt to project any transfer of trips from private to public transport as a result o f the scheme, even though the relative performance of the modes w i l l shift considerably in favor o f public transport. I t estimated

lo The benefits o f saving costs by reducing off-peak frequencies i s thus not attributed to the program.

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changes in walking time, waiting time and in-vehicle time for public transport users and in- vehicle times for car users. The travel assignment model uses different weighing factors for walking/waiting/in-vehicle times in i t s route choice behaviour algorithms I t showed the aggregate benefits for each category of effect. I t did not, however, show the composition o f the aggregate benefit for Municipalities or income groups.

Average Travel Time Average Waiting Time Average Access + Transfer Time

59. In aggregate the economic model showed an internal rate o f return of 17.9% in terms o f transport resource and time savings, and a Net Present Value of US$ 418 million at a 10% discount rate for an initial investment assumed to total US$ 636 mill ion in 2005. In addition as a separate exercise environmental health benefits were estimated at US$ 17.6 mill ion per annum in 1998 prices. Overall that would suggest an internal rate o f return o f well over 20%. Since environmental benefits have not been included in the IRR/NPV calculation, one o f the TAL- financed activities wi l l be precisely to define a methodology (and have it approved by the Ministry o f Planning) to estimate air pollution improvement benefits and translate them into monetary benefits so that they could be included in the socio-economic evaluation o f projects.

-10% -10% 1% 37%

18% 18%

60. Those calculations are inevitably preliminary. As mentioned earlier, traffic forecasts do not include any impact on modal share, which would increase benefits, or on any adjustment in the timing o f car trips, which would also be likely to increase the rate o f return by reducing the losses to peak car driving times. There appears to be no incremental evaluation of the various separable components o f the plan, in particular, an evaluation of the consequences simply o f reducing off- peak frequencies, or of tendering out existing routes in larger packages to avoid incentives to over-suppl y .

- Average number of trip legs per trip 45 % Average Bus Commercial h e e d 2%

62. But there are a number of considerations which militate in the opposite direction, including: (i) the level o f infrastructure assumed, and hence the traffic benefits estimated, appear to be greater in the earlier years than i s now likely," and (ii) walking time and waiting time increases, which are forecast to arise as a consequence of the introduction o f the feeder and trunk system, are valued at the same hourly rate in the evaluation despite the fact that behavioral analysis o f the model shows that users weight these disbenefits at two or three times the unit savings in in- vehicle travel times.

37% 4%

Average Trip Length Trip legs by metro

0% 1% 95% 95 %

However, the bulk of the benefits stem from the bus reform rather than from the segregated busways. An economic evaluation examining only the bus reform and the infrastructure associated with i t (i.e. the transfer centers, road junctions and terminals) would probably yield a higher rate o f return.

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64. NE3 : Average travel time goes down mainly because of the extension o f the metro network. While waiting and access times increase slightly on the bus network with only marginal gains in terms of bus commercial speeds in the short run, the number o f trips by metro almost doubles compared to the baseline and the metro commercial speed i s around 32 kmh, i.e. twice to three times as high as the bus commercial speed on the most congested axes during peak hours, such as on Line 4 corridor.

66. Average bus commercial speeds are expected to increase gradually while the segregated busways network i s being extended over the next 15 years.

C. Poverty Impact

67. Transantiago i s aimed at improving the overall efficiency o f the system, providing safer, more comfortable and more convenient services for riders, and for improving overall air pollution through reduced emissions. The majority o f bus riders, some 70%, are from low income households and thus the improvements in the system will, on the whole, benefit this group. A more efficient urban transport system can contribute to poverty reduction through i t s impact on the city economy and hence on economic growth. Urban development contributes to national economic growth by allowing increasing returns to land, labor, and capital. Thus savings, investment, and wealth accumulation become concentrated in cities. Firms locate in cities to benefit from agglomeration economies and greater access to information and technology which in turn creates more jobs and demand for services.

68. The coverage of the new system i s such that every household, especially in the now poorly accessible areas, wi l l be less than a few blocks away from a bus stop (see Annex 6 for system coverage, especially in poor municipalities and Policy Matrix, Social Aspects). As previously said, fare integration wi l l yield substantial benefits for those who live in poorly served areas, mainly low-income residents who now use two buses per trip. Travel time savings amount to 77 mill ion hours per year (approximately 3.3 minutes per bus trip), 65.9% of which w i l l accrue to low-income users.

69. Air pollution benefits wi l l be substantial and w i l l mainly benefit low-income areas, which suffer from the highest contamination levels (see Annex 7 to visualize emissions reductions per area).

70. However, the poverty impacts o f the program need to be further assessed. Total travel times are expected to decrease or stay stable but with a higher proportion of waiting times which are perceived more negatively than in-vehicle time. T h i s might lead to a negative subjective perception of the impacts o f the system. The increase in the number of transfers o f the new system wi l l be mostly felt in the more peripheral low income Municipalities. Analysis o f this concern, and the design o f satisfactory measures to mitigate it if indeed i t i s the case, w i l l be carried out under the Technical Assistance Loan which wi l l finance user surveys (samples o f users surveyed on a regular basis to collect quantitative information on Transantiago's impact on mobility) and user panels (smaller group o f users surveyedinterviewed during a two-year period to determine how Transantiago w i l l affect their travel behavior and collect qualitative information in this regard) with a specific focus on poor users.

71. There i s also a concern about the effects of the introduction o f the new system on the operators of the current situation, and particularly on their employees. The number o f buses that wi l l be required to operate the new system w i l l be slightly higher (6,849 instead o f slightly more than 6,000) than what was forecast in the so-called bus retirement plan that was established some

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years back and made public. In addition, working conditions are expected to improve, which means that drivers wil l work fewer hours per day. Fare collectors w i l l be required on vehicles operating on trunk routes. On the other hand, some economies o f scale are to be expected from the corporatization of the bus operating companies, which might result in fewer jobs for example for maintenance workers. All in all, the number o f transit-related jobs should not be lower than what i t would have been without Transantiago. Nevertheless, the reform might imply a substantial change in the composition o f the bus companies’ staff. Some may leave the sector, while others w i l l come in. A t this stage, it i s difficult to assess the magnitude o f this possible turnover before concession winners are selected, but there i s a clear need to deal with the persons in danger o f losing their livelihood, with a program to be put in place for retraining for the new situation (and compensation for those who do not find a role in the restructured industry). That need has been recognized by the Government and the associations o f private operators, and i s being partially addressed through the ongoing GEF Transport and Air Quality project that w i l l design the corresponding social mitigation strategy, building upon IDB-financed pilot programs. The proposed TAL wi l l finance the corresponding social mitigation scheme (support to business creation, professional training, capacity building), wi l l provide technical support to those family operators who wi l l enter the “corporatization process”, and w i l l fund follow-up surveys to assess the changes in the transit workers quality o f life, as a result o f the Transantiago.

IV. B A N K ASSISTANCE STRATEGY IN TRANSPORT AND ENVIRONMENT

A. Bank Assistance Strategy

A.l. Government request/motivation

72. The Government has requested program support of US$ 100 million, including a US$ 75 mill ion single-tranche sector adjustment operation with a DDO feature and a US$25 mill ion two- tranche sector adjustment operation to assist the implementation o f the proposed reforms in the urban bus sector, using quick disbursing instruments to allow the reforms to be pursued at the pace desired despite some short term budgetary difficulties, partially due to the net effect o f revenue losses due to the Free Trade Agreements, but also permitting the Government to defer draw down if necessary to accommodate improvements or fluctuations o f the fiscal position o f the country within the disbursement period.

A.2. Link with CAS

73. The operation i s consistent with the goals and strategic approach set out in the 2002 Country Assistance Strategy (CAS, Report No. 23329-CH, discussed on February 19, 2002) wil l: (i) enhance sustained economic growth and social progress through increasing average speeds and improving accessibility, making the city more appealing and increasing the labor market size (i.e., the number o f jobs accessible from any point o f the city). T h i s w i l l increase the economic output o f a region which yields 47% o f Chile’s GDP, and should generate a trickle-down effect that w i l l most likely have a very positive impact on the poor; (ii) increase the inclusion of the most vulnerable groups; a more reliable and quick public transport system i s expected to address the low levels o f mobility o f the poor, reducing their exclusion through improved access to services and opportunities at affordable prices and reasonable travel times, hence contributing to a more socially inclusive growth pattern; (iii) improve environmental conditions in a city where pollution reaches very high levels and primarily affects the poor. Reduction in emissions o f air pollutants and GHG wi l l result from the introduction o f cleaner technologies and a less intensive use o f fuel, to be achieved through supporting measures to rationalize public transport

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supply, promote modal shift to public and non-motorized transport, increase utilization o f the electricity-powered metro, especially during off-peak hours, and relieve congestion through a more efficient use o f road space; (iv) promote public private partnerships through a renovated concession mechanism for private operators to provide public transport services and through the participation of private investors in the infrastructure program, expected to be mainly financed without resorting to public funds; (v) modernize the State and build its capacity: (a) it w i l l increase the state capacity to handle public private partnerships, (b) i t w i l l reinforce CONAMA’s capacity to deal with transport-related environmental issues and participate in the reinforcement o f the State technical capacity and i t s ability to enforce environmental regulations with minimal impact on the pace of economic growth, (c) strengthen coordination between public entities in charge of transport planning, urban planning and environmental management and (d) create the institutional background that ensures sustainability and continuity to Transantiago-PTUS.

74. There are currently six loans in Chile’s operations portfolio, totaling US$479.8 mill ion in commitments o f which US$150.9 mill ion remain undisbursed The portfolio i s heavily concentrated in human development which has four projects and over 90% of commitments: Higher Education (FY99), Lifelong Learning (FY02), Science for the Knowledge Economy (FY03) and Social Protection Adjustment DDO (FY04). The Social Protection TA approved by the Board in December 2003 i s s t i l l pending signing.(FY04). The remainder o f the portfolio supports public sector reform initiatives: Municipal Development I1 (FY99) and Public Expenditure Management (FY02). Portfolio performance i s highly satisfactory and there are no problem projects. Additional lending for FY04-FY06 i s now expected to target rural infrastructure services and a follow up to the higher education project.

75. The Social Protection Adjustment loan included a Deferred Drawdown Option and was approved in December 2003. The option to draw down has been fully exercised, and the full US$200 mill ion amount was disbursed in January and February of 2004, based on the overall performance and progress with the implementation o f the program supported by the Loan. For further information on the satisfactory assessment o f the macroeconomic framework and the Borrower’s continued adherence to the overall social protection program, see Memorandum o f the President entitled “Republic of Chile - Social Protection Sector Adjustment Loan (IBRD Loan No. 7202-CH) - Exercise of Drawdown - Full Compliance”, dated January 13,2004.

A.3. Rationale for Bank involvement / value added

76. The rationale for Bank support for the program in Santiago i s as follows:

Consistency with WB urban transport strategy

(i) Santiago’s Urban Transport Plan i s in line with the Bank-recommended practice for urban transport as stated in the recent strategy paper “Cities on the Move.” In most other client countries, i t would take a considerable effort by the Bank to convince decision-makers to adopt such a set o f policies;

Support to implementation of the Urban Transport Plan for Santiago

(ii) The Bank’s involvement w i l l support the Government in the politically difficult process of reallocating scarce street space from general traffic to exclusive use o f non-motorized transport and public transport vehicles, which i s essential if cities

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are to provide high quality rapid transit level service at comparatively low resource cost. Without Bank support there i s a greater risk that this element might be pushed out of the program or be truncated;

(iii) Through loan conditions the Bank wi l l further the development of coordination mechanisms and the creation of the institutional background for the continuity and sustainability o f Transantiago-PTUS;

(iv) The Bank w i l l support a more integrated coordination between transport, land-use, and environmental policies, which i s consensually recognized as highly desirable but very difficult to put in practice;

Value added to the Government plan and accelerated completion o f some o f its components

(v) Bank involvement w i l l contribute to the adoption o f adequate safeguards for the handling o f such issues as resettlement, the loss o f employment and environmental protection in the course of civil works in the built up urban area. All of these wi l l be addressed in the parallel TAL andor are included in the conditions for the SECALs tranches;

(vi) Bank involvement w i l l continue to influence decision-makers (as it has already during project preparation), so that they ensure that the improvements to the urban transport system wi l l be structured to provide direct benefits to low income groups through appropriate system design and fare integration arrangements. Analysis o f these effects w i l l be supported by the parallel TAL;

(vii) Through loan conditions, the Bank w i l l enhance the citizen participation process and help the Government to involve the citizenry in the next steps o f Transantiago;

(viii) Through loan conditions and supervision o f the SECALs and the TAL, the Bank i s expected to act as a catalyst in strengthening pro-active and advanced reforms such as congestion pricing and efficient and socially progressive reallocation of road space;

Cross-fertilization and replication opportunities

(ix) Drawing on i t s recent involvement in bus reform projects in other Latin American cities and elsewhere, the “knowledge” Bank w i l l provide professional advice and thus wi l l contribute positively to Transantiago’s success;

(x) Reciprocally, Santiago faces s i m i l a r issues as many medium to large cities in the developing world, since the evolution o f urban transport i s following similar patterns across countries: what the Bank i s proposing to support in Santiago can and probably w i l l be replicated in many more developing countries, and the Bank’s involvement in the Santiago process should benefit other clients in the context of future urban transport operations aiming at addressing the same problems as in Santiago.

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B. Coordination with Multinational InstitutiodOther Donors

77. There i s a mix o f complementary interventions from multinational institutions and other donors that support Transantiago, some o f them aiming to maximize Transantiago’s environmental impacts (GEF, Clean Development Mechanism, Prototype Carbon Fund), some focusing on the private sector stakeholders of the program (IFC), others on the robustness and viability o f the reform (Inter-American Development Bank and World Bank).

78. GEF : The World Bank has been working since 2001 on a GEF h r Quality and Transport project for Santiago, which was approved by the Board in November 2003. The purpose of this US$ 6.980 million grant (closing date: August 2008) i s to help reduce greenhouse gases (GHG) from ground transport through the promotion o f a long-term modal shift to more efficient and less polluting forms o f transport, and the adoption of sustainable low-GHG transport measures. To that end, the GEF project wi l l support the implementation o f the 2000-2010 Urban Transport Plan for Santiago and w i l l complement the proposed adjustment operation in two ways:

0 Firstly and as agreed since the early stages o f the GEF project design, it w i l l finance the next stage of the Strategic Environmental Assessment (SEA) of Transantiago, currently under progress. This next phase w i l l include: (i) environmental assessment of PTUS programs; (ii) improvement o f participatory approach; and (iii) development o f institutional capacity for SEAS. Other components o f the grant w i l l support and complement as well the proposed adjustment loans since they deal with bus technology testing, land use, road pricing, car use reduction measures, etc;

Secondly, i t w i l l help consolidate the reform program through three components which were added when, as a result of the continuous dialogue on transport and environment, the Government of Chile formally requested the proposed adjustment loans to support the urban transport plan. These components are the following : (i) design o f a social mitigation strategy for transit workers that might have to leave the sector; (ii) monitoring o f the operation environmental impacts; and (iii) renewal o f the fleet in secondary cities, using those “not-so-old” buses that w i l l be removed from Santiago’s streets to displace much older vehicles in secondary Chilean cities.

79. Potential Carbon Funding : The task team i s also in contact with the Carbon Financing Group at the World Bank (see attached preliminary project brief, Annex 8) to examine whether Transantiago could benefit from some carbon funding, be it through the PCF or other potential carbon buyers. The discussion i s ongoing but expectations are modest since investors have been so far reluctant to purchase transport carbon emission reductions for different reasons such as the complexity o f establishing a baseline in the urban transport field and the magnitude o f transport investments, which make carbon funding relatively marginal in the overall financial balance o f transport projects. However, CONAMA i s currently funding a US$ 80,000 study to elaborate the Project Design Document that corresponds to the f i rst step o f the validation and registration process o f any Clean Development Mechanism Project, which i s a prerequisite for the verification, certification and issuance of greenhouse gases Emission Reductions Credits (ERCs) related to that project activity. The Terms o f Reference o f the study include the provision o f all the information and calculations required by “The United Nations Framework Convention on Climate Change” (UNFCCC) : baseline methodology, duration o f the project activity / crediting period, monitoring methodology and plan, calculations o f GHG emissions by sources, etc.

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80. International Finance Corporation : IFC i s exploring with Transantiago’s General Coordinator and other executives ways o f supporting, if appropriate, the winners of the various projects that would go for bidding. Information about IFC’s products was made available in the data rooms for the various projects at Transantiago’s request, but no formal request for financing from potentially interested companies has been sent to the IFC yet, probably because the bidding processes for both the infrastructure bits and the bus services are s t i l l in their early stages.

8 1. The Inter-American Development Bank (IADB) i s currently executing a US$ 1,250,000 grant from the Multilateral Investment Fund to support modernization o f the surface mass transit system o f the metropolitan area o f Santiago. The resources have been used in developing the concept design and concession schemes for the restructured public transport system to be implemented under Transantiago, and to launch some pilot training program for transit workers to be employed under the new scheme.

82. The Clean Air Initiative (CAI) for Latin American Cities i s a special initiative spearheaded by the World Bank Institute (WBI) and the Latin American and Caribbean region o f the World Bank, aimed at promoting dissemination of best practice and capacity building on air quality management in Latin American Cities. The C A I i s proposed as the vehicle for disseminating the lessons learned under this innovative operation outside Chile and i t s outreach i s now global as the C A I i s being expanded to other regions (Asia, ECA, Africa). In Santiago, the CAI provided the opportunity for sharing the city’s experience in i t s air pollution decontamination plans among partner cities (Buenos Aires, Rio, Mexico City, Lima-Calla0 and BogotA), and set the grounds for advancing with the Air Quality and Sustainable Transport Project. The Technical Director o f CONAMA has chaired i t s governing board until March 2004.

V. THE PROPOSED OPERATION

A. Bank Assistance Instruments

83. The proposed response contains three components, two sector adjustment loans and one technical assistance loan:

(i) a two-tranche sector adjustment loan for the sum of US$25 mill ion (US$lO mill ion + US$15 million) to support the reforms program (SECK) . The implementation period of the loan w i l l be three years.

The selection of the lending instrument was discussed at length, and made after considering several options in an effort to ensure responsiveness to client interest and to meet operation requirements. The choice o f financial instrument was governed by Chile’s request for support by the Bank in the design and implementation o f the policy and institutional framework required for implementing Transantiago. The Bank has agreed to this based on, the broadness and deepness o f the reform program which would result in a substantial change in the urban transport sector. The reform agenda i s quite comprehensive and includes themes such as coordination with land-use policy, need for a metropolitan agency responsible for urban transport planning, air pollution reduction, corporatization o f the bus operating companies, suppression o f in-the-market competition, fare integration, redistribution o f road space between modes, congestion pricing, citizen participation, etc. The two tranches have been designed to ensure a continuous follow-up o f the reform implementation process

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Box 3 : The Deferred Draw-Down Option

The Deferred Draw-Down Option

The Deferred Draw-Down Option (DDO) became available for IBRD borrowers in May 2002. I t s introduction was one o f the recommendations contained in the Report o f the first Task Force on the World Bank Group (WBG) and the Middle Income Countries dated April 2001 on ways in which the WBG could tailor i t s products to provide more effective support of IBRD middle-income country members.

The DDO i s a particularly useful instrument for borrowers that are eligible for IBRD adjustment lending, are accessing capital markets for a large part o f their funding needs, but would l ike to remain engaged with the Bank and retain access to a cost-effective risk management tool to support core structural programs in case an unexpected funding need were to arise. The DDO gives the flexibility, over a period o f three years, o f drawing down the loan proceeds only if needed, provided that overall program implementation remains on track. If the loan i s not disbursed, the only charge i s a commitment fee o f 0.50%, net o f waivers, per year. An adjustment loan with a DDO, like other regular adjustment loans, i s included within the envelope of the CAS, and does not constitute a window for additional resources. The operational prerequisites and implementation arrangements associated with it are broadly the same as for other single-tranche adjustment loans, with additional provisions for loan supervision and drawdown.

The first adjustment loan with a DDO was approved by the Bank’s Board of Executive Directors in September 2002, for the Republic o f Latvia. Having reached the final stages of completing i t s transition to a market economy, Latvia did not foresee the need for additional resources from the Bank to support the implementation o f i t s reform program. Use o f the DDO thus allows Latvia to have access to Bank funding if needed, and to continuing using the Bank’s advisory support, without incumng external debt if a funding need does not arise. In effect, Latvia has not yet exercised i t s DDO.

Since then, one other adjustment loan with a DDO has been approved by the Board of Executive Directors: the Chile Social Protection loan. Chile became the f i rst country to exercise a DDO in January 2004.

(ii) a US$ 75 mill ion single-tranche sector adjustment loan with a deferred drawdown option (DDO) feature to accommodate the Government’s request for flexibility to respond to variation in the macroeconomic circumstances. The implementation period of the loan w i l l be three years.

The proposed choice o f the DDO (Deferred Drawdown Option, see Box 3) i s supported in the CAS, given the volatile external conditions and higher external r i sks faced by Chile at the time the CAS was prepared. While the DDO was foreseen as an instrument to allow continued access to financing in case of external shocks, Chile has since viewed it in a broader light. The Social Protection Adjustment Loan ICR wi l l analyze in greater depth the reasons for which Chile selected to use the DDO instrument. Despite improved regional and global conditions, and Chile’s own particular strengths and access to international capital markets, the authorities have

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found the DDO to be an attractive option for a number of reasons. With several FTAs coming into effect (in addition to the agreement with the EU which began to be implemented in 2003, the FTAs with both the US and South Korea w i l l enter in force this year), there i s significant uncertainty as to the magnitude these w i l l have on fiscal revenues (foregone tariffs); DDO financing helps to hedge this uncertainty and ensure the availability o f financing for priority programs, including TRANSANTIAGO as well as the social assistance agenda. Finally, DDO financing also helps to hedge against uncertainty in nominal revenues brought about as a result of variables beyond the immediate control o f policy makers, and helps to safeguard the availability o f financing for priority programs while ensuring compliance with Chile’s structural balance rule

As pointed out in the CAS, conditions in Chile are consistent with the Bank’s prerequisites for use of the DDO instrument. Macroeconomic policies and program implementation have been highly satisfactory. The proposed operation would support core structural reforms in the area of urban transport in a country that i s eligible for IBRD assistance, but i s not making full use of the Bank’s financial resources.

(iii) a technical assistance loan for the sum of US$6.1 mill ion which comes as a separate operation (see Project Document: 28521) to assist in the implementation o f the reform arrangements, to support the monitoring o f the reform process, to contribute to the system evaluation and continuous planning process, and to strengthen local institutions vis-&vis local safeguard policies related to infrastructure investments. The implementation period o f the loan w i l l be five years. (see Annex 9 for a more detailed description of this operation).

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Box 4: The Proposed Technical Assistance Loan

TECHNICAL ASSISTANCE LOAN B y supporting the implementation of Santiago Urban Transport Plan, the TAL i s in line with the 2002 CAS that focuses among others on an increased inclusion o f the most vulnerable groups, the improvement o f environmental conditions, the promotion o f public private partnerships and the modernization o f the state and the building of i t s capacity. The Bank involvement through the TAL i s a means to increase the robustness o f the overall project and thus its acceptability. I t wi l l also help to maximize benefits for low-income groups and people with disabilities and wi l l ensure compliance with adequate safeguards. The purpose o f the TAL i s to ensure that financing i s immediately available to assist the design, implementation, monitoring and evaluation o f the reform arrangements, and facilitate compliance with the adjustment loans policy matrix tranche release conditions, as well as to ensure that the Bank safeguard policies are complied with. Components

Pilot testing Transantiago-PTUS’s communication, image building, marketing and user information strategy; Design and implementation of a participatory approach to define a strategy for the recovery of the road space released through the reduction of congestion; Analysis o f the impact o f Transantiago-PTUS on transport demand; Update o f the Origin-Destination survey for passenger transport; Origin - Destination survey for freight transport in Metropolitan Santiago; Updating, testing and fine-tuning of the economic model MODEC and quantification of the environmental benefits o f Transantiago-PTUS; Analysis and updating o f the socio-economic ESTRAUS models, development o f a model to forecast the income and motorization rate o f households; Preparation of a draft law for congestion pricing; User perception survey o f the new public transport system; Design and implementation of a monitoring and information system o f the impact o f the transport system on air quality and noise; Impact Analysis of Transantiago-PTUS on urban development; Analysis o f the transport and urban planning entities and design o f instruments to facilitate inter- institutional coordination; Technological and legal support for the development o f the “one-stop process” (Ventanilla ‘Ijnica) project; Design and implementation of a communication and education strategy regarding Transantiago- PTUS’s accessibility features for users with reduced mobility; Capacity building, business creation and re-conversion of the workers in the transport sector; Assessment o f the change in quality o f l i fe for drivers due to the implementation of Transantiago-PTUS ; Institutional capacity strengthening in the area o f involuntary resettlements, including the updating o f the revised resettlement framework; Upgrading of the guidelines for environmental management plans o f infrastructure works.

~

I

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B. Objectives and Results to be Reached under the Proposed Loans

84. The objectives of the proposed Urban Transport Sector Adjustment Loans are to support efforts by the Government of Chile to implement the Santiago Urban Transport Plan and the reforms spelled out in the Policy Matrix (see Annex 2) of this document. In addition to developing the foundation of the medium-term reform program, the Government o f Chile completed several substantial and concrete actions to begin implementation of Transantiago- PTUS. The Board conditions related to these actions are identified below. These conditions focus on: (i) the robustness of the institutional framework within which Transantiago w i l l be implemented; (ii) the enhancement o f the public participation process to make sure that stakeholders of different horizons are informed, consulted and given the opportunity to participate in the improvement o f the first versions of the urban transport plan; (iii) the materialization o f the positive air pollution impacts expected from the reform; (iv) the inclusion of marginalized categories o f the population such as people with reduced mobility; (v) the sustainability o f the public transport business and i t s rationalization. The maintenance o f macro-economic stability, which was discussed in the f irst section of this memorandum, i s a precondition for proceeding with the proposed SECALs. As discussed earlier, macroeconomic performance has been robust in 2003.

85. Conditions met prior to Board Presentation both for the US$ 75 mill ion single-tranche SECAL with a DDO feature and the f irst tranche o f the US$25 mill ion two-tranche SECAL:

Definition and adoption o f an Urban Transport Plan for the Metropolitan Area o f Santiago;

Creation o f the Committee o f Ministers charged with the implementation of the Urban Transport Plan for the Metropolitan Area o f Santiago;

Formal Commitment to engage MOP and MTT in citizen participation processes through issuance of Znstructivo Presidencial No. 30;

Carrying out o f citizen participation in the design o f Transantiago-PTUS through :(a) a seminar with all municipalities o f the metropolitan area, culminating a participatory process o f workshops with mayors and municipal transport directors; and (b) two workshops with local NGOs;

Dissemination of information about Transantiago-PTUS, through: (i) a press conference; and (ii) the carrying out o f a launching seminar o f the Transantiago- PTUS; Adoption o f emission reduction targets for public transport by 75% for PMlo and by 40% by NO, in relation to 1997 levels;

Modification o f the typology o f terminals for urban passenger services;

Adoption o f new standards for bus size and functional specifications, including with regard to: (a) height of accesses (low-floor buses); (b) automatic transmission and pneumatic suspension; (c) facilities for people with reduced mobility and other vulnerable users groups; and (d) emission standards;

Sending to Congress of a Draft-law authorizing fiscal transfers related to the public transport system concessionaires;

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0 Rationalization of public transport services through the reduction in the bus fleet by 20%;

0 Freezing of the registration of shared taxis until 2010.

Second-Tranche Release Conditions for the US$25 million two-tranche SECAL

86. Several actions during the next 18 months cri t ical to the success of the program have been identified and are listed below as second-tranche release conditions. These conditions put emphasis on important complementary measures that w i l l maximize the benefits generated by the urban transport plan, such as congestion pricing which w i l l further rationalize private car use through the internalization o f external costs and such as the recovery o f public spaces aimed at improving the quality of urban l i fe. Through this set o f conditions, the operation keeps supporting the strengthening of the institutional framework for urban transport and focuses again on the inclusion of vulnerable groups through fare integration that w i l l benefit the low-income groups l iving in remote areas. The environmental agenda also forms part o f the conditions through compliance with air pollution targets and the realization of an adequate Strategic Environmental Assessment. In addition, the continued maintenance o f macroeconomic stability i s a precondition for the release of the second tranche.

Sending to SECPRES o f a draft law allowing congestion pricing to control motorized traffic;

Conducting citizen participation exercises regarding public space recovery freed from traffic congestion through the carrying out of at least two citizen participation seminars in each of the following neighborhoods: (a) Bellavista (Recoleta- Providencia); b) L a Vega (Constitucih-Recoleta); c) Santa Lucia (Providencia) and d) Providencia Central-Mapocho;

Sending to Congress of a draft law for the institutionalization o f Transantiago-SE to establish a control and technical inspection department for concession contracts;

Signing of a Decree to establish coordinated Transport and Infrastructure Planning mechanisms at the metropolitan level;

Full Implementation o f fare integration for the urban public transport system in Metropolitan Santiago;

Meeting o f emission reduction targets for public transport established in the Decontamination Plan within a margin o f 20%;

Finalization of the Inception Report for the implementation o f the strategic environmental assessment o f Transantiago.

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C. Results Monitoring

87. The loans would support Government actions in seven key policy areas, for which tranche release conditions have been defined to address the problems identified in the diagnosis phase and reach pre-agreed objectives, as described in the following tables which w i l l be used as guidelines for the monitoring of the project:

C.l General Urban Transport

Issues High level o f - congestion, steady increase o f car use in absolute and relative terms, steep decrease in public transport modal share, substantial external costs due mainly to air pollution and congestion, unpleasant conditions for pedestrians and cyclists, public space increasingly for cars rather than people.

Commitments To adopt an Urban Transport Policy for Santiago Metropolitan Area, via Decree (March 2002). To exclusively dedicate to public transport at least 19 km of lanes on the bus trunk routes network'*. Expected May 2005 To elaborate and secure Executive endorsement o f a draft law permitting congestion pricing. Expected end 2005

To implement a participatory approach (involving citizens and municipalities through workshops and round table discussions) in order to elaborate proposals for the recovery o f road space freed in the process of urban transport modernization.

Expected Results Priorities and policy goals clearly defined (maintain public transport modal share). Road space efficiently reallocated, priority given to energy- and space-efficient transport modes. Congestion pricing made applicable, which w i l l allow the internalization o f external costs related to car use and w i l l decrease congestion. Urban environment improved in agreement with the citizenry's will, non-motorized transport (pedestrian facilities, bikeways) and public spaces promoted.

l2 For more details on the implementation schedule o f the infrastructure program, see annex 14.

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C.2 Urban Public Transport ~~ ~

Issues Public bus transport lack o f competitiveness and bad image, off-peak oversupply, inefficient overlapping and concentration of bus routes in the CBD, tortuous bus itineraries, traffic accidents due to driver’s anti-social road behavior generated by an inadequately regulated public transport market, atomized business structure, proliferation of s hared-t axis.

Commitments (i) To reduce by at least 20% (resp. 30%) the number of buses (resp. bus- km) providing public transport services in the city13; (ii) To freeze the licensing o f new taxis until 2010; (iii) To normalize o f transfer terminals for passenger urban transport; and (iv) To establish new standards for buses including: (a) Access level (low-floor buses); (b) Automatic transmission and pneumatic suspension; (c) Facilities for users with reduced mobility; and (d) Emissions standards; Expected May 2005 To complete competitive bidding processes for a limited number (15) o f big-size concession contracts, that give geographic exclusivity to feeder services and remunerates trunk services per bus-km (for-the-market competition instead of in-the-market ~ompetit ion’~). Expected April 2004

Expected Results Public transport supply rationalized, levels o f congestion and contamination lowered, quality and image of public transport improved without substantially altering fare levels (current average fare = CL$346), reduction in public transport modal share arrested and possibly reversed (current public transport modal share = 5 1.9% of all motorized trips).

Levels of safety improved, bus companies formalized, operating costs savings through economies o f scale and better supply- demand match.

l3 See Annex 10 for more detail on the rationale behind the reduction in buses and bus-km. l4 Regarding the distinction between for-the-market competition and in-the-market competition, and the drawbacks o f the latter, see (i) “Cities on the Move, a World Bank Urban Transport Strategy Review”, ISBN 0-8213-5 148-6, August 2002, and (ii) Estache and G6mez-Lobo, which indicates that liberalizing the sector may not be the welfare maximizing option and discusses the market failures that justify this claim and presents the regulatory options available to address said failures.

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C.3 Regulatory Framework

process s t i l l very much centralized.

I

Commitments To create an institutional mechanism to implement Santiago’s Urban Transport Plan. (April 2603) To obtain Congress approval o f Government guarantees for bus service concessions (that would kick in if a shortfall in farebox revenues make i t necessary for operators to borrow money). Expected April 2004 (i) To concession through a competitive process farebox revenues collection and administration and the public transport information and management center; (ii) To implement full fare integration, which w i l l ease transfers among bus routes and with the metro system and; (iii) To set rules to share farebox revenues between public transport services providers and infrastructure concessionaire^'^. Expected May 2005 (i) To establish a Control and Technical Inspection Department for concession contracts; (ii) To set up coordinated transport and infrastructure planning mechanisms at the metropolitan level. ExDected end 2005

Expected Results Responsibility of implementation clearly assigned.

Financial sustainability o f the whole system, reduction in the level of risk perceived by operators who would otherwise request a risk premium, which would in turn impact fares negatively. Fare integration through magnetic cards wi l l ease boarding, w i l l open up the metro system to all public transport users, and w i l l benefit users who live in remote areas and who currently have to use two buses and pay twice.

Concession contracts strictly enforced through the creation o f a specific purpose entity, first step towards decentralization and coordination o f urban transport policies at the metropolitan level.

” For more details on the pace o f the tendering processes accompanying the reform, see annex 14.

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C.4 Public Participation

Issues

Issues Relatively low levels of public participation in Govemment- sponsored projects.

Commitments

Commitments Formal Commitment of MOP and MTT to citizens’ participatory process via Presidential Instruction; (December 2002) To organize (i) continuous technical discussions with the participation o f the 34 municipalities; (ii) workshops with NGOs; and (iii) at least 50 public workshops to assess user’s satisfaction; To organize (i) Press conference to publicize Transantiago; and (ii) Launching workshop for Transantiago; (December 2003) Executive Branch to send the Draft Law on Public Participation to Congress. Expected 2005

Expected Results Participatory approaches promoted in Govemment sponsored infrastructure projects. Citizens’ participation included in Transantiago design, dialogue with all stakeholders.

Information about Transantiago disseminated.

Public participation at the national level promoted and strengthened.

88. The short period over which the new system has been planned and designed almost inevitably means that there has been relatively little co-operation with the industry, the municipalities or the users. For such a large change a very thorough program o f consultation and participation i s desirable. For that reason, a consultation plan (see Annex 12) has been agreed upon. Completion, of some o f i t s most essential components, especially with the industry and with local resident groups, i s being made a tranche release condition. This w i l l be easily sustained as there i s Presidential Directive on participation; MOP has even developed guidelines for citizen participation in infrastructure projects.

C.5 Environment

spite of recent improvements. Public transport responsible for one

emissions, the most worrying contaminant in the metropolitan area.

fourth of PMlo

targets against which Transantiago environmental success w i l l be objectively assessed. (January 2004)

ExDected Results Pollution reduction targets fixed by CONAMA and SESMA for public transport are met, within a safety margin o f -20%. Air pollution substantially reduced, along with the number o f alert, pre-emergency, and emergency days.

32

C.6 Land-Use ~

Issues I Commitments Lack o f coordination I To establish multi-sector coordination between urban transport policies and land-use, especially housing policies. Quick expansion o f the built urban area.

mechanisms, including at least a coordination agreement amongst key agencies, including MINVU, Transantiago, the municipalities; Expected end 2005 To send to Congress the Draft Law that establishes incentives for efficient location o f housing, schools, and activities in metropolitan urban areas. Expected mid-2005

C.7 Social Dimension

Issues Public transport coverage i s quite exhaustive today but the city-wide restructuring might alter this situation.

Formal request from disabled people associations to address their specific needs.

Transantiago might cause a substantial number of transit workers (many o f whom, however, work 12 hours daily or more) to lose their current job or to have to retrain to adapt the new system.

Commitments To implement an integrated public transport network through which at least 95% of the households in each of the 10 Service Areas w i l l be located at less than 800 meters from a stop served at least by 5 buses per hour and/or a metro line; Expected May 2005 To adopt rules and norms for public transport facilities that, w i l l enable access for users with disabilities, including at least (i) signaling for vision-challenged people; (ii) ramps to access stations for mobility- challenged people; and (iii) reserved seats in buses; Exvected Mav 2005 To execute a program to promote formal companies, and to offer training and reinsertion into the labor market for at least 20% o f the current labor force. Expected end 2005

Expected Results Reduced likelihood of contradictory land-use and transport policies.

Slowing down o f urban sprawl and hopefully densification of the areas well served by public transport, which should in turn lead to shorter trips, increase in public transport modal share, and to less contamination and congestion.

Expected Results System coverage i s exhaustive. No household left behind.

Inclusive public transport system, accessible to old people and persons with disabilities.

“Corporatization” process facilitated (bigger and more formal bus companies) and mitigation o f social impacts for displaced bus workers. Bus drivers w i l l work regular hours (8 hours per day or less) without the stress of having to attract a large number o f passengers.

33

89. In addition to the dates indicated above, the key milestones prior to Transantiago implementation are the following :

~

March 2004 Tendering o f the bus services Tendering o f the: (i) farebox revenues

April 2004

May 2004

June 2004

collection and administration; and (ii) the public transport information and management center. Opening o f the bids for the farebox revenues collection and administration. Opening of the bids for the the public transport information and management center + Selection o f the concesionaire o f the farebox revenues collection and administration. Opening o f the bids for the bus services +

August 2004

May 28th 2005

Selection of the concessionaire for the public transport information and management center. Selection of the bus service concessionaires. Launching date of Transantiago.

July 2004

90. For more information regarding the execution of the works related to the segregated busways, bus terminals, road junctions and transfer stations, see Annex 13.

D. Environmental and Social Concerns

91. The SECALs are intended to finance the policy reform agenda o f Chile's urban bus sector, which wil l improve the environment and bring about a number o f desirable social changes, including an improvement in the consultation mechanisms. Aside from changing the regulatory and institutional framework, the authorities have indicated that they w i l l undertake through public private participation schemes some infrastructure projects that would help them maximize the benefits of Transantiago. These works would consist o f (a) road upgrading to segregate busways (in the comdors Santa Rosa, Alameda-Calle Placer, and Pajaritos), including adequate pedestrian areas and bus stops; (b) building of modal transfer stations; and (c) road connections (Blanc0 Encalada - Arica and Suiza - Departamental) to improve the connectivity o f the network and make possible a better spatial distribution o f bus routes.

D.l. Environmental Guidelines for Infrastructure Works

92. The plan wi l l have net environmental benefits, and relatively low potential negative impact associated with the construction phase; environmental impact wi l l mainly result from nuisance associated to the levels of noise, dust, air pollution, and traffic congestion during works.

93. Guidelines for mitigating environmental impact during construction already exist. There i s a well instituted system for environmental impact assessment o f projects with potentially high impacts, regulated by Law 19.300. Depending on the type o f projects, and on the anticipated level

34

of impact, projects need to enter the national System of Environmental Impact Assessment (SEIA) with either a full EIA or a Declaration of Environmental Impact. SEIA i s a one-stop process operated by the National Commission on Environment (CONAMA), where all relevant authorities and the public have the possibility to provide feedback and recommendations on the proposed project, and i t s environmental impact assessment. Projects not considered as of high potential environmental impact, and therefore not required to enter SEIA, w i l l have to follow environmental and social guidelines existing at both the Ministry o f Works and SERVIU (local implementation service o f the Ministry o f Housing). This i s the case o f most investments to be implemented under the Santiago Urban Transport Plan. These guidelines are to be followed by contractors, who have to prepare environmental management plans and contingency plans, and aim at mitigating environmental impact o f infrastructure works. In addition, MOP’S practice includes environmental impact assessment o f some o f the urban infrastructure works to be allocated to concessionaires (under BOT schemes). These environmental guidelines wil l be improved under the complementary TAL and the definition o f an upgraded version takmg into account Bank policy i s made a legal covenant o f the TAL agreement, to be complied with one year after the effectiveness date.

D.2. Resettlement Issues

94. Some involuntary resettlements w i l l also result from the road upgrades. There i s a Law of Expropriations under which all property owners and dwellers with legalized titles are compensated according to market value o f land and property. Other dwellers can go to court for settlement o f disputed cases. Also, all households l iving in the area and not compensated are always assisted to participate in Govemment programs for housing subsidies targeting the poorest segments o f the affected population. SERVIU i s the authority in charge o f handling most involuntary resettlements in the Metropolitan Area o f Santiago (except in some cases where concessions are implied and therefore managed by MOP). A Framework Policy for Resettlements, inspired from Bank safeguard standards, w i l l be developed on the basis o f the existing one following:

(i)

(ii)

(iii)

under the accompanying TAL. The agreed strategy to deal with the issue i s the

immediate corrective actions which are already included in the resettlement policy for Transantiago, dated March 2004, and which reflects the continuous dialogue between the Project Team and SERVIU, the entity in charge of the resettlement policy;

a US$ 200,000 resettlement component to be funded under the proposed Technical Assistance Loan. It includes a comprehensive institutional strengthening program in the area o f resettlement, targeting SERVIU and Transantiago-SE. It w i l l simultaneously aim, inter alia, at assessing the r isks associated with the gaps identified between OP 4.12 and the recently adopted resettlement policy framework and propose measures to fill the gaps, particularly those concerning assessment and compensation mechanisms (including for persons without legal rights), consultation, participation and conflict resolution mechanisms. The finalization o f the revised and upgraded resettlement policy framework taking into consideration the above-mentioned issues i s made a legal covenant o f the Technical Assistance Loan, to be complied with one year after the effectiveness date of said loan; adequate supervision of the resettlement enhancement activities to be executed during the implementation o f the loans through the continuous implication of the team’s resettlement specialist.

35

D.3. Strategic Environmental Assessment

95. An Analytical Strategic Environmental Assessment of PTUS has already taken place. For evaluation o f urban transport plans, programs, and policies, Chile has started a process o f Strategic Environmental Assessment for Urban Transport Plans for the Metropolitan Area of Santiago, and i t aims at institutionalizing a more permanent mechanism, s i m i l a r to SEW. The GEF Air Quality and Transport Project wi l l fund studies for the next phase o f the Santiago Urban Transport Plan's SEA, including capacity building, citizen participation and institutional strengthening strategies.

96. As a conclusion, Chile has a relatively high capacity and standards for managing environmental and social issues. The investment projects that the authorities may undertake would comply fully with the environmental and social standards of Chile, which are judged to be high-quality standards, in many respects comparable to those of the Bank. The attached TAL wi l l provide an opportunity to further improve Chile's capacity with respect to the above-mentioned issues. See Annex 12 for additional information.

E Fiduciary Arrangements

E.l. Flow of Funds and Audit Arrangements

97. Disbursement arrangements w i l l follow the simplified procedures for SALs/SECALs approved by the Board on February 1, 1996. Once the Bank formally notifies the borrower that the loan i s available for withdrawal, the borrower may submit a withdrawal application so that the proceeds (or some part for the DDO) are deposited by the Bank into an account (Deposit Account) o f the Treasury o f the Republic o f Chile, established at the Central Bank o f Chile for the borrower's use.

98. Although the Bank w i l l not routinely require an audit o f the Deposit Account, it reserves the right to do so under Terms o f Reference, and by auditors, acceptable to the Bank. In the event that the Bank requested an audit, an audit by the Comptroller General's Office (Controlaria General de la Rep6blica) would be considered satisfactory as an independent audit. The closing date o f the loan w i l l be set three years from the date o f signing, expected to take place in July 2004.

E.2. Financial Management

99. For adjustment lending, effective management o f all Government finances provides the best assurance that Bank funds are used appropriately. A fiduciary framework for adjustment lending starts with a sound knowledge o f borrower financial management arrangements and an appreciation of the r isks they pose to Bank programs and funds. This information may be generated by a Country Financial Accountability Assessment (CFAA) with an embedded financial management risk assessment. Although the Chile CFAA i s not yet completed -- i t i s scheduled for this fiscal year -- sufficient knowledge o f financial management risk in Chile to support the operation was acquired in part from the preliminary review of the accountability arrangements reported in the Initiating Memo o f the Chile CFAA, principally from secondary sources which were reviewed in the preparation o f the Chile CFAA. Specifically: (i) interest and initiatives underway in reforming public sector expenditure management including the World Bank Public Sector Expenditure Project which aims to support improvements inefficiency, transparency, and accountability; (ii) the favorable conclusions on the transparency o f financial

36

management arrangements in Chile found in the IMF Chile Fiscal Transparency ROSC; and (iii) Chile’s excellent performance in compliance with Bank financial management in investment projects - there are six active projects and all are rated satisfactory in financial management.

100. The conclusion, which i s taken into account in deciding the design o f the proposed operation, i s that financial management risk i s low and that no additional conditionality need be introduced with respect to financial management. To support supervision o f the operation, the Borrower wi l l generate appropriate reports to demonstrate that the funds were included in the budgeted sources of funding and that uses of these funds, along with all other sources, were duly recorded and reported in the budget expenditure report.

F. Benefits and Risks

F.l. Benefits

101. Major benefits associated with the operation are the following

(i) Resource savings due to the removal o f the revenue risk from operators, transferring the bus flows in major corridors to an exclusive space, the reduction o f bus vehicle-km on the street system, and the rationalization o f the route network;

(ii) Environmental improvements (higher air quality and lower noise) due to better- quality buses and fewer bus-km;

(iii) Increased quality of service for passengers who live in the catchment areas of the metro extensions and the new metro line;

(iv) Increased comfort, safety and reliability for passengers on the bus network;

(v) Comprehensive coverage of feeder routes particularly in poor neighborhoods to enhance social inclusion o f the poor;

(vi) Savings stemming from the unified fare system, i.e. passengers not having to pay when transferring among bus and metro lines;

(vii) Reduced use o f ‘road space’ by car drivers contributing to a reduction in congestion and more equitable distribution o f road space;

(viii) Efficiency improvements that wi l l contribute to the city economy and hence economic growth.

F.2. Risks

102. There i s no doubt that the client authority has very strong planning and analytical capability. Much very good work has been done on the design o f the business models for the various forms of private participation, on network design, and on concession design. However, experience with some recent rail-based infrastructure concessions in Chile makes it necessary to be particularly careful over the design o f the various concessions within the program, since interest in infrastructure concession seems to wane after the most attractive contracts have already been awarded. This being said, bus service concessions are expected to be more attractive to private investors since they do not imply the same level of investments and r isks as the recently failed concessions for a light rail and a suburban rail lines.

37

103. It i s also clear that the existing bus franchises are not appropriately enforced, particularly in respect o f restricting the number of buses operating off-peak. It i s therefore important that the new contracts are well enforced, particularly in respect to the coverage and levels o f feeder service in the lower income municipalities. Enforcement wi l l be made easier since much fewer operators w i l l have to be monitored, the Information Center for Public Transport wi l l provide real-time, extensive and reliable information on bus services and Transantiago w i l l be delegated the authority to enforce said contracts. Similar commitment w i l l be needed to enforce any attempt to limit the role o f shared taxis in the context of a withdrawal o f many direct, longer distance, bus services. The current bidding documents for shared taxis reflect this commitment.

104. Bus based mass transit systems involving trunk and feeder systems with physical and fare integration, have been successfully implemented in some Latin American cities - most notably Curitiba, Bogota and Quito. The conditions for their success appear to include the following:

0

0

0

Significant improvement o f journey speeds on trunk lines; Simultaneous introduction of physical and fares integration; Improvement of the image o f buses to secure their acceptability as a mass transit trunk mode.

105. Santiago differs from Curitiba in respect o f the absence o f an integrated land use and transport policy designed to facilitate the trunk and feeder pattern. I t differs from Bogota and Quito in having a much more favorable starting condition in terms o f both the economic and environmental quality of the existing bus services and because o f the significant role played by the underground system, the length of which w i l l be duplicated. That has been accentuated by the successful measures that have been taken over the last four or five years to improve general traffic flows (see the tidal flow systems on some major roads) and conditions for buses (see the partial segregation of buses on Alameda and other major roads). To gain public acceptance it thus becomes more critical than ever to ensure that all o f the elements o f the plan are combined to yield obvious benefits, and to avoid obvious costs, from the outset. In that context, a number o f r isks o f the program as proposed have been identified, and mitigation measures have been designed. The table below includes the major risks:

38

Maior Risks

Risk

Low income residents of poorer areas, even in the event of full and immediate implementation o f all elements of the program, may sustain increases in waiting and access times which offset the benefits that they obtain in improved trunk travel times, particularly for non-work journeys off-peak. De-linking introduction o f the segregated bus ways from the route restructuring may accent any adverse effect on the poorer peripheral areas. 3 busways (Pajaritos, Alameda, Santa Rosa) and two road connections (Blanco-Arica and Suiza-Departamental) are essential to the f irst phase success

Uncertainty concerning operating conditions, especially commercial speeds, andor the imposition o f a maximum allowed tariff may lead to unsuccessful bidding processes.

The initial system may only be in financial balance with higher fares than those currently intended.

Necessary time may not be available for the formation o f new companies o f sufficient size and capability. Existing transit workers and operators may become opposed to a change in the status quo and w i l l oppose resistance to the proposed public transport reforms.

Current Status (February 2004) and mitigation strategy

Impose minimum service density and frequency conditions on bus service contracts, as shown in the SECAL, policy matrix.

An analysis o f the impacts on poorer communa residents w i l l be carried out under the TAL, and mitigation measures to maximize gains w i l l be designed.

Route restructuring w i l l be operational by end o f May 2005. Completion o f Pajaritos and Alameda i s expected in May, and Blanco Arica and Suiza-Departamental in July-August 2005 but an alternative bus route network has been defined for the May-Sept 05 transition period. Santa Rosa i s a 4-lane road, two lanes of which w i l l reserved exclusively to public transport until works start. Then, these two w i l l be under construction in 2006 but the two remaining ones w i l l be fully dedicated to buses until the busway i s completed. So far, the private sector has shown enormous interest, especially during the January road-show in Europe. In case some concession packages are left with no interested bidders, the winners o f the other packages w i l l be proposed to take these over, under conditions similar to those they w i l l have offered for the packages they wi l l have won. Simulations show the system wi l l break even with the current average fare, after i t was decided to drop some parts o f the plan (light rail line, suburban train). In case it s t i l l does not, a contingency plan has been developed, which includes the setting o f a buffer fund and the possibility for concessionaires to benefit from fiscal transfers to borrow funds to cover short term financial needs (approval o f the “Ley de Transferencias Fiscales” i s one o f the policy conditions). Current operators are moving quickly and creating sizable “sociedades anbnimas” as required to bid for the concessions. The last general strike (August 2002) w i l l probably not repeat itself but a mitigation plan i s being elaborated with GEF funds to help these transit workers either to get training to enter the new system or to find jobs outside the transport sector. This support program targets 40% of the current workforce.

39

Risk

The informal sector, particularly shared taxis, may expand services to replace longer distance direct services lost in the route restructuring.

Location o f interchange stations i s delayed by local opposition.

40

Current Status (February 2004) and mitigation strategy

A strategy for shared taxis has been developed and freezing the number o f licenses i s a condition for the US$ 25 million SECAL f i rst tranche. In addition, taxi routes wil l be local and short, and are designed as feeder routes to the bus network.

A pro-active consultation was developed with the municipalities and culminated in a seminar in December 2003 (see Annex 12 on Participation) where Transantiago received strong support and where technical discussions were held to fine tune the location o f bus stops and interchange stations.

Annex 1: Fund Relations Note

International Monetary Fund

Public Information Notice (PIN) No. 03/103 August 20,2003

700 19'h Street, NW Washington, D.C. 2043 1 USA

Chile: Public Information Notice

On August 18, 2003, the Executive Board concluded the Article IV consultation with Chile.16

Background

Chile's sound policy framework and strong fundamentals have shielded the country from the regional financial crisis and permitted continued, though moderate, growth. The pace of Chilean growth has largely followed that of the global economy, as Chile has successfully resisted contagion from neighboring countries' difficulties. In the context o f inflation targeting, monetary policy has played an important countercyclical role, while the Government's fiscal structural balance rule has allowed automatic stabilizers to operate.

Economic activity has tumed up since mid-2002, with a recovery o f domestic demand prompted by lower interest rates, better terms o f trade, and improved consumer confidence as employment picked up after several years of stagnation. The unemployment rate remains elevated, however, and i s declining only slowly from i t s 1999 peak. Given a still sizable output gap, inflation has stayed inside the 2-4% target band, with very brief exceptions, and indicators of inflation expectations confirm the credibility of the inflation targeting framework.

Monetary and fiscal policies have followed their rules-based frameworks. The central bank has maintained the accommodative stance it adopted during the f i rs t part o f 2002. The low policy interest rate has kept inflation from dropping below the target band, as it was successfully transmitted to commercial rates, fueling a recovery o f consumer credit and mortgage activity. The Chilean peso fluctuated considerably in 2002, reflecting turbulence in the region. At the height of market concern about Brazil last October, the central bank announced a temporary window of potential exchange market intervention; in the event, intervention was less than the announced l i m i t s . Fiscal policy continued to aim at a structural surplus of 1% o f GDP, which, in the context o f a sizeable output gap, allowed for a modest widening of the actual deficit (to around 1!h% of GDP) . For 2003 and 2004, recovery i s expected to gather momentum as slack capacity i s taken up, while inflation remains close to 3%. Over the medium term, potential output growth should gradually

l6 Under Article I V o f the IMF's Articles o f Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. A t the conclusion o f the discussion, the Managing Director, as Chairman o f the Board, summarizes the views o f Executive Directors, and this summary i s transmitted to the country's authorities.

41

increase on account o f both higher capital accumulation and productivity growth, on the basis of recent and planned reforms. As demand recovers, the modest current account deficit w i l l widen, but only slowly, since the terms of trade are expected to improve. As both output and copper export prices recover over the medium term, the actual Government balance i s projected to converge to the structural balance target.

The authorities have made progress in implementing the Pro-Growth Agenda formulated early last year. Further reform efforts have focused on ambitious measures to modernize the public administration, increase monetary and fiscal policies transparency, and reinforce the financial system. Chile also has concluded negotiations for free-trade agreements with South Korea and the United States, and such an agreement with the European Union i s now in force.

Executive Board Assessment

Executive Directors commended the Chilean authorities for implementing a sound policy framework, based on inflation targeting, exchange rate flexibility, and a prudent target for the structural fiscal balance. They considered that these policies, in conjunction with other strong fundamentals, such as transparent institutions, an open trade regime, and sound banking and financial regulatory systems, have allowed Chile continued stability and economic growth in 2002.

Directors recognized that Chile's inflation targeting framework has successfully anchored inflation expectations and increased the economy's resilience to external shocks while maintaining price stability. They supported the current accommodative monetary stance, in light o f the s t i l l tentative recovery in Chile and the global economy, and advised the authorities to stand ready to adjust the monetary policy stance in either direction in order to keep inflation inside i t s target band. They commended recent initiatives to strengthen monetary policy transparency and supported the authorities' interest in recapitalizing the central bank, which would further consolidate confidence in the independence o f monetary policy and allow for a better understanding of the authorities' fiscal policy rule.

Directors observed that the floating exchange rate regime has helped the economy adjust smoothly to adverse shocks. They noted that the peso had remained flexible even throughout an episode of exceptional volatility in late 2002, during which the central bank chose to intervene in the markets.

Directors supported the central bank's decision to deepen the market for peso-denominated debt, though they suggested a cautious approach to issuing dollar-indexed debt and continuing to avoid issuing such debt at short maturities. Some Directors urged the inclusion o f collective action clauses in future external debt issues, stressing the positive signal that such action would transmit to other emerging market economies, given Chile's strong position in international financial markets.

Directors underscored the importance o f sustained fiscal discipline and supported the Government's commitment to meeting i t s structural surplus target o f 1% o f GDP, consistent in the current environment with a small actual deficit. They viewed recent actions to raise taxes and lower expenditure as appropriate to achieve the fiscal objective, and in particular endorsed the recent VAT rate increase as a means to replace the tariff revenue forgone through recent trade agreements and finance additional outlays associated with social programs.

42

Directors noted that the structural balance rule had improved the credibility o f the fiscal policy framework and the effectiveness of monetary policy. Looking forward, they agreed that reinforcing the public consensus regarding the need for the structural balance rule would be essential to sustaining it. Several Directors encouraged the authorities to consider formalizing elements o f the structural balance target, including i t s level or procedures for measuring the balance, though others thought that greater formalization would be unnecessarily constraining.

Directors commended the authorities for the transparency o f fiscal policies, as documented in the recent fiscal ROSC. They welcomed the authorities' plan to further improve transparency by presenting information on off-budget expenditures, contingent liabilities, and public-private partnerships, as well as reformulating the fiscal statistics using the 2001 Government Finance Statistics standards.

Directors endorsed the broad set of public sector reforms taken this year, including those to rationalize remuneration in the civil service, place l i m i t s on and increase the control o f campaign finance, and increase the transparency of procurement procedures. They considered these reforms an appropriate response to weaknesses that had recently come to light in public governance, and urged the authorities to remain vigilant in monitoring their effectiveness. They also welcomed the authorities' efforts to improve the financial regulatory framework through legislation submitted to congress that would strengthen bank regulatory controls, exchange o f information among supervisory agencies, and modernize financial transactions, and supported the authorities' intention to participate in an FSAP later this year. They commended Chile's continued efforts to combat money laundering and the financing o f terrorism.

Directors considered the sizable external debt and refinancing needs o f the corporate sector one possible source of vulnerability, but recognized that the central banks liquid international reserves and the corporate sector's significant foreign assets offered assurance against instability in financial markets. A few Directors suggested that the global economic slowdown and the volatility o f international capital flows was having a serious effect on Chile's well-managed economy, reinforcing the importance of greater surveillance o f advanced economies.

Directors highlighted that the main challenge for Chile i s to return to higher, sustained growth and to reduce unemployment. They emphasized the importance o f enhancing progress to date in addressing constraints to growth and investment through regulatory, capital market, and social sector reforms, including those in the Pro-Growth Agenda. In this regard, they noted the importance of proposed steps to broaden capital market access and promote financial stability, including measures to promote venture capital, reduce transactions costs, and improve corporate governance.

Directors also noted that recent trade agreements, including with some o f Chile's largest partners, should enhance growth prospects. They considered that Chile's endowment o f natural resources would best serve the process of economic development when combined with a further enhancement o f human capital. Though encouraged by recent growth o f employment, they urged the authorities to move ahead on their commitment to make work schedules more flexible, and to consider other steps, such as introducing a more differentiated minimum wage structure, that would lower unemployment.

Directors recognized that the data received by the Fund are o f good quality, timely, and adequate for surveillance purposes. They welcomed that most o f the data shortcomings identified in previous consultations have been addressed.

43

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Annex 3: Le t te r of Development Policy

Documento de Folitica Transantiago

Seiior James D. Woifensohn Presidente Banco Mundial

En el context0 de ia agenda modernizadora que nuestro Gobierno ha impulsado con &as a que Chile logre Insertnrse en el mundo como un pais desarrollado al eumplirse e l Bicentenario de nuestra Hepliblica, se ha dlseiiado un progama de mejoramiento y racionatuaci6n del transporte en nuestra ciudad capltd, denominado Tmnsantiaga

Dieho plan eontempla un cambio vasto y skt6mico en el transporte plblico en Santiago, abonfando integramente los desaflos que plantea el trwlado de sus habitan& y el mejoramiento de la calidad de n'da de su poblaci6n.

El program incluye un conjunto de tareas que van desde el rediiselio f i i co y operacional del sistenia hash el mejorrtmlento de la inforrrmcih a los usuarios, fncluyendo In modernizacicin taulligica de fos servicios, la diversificaci6n de la oferta, la integraci6n fisica, operacional y tarifaria de 10s distintos modos de transporte (bum, taxibuses y Metro), la iufmestrudura especiallzada para el transpork plibiico, 10s incentivos para Is empresarizacibn del sector y la profesionalizacih de 10s conductores,

La integracicin de 10s distintos modos de transporte peblico se materializar6 a travb de una red de servicbs lroncsles y de servicios locafes de plimentacicin, que se estructuradn en torno al Metro, que opera& eomo eje articuladnr. Estos Servicios se licitallin y se enteegamin en cancesi6n por un period0 &terminado a aperadores privados que presten servidus de Bptima calidad y que atraigan a1 mayor nitmero de usunrios.

E1 esquema de Iicltacidn de Servicios apuntar6 a1 desamllo de un ststema de trawporte pliblica que opere en red y que est6 orientado hacia la satisfacekSn de 10s requerimgentos de los usuarios y al servicio de una ciudad mku amigable, con lo cual Is competencia por la prestacilin de servicios se e x p m t 8 en las licitaciones -basadas en la &dad y con una adrcuaci6n entre la oferta y la demanda-, y no en las calls par la captura de pwjems, como ocurre en la actualidad, con 10s consiguientes mayores costos que deben soportar 10s muarios.

Pars garantbar la calidad y optimizar el fundonamiento, el sistema contar6 con tecnologilts de dltima generacih. Los usuaries conocerh 10s servicios, tarifas y tiem- de viajes B travC?s de Internet, ceotm de inrormaciirn, atencihn telefbnica y en estaciones, paraderos y buses.

51

2

E1 nuevo slstema operad sobre la base de un esquema integrado de tarifas y con un sistema de pago automhtico que permita centraUzar is recaudaciljn de 10s pasajes y distribufr 10s ingresos de acuerdo a1 pago que corresponde efectwr a cada e m p m segrin el us0 de lw servicias, Esta funci6n de admMtracli6n financiera sed realizada por una entidad que se elegirg a travEs de un proceso de ficbiadn piibficrt

E1 usuario del sistema Tramantiago ulilizarh una tarjeta inteligente mino forma de pago y acceso a todw 10s servicios de transporte piibtico, que registran% 10s vides y cuyos cobrrw senin combinadas, de manem que un usuario que deba tomar m6s de un medio de transporte pagarsl un monto menor que la sum de IQS boletos individuales. Ea cada viaje se descantwan de la tarjeta sumas que i r d~ a un fondo comlul, del cual saldrh 10s mums para retribuir B IQS dlstintos servicios, con una alructura de reparto de bgesos que s e d definida previamente y que s e d consistente con 10s objetivos del proyecto.

Este sistema apunh a priviteglar e SneremenBr e l USQ del transporte phbtico por sobre el us0 del vehiculo indivIdua1, esperdndose que 15s emisiunes de gases del transporte plibliclo brtjen significativamente con respecto de su valor actual. Dado que el transpork pfiblko constituye una de las mayores fuentes de contsminacih ambiental en Santiago y que la emisi6n de 10s autom6viles tambii5n se reduck5 debido a 10s menores tiempos de viaje por reduceidn de Ia congesti6n vehIcuEar, e! efecto pasitivo sobre e1 medio ambiente urbana, la d u d y la ealidad de vida de 10s habitantes de la ciudad sersin, sin duda signi&ativos. Adem& la mayor eficieacia en la operaci6n del &&ma de transporte implicad un sumento de la productividad de 10s dlshtos sectores de la eeonomia de la ciudad,

Cabe seiidar a1 respecto que segh la encuesta origen-destinn @OD), redizada en Santiago ei aiio 2001, la evaluacibn de fa ciudadania sobre el tmnsporte piiblico da cuentjl de una percepcfljn de exceso de buses, congestitin, inseguridad, conduccih descuidada y agraiva, situaci6n de deterioro de las mriqu@as, con sus consiguientes efectos contaminantes atmusRricos y aciisticos y el nu poder predeeir 10s tiempas de viaje ni la frecuencia de 10s semieios.

Ash Transantiago es una iniaativa con una extenqicin y profundidad no antes abordadas que dice relaci6n con una opeitin de poIitica pbblica de transporte que cambia&, positivamente, e l niodo de vids de 10s habitante3 de nuestra ciudad capitat y que beneRciar6 especialmente a los sectores de menom ingresw, por euanto sun &os 10s que mbs utilizan el sistema de transporte pcblico, asi coma tambi6n il aquellos que habitan en iiress perifhrfcas de la eiudad, 10s que en su mayoria corresponden tambi6n a personas de escaFof mums.

Ademris de !a consdidaciljn de una sotucicin tecnoI6giea adecuads a1 objetivo antes seiialado, ate proceso involuerad el desarrollo de nuevas instltuciones y el perfeccionamiento de difercntes instrumentos juridicos dstinados a la gestiljn, monitoreo y evaluacirin del sistema en operaricin, con el objetivo de asegurar su oportuna y eficaz implemenhcicin y disponer de lar. elementos que p e d t a n reallizar correeeiones que lo optimicen.

IJ.,

52

3

La ejcrucidn de Transantiago no s610 involucra el us0 de recursos en nueutros servieios de transporte y nuevos instmmentos jurfdicos relarionados con ellos, sin0 que tambik debe ser coherente con el dessrrollo de dhtintcw proyectos de infmestructura urbana que permitan implementar, en forms adecuada, leq soluciones propuestas para tos nwvw y m6s modernos sistemas de servicios de transporte pliblico de posajeros,

Dadaa lo mgnitud y complejidad del proyetto, y la importancia que e l Gobierno le ariigna en el contexto de sus metas de p~lit ica~ pfiblics, uSC c o w In neeesidad de diversificar las fuentes de r e c u m disponibles para su financiamiento -de 10s cuales una parte serP aportada por kndos pbblicas-, unido a la relevancia que para nuestro pais repmenta la padciparih dei Banco, no SWO desde el punto de vista financiera, sino en grmincls del vator agregado que aporta en la ejeeudbn y cumplimiento de 10s objetivos de 10s proyectos, es que el &bierno de Chile ha decidido aolicitar a1 Banco Mundial dos prestamOs de Ajuste Sectorirtl, mociados a la implementacih del proycrcto Transantiago.

En virtud de todo Io anterior, agradecerk a usted ten@ a bien presentar a la consideracidn del Directorio del Banco, para su aprobacih, dos pr&tamos de Ajuste Sectorial a la Rephbka de Chile: uno por un monto de U§$75 ndlones afeclo a la modalidad de Deferred Drawdown Option (D.D.O.) -por constituir &e un instrumento flexible y adaptable a la cvvlucri6n de nuestros requerimientos de financiamiento futuros- y olro de US$25 millones a ser desembofsados en das tranches.

Junto con reiterarle 1% sentimientos de mi mair distinguida consideraci6n, saluda atentamente a usted,

Replbtica de Chile

53

QQ-065 19th of April, 2004

Letter of Development Policy Transantiago

Mr. James Wolfensohn President World Bank

Transantiago, which i s a program for the improvement and rationalization o f transport in our capital city, has been designed in the framework o f the modernization agenda started by our Government with the aim to present Chile to the world as a developed country on the occasion o f the Bicentenary o f our Republic.

This plan envisages a wide-ranging and systematic change in Santiago’s public transport, fully facing the challenges posed by the mobil i ty needs of its inhabitants and the improvement o f the quality o f l i fe o f i t s population.

The program includes a number o f tasks that range from the physical and operational redesign o f the system to the improvement o f user information, embracing technological service modernization; diversification o f the supply; physical, operational and fare integration between the different transport modes (buses, taxi-buses and metro ); specialized infrastructure for public transport; and incentives for the corporatization o f the sector and the professional development o f bus drivers.

The integration of the different public transport modes w i l l be achieved through a network o f trunk and local feeder services, structured around the metro which w i l l become the backbone o f the system. These services wil l be tendered and concessioned for a specified period to private operators that provide the highest quality service and attract the largest number o f users.

These service tenders aim at developing a public transport system that operates as a network, i s oriented towards the satisfaction o f user needs and i s the development o f a more livable city. They aim to achieve competition for the market (based on quality and an adequate balance between supply and demand), rather than competition in the market (based on the capturing o f passengers in the street as i s currently happening, wi th higher user costs as a result).

To guarantee the quality and optimize the functioning, the system w i l l rely on last generation technology. The users w i l l obtain information on services, fares and travel times through the internet, information centers, phone, and in stations, stops and buses.

54

The new system w i l l be based on a fare integration scheme and an automatic payment system, which w i l l permit to centralize fare collection and to distribute the revenues in l ine with the payment to be made to each operator according to the use o f the services. This financial management function w i l l be carried out by an entity that w i l l be chosen through a public bidding process.

The user o f the Transantiago system w i l l use an intelligent ticket as means o f payment and access to all public transport services. The ticket wi l l register the trips, and their cost w i l l be calculated in a way that the user traveling on more than one transport means w i l l pay a lower amount than the sum o f two individual tickets. The amounts debited to the ticket for each trip go into a common fund from which the resources to pay for the different services w i l l be transferred according to a revenue sharing structure that w i l l be previously defined, consistent with the project objectives.

This system aims at giving priority to and increasing the use o f public transport, with a corresponding decrease o f private vehicle use. I t i s also expected that the emissions from public transport w i l l be reduced significantly compared to the current values. Since public transport constitutes one o f the major sources o f environmental pollution in Santiago and the emissions from cars w i l l also be decreased due to lower travel times made possible by reduced congestion, the positive effect on the urban environment, on health and on the quality o f l i f e o f the city’s inhabitants w i l l certainly be significant. In addition, a more efficient operation o f the transport system w i l l generate an increase in productivity for the various economic sectors o f the metropolitan area.

In this context i t should be pointed out that according to the origin-destination survey carried out in Santiago in 2001, the citizen’s evaluation o f public transport showed a perception o f bus oversupply, congestion, lack o f traffic safety and personal security, careless and aggressive driving, vehicles in poor condition, a l l having negative effects on air and noise pollution and noise, and the impossibility to predict travel times and service frequency.

Thus, Transantiago i s an initiative o f an extent and depth never attempted before. I t opts for a public transport policy that w i l l positively change the l i fe style o f the inhabitants o f our capital city. I t wi l l especially benefit low-income residents since i t i s them who use public transport most. Moreover i t w i l l benefit those that l ive in peripheral areas o f the city, which in most cases are also people with l imited incomes.

In addition to the consolidation o f a technical solution that can achieve the above- mentioned objective, this process wil l also involve the development o f new institutions and the improvement o f various legal instruments for the management, monitoring and evaluation o f the system once in operation, wi th the objective o f assuring the appropriate and effective implementation o f the system and providing the necessary elements for i t s fine-tuning and optimization.

55

The implementation of Transantiago does not only involve the use o f resources for our transport system and new legal instruments related to it, but it also has to be consistent with the development o f various urban infrastructure projects that permit to adequately implement the solutions proposed for the new and more modern systems o f public passenger transport services.

Given (i) the magnitude and the complexity o f the project, (ii) the importance that the Government assigns to i t in the context o f i t s public policy targets, (iii) the need to diversify the available sources o f funds for i t s financing, including a part that w i l l be covered b y public funds, and (iv) the relevance that the participation o f the Bank constitutes for our country not only f rom a financial viewpoint, but also in terms o f value added for the implementation and the achievement o f the project objectives, the Government o f Chile has decided to request f rom the Wor ld Bank a Sector Adjustment operation, associated with the implementation o f the Transantiago project and the urban infrastructure works related to it.

Based on what has been previously said, we would appreciate i t if you could submit to the Bank’s Board o f Directors, for i t s approval, two Sector Adjustment loans in favor the Republic o f Chile: one with a Deferred Drawdown Option feature for an amount o f US$ 75 mil l ion because this constitutes a flexible instrument that i s adaptable to the evolution o f our requirements in terms o f future financing, and the other a two- tranche SECAL for an amount o f U S $ 2 5 million.

Yours sincerely,

Nicolhs Eyzaguirre Guzmin Finance Minister Republic o f Chile

56

Annex 4a: Chile - Key Economic Indicators

Indicator 1999 2000 2001 2002 2003 2004 2005

National accounts (as % GDP at current market prices)

Gross domestic product Agriculturea

Industrya Servicesa

Total Consumption Gross domestic fixed investment

Government investment Private investment

(includes increase in stocks)

Exports (GNFS)b Imports (GNFS)

Gross domestic savings Gross national savings'

Memorandum items Gross domestic product (US$ million at current prices) Gross national product per capita (US$, Atlas method)

Real annual growth rates (%, calculated from 1986 prices)

Gross domestic product at market prices Gross Domestic Income

Real annual per capita growth rates (%, calculated from 1986 prices)

Gross domestic product at market prices Total consumption

100.0 5.7

38.1 56.2

76.8 21.1

4.0 17.7

26.9 25.2

23.2 23.8

73046

4740.0

-1.1%

-0.3%

-2.4%

-3.8%

100.0 5.9

37.6 56.5

76.1 21.0

3.5 19.3

29.8 28.8

23.9 24.6

755 15

4810.0

4.4%

6.3%

3.1%

2.7%

57

100.0 6.0

37.5 56.5

77.3 21.4

3.6 17.4

34.7 32.7

22.7 23.3

68264

4600.0

2.8%

-0.7%

1.6%

1.7%

100.0 6.2

37.4 56.4

73.2 21.6

4.0 17.7

35.9 32.1

26.8 25.7

66425

4260.0

2.1%

2.3%

1 .O%

-2.6%

100.0 9.0

36.6 54.4

75.9 21.1

4.1 18.0

36.6 31.6

28.6 26.1

70099

4190.0

3.3%

3.4%

2.2%

2.1%

100.0 8.0

36.5 55.5

76.2 20.7

4.1 17.5

33.9 29.0

28.4 25.3

86 142

4356.6

4.5%

4.1%

3.4%

4.5%

100.0 8.0

36.5 55.5

76.5 20.7

4.1 17.5

35.2 30.5

28.0 24.8

89082

4866.1

5.2%

5.4%

3.9%

4.8%

I Indicator 1999 2000 2001 2002 2003 2004 2005 I Balance of Payments (US$m)

Exports (GNFS)b Merchandise FOB

Imports (GNFS)b Merchandise FOB

Resource balance Net current transfers (including off icial current transfers)

Current account balance (after off icial capital grants)

Net private foreign direct investment Long-term loans (net) Change in reservesd

Memorandum items Resource balance (% o f GDP at current market prices) Real annual growth rates ( YR86 prices) Merchandise exports

Merchandise imports (FOB)

KIF)

Public finance (as % of GDP at current market prices)e Current revenues Current expenditures

19406.0 22086.7 22315.1 23019.3 25022.0 28678.0 30767.0 15616.0 18158.0 18050.0 19133.0 20874.0 23955.0 25743.0 18056.0 21208.9 21221 .O 20593.5 23446.0 26677.0 28919.0 13951.0 16721.8 16334.0 17151.0 17830.0 20317.0 22160.0 1350.0 877.8 1094.1 2425.8 1576.0 2001.0 1848.0

643 558 428 426 500.0 540.0 583.0

99.3 -766.3 -1192.2 -552.8 -630.9 -172.3 -979.9

6203.1 -347.8 3044.9 1139.6 1586.9 1584.0 1664.0

1430.0 148 1.9 558.2 494.0 522.7 729.4 940.9 -1222.7 418.4 -655.9 962.1 500.1 400.0 800.0

1.8% 1.2% 1.6% 3.7% 2.2% 2.3% 2.1%

-2.4% 8.6% -14.9% -2.3% 8.7% 32.4% 2.3%

-27.1% 6.9% -19.1% -3.2% 3.6% 31.4% 3.9%

20.3 21.6 21.9 21.3 21.5 21.9 22.3 18.8 19.0 19.4 19.3 19.1 19.1 19.2

58

1.5 2.6 Current account surplus (+) or deficit (-)

Capital expenditure

Monetary indicators M2/GDP (at current market prices) Growth of M2 (%) Private sector credit growth / total credit growth (%)

Price indices( YR86 =loo) Merchandise export price index Merchandise import price index Merchandise terms o f trade index Real exchange rate

Consumer price index (% growth rate) GDP deflator (% growth rate)

(us$/Lcup

3.7

43.1

10.6 165

157

117

134

126.0

3.3%

11.8%

3.4

43.0

8.4 117

167

119

141

125.3

3.8%

4.2%

3.4

44.0

7.0 106

148

114

130

114.2

3.6%

1.5%

2.0 2.4 2.8 3.1

3.5

45.9

9.2 72

145

110

133

115.8

2.6%

2.6%

3.6

42.5

-1.6 109

157

113

140

117.1

2.8%

2.8%

3.6

43.0

5.9 96

167

119

141

120.3

1.3%

1.3%

3.6

43.0

8.4 96

170

117

146

121.5

3.0%

3.0%

59

Annex 4b: Chile - Key Exposures Indicators

Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005

Total debt outstanding and disbursed (TDO) (US$m)"

Net disbursements (US$m)"

Total debt service (TDS) (US$m>"

Debt and debt service indicators (%I

TDO/XGS~

43119 42893 34269 36776 42062 45913 44101

2090 2398 1366 2273 -1 167 -298 -649

4928 6177 6648 7729 7 144 6985 6949

156.3 162.5 156.6 168.5 181.1 172.4 169.0 46.9 48.7 55.7 60.8 58.4 57.1 56.8

TDO/CDP 31.6 39.6 42.6 49.5 31.9 38.8 48.4

TDS/XGS ConcessionaVTDO

IBRD exposure indicators (%) IBRD DS/public DS IBRD DS/XCS IBRD TDO (us$mId

Of which present value of guarantees (US$m)

Share of IBRD portfolio (%) IDA TDO (US$mId

IFC (US$m)

Loans Equity and quasi-equity IC

MICA MICA guarantees (US$m)

1.2 1 .o 2.2 0.6 0.6 0.6 0.6

23.2 16.3 14.8 17.0 17.0 17.0 17.0 0.9 1 .o 0.9 1.3 1 .o 1 .o 1 .o 877 808 728 556 90 1 85 1 813

0 0 0 0 0 0 0 8 7 7 6 6 5 5

a. Includes public and publicly guaranteed debt, private nonguaranteed, use o f IMF credits and net short-

b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the

Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.

term capital.

60

Annex 5: Chile at a glance

& Carib. income POVERTY and SOCIAL

2002 Population, mid-year (mdlions) GNi per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 199642

Population (%) Labor force (“/.)

Most recent estimate (latest year available, 1996-02) Poverty (% of populahon below nationalpoverfy line) Urban populabon (“7 of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutntion of children under51 Access to an improved water source (% ofpopulatron) illiteracy (% of population age 1s) Gross primarj enrollment (“7 of schod-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

I Development diamond‘

GDP (US$ billions) Gross domestic investmenffGDP Exports of goods and sewicedGDP Gross domestic savingdGDP Gross national savmgdGDP

Current account balanceiGDP interest paymentsiGDP Total debffGDP Total debt sewiceiexports Present value of debffGDP Present value of debtlexports

(average annual growth) GDP GDP per capita Exports of goods and sewices

527 331 3,280 5,040 1,727 1,668

1962

24.3 11.3 19.4 9.4 1.5

8.0 71.1

Life expectancy

T

1982-92 1 992-02

6.8 5.0 5.0 3.6 9.7 8.6

1 1 2 2 1.8

76 75 71 73 27 I 9

86 90 11 7

I30 105 131 I06 128 105

9

Chile

15 6 4,260 66 3

1 3 2 0

21 86 76 9 1

94 4

106 108 104

1992

41 8 23 8 30.7 25 2 21 5

-2 3 2 7

45.7 19 8

2001

2 8 1 6

-3.9

GNI

capita per

Access to improved water source

Chile - -- Upper-middle-income group

68.3 66.4 Economic ratios‘ I

2.1 3.3 0.9 2.2

Chile I__

- - - Upper-middle-income group

20.7 23.1 347 35.9 22.7 26.8 198 21.7

Trade

T -1.7 -0.8 I ____. ._

S

STRUCTURE of the ECONOMY

( “7 of GDP) Agriculture Industry

Sewices

Private consumption General govemment consumption Imports of goods and sewices

Manufacturing

(average annual growth) Agriculture Industry

Sewices

Private consumption General government consumption Gross domestic investment Imports of goods and sewices

Manufacturing

1982 1992

5.5 9.9 34.7 38.1 18.5 20.5 59.8 52.0

75.3 65.2 15.3 9.7 21.3 29.3

1982-92 1992-02

7.4 2.1 5.7 4.7 6.4 2.8 5.7 3.4

5.4 5.1 1.5 3.5

14.6 3.8 9.4 7.3

2001 2002

6.0 6.2 37.5 37.4 17.0 17.1 56.5 56.4

65.3 61.1 12.0 12.0 32.7 32.1

2001 2002

6.5 2.1 2.1 2.1

-0.3 2.1 2.9 2.1

3.0 1.9 2.7 2.1

-13.8 2.9 -4.0 -2.5

1 Growth of investment and GDP (%) C 20

10 0

-10

-20 .sa

-GDI *GDP I 1 Growth of exports and imports (%) 1 20

10

0

-10

-20

Note: 2002 data are preliminary estimates. * The diamonds show four key indicators in the Country (in bold) compared with its income-group average. If data are missing, the diamond will

be incomplete.

61

Annex 6: Coverage of the future bus system

NB : local bus networks are not fully represented here since it w i l l be up to the bidders to complement a core-network imposed by Transantiago. Bidders w i l l design the secondary feeder routes and decide on the location of some bus stops.

62

Annex 7: Emissions distribution for MPlo and NO,

Interestingly enough, and beyond the information strictly related to emission levels, these graphs reflect as well the concentration o f bus routes along the Alameda (highest emission peaks) in the baseline situation and a more expanded and more even coverage of the area in the situation with project (assuming that levels of emission are a good proxy for bus supply).

Baseline, PMlo emissions (kg/day/0.64km2)

i )

Transantiago, PMlo emissions (kg/day/0.64km2)

Distrih~cicjn de Ias Emisil~les de Ivp &<g~dh.l Sihaucjn mn TRANSANTIAGO

9 5 9 8 5 8 7 5

5 L5 1 3 5 3 2 5 2 1 5 1 0 5 [I

95 9 8 5 8 15 1 6 5 6 5 5 5 15 I 3 5 3 2 5 2 15 1 115 0

63

Baseline, NO, emissions (kg/day/0.64km2)

Disbibucicin de las Emkiones de #Ox e(g/db) Sitwcibn Base

Source: SECTRA

2 9 2a l 210

la 18[1 170 160 1 s 110 13J lal 110

90 80 70 60 50 10 30 20 10 0

zm

im

Transantiago, NO, emissions (kg/day/0.64km2) Dsfribucit5n delas Emisiones de NOx f ig /dk )

Sifwcicin con TRANSANTIAGO

zm 2m 210

150

170

2m

im 161 1s 110 1 9 iz 110

90 80 70 60 50 10 30 20 10 0

im

64

Annex 8: Possible Carbon Funding Concept

Preliminary Project Brief

The overall scheme to upgrade the urban transport system in Santiago can be summarized as follows :

0 Santiago today i s served by a relatively inefficient road-based public transport system and a very efficient and financially sustainable metro network. The road-based network contributes heavily to air pollution, congestion and to the emission o f greenhouse gases, and i s characterized by an oversupply provided by a multitude o f small operators who compete on the same routes, run relatively old buses all day long and race for passengers. It i s estimated that the fleet should be reduced from the present 7,300 buses to 6,849 to match the demand. In addition to this, almost all buses run during off-peak hours and almost all routes go through downtown, using the very same corridors that are shared with general traffic;

0 In 2004, bus routes w i l l be redrawn to avoid counterproductive overlapping and tortuous itineraries whereby buses weave in and out o f main arteries to cater for different suburbs. These new routes w i l l be divided in a small (15) number o f geographically-defined service packages. Each one o f these w i l l be awarded as concession to a single operator after competitive bidding. The oversupply w i l l be cut, and bus-km during off-peak (resp. peak) hours wi l l go down by 50% (resp. 30%). The energy-efficient metro wi l l be fed by the buses and w i l l be fully integrated (physically and fare-wise) with the bus network. Contrary to the current situation, buses wi l l not run parallel to the metro unless during peak hours when the latter reaches capacity;

0 Through the implementation of express routes and increases in commercial speed due to expected lower levels o f congestion and the building o f segregated busways, total travel times wi l l go down and fuel consumption w i l l be reduced. Total farebox revenues o f the system should stay stable if not increase while operating costs w i l l decrease substantially (lower unitary costs per bus-km and fewer bus-km).

What to do with the resulting surplus?

The idea i s to dedicate those savings to finance the required infrastructure, mainly segregated busways and bus technology upgrades, bus stops and bus terminals that w i l l further increase the performance of the system and generate additional C 0 2 emission reductions. As far as the team knows, there i s so far no successful example in the world o f an attempt to fully finance an urban transport infrastructure through farebox revenues. It seems that i t w i l l be possible in Santiago, on the basis o f the following scheme: revenues w i l l be collected by a specific purpose entity. Revenues w i l l then be split between the different concessionaires. Preliminary estimates show the scheme wi l l barely break even, assuming all shareowners satisfy themselves with a 12% internal rate o f return, which i s low compared to international standards. Should this assumption be confirmed, savings obtained from the rationalization o f the system wi l l be sufficient to finance the public transport road-based infrastructure, and hence break new grounds in the urban transport field.

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Bus operators and infrastructure concessionaires are asked to pool the r isks related to their businesses, and to assume jointly part of the revenue risk of the whole proposed scheme through the capital they would put into this special purpose entity, and that could be tapped into should the scheme not break even. The special purpose entity would in addition emit bonds on the financial markets in order to enable the shareholders to have access to a source o f financing (to purchase higher capacity and cleaner buses and to build the infrastructure) which should result cheaper than otherwise since the combination of various types o f r isks i s expected to lower the overall risk perception and improve the credit rating o f these bonds.

PCF Involvement Concept

As per the additionality o f carbon funding (be i t PCF or any other C D M mechanism), it i s always arguable to state that without it, the reform-related changes wi l l take place anyway since they are sustainable almost per definition. But the plan to use the benefits generated by the reform to finance the infrastructure w i l l likely complicate the conclusion o f an agreement with the bus operators, the metro and the infrastructure concessionaires. CDM funding wi l l serve as a catalyst that wi l l speed up and secure the generation of the reform-related C 0 2 emission reduction and generate additional reductions though contributing to make possible :

- the building o f the required infrastructure (busways), without which the environmental benefits o f the institutional reform would be significantly lower;

- possibly the purchase o f more energy-efficient buses such as hybrid buses, as stated above.

If carbon funding could be added to the expected cash flow of this entity, it i s clear that it would increase the profitability o f the whole business, still lower the risk perception o f potential bond buyers and hence improve the bonds credit rating and allow the stakeholders to have access to cheaper money, which w i l l in turn further increase the profitability.

This would contribute to make a very bold scheme more attractive to private investors, more likely to end up being sustainable in spite of the non-existence o f similar successful schemes, and possibly increase profit margins that could be used by bus operators to respond more favorably to the incentives included in the bidding documents to go for more energy-efficient technologies such as hybrid buses. And this can be a unique opportunity for the PCF to get involved in a pioneer urban transport financing scheme, which w i l l be highly visible in the urban transport community worldwide.

Competitive edge of v i s - h i s other urban transport projects

0 Very reliable data base on transport including a recent origin-destination survey (2001) which gives an excellent snapshot o f current urban transport pattems and would be extremely useful in establishing the baseline;

0 World-famous transport modeling tools such as ESTRAUS, MODEM, MUSSA, which have been used and constantly upgraded for years and would as well be very valuable to establish the baseline and to forecasts emissions reductions to be expected;

0 Strong local technical sk i l ls as far as both urban transport planning (SECTRA) and carbon funding i s concerned (CONAMA, the executing agency o f the f i r s t approved

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PCF project and which even plans to implement a carbon emission trading scheme at the national level);

0 City-wide program, not limited to one or a few corridors : the urban transport plan for Santiago covers the whole metropolis and the public transport supply rationalization to be implemented through a city-wide bus routes re-concession, associated with the construction of segregated busways to be operated with more energy-efficient vehicles and the extension of the metro network, w i l l generate high volumes o f COz emissions reductions compared to projects that usually cover only the catchment area o f a specific corridor;

0 Very low likelihood of leakages : Santiago i s one o f the very few cities in Latin America where there i s a strong regulatory framework which leaves no room for informal transport. Law enforcement i s strong, which means that those vehicles to be displaced as a result of the implementation o f the plan w i l l not run on altemative routes where they would add to the current levels o f congestion and GHG emissions. These vehicles wil l be scrapped or sent to secondary cities where they wi l l in turn replace older vehicles. The team i s confident that this w i l l happen according to the plan thanks to the very specific Chilean context;

0 Total investments relatively low compared to the magnitude o f the reform and the expected reductions, and compared to light rail or metro projects. Carbon funding additionality would then be more influential than in other urban transport projects;

0 An on-going GEF project has already identified the potential C 0 2 emission reductions of the whole scheme.

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Annex 9: T A L Project Information Document

Project Name Region Sector Project ID Borrower(s) Implementing Agency

Environment Category Safeguard Classification Date PID Prepared Estimated Date of Appraisal Authorization Estimated Date of Board

RePort No.: AB456 Santiago Urban Transport Technical Assistance Loan LATIN AMERICA AND CARIBBEAN General transportation sector (100%) PO86689 Government o f Chile MTT through Transantiago-SE, Nueva York, 9, piso 10 - Santiago, Chile Phone : 56 2 428 7900 [ I A [ I B [XI C [ ] FI [ ] TBD [ ] SI [ ] S2 [XI S3 [ ] SF [ ] TBD February 10,2004 March 17,2004

June 1,2004

1. Key development issues and rationale for Bank involvement

Santiago’s urban transport system i s suffering from high congestion, air and noise pollution, traffic accidents, low levels satisfaction and low affordability o f transport for some o f the poor.

In order to improve l i f e quality in Santiago together with competitiveness and potential for growth, the Government o f Chile (GoC) has embarked on a city-wide ambitious urban transport program. The most powerful tool to reach these objectives i s the 2000-2010 Urban Transport Plan that aims at transforming it into a “world-class city” by giving priority to public transport and paying particular attention to the linkage between urban transport and urban development.

The GoC approached the Bank for a program support o f US$ 106.1 mill ion to support the implementation of the proposed reforms in the urban transport sector. This i s to be provided through a US$ 25 million Sector Adjustment Loan (SECAL), a US$ 75 mill ion SECAL with a Deferred Drawdown Option (DDO) and a Technical Assistance Loan (TAL) for 6.1 million.

B y supporting the implementation o f the plan, the TAL i s in line with the 2002 CAS that focuses among others on an increased inclusion o f the most vulnerable groups, the improvement o f environmental conditions, the promotion o f public private partnerships and the modemization o f the state and the building o f its capacity. The Bank has had a long-standing involvement in similar urban transport projects in Latin America that should benefit the Transantiago project.

The Bank involvement through the TAL i s a means to increase the robustness of the overall operation and thus i t s acceptability. It w i l l also help to maximize benefits for low-income groups and people with disabilities and w i l l support efforts to ensure compliance with adequate safeguards.

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2. Proposed objective(s)

The purpose o f the TAL i s to ensure that finance i s immediately available to assist the design, implementation, monitoring and evaluation of the reform arrangements, and facilitate compliance with the adjustment loans policy matrix tranche release conditions, as well as with the Bank safeguard policies. By doing so, the TAL wi l l contribute to meet the development objectives o f the overall project. These include among others the reduction in travel and waiting times for public transport users, in particular for low-income groups, improvement o f air quality, noise reduction and efficiency increase o f Santiago’s urban transport system to the benefit of al l residents.

The main expected project outputs are:

A wider support for the Santiago Urban Transport Plan and the preventive removal o f obstacles that could hinder the success o f i t s implementation;

A more in-depth understanding of the impact o f Transantiago on the public transport labor force, on people with disabilities and other disadvantaged groups, and the definition and implementation of corrective actions;

Adequately retrained transit worker with greater chances o f being reinserted into the employment market;

Improved public transport network and service planning and thus a more effective and efficient system;

A more in-depth understanding o f the impacts o f Transantiago air quality and noise, and greater compliance with environmental targets;

Follow-up o f the resettlement and real-estate properties acquisition program, in order to facilitate compliance with works timetables;

A better coordination between the transport and land use planning functions;

A number of evaluation and survey tools that w i l l allow to enhance the quality, effectiveness and efficiency on the urban transport system on a continuous basis;

Increased s k i l l s in terms o f system evaluation, planning and improvement.

Preliminary description

The components o f the TAL are:

Pilot testing Transantiago-PTUS’s communication, image building, marketing and user information strategy;

Design and implementation o f a participatory approach to define a strategy for the recovery of the road space released through the reduction o f congestion;

Analysis of the impact of Transantiago-PTUS on transport demand;

Update of the Origin-Destination survey for passenger transport;

Origin - Destination survey for freight transport in Metropolitan Santiago;

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e

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Updating, testing and fine-tuning of the economic model MODEC and quantification of the environmental benefits of Transantiago-PTUS;

Analysis and updating of the socio-economic ESTRAUS models, development of a model to forecast the income and motorization rate o f households;

Preparation of a draft law for congestion pricing;

User perception survey of the new public transport system;

Design and implementation o f a monitoring and information system o f the impact o f the transport system on air quality and noise;

Impact Analysis o f Transantiago-PTUS on urban development;

Analysis o f the transport and urban planning entities and design of instruments to facilitate inter-institutional coordination;

Technological and legal support for the development o f the “one-stop process” (Ventanilla rjnica) project;

Design and implementation o f a communication and education strategy regarding Transantiago-PTUS’ s accessibility features for users with reduced mobility;

Capacity building, business creation and re-conversion o f the workers in the transport sector;

Assessment of the change in quality o f l i fe for drivers due to the implementation of Transantiago-PTUS ;

Institutional capacity strengthening in the area o f involuntary resettlements, including the updating o f the revised resettlement framework;

Upgrading o f the guidelines for environmental management plans of infrastructure works.

Safeguard policies

The Chilean regulatory framework for environmental issues has been judged equivalent to the Bank’s safeguards. Law 19.300 /94 defines the types of projects which depending on their impact are required to enter into the National System for Environmental Impact Assessment (SEIA), which not only allows for cross-sectoral evaluation but also enforces public disclosure. The type of intervention foreseen for Transantiago does not require following the SEIA cycle, except for terminals and transfer stations; however, the TAL wi l l contribute to fine-tune environmental guidelines for the management of public works, so that these could be used for the future works related with the extension of the segregated busway network schedules over a period o f 10 years.

Similarly, there i s a law governing all involuntary resettlements resulting from expropriations based on public interest, which sets the legal framework to compensate or ensure that the livelihood conditions of property owners are preserved. Other affected people (tenants, and other third party residents) can get compensation if mandated by a judge. The TAL wi l l aim to finalize the revised Policy Resettlement Framework, to design procedures and processes for i t s implementation and wi l l provide capacity strengthening for institutions dealing with resettlements.

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5. Loan Amount : US$6.1 million

6. Contact point: Pierre Graftieaux

Title: Urban Transport. Spec. Tel: (202) 473-8664, Email: pgraftieaux@ worldbank.org

Annex 10: Oversupply and concentration of bus routes on the Alameda

The two graphs below illustrate the oversupply and concentration o f bus services on the main arteries, especially in the city center and along the Alameda, the backbone o f Santiago road network. During peak hours, when real demand on central stretches o f the Alameda does not exceed 35,000 passengers per hour and per direction, supply goes up to 60,000 passengers per hour and per direction, i.e. almost twice as much. During off-peak hours., while hourly demand i s roughly divided by three, supply i s reduced only by a mere 15 to 20%. The ratio supply/demand varies then from approximately 1.7 to approximately 5. Part o f the essence o f the operation i s then to better adapt supply to demand and reduce the number o f unnecessary bus-km, hence total operating costs. Savings can then be reinvested into infrastructure improvements, better technologies, terminals, which can be funded out of the system revenues without resorting to a fare increase.

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I Fuera de Punta 1o:oo-11:oo

Perfil de Carga eje Pajaritos-Alameda-Providencia-Apoquindo PO

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1 PerFil de Carga eje Pajaritos-Alameda-Providencia-Apoquinda PO[

Punta Manana

One o f the consequences o f the reform wi l l be a sharp reduction in the number o f buses and in the number o f bus-km. This might appear at f i s t sight as a regressive step that might translate in less geographic coverage and/or less frequency. In the context o f Santiago and on the basis o f the lessons than can be drawn from the graphs above, one has to bear in mind that the current supply i s characterized by off-peak oversupply, inefficient overlapping and concentration o f bus routes in the CBD and tortuous bus itineraries. In addition, drivers, whose salaries depend on the number o f carried passengers, are induced to keep their vehicles on the road for the whole day, whatever the real demand is. Through designing more direct bus routes in the outlying areas, reducing overlaps to a minimum, cutting reasonably the oversized off-peak supply and using high-capacity articulated buses, it i s possible to substantially reduce the number o f bus- km and s t i l l to maintain high frequencies, without deteriorating the service coverage, which w i l l be more evenly distributed over the metropolitan area.

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Annex 11: Participation Plan

The GEF project aims at supporting the implementation of Transantiago-PTUS during its 10 years o f implementation form 2000 to 2010. Among i t s major characteristics, participation of stakeholders, public and civil society has become a fundamental issue since i t s formulation. Transantiago-PTUS i s a radical and comprehensive initiative aiming at the reorganization o f the Urban Transport Sector in Santiago. With this in mind, a participatory plan was designed to assure a good level of civic engagement and the World Bank included some additional requirements to increase i t s efficiency.

Transantiago-SE has identified the main institutional and social actors involved in the preparation and implementation of the plan as follows:

e Institutional: Government & Municipalities;

e Public transport system: Operators, drivers, bus maintenance workers, informal regulators (the so-called “sapos”);

Communities (at the neighborhood level); 0

e NGOs;

e

Buses and equipment suppliers, construction companies; and

The business community in general.

Along with this identification, Transantiago-SE i s developing a conflict management analysis, based on the following assumptions:

e Public transport i s a very important issue for the citizenry and for all relevant public opinion-maker actors and sectors;

Public transport tend to be the worst evaluated public service by the citizens;

Operators are the main source o f conflict resistance to change, but are suffering from a very poor public image;

Support to the project i s strengthened if a real process of participation engaging communities and municipalities i s developed at the different stages of policy design and implementation.

e

e

In addition, Transantiago-SE i s about to bid three contracts for a total o f US$ 550,000 for the implementation o f the citizen participation process in three sets o f municipalities that cover the whole Metropolitan Area.

Some additional conflict management analysis can be added to help Transantiago-SE vis a vis potential conflict situations, through: i) Contracting (by the World Bank) a permanent follow-up, performed by an external institution, for an initial period o f 6 months, that would provide the World Bank and the GOCH with up-to-date information on the outcomes of the participation process. Academic research centers could be the potential advisors; ii) provision o f World Bank technical assistance to make sure that the outcomes o f the citizen participation process, including the three above-mentioned activities, are retrofitted into the fine-tuning process of Transantiago- PTUS .

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The accompanying Technical Assistance Loan wil l be financing a US$ 261 .OOO survey to gather information on the users’ perception of the new public transport system in order to provide objective background information in the process o f continuous planning and fine-tuning o f Transantiago-PTUS. An additional US$ 100,000 study w i l l focus on behavioral changes as a result o f the implementation o f Transantiago-PTUS and wil l aim at assessing how public transport users perceive the substantial changes generated by the reforms, and especially how they adapt to different travel patterns materialized by somewhat shorter trips, but that might include more transfers.

The plan, some parts of which are already implemented or are being implemented, i s described below in more details, according to the targeted category o f stakeholders:

0 At the community level, the plan includes the following:

Work with community organizations at the neighborhood level to polish up the design o f the new system (itineraries of troncal and feeder services, design & security o f bus stops, interior layout o f the new buses, type & conditions of night services, information requirements, etc) and to check advances at different stages, incorporate some specific stakeholders (i.e. university students and the like) into some specific tasks at different stages of the modernization process; build regular links and contacts between the community, the public transport operators and the municipalities; design a web page for information exchange and suggestions gathering, which i s currently in place for the development o f the GEF project; and make available a dedicated telephone line for consultations and suggestions. Several actions are ongoing, especially seminars with different stakeholders that provide useful information to improve the quality of the project.

I t i s worth mentioning here that a presidential instruction o f year 2000 made mandatory Civi l Society Organizations participation in every Government-sponsored project and the NGO’ s are monitoring the achievement o f this goal. In addition, a new law on participation i s being prepared by the GOCH and wi l l be presented to the Parliament this year. I t s presentation to Parliament i s one of the conditions attached to the SECAL. second tranche.

0 At the Municipalities level, the plan include:

Permanent “Work Table” with majors, heads o f the transit and public works departments and other local officials. The agenda of these work tables include (i) urban planning & public transport; (ii) specific coverage requirements of the local public transport system; (iii) design o f egregated lanes for public transport; (iv) location and design o f modal exchange stations, and transfer stations (metro-bus & bus-bus); (v) technology o f buses.

On December 19, 2003, Transantiago-SE organized a meeting with the municipalities, named “Design o f Transantiago Services”. The main objectives were: Qto generate a working environment with all municipal technical teams in order to take note and reflect their insights and proposals to increase the relevance o f local services that w i l l operate in Santiago; ii) to deliver the results o f the participation process developed all along 2003; iii) to disseminate the progress status of the plan and iv) to present a preliminary bus route design for each o f the local areas. The seminar was attended by 83 participants from 31 municipalities o f Santiago and by public officers. The evaluation of the seminar through an anonymous survey on the results o f the process yielded the following results: 60 evaluation forms were returned to the organizers with an overall

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high level of satisfaction (chairmen: 96.7% of favorable opinion, quality o f presentations: 95%, contents: 88.3%, level of participation: 88.4%). ,

The main conclusions of this seminar, which was attended by the Task Team Leader, showed strong support to the project, and acknowledged i t s technical soundness but this seminar was also the opportunity to voice certain concerns about the fee system (several fees, reasons for higher costs in obtaining unitary tickets, average fare level, among others), local services and their flexibility, type o f infrastructure (terminals, bus stops, roads), financing sources, bicycle networks and new metro lines. Most questions reflected a good knowledge o f the overall plan.

Participants acknowledged that a positive work had been carried out from the technical point o f view, and there was a change from the initially less receptive attitude expressed by some municipalities on the citizen participation process promoted by Transantiago-SE.

Municipal teams expressed the need to continue working on the definition of local bus routes in the short and medium term, and also suggested to set an agenda with each municipality for carrying out more in-depth work on Transantiago infrastructure issues.

There was some criticism on the timing of the information delivered, as well as to the lack o f clarity on some issues related to Transantiago infrastructure. Some participants stated that “Transantiago does not contribute to stopping the extension o f the city, on the contrary”, and that “there are no policies to discourage the use o f automobiles”. Others had the opinion that the bidding o f shared-taxis, that includes a license freezing and scraps all long-distance services, can cause discontent among passengers: many currently use shared taxis from home to work and vice-versa, and not to be taken to a given terminal, as planned in the new system which wi l l allow shared-taxis to provide only local services, through-city services being provided by the bus-metro integrated network only. Some concerns were expressed about noise pollution by buses and the lack o f provision for bicycles facilities.

Most o f these concerns were addressed by Transantiago-SE, and part of these wi l l be dealt with through either the GEF project (bicycle facilities, urban sprawl) or the accompanying TAL (congestion pricing to rationalize the use of the automobile, land-use and transport planning coordination, access for the disabled).

0 At the NGOs level, the plan include the following.

- Creation of a permanent consulting council that w i l l include NGO representatives, in order to discuss policy design and implementation o f the public transport system, community participation, and to work with municipalities;

- Creation of a consultative body comprised o f NGOs with expertise and interest in environmental aspects linked to different policy and plan components of the reformed public transport system. Involve NGOs in the technical work (through tendering o f the above-mentioned community participation activities), so that they can participate as consultants and provide their experience on community participation processes;

- Meetings with NGOs were held in different opportunities. A workshop to open the floor for discussion with Civi l Society Organizations (CSOs) took place on August 1, 2003 with the following objectives: provide updated information on the progress status o f the plan to CSOs (environmental, development-oriented, consumers and academic organizations). The seminar was attended by 40 participants from NGOs

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and several public officers related to the Transantiago Ministers’ Committee. At the time, the main findings of this preliminary meeting were the following: (i) existence o f some distrust about the process o f citizen participation, since no concrete results were shown and since the level o f influence of civi l society on the design o f the project remained unclear, (ii) need to integrate the views of the various public institutions related to Transantiago (Ministry o f Housing and Urban Planning, Ministry of Public Works and Transport), (iii) need to take into account disabled users needs regarding the accessibility o f the new transport system, (iv) relevance o f creating a Consultative Committee for Transantiago, in which citizenship and Transantiago Coordination can have a direct dialogue. Transantiago i s viewed as a “revolutionary” change, therefore i t was proposed that part o f the resources destined to communication and citizen participation are invested in a campaign with social leaders, who can convey the plan concept to their communities.

e At the Public Transport Operators level, the plan includes the following:

- Promotion of a strong participatory process and provision of technical assistance to support the creation o f formal large enterprises within the new concession schemes for public transportation;

- Exchange of views regarding the design o f the tender process itself ;

- Support to current public transport operators so that they could merge into “sociedades anhimas” or associate with outside operators (both national and foreign) ,;

- Promotion o f continuous dialogue between operators, municipalities and local communities.

e At the transit workers level, the plan includes the following:

- A wide informative process amongst drivers’ organizations about urban transport policies and Transantiago, including i t s consequences for workers in the sector;

- Promotion of an active participatory process, involving the various drivers’ organizations. Through an IDB grant, transit workers were surveyed to assess their needs in terms o f training and understand their expectations vis-&vis the new public transport system. The IDB grant financed as well some pilot training programs, the outcomes o f which w i l l be used as a basis to design the overall mitigation program with GEF funds. T h i s program w i l l be partially financed with the TAL;

Installation of a work table for permanent and periodic discussion around an agreed agenda about workers rights and labor conditions in the future public transport system;

Re-training of current drivers, permanent training in future concession contracts.

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e At the Great Santiago community level, the plan wil l include the following

- Strong and sustained communication strategy, closely synchronized with the participation strategy, addressed at users as well as non-users o f public transport in order not only to inform them but also to prepare them for the oncoming changes;

Develop among “santiaguinos” a sense o f identification with Santiago and with the program driving idea (“Santiago, world quality city”) as well as with the importance o f the public transport system;

- Develop a powerful sense of identification for the “santiaguinos” with their modernized public transport system: “Un transporte como la gente”.

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e At the business community level, the plan wil l include the following

The last public meeting to present the final draft o f the bus services bidding documents (approved by the Contraloria Pliblica in February 2004) for Transantiago, was named “Public Transport Business in Transantiago” and was held on January 12, 2004. The objective was to present the Plan to a wide l i s t o f attendees from various sectors and to open discussion on the business model of the future public transport. The seminar was attended by more than 400 participants out o f 650 invitees, with the participation of current operators, technology suppliers, banks, engineering consultants, representatives of public institutions, union leaders, academics, representative of the expropriation committee, Contraloria officers, etc. The main conclusions are as foIlows:

- Strong credibility and openness: the open definition o f the business model, i t s official communication, i t s availability on Transantiago website and free access to the bidding documents grants credibility to the project. Participants felt that all the relevant actors of the project were present;

Transparency: the meeting strengthened the transparency, dialogue and open door policy established by Transantiago Coordination;

No major objections: Among the interventions o f the participants, there were no serious objections to the project or to the established and announced schedule, except by the current operators who are worried about the expected competition from abroad: they reiterated their distrust towards the project in general and expressed their fears about the transport business being given away to foreign hands, potential job losses, and the inexistence of a reconversion policy for those who are left out o f the business, in spite of the GEF and TAL funded initiatives.

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Annex 12: Environmental and Social Concerns Summary Annex

Background

Sector Adjustment Loans (SECAL). The World Bank i s financing two Sector Adjustment Loans (SECALs), complemented by a Technical Assistance Loan, to support efforts by the Government o f Chile to implement the Santiago Urban Transport Plan (PTUS) and a set o f key reforms, including: (i) bus route restructuring : the proposed route restructuring w i l l establish a trunk and feeder network, incorporating bus and metro services; (ii) fare integration, to integrate all bus and metro fares into a single system; (iii) finance reform aiming at making the system financially self sufficient; (iv) regulatory and institutional reform : operators wi l l have to merge and corporatize. Infrastructure, ticketing and cash management franchisees w i l l have to be formed. A Metropolitan Transport planning agency w i l l be created. Co-ordination o f land use and urban transport policies wi l l be institutionalized. And (v) priority to low-emission transport modes: implementation o f segregated busways, construction of non-motorized transport facilities, rationalization of private car use through the internalization o f external costs o f car travel (congestion pricing being one of the possible options). The operation includes a 2-tranche SECAL to disburse USD25 million (10 + 15), and a a one-tranche SECAL with a Deferred Draw- Down Option (DDO) feature for an additional USD75 million.

Technical Assistance Loan. In parallel with the adjustment loan, the Bank i s preparing a Technical Assistance Loan (TAL) to ensure that finance i s immediately and specifically available to facilitate compliance with the policy conditions for disbursements under the SECAL; and to finance the analysis and mitigation of the various potential adverse impacts and r isks associated to the implementation of Transantiago, in particular those related to the restructuring o f the public transport system. Amongst the areas for implementation, the TAL wi l l help develop guidelines for Environmental Management Plans for Urban Infrastructure Projects, and a general Resettlement Policy Framework drawing from the Bank environmental and social safeguards.

GEF Air Quality and Transport Project. Complementarily, the Bank signed in January 2004 the Grant Agreement for a GEF Air Quality and Transport Project to support Santiago’s Urban Transport Plan (PTUS). The project w i l l strive to accelerate the implementation of Transantiago, by concentrating on 4 components, each one contributing to abate GHG emissions with different degrees o f intensity, and with different implementation periods. (i) Promotion of bicycle use, by building bikeways and carrying out promotion campaigns to encourage bike use; (ii) Modernization of bus system : restructuring o f bus routes, bus technology field and laboratory tests, and evaluation of obsolete bus scrapping options; (iii) Strategic Environmental Assessment o f PTUS; and (iv) Technical Assistance and Analytical Support: land-use policies and their impacts on travel patterns, internalization of external costs o f car use (congestion pricing), travel demand rationalization; and promotion o f efficient housing location policies that are efficient from a transport perspective.

Urban Transport Plan. The main goal i s to improve the quality o f l i f e in the metropolis and the individual neighborhoods and to help in correcting social imbalances. This would be attained through better traffic flows, lesser time o f travel, improved air quality from reduced emissions o f air pollutants, improved access to public transport, and improved mobility. P T U S includes the following programs: (1) Public Transport Modernization; (2) Road Investments and Traffic Control; (3) Efficient Location o f Educational Institutions; (4) Efficient Location o f New

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Commercial and Service Centers; (5) Change in Residential Land-Use Trends; (6) Non- Motorized Transport; and (7) Communications and Citizen’s Participation. The plan was designed in consultation with the authorities in charge o f handling transport related issues, including land-use management and environmental matters. Also, the plan i s consistent with the Decontamination Plan for Santiago recently launched by CONAMA, and aims at reducing air and noise pollution from mobile and fixed sources of emissions.

Long Term Environmental and Social Impacts. PTUS i s expected to provide net environmental benefits in the long run, derived from a cleaner, more modem and more energy- efficient transport system, with improved accessibility, and lower emissions o f air pollutants and greenhouse gases. In addition, the modernization of public transport wi l l bring lower congestion and increased safety for all transport users. Lower emissions o f air pollutants and GHG wi l l result from a more efficient use of the transport fleet, and from better technologies and fuels; a good and reliable public transport service wi l l not only help access to work, leisure, and housing, but w i l l enable modal shift from private cars and motorcycles. Provision o f good non motorized transport facilities as safe and convenient bikeways and pedestrian space wil l also contribute to lower the energy intensity o f transport. Also, coordination of land-use policies and rationalizing travel demand w i l l enable a reduction in trip length and frequency. PTUS implementation w i l l include upgrading o f existing urban roads to enable an integrated system of segregated trunk and mixed- traffic feeder routes, which in most cases wi l l also result in urban space improvements in the form o f upgraded pavements and adjacent green areas. Reducing pollutant emissions in Santiago directly impacts the quality o f l i fe o f i t s citizens.

This annex summarizes the findings of a number o f environmental analyses done during project preparation, including the: i) Strategic Environmental Assessment o f the Urban Transport Plan (SEA), completed by TAU (Spain) and CED (Chile) (see Appendix 13.b); ii) Review of environmental guidelines and procedures for urban infrastructure projects at MOP, and SERVIU (see Appendix 13.a); and (iii) Review of resettlement practices at SERVIU.

The study by CED on SEA; TORS for next SEA stage; and existing Environmental, Public Participation and Land-use Guidelines for Infrastructure Projects from the Ministry of Works w i l l be disclosed.

Legal Framework for Environmental Assessment

Chile has relatively high capacity and standards for managing environmental and social issues. There i s a well instituted system for environmental impact assessment o f projects with potentially high impacts, regulated by Law 19.300. Depending on the type o f projects, and on the anticipated level of impact, projects need to enter the national System o f Environmental Impact Assessment (SEIA) with either a full EIA or a Declaration of Environmental Impact. SEIA i s a single window system operated by the National Commission on Environment (CONAMA), where al l relevant authorities and the public have the possibility to provide feedback and recommendations on the proposed project, and i t s environmental impact assessment.

Urban infrastructure projects not considered as o f high potential environmental impact, and therefore not required to enter SEIA, w i l l have to follow environmental and social guidelines existing at both the Ministry o f Works and SERVIU (local implementation service o f Ministry of Housing). This i s the case o f most investments under PTUS implementation. These guidelines are to be followed by contractors, who have to prepare environmental management plans and contingency plans, and aim at mitigating environmental impact of infrastructure works. In addition, MOP’S practice includes environmental impact assessment o f some o f the urban

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infrastructure works to be allocated to concessionaires (under BOT schemes). See appendix 13.a for more information. Regarding involuntary resettlements, there i s a Law of Expropriations under which a l l property owners and dwellers with legalized t i t les are compensated according to market value o f land and property. Other dwellers can go to court for settlement o f disputed cases. Also, al l households living in the area and not compensated are always assisted to participate in Government programs for housing subsidies targeting the poorest segments of the affected population. SERVIU i s the authority in charge o f handling most involuntary resettlements in the Metropolitan Area of Santiago (except in some cases where concessions are implied and therefore managed by MOP). A permanent Framework Policy for Resettlements, inspired from Bank safeguard standards, wi l l be developed on the basis o f the existing one under a complementary TAL.

Environmental Baseline

The project area of influence i s the Santiago Metropolitan Area, as the transport system wi l l be changed as a result o f the public transport modernization under PTUS. As per the environmental and social safeguard impacts, the main effects wi l l be felt in the central municipalities (Santiago, Estaci6n Central, Providencia, Quinta Normal, L a Cisterna), which w i l l benefit from the road upgrades. The works under the f irst stages o f Transantiago w i l l be confined to the following areas, and w i l l mostly involve upgrading road corridors: (i) Alameda, 7.5 km; (ii) Pajaritos, 7.7 km; (iii) Santa Rosa, 11.1 km; (iv) Suiza-Las Rejas, 2.9 km; and (v) Arica-Departamental, 1.7 km. Most involuntary resettlements are associated to the Santa Rosa corridor, which i s a consolidated area combining housing and businesses. The following figure shows the city of Santiago, divided into Municipality areas, and grouping used to model transport and emissions43.

Chile’s sustained rate o f economic growth has a large impact on Santiago’s air quality and on i t s aggregate environmental service capacity. With about 5.3 mill ion inhabitants, Santiago ranks seventh among urban areas in Latin America and concentrates about 40% of Chilean population. While population growth has decelerated from 4.5% per annum during the 1950s to about 1.470, residential settlements continue to expand over an area o f more than 600 square kilometers. T h i s adds to i ts intense economic activity. Transport demand grows at a high pace, inflicting pressure on the urban transport system through increased traffic and congestion, and generating increased GHG emissions and air pollution.

Between 1991 and 2001, the population increased by 3096, car registrations by 103%, and the number o f trips (by all modes including walking) by 69%. O f great concern from the viewpoint of air pollution i s the growing use o f the private car which has increased from 12.3% o f motorized person trips in 1977 to 38.09% in 2001. Vehicle ownership rates rose from 320 cars per 1000 households in 1977 to 360 cars per 1000 households in 1991 and 560 cars per 1000 households in 2001, with s t i l l higher figures in the up-scale districts such as Las Condes, Providencia and Vitacura.

As a whole, Santiago’s transport system i s much less chaotic than in other cities of Latin America and highly competent transport planning entities combined with political commitment to tackle urban transport issues have shaped a fairly well organized and reliable transport system.

43 Source: SECTRA, Document on MODEM, model used to predict area emissions according to transport activities

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Sector 1 Providencia Vitacura Las Condes Lo Barnechea

Sector 2 NuRoa La Reina Macul Peiialolen

-

Sector 3 Santiago Estacion Central

Sector 4 H uec h u raba Recoleta lndependencia Conchali

Sector 5 Renca Quinta Normal Cerro Navia Lo Prado Pudahuel Quilicura

Sector 6 Maipu Cerrillos Lo Esueio Pedro Aguirre Cerda

Sector 7 San Miguel San Joaquin La Cisterna La Granja

Sector 8 San Ramon La Pintana El Bosque San Bernard0

Sector 9 La Florida Puente Alto

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Much of Santiago’s pollution problem stems from i t s climate and topography. A thermal inversion acts as a cap over the city during fall and winter (April-August), inhibiting the dispersion o f pollutants, which i s further obstructed by the mountains surrounding the city. For more than ten years, the Government has declared pre-emergency or emergency days when ambient levels o f particulate reach unhealthy levels. Fortunately, the measures taken in the last ten years have led to substantial improvements, reflected by a much lower occurrence of emergency daysu. Nevertheless, air pollution levels are s t i l l too high and transport i s the major contributor to local emissions; in October 2000, transport accounted for 91% o f CO emissions, 84% of NO,, 48% of PMlo, 34% of SO,, and 38% o f VOC emissions.

The relatively high levels o f emissions and concentrations o f airborne pollutants affect health and quality o f life. Ozone and PM2,5 are the pollutants o f most concern in Santiago, as their concentrations s t i l l exceed the air quality norms for the city. Besides their direct effect on health, PM10, NO, and SO, are major precursors for the formation of PM2.5, which inflicts serious health impacts, including increased morbidity and mortality; and NO, and VOCs are also precursors for ozone formation, which has in itself serious local social costs, while contributing to global warming. Following i s a graph showing that the emissions o f Particle Matter as a result of diesel use are higher at the city core, where public transport and most of the activities take place.

1 3 - 7

Source: SECTRA

44 I n 2002, there were 22 days of pollution advisory, 11 o f pre-emergency, and 0 emergency, a considerable improvement since 1997 when there were 38 days of advisory, 37 of pre-emergency, and 4 o f emergency.

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Transportation i s a major source of GHG, mostly in the form o f C02. In Chile, transportation i s the major source of energy-related GHG emissions, accounting for about 37% of C02 emissions. C02 i s emitted as a direct result o f fossil fuel combustion; in Santiago, these emissions are mostly associated to the use of gasoline and diesel. Thus, measures aimed at improving efficiency o f transport flows, at promoting modal shifts to non-motorized, or to less energy intensive modes of transport, and at adopting cleaner fuels and vehicles w i l l not only help address local air pollution but w i l l also reduce GHG emissions.

Safeguard Policies triggered

N o significant or irreversible impacts are expected.

The policy i s triggered due to the potential adverse environmental impacts associated with investment projects that wi l l be undertaken by the Chilean authorities to support the implementation o f the policy reform program supported by the SECALs. These impacts are related to (a) management o f materials and waste; (b) restriction o f traffic flows and access to homes and businesses; (c) increased noise and emission o f pollutants; (d) management o f work camp sites; and (e) interference with urban infrastructure (phone lines, piping, electricity wires, sewage). The Ministry o f Works (MOP), in charge o f concessioning most o f Transantiago’s road upgrades, already has guidelines for environmental management plans o f infrastructure works. These guidelines are in agreement with Bank standards for this type o f urban intervention (mainly maintenance, rehabilitation, and segregation of existing roads, with some upgrading). According to the MOP guidelines, contractors have to produce EMP and contingency plans for (i) camp site; (ii) archeological and historical heritage; (iii) management o f borrow materials and sites; (iv) management o f waste and disposal; (v) traffic management; (vi) public participation; (vii) management o f green areas; (viii) health and safety; and (ix) risk management and contingencies. SERVIU also has a set of Guidelines and practice procedures dealing with environmental management o f camp sites; borrow materials; wastes; traffic and signaling; occupational health and safety; contingencies and risk management and contingency plans.

Possible impacts during bus services operation include air, noise, soil and water contamination from the terminals and parking/maintenance areas. New bus terminals, and some transfer stations w i l l have to follow the procedures of the national system for environmental impact assessment (SEIA). As explained below in paragraph D.4, the SEIA i s a comprehensive single window process o f reviewing the environmental impact assessment o f a project, which guarantees participation from main public and Government stakeholders. I t i s expected that appropriate environmental management plans for the works and operation o f terminals and transfer stations wi l l be produced. The Guidelines existing at MOP set up criteria to be included in the EIAs to be submitted to CONAMA, and clarifies the procedures. See summary on the existing Environmental Guidelines below, appendix 13.a.

Complementarily, to ensure that the Urban Transport Plan i s environmentally sound as a whole, the Government of Chile, through i t s national transport planning agency, SECTRA, decided to undertake a Strategic Environmental Assessment to evaluate the Urban Transport Plan for Santiago. TAU, a Spanish consultant specialized in strategic environmental assessment, was contracted to perform an Analytical Strategic Environmental Assessment (ANSEA) of PTUS. This work took place in 2001-2002 and focused on (i) evaluating environmental decision domains; (ii) assessing environmental mainstreaming at those decision domains; and (iii) proposing a validation procedure for PTUS involving public participation. To advance to the next SEA stage, the GEF Air Quality and Transport Project w i l l fund additional studies, for which Terms o f Reference are being prepared. Next phase w i l l include (a) environmental assessment of

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PTUS programs; (b) improvement o f participatory approach; and (c) development of institutional capacity for SEAS. TORs for this phase wil l be ready by appraisal of this SECAL. See summary of SEA process and TORs in the appendix 13.b.

Although the operation wil l not fund specific investments, upgrading existing roads wi l l imply some involuntary resettlements. OP4.12 i s not triggered since it does not apply to SECALs. However, through technical support funded under the TAL, the current Resettlement Policy Framework w i l l be upgraded, and wi l l be used for the upcoming works required to expand the segregated busway network over the next 10 to 15 years.

Compliance with Environmental and Social Safeguards- SUMMARY

The net environmental impacts from implementing PTUS wi l l be positive, with substantial impacts on air quality. The potential adverse impacts are related with the construction phase of PTUS. The operation i s a SECAL with a DDO; and Chile i s a sophisticated borrower with acceptable environmental and social guidelines for environmental management o f investment projects.

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The following matrix summarizes the compliance with the Safeguard Policies, and it i s consistent with the I C M review meeting.

Potential Impact

Environment

Involuntary Resettlement

Safeguard Policies triggered OP4.01 i s triggered

OP4.12 i s NOT triggered, as i t i s a SECAL

Disclosure requirement

Existing guidelines at MOP for environmental management of infrastructure works, for public participation, and land use (Manual summarized at appendix). Existing guidelines and procedures at SERVIU for environmental management of infrastructure works.

ISDS

Strategic Environmental Assessment (methodological approach) Draft TOR for next phase of SEA

NOTE: SEA and Guidelines to be disclosed prior to Appraisal N.A.

Next Steps

Develop harmonized guidelines for environmental management o f urban infrastructure works, under TAL

Carry out next phase of SEA of PTUS, under GEF

Develop Resettlement Policy Framework, drawing from Bank safeguard standards; and strengthen MINVU and Transantiago capacity, under TAL

Agreement on areas to be included in the Resettlement Policy Framework to be developed under TAL

All involuntary resettlements taking place as a result o f implementing PTUS w i l l be conducted by SERVIU, the regional service from the Ministry o f Housing; SERVIU has already started collecting information about the type o f settlements present in the corridors where road upgrading may require expropriations.

Considering that the local law o f expropriation falls short of the Bank policies on involuntary resettlements, as reflected in the safeguard policies, i t was agreed that capacity building and institutional strengthening activities would take place under the parallel Technical Assistance Loan. Thus, as part of project preparation, a dialogue on an improved resettlement policy

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framework was initiated. SERVIU presented to the Bank the proposed treatment of involuntary resettlement cases, according to the local law, and the Bank provided information on the additional requirements to meet the Bank safeguard standards. At the end, there was agreement on the type o f work that needs to be done under the TAL, as summarized by the following table:

Impact Total loss o f

Category Owners

property Total loss o f property, and o f social and

service networks

Total loss of economic activity

Owner, renter, allegado*, squatter

and encroacher, and property

watcher

Owners o f businesses in

owned properties, and in rented property; and

renters

income due to businesses in

affection of properties partial owned or rented

I

Current course of action Payment in one installment o f commercial value o f property

Squatters and encroacher receive: support and advisory services to

apply for housing subsidies. A l l residents w i l l be assisted on:

Registration into health and education services at new location

Owners o f formal businesses and renters

Law o f Expropriation includes compensation for business losses, after a legal suit i s filed and settled

Law o f Expropriations includes the option o f total compensation if lot

affection requires it, and recognition o f damage and losses derived from

the temporal loss o f intrinsic capacity o f property

Recommendation Evaluate payment o f

registration costs Offer to every one:

(i) Compensation for moving expenses;

(ii) Assistance through municipalities to motivate the purchase o f a substitute

home. To renters and Dropem watchers: a program for legal assistance through

municipalities Offer to al l owners o f formal

and informal businesses: (i) Information on legal

rights; (ii) legal assistance and

training through Municipalities.

Property Watcher: families who live and watch the properties and are paid for said service.

Public Consultation and Disclosure

The SEA process has included in-depth interviews and consultation workshops with stakeholders. Considered stakeholders included bus service operators and associations, and NGOs. Representatives from govemmental agencies were consulted on a regular basis, and all interim and final reports were placed in a website administered by SECTRA, where there were forum spaces established to allow an open discussion. SEA studies from both CED and TAU are available at: http://www.sectra.cl/medio ambiente/medio ambiente frm.htm1.

Regarding the SEIA requirements, both CONAMA, and CONAMA-RM (Metropolitan Area of Santiago) have public information at their websites http://www.conama.cUcoain/channel.html, and http://www.conamarm.cl/channel.html. Public participation i s an essential element o f the System o f Environmental Impact Assessment (SEIA), as all projects’ EAs submitted to CONAMA for review are disclosed to the public and open to feedback and comments. (See appendix 13.b for more information).

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Also, the Ministry of Works, Transport, and Telecommunications (MOPTT) has a website on general environmental, public participation, and land-use policies and requirements (http://www.dpop.cl/documentos/semat-manual.asp). Here all contractor’s environmental obligations are spelled out, and guidelines to develop Environmental Management Plans are clearly presented. The website has also additional environmental and risk prevention information to inform not only investors but the general public.

Institutional Capacity to imalement and monitor EMP

MOP wil l be the agency in charge o f approving and monitoring all EMPs for most works required under PTUS. Its environmental department i s strong and well positioned within the institution. I t consists o f a Secretariat on Environment and Land-use (SEMAT in Spanish), depending from the General Director of Works (3rd level), who in turn depends on the Under Secretary of Works (see graph below). In each Division or Directorate, there i s in turn an Environmental Coordinator who ensures that the policies and orientation given by SEMAT i s carried out well in the investment projects financed or coordinated by MOPTT. The Environmental Unit at the Concessions Division i s particularly strong, as i t has developed i t s capacity through a very intense recent experience under the Law o f Concessions. This unit has proved successful in ensuring that private contractors follow MOP guidelines, mostly through the adequate set up of contractual obligations spelled out in the bidding documents, and reflected in legal obligations thereafter. T h i s capacity applies both to environmental, and land use management, and to public participation. As explained in the Appendix 13.a, an independent auditor w i l l be in charge o f approving, monitoring and evaluating the EMPs and their compliance.

Institutional Capacity to manage involuntary resettlements

Most of the estimated expropriations to implement Transantiago’s first phase w i l l take place in 2005, when construction o f the Santa Rosa corridor (between Placer and Ovalle within the Municipalities o f San Miguel and San Joaquin) starts. Within SERVIU, there i s a Unit in charge o f Real Estate Acquisition, which w i l l be handling all PTUS-related expropriations. However, the unit does not have enough capacity to handle the relatively high number of expropriations expected (around 600 properties), and i s in the process o f hiring additional personnel.

Transantiago-SE, the office in charge o f coordinating the overall implementation’ o f PTUS, does not have a team to take care o f following up SERVIU commitments. As a consequence, a program for institutional strengthening both o f SERVIU and Transantiago-SE wi l l be designed and implemented as part o f the complementary TAL.

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The Program for expropriations at SERVIU has a communications strategy designed by an external firm. The Communications Program i s addressed to all affected by the expropriations, and i t i s formed by the following:

Office for assistance to ex-owners, located in a strategic place o f Santiago; Publication and dissemination o f a leaflet on Transantiago characteristics, and procedures for expropriation; Publication o f property value assessment commissions ; Mobile unit from MINVU, programmed to do 3 visits per sector o f expropriations, to disseminate information; Telephone line for public help; Meetings through focus groups, workshops, assemblies.

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Appendix 12.a: Manual on Environmental and Land-use Management, and Public Participation for Infrastructure Projects (Summary)

Introduction

The Ministry o f Works, Transport, and Telecommunications (MOPTT) has issued guidelines for environmental management, consideration of land-use development plans, and public participation enhancement, to be applied to investment infrastructure projects. These guidelines are compiled under the so-called Manual on Environmental and Land-use Management, and Public Participation for Infrastructure Projects. The objective o f the Manual i s to incorporate the environmental, land-use, and public participation dimensions as early as possible into the development o f projects, in particular in costs and management aspects to ensure their technical and economic consideration. Projects must be integrated in to the environmental conditions, land- use plans, and public policies. Factors to be considered by the projects include:

Technical Aspects; Economic aspects; Economic activities in project location; Human settlements; Existing infrastructure in project location; Human environment; Environment; Regulations.

The Manual has the following objectives:

Establish the Institutional, Legal, and Conceptual Framework for the Environmental, Land-Use, and Public Participation Management, as mandated by the Government’s policies and the Ministry’s directives;

Explain the administrative process for the projects required to enter into the National System for Environmental Impact Assessment (SEIA);

Define content, requirements and procedures related to Land-Use, Public Participation and Environment, for MOP projects entering and NOT entering SEIA;

Define content, requirements, and procedures to develop and implement Environmental Management Plans, 5.Risk Prevention Plans, and Control o f Environmental Accidents (Contingencies);

Define responsibilities o f MOP, and o f Fiscal Inspectors, with relation to Land-Use, Public Participation, and Environmental Management, relating to the different stages on the project cycles.

The Manual i s structured in the following chapters:

Chapter 1. Introduction

Introduces the Manual

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Chapter 2. Institutional and Policv Framework

Integration of land-use variable into social, political, and economic dimensions o f Government policies;

Study o f local conditions o f project, to orient project design and development so that potential benefits are maximized avoiding undesired effects on human activities and ecosystems present in proiect sites.

Explains organic structure o f Chilean State, defining roles and scopes for decision making. Defines ministries, and presents Law 19.300/94 on General Basis for Environment. Also introduces the National System on Environmental Impact Assessment (SEIA). Defines the role of MOPTT and i t s Directorates. Defines the Environmental Policy of MOP: “The environmental strategy for sustainable development in Chile i s based on generating the basic conditions to harmonize the country economic growth with environmental protection and sustainable use o f natural resources, within an equitable social and economic framework.” Specific aspects of the policy include, amongst other:

I

Integration of concepts of economic development and environmental protection;

Contribution to environmental recovery in areas where cumulative effects from environmental degradation endanger health and quality of l i fe o f the population;

Integration of environmental costs into investment decision making;

Consideration o f environmental quality from technical and participatory perspectives;

Guarantee o f access to information and participation on environmental issues, and enabling of conflict resolution processes.

Land policy o f MOP includes:

Public participation policy at MOP includes:

Convention of interests from stakeholders (NGO, academia, local communities, workers, private and public institutions) into decision making and investment projects.

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Chapter 3. General Legal Framework

Presents Law 19.300 on General Bases for Environment, which regulates the Constitutional right to live in pollution free environment, and to protect the environmental and preserve the environmental patrimony. The Law, inter-alia:

Establishes the scope for application of Law 19.300;

Defines terms used under the law;

Creates the System for Environmental Impact Assessment (SEIA), under which all projects with potential environmental impact have to submit either an Environmental Impact Assessment or an Environmental Impact Declaration as conditions for prior approval;

Creates the National Commission on Environment (CONAMA) and i ts regional chapters, which wi l l be in charge of administering the SEIA;

Incorporates public participation into the process o f Environmental Impact Assessment;

Defines procedures for handling emissions, environmental quality, and management norms;

Establishes the Decontamination Plans and related instruments:

Establishes a complain and conflict resolution system;

Establishes responsibilities for environmental damages;

Creates the framework for legal responsibilities o f environmental damage: in the case of non compliance with environmental quality norms; emission norms; and decontamination or prevention plans; or with norms on protection and conservation o f environment;

Presents the System o f Environmental Impact Assessment (SEIA).

The Rules o f Procedure (Reglamento) for SEIA establish the types o f projects subject to the SEIA. If a project i s typified as subject to SEIA, the Rules o f Procedure establish criteria for determining the type o f potential impact (screening). A project with high impact wi l l have to produce an Environmental Impact Assessment (EM), while a project with lesser impact w i l l have to prepare a Declaration of Environmental Impact (DEI). An EIA i s a document describing the project or activities; baseline situation; identification o f potential environmental impacts, project alternatives, and mitigation strategies. A DEI describes the project, and demonstrates that the environmental impact o f the project i s within the allowable thresholds as established by the current regulations; it also includes voluntary environmental commitments.

For an EIA, after a maximum of 180 days, CONAMA must issue an Environmental Resolution (ER) qualifying the project, which may be approved, rejected, or approved with conditions. For a DEI the period for the ER gets reduced to a maximum o f 90 days. The process under SEIA i s lead

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by a project entitled agency, which in the case o f MOP i s the General Directorate of Public Works.

Biotic

Chapter 4. ConceDtual Framework on Land-use, Public Participation, and Environmental Management

Landscape Flora Fauna

Presents general concepts on environment, land-use, and public participation and their relation to infrastructure projects.

Social Economic and Cultural Plants Quality o f l i fe Groups o f opinion Economic activities Social characteristics Patrimony (Archeological, Historical, and

Also, i t states the type of activities included in Environmental Management Plans:

Characterization of project site;

Identification of conditioning factors;

Environmental assessment o f alternatives;

Identification and valuation o f project impacts;

Identification of mitigation, restoration, andor compensation measures to environmentally upgrade the project;

Elaboration o f Environmental Management Plan;

Development o f an Environmental Audit Program, to monitor and evaluate environmental impact during construction, exploitatiodoperation, and finalization.

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On Land- Use planning and management, the Manual states the different instruments for land-use planning to be considered by new projects:

Urban Development Regional Plan, competence o f SERVIU;

Metropolitan Regulating Plan, under SERVIU;

Inter-Municipality Regulating Plan, to be developed by SERVIU;

Municipal Regulating Plan, under each Municipality (Comuna);

Sectional Plans, under each Municipality;

Urban Transport Plans by SECTRA;

Regional Development Strategies.

Land-use management requires a pre-project analysis, and an assessment o f potential project impacts, and mitigation, reparation, and compensation measures. Land-use impact are changes to land variables and components, affecting productivity, development perspectives, or conditions of l i fe. Under the Manual, land-use management involves the following activities:

Study Land-use Framework;

Undertake Report on Recommendations derived from study, including conditions and requirements to support decision making;

Identify, analyze, and evaluate potential project impacts on land-use development;

Propose measures to mitigate, restore, andor compensate negative impacts on land use.

On Public Participation, the Manual recognizes the opportunity to make public the scope, impacts, and benefits from projects, while incorporating the community feedback on the projects design and implementation. There are 3 types of participatory processes: (i) Participation in Projects for projects not entering SEIA; and (ii) Early participation; and (iii) Formal Participation for projects entering SEIA. Early participation i s a process carried out by MOP, before entering SEIA, to allow more time for participation. Formal Participation i s the period o f days under which a project i s disclosed for comments by CONAMA. Participation in projects i s a consultative process that MOP implements to ensure early and sustained public participation.

Chapter 5. Institutional Management at MOPTT of Land-use, Public Participation, and Environmental Management for Infrastructure Projects

This chapter presents the environmental obligations of all divisions and Directorates at MOPTT, with relation to the type of projects under their scope. Depending on the type o f projects, and according to the criteria setout in the chapter, i t i s clarified when a project needs to enter SEIA (depending on potential impact). As a general practice, M O P undertakes Reference Environmental Impact Assessment for all projects4’, and then, depending on the type o f impact it

45 TOR for these Referencial or voluntary Environmental Impact Assessment are done according to an Environmental and Land-use Profiles. These profiles include information on baseline; typical impacts

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submits the EIA to SEIA or obligates the concessionaire to take into consideration the recommendations from the EIA, according to the following illustration.

~~

'rofile I Pre-project

Environmental Profile: general description of components and potential environmental impacts, area of influence of each altemative

Reference Environme ntal Impact Assessment: TORS for EIA are drafted according to environment

use profiles and EIA i s contracted

al and land-

Land-use profile: general description of components and potential land-planning impacts; area of influence of altematives

Project

ire submits EIA to SEIA

Concessionaire incorporates mitigation, restoration, and compensation measures suggested by EIA

:onstruction, Ixploitatiodoperation, !elease/exit

Obtain Environmental Qualification Resolution on project

Implementation of Measures (from EQR or voluntary) and enforcement of measures and environmental objectives

associated to the type o f projects (in physical, biotic, and socio-economic and cultural environments); environmental and land-use conditions and limits according to location; criteria to enter or not SEIA; licenses and permits required; costs according to alternatives; and reports.

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Chapter 6. Procedures and Management of Activities entering SEIA

I t defines the procedures and requirements to enter SEIA. Before a project can start, an Environmental Qualification Resolution must be obtained. In some cases, CONAMA may authorize to begin a project with after an Environmental Insurance Policy i s presented.

Chapter 7. Environmental Management Plans

This chapter presents guidelines to prepare Environmental Management Plans for mitigating environmental impact at Camp sites; Borrow material sites and movement; Wastes and disposal sites; Archeological Management; and Forest and green areas during construction and operation o f projects. I t i s necessary to emphasize that each EMP must adapt to the specific type o f activity and location. For example, to determine how close to install a camp site from a body o f water, or a borrow material site, it i s necessary to consider the characteristics o f the water course, importance o f water stream, proximity to settlements, soil characteristics, zone geomorphology, climate, work camp site characteristics, potential impacts on water body, etc.

EMP are to be elaborated by the contractor or concessionaires, and require approval o f the Work Fiscal Inspector (Inspector Fiscal de Obra). If projects enter SEIA, the EIA or DEI must include the specific EMPs. If the projects do not enter SEIA, EMPs must be developed and approved by the inspector and the Environmental Unit at MOP. In all cases, if a Forest Management Plan i s needed, CONAF’s approval w i l l be needed.

The following are General Criteria for all EMPs:

Criteria for the civi l works

Minimize alteration o f green areas;

Avoid activities close to water bodies;

Avoid toxic and non biodegradable materials;

Avoid cutting of trees and green areas clearing;

Favor use of existing road network, both formal and informal;

Ensure safety equipment for workers in charge of dangerous activities;

Favor use of existing sewage facilities over construction o f sanitary drainage;

TemDorarih store dangerous industrial wastes. in an orderly and safe manner.

Criteria to control activities

I To keep a photograph record of the work sites, before, during and after activities.

Criteria related to subcontracts

I Incorporate into subcontracts all environmental requirements bv MOP.

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Criteria related to affected community

Contact local community to inform about the activities development and about the environmental practices to be considered during execution;

Maintain good relationship with local communities to minimize conflicts.

Criteria related to legislation and permits

Verify that all permits are obtained before starting activities;

Obtain municipal permits;

Comply with Law 19.300 on General Environmental Basis and with current environmental regulation;

Obtain sector permits;

Comply with Law of Forests;

Comply with Law on National Monuments and Heritage, when discovering remains, historic pieces, paleontology and anthropology material during activities.

Chapter 8. Risk Prevention and Control of Environmental Accidents

This chapter i s aimed at helping decision making, help improve works designs, prevent and control accidents, and minimize losses caused by them. Environmental r isks are mainly determined by potential dangerous events that may affect negatively the works, environment, and project image. A risk analysis i s a study to identify potential risks, estimate probability of events, and evaluate potential consequences. The project vulnerability must be determined in order to design a risk prevention and control strategy. The advantage o f developing and implementing an Integral Safety Management System i s that i t allows a more efficient use o f resources and coordination in emergency cases.

This chapter offer guidelines to elaborate Plans for Risk Prevention; and for Plans for Environmental Accidents Control; such plans must be based on existing environmental risk analysis for the works, on current regulation, and on the general strategy o f the Integral Safety Management System.

Environmental Risk Analysis

Following i s the outline o f the guidelines for a risk analysis:

Identify risky activities;

Identify contingent dangers, endogenous (explosions, fires, etc); and exogenous (floods, weather, etc). Determine induced contingencies, and short and long term occurrences;

Define potential scenarios linking contingencies to activities;

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Estimate probability of occurrence; assign to scenarios;

Define vulnerability factors, according to negative effects of contingencies per scenario, considering impact areas, potential victims, economic losses, environmental damages, victims, and works suspensions;

Estimate gravity o f consequences;

Calculate risk, combining probabilities and gravity o f contingencies.

Plans for Risk Prevention

Following i s the outline of guidelines for developing these plans:

General background, defining plan objectives according to project l i f e cycle, available resources, responsible entities, etc;

Description of activities to follow, procedures, timeframes, responsibilities, etc;

Definition and description of training required;

Definition of information, coordination, and communication mechanisms;

Monitoring o f plan compliance;

Plan Evaluation steps.

Plans for Accidents Control

Following i s the outline o f guidelines:

General background, including specific plan objectives, location, resources, organizations involved, responsible entities, etc;

Alert Mechanisms;

Procedures in case of accidents or alerts;

Order restoration procedures and operations;

Communication strategies;

Training and capacity building;

Plan evaluation.

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Appendix 12.b: Strategic Environmental Assessment of Santiago's Urban Transport Plan 2000-2010 (Transantiago-PTUS)

SCOPE AND OBJECTIVE OF SEA

Environmental Strategy for SECAL. In order to comply with the Bank's Environmental and Social Safeguards, the SECAL's task teamhas adopted the following strategy: (i) Existing guidelines for EMP wi l l be accepted by appraisal; however, the TAL wil l help develop harmonized national guidelines; (ii) A Framework for Involuntary Resettlements i s being produced, and wi l l be supported by the TAL; specific plans are not requested as the Bank w i l l not directly invest in infrastructure projects; and (iii) Next phase o f an on-going Strategic Environmental Assessment to assess Santiago's UTP, to be financed by the GEF Air Quality and Transport Project, to ensure adequate participation, to promote upstream coordination amongst the agencies involved in developing and implementing policies, and programs affecting urban transport, and to provide valuable feedback on the Transport Plan.

Strategic Environmental Assessment in Chile. The Government hired TAU, a Spanish consultant firm, to undertake an Analytical SEA of Santiago's Urban Transport Plan. Under the study, the environmental decision domains were identified. Later, under the GEF preparation process, a local consultant firm (CED) was contracted to help develop TOR for implementing UTP's SEA, taking into account TAUS approach. This upcoming study w i l l help orient the proposed TOR, so that the SEA can better help assess the urban transport plan, and to coordinate policy making at the upstream.

ANALYTICAL STRATEGIC ENVIRONMENTAL ASSESSMENT

The Analytical Strategic Environmental Assessment implemented by TAU was centered around three objectives: (i) to verify the inclusion o f the environmental dimension into the urban transport planning processes; (ii) to promote endorsement of Transantiago-PTUS by key stakeholders; and (iii) to evaluate the options for incorporating a plan such as Transantiago-PTUS into the existing national system for environmental impact assessment. Since the Urban Transport Plan had already been developed, the SEA made an ex-post analysis on i t s conception, focusing into the decision making process involved with relation to the environmental dimension. As per the operative programs o f Transantiago-PTUS, which were being developed and revised, the SEA was aimed at improving the decision making with an ex-ante evaluation.

STAKEHOLDERS AND PARTICIPATION

SECTRA, the transport planning agency o f Chile, took the lead to undertake the Strategic Environmental Assessment and contracted TAU. Also, i t served as counterpart for a GEF-funded complementary study on SEA46.

To develop i t s Analytical Strategic Environmental Assessment (ANSEA), TAU consulted all relevant stakeholders, including NGOs, universities, and the Government authorities participating in the committees about the urban transport plan for Santiago (Housing and land-use; Works,

46 Before SECTRA, in 1998, the national commission on environment (CONAMA) had already contracted TAU for a basic assessment on the methodological approach to develop urban transport plans.

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Transport, and Telecommunications; Environment; the authority from the Metropolitan Area of Santiago; and the president o f the Metro). Two formal workshops to discuss the methodology and results took place in 2002; followed by an open website discussion forum. TAU found that the development o f Transantiago-PTUS had involved consultation and participation from stakeholders at various levels: internally, as all relevant agencies involved in the planification process are in close coordination; and externally, as the plan and programs have been disclosed to the public. Close consultation has taken place with the bus owners and operators, as they w i l l be the main affected group. The agency leading the consultations and final programs development i s Transantiago-SE, the Executive Secretary established for the implementation o f Transantiago- PTUS .

One o f the recommendations arising from the ANSEA i s to institutionalize a committee on SEA, which would be formed by representatives from the main stakeholders. This would be complemented by periodic open consultation forums. Technical assistance for this institutional development w i l l be financed by the GEF project.

STRATEGIC INFLUENCE OF THE INTERVENTIONS

The process o f developing urban transport plans for the city started at the early 1980’s and i s an evolving and on-going effort, where continuous feedback allows the plan to adapt to changing conditions, knowledge, and challenges. When TAU started the Analytical Strategic Environmental Assessment, the 2000-20 10 Urban Transport Plan for Santiago was already developed and accepted by the stakeholders. However, the operative programs were s t i l l in the making, or being revised, and the SEA process helped bring closer the agencies on transport, environment, and land-use management. One o f the main objectives o f the SEA was to validate the process to minimize opposition to the plan from the beginning. The main recommendations did not affect the plan, or program elements already designed, as the ANSEA was oriented towards the decision making processes. The recommendations basically centered on a more institutionalized SEA process in the country, through the creation o f a Committee on SEA; and on a more open and participatory approach to ensure better and more proactive participation from stakeholders in decision making. The GEF component w i l l fund these activities, in addition to actual inter-temporal measurement and monitoring activities. In this sense, the SEA was effective; i t has been part o f a series of steps or stages.

SEA ACTIVITIES RELATED TO TRANSANTIAGO

The Strategic Environmental Assessment for Transantiago-PTUS has been structured according to the following stages:

Methodology Development for Urban Transport Plans (TAU, 1998); Analytical Strategic Environmental Assessment: Review o f Methodological Approach for designing PTUS (TAU); Development o f next steps and TOR for SEA validation (assessment o f programs), participatory approach enhancement, and institutional strengthening (CED); Actual SEA (trans-temporal), participatory approach development, and institutional strenrrthenina (GEF, to be contracted).

PROCESS AND INSTRUMENTS USED

Analytical Strategic Environmental Assessment (ANSEA)

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TAU carried out i t s ASEA according to the following methodological approach:

Ex-post assessment of the Urban Transport Plan, as this was already defined; Ex-ante assessment for operative programs, which s t i l l were being defined.

SCREENING Evaluation of decision making processes

The methodological approach for an Analytical Strategic Environmental Assessment (ANSEA) i s represented by the following figure47:

SCOPING Institutional, legal framework for decision making -b

ENVIRONEMNTAL PROCEDURE CRITERIA DECISION DOMAINS (PC) IDENTIFICATION

Opportunity

critical short l i s t

I EDD EVALUATION I With relation to PC Summarize in matrix Identify strengths and weaknesses

MONITORING Related to EDD and PC

I I I I

Besides consulting the agencies and stakeholders related to the development of Transantiago- PTUS, TAU conducted two open workshops with the participation o f governmental agencies, universities, consultants and experts, private sector, and civi l society (NGOs). First, TAU evaluated the evolution o f the decision making process. Second, i t assessed the transport, land-use development, and environmental objectives to be considered in sustainable transport projects. Third, TAU identified environmental procedure criteria, so that key tasks related to the decision making involve environmental dimensions. Fourth, it identified environmental decision domains, or planning tasks where the environmental criteria can be incorporated. Fifth, after crossing the environmental procedure criteria with the environmental decision domains, i t came up with a ranking o f planning tasks. Finally, it proposed validation methodologies, including a wider participatory approach. Following are some o f the results:

A. TRANSANTIAGO OBJECTIVES

Main Objectives

47 Source: TAU, Methodological Approach for Strategic Environmental Assessment of Urban Transport Plans, 2002

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To improve the quality of l i f e of citizens;

To minimize economic income gaps; and

To improve opportunities for accessibility to social services offered by the city.

Environment Reduce, minimize air pollutant

emission standards (NOx, SOX, PM, HC)

Reducelminimize Noise levels Reduce impacts on Land scape /

environmental services Minimize fuel consumption and

promote use o f cleaner fuels Minimize social impact and

effects on patrimony and national heritage

Specific Objectives

Land-Use Densities Promote location o f services

close to transport system Prevent dense settlements outside

public transport system coverage

management Develop standards for traffic

To promote safe and reliable public transport;

To rationalize private car use, by internalizing real travel costs;

To promote non-motorized transport;

To promote a coordinated policy for location o f housing, schools, and services taking into account the transport variable;

To reduce air pollutant emissions; and

To improve institutional coordination and participatory approach.

B. SUSTAINABLE TRANSPORT, ENVIRONMENT, AND LAND-USE OBJECTIVES

Based on general international agreement about the type o f objectives to be considered in sustainable public transport plans, TAU l is ts the following:

Sustainable Transport4' Improve accessibility (good

quality service and good urban coverage)

System affordable for users Good quality o f transport service

(travel time, reliability, safety, and comfort)

Minimize Environmental impact (emissions, noise)

Keep/improve safety (traffic) Promote Economic efficiency

Environmental Decision Domains

TAU identified 12 environmental decision domains, planing process tasks where environmental decisions can better take place. These domains include activities such as the identification of objectives; model definition; identification o f areas and geographical zones to be studied; scenarios for urban development; urban transport policies; identification o f strategic altematives; cost-benefit analysis.

Environmental Procedure Criteria

These criteria are l imiting factors which help take decisions in an Environmental Decision Domain. EPC are aimed at ensuring that the environmental values are incorporated into the

48 Source: Wupertal Institute, 2000

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decision making process. The criteria, based in representative values or principles accepted by society, are (1) Objectives and models; (2) Environmental variables; (3) Private transport role; (4) Environmental alternatives; (5) Internal coherence; (6) Uncertainty; (7) Institutions and absence of discretion; (8) Participation; (9) Subordinate execution o f environmental measures; (10) Financing; and (1 1) Social impact.

process Planning objectives must have the consensus o f all stakeholders Analysis o f coherence o f planning strategic objectives o f urban transport with other relevant planning strategies Models must facilitate the incorporation o f environmental costs and benefits to the traditional evaluation o f plans and programs in all planning stages Participation of institutions such as CONAMA, regional Government, and housing and transport authorities in the definition o f models Incorporation o f environmental variables to define areas and zoning To activate the Committee on Land-use to formulate the urban development scenarios for transport planning

Resulting Environmental Tasks for Transport Planing

Necessary Important

Necessary

Fundamental

Important Fundamental

Out o f combining the Environmental Decision Domains with the Environmental Procedure Criteria, and eliminating repetitions and reduntant tasks, TAU later identified 43 environmental planing tasks, which were ranked according to their importance in the decision making process, considering the objective of integrating the environmental dimension in the planning process: important ( lo) , jkndamental(14), or necessary (19). Necessary being the most important tasks.

Next table illustrates some of the identified tasks:

TASK RELEVANCE

Defining environmentally friendly alternatives to consider in the planning I Necessary

CED Study and TORS

CED, a local consultant conducted a study to develop the methodological approach for a Strategic Environmental Assessment o f F'TUS, based on the study being conducted by TAU. The objectives o f this study were to advise the Government on the process of developing a practical methodology for a SEA of PTUS; to evaluate different sector plans affecting the city o f Santiago and find complementarities with F'TUS; evaluate public participation processes involved and opportunities; evaluate current quantitative tools available in Santiago for planning, monitoring and evaluation. Finally, CED was to prepare a Plan o f Action and draft TOR for studies required at the next phase.

The methodological approach i s synthesized in the following figure:

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TRANSPORT PLANNING

U I IDENTIFICATION OF ACTIVITIES WITH

ENVIRONMENTAL DIMENSIONS

f V

Where to focus SEA of PTUS I I

IDENTIFICATION OF 43 SPECIFIC PROCEDURE PRESCRIPTIONS

19 Essential 14 Necessary 10 Important

hlethodologic Foundation for SEA

Basic scheme for the SEA of PTUS planning

Steps proposed to undertake the SEA, being iterative from step 3 on:

STEP 1 : Work Program for SEA STEP 2: Framework for SEA STEP 3: In i t ia l assessments STEP 4: Final assessment STEP 5: Validation of SEA STEP 6: Updating o f Work Program and Framework for SEA

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Annex 14: Statement of Loans and Credits

Difference between

expected and actual

disbursements Original Amount in US$ Millions

Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. ID Rev’d

PO82037 2004 CL-Social Protection 10.71 0.00 0.00 0.00 0.00 10.71 0.00 0.00

PO77282 2003 CL-Science for the 25.26 0.00 0.00 0.00 0.00 25.01 2.99 0.00

PO69259 2002 CLPubExpenditure 23.23 0.00 0.00 0.00 0.00 17.47 5.24 0.00

TA Loan

Knowledge Economy

Management

and Training

EDUCATION

PO68271 2002 CL-Lifelong Learning 75.75 0.00 0.00 0.00 0.00 71.17 24.01 0.00

PO55481 1999 CL-HIGHER 145.45 0.00 0.00 0.00 0.00 56.18 49.35 0.00

PO55480 1999 CLMUNICDEVTII 10.10 0.00 0.00 0.00 0.11 1.66 1.77 -0.70 Total: 0.00 0.00 0.00 0.11 182.20 - 0.70

290.50 83.36

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CHILE STATEMENT OF IFC’s

Held and Disbursed Portfolio In Mill ions o f U S Dollars

Committed Disbursed IFC IFC

N Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval

1991f93 Aconcagua 0.00 0.45 0.00 0.00 0.00 0.45 0.00 0.00 1999 CBTI 0.00 0.00 0.83 0.00 0.00 0.00 0.83 0.00 1989f91199 Escondida 0.00 0.00 16.66 0.00 0.00 0.00 12.91 0.00 1996 FEPASA 11.60 5.60 0.00 4.68 11.60 5.60 0.00 4.68 2003 Lan Chile 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1994/96/97 Moneda Mgt 0.00 0.13 0.00 0.00 0.00 0.13 0.00 0.00 1994 Pionero Fondo 0.00 3.77 0.00 0.00 0.00 3.77 0.00 0.00 1996 Proa Fund 0.00 6.64 0.00 0.00 0.00 6.64 0.00 0.00 2000 San Antonio 35.00 3.70 0.00 65.00 24.15 3.70 0.00 44.85 0 TFSA 0.00 4.44 0.00 0.00 0.00 4.44 0.00 0.00 2003 TRANSELEC 60.00 0.00 0.00 0.00 60.00 0.00 0.00 0.00

Total portfolio: 136.60 24.73 17.49 69.68 95.75 24.73 13.74 49.53

Approvals Pending Commitment FY Company Approval

Loan Equity Quasi Partic.

2002 San Vicente 0.02 0.00 0.00 0.02 2003 Thames Chile 0.04 0.00 0.00 0.04

Total pending 0.06 0.00 0.00 0.06 commitment:

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