Introduction of road maintenance microenterprises in Georgia Workshop report

69280 Improving routine maintenance of local roads in Georgia

WORKSHOP REPORTSerge Cartier van Dissel

January 2011

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CONTENTSLocal road data...............................................................................................................................1Maintenance funding and prioritization.......................................................................................1Performance-based maintenance contracting............................................................................2Maintenance teams or microenterprises.....................................................................................2Conclusion......................................................................................................................................3Annex 1: List of participants...................................................................................................4Annex 2: Workshop presentation...........................................................................................5

ABBREVIATIONSGEL Georgian LariMRDI Ministry of Regional Development and InfrastructurePPIAF Public-Private Infrastructure Advisory FacilityRD Roads DepartmentSLRP Secondary and Local Roads ProjectVAT Value Added TaxUSD United States Dollar

In this report an exchange rate is used of USD 1 = GEL 1.85

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1. The results of a PPIAF funded study on improving routine maintenance of local roads in Georgia were presented in a workshop held in Tbilisi on the 2nd of December 2010. Participants of the workshop included representatives of the Ministry of Infrastructure and Regional Development (MRDI) and its Roads Department (RD), the State Procurement Agency, the Tax Service, and representatives from several municipalities and contractors. A full list of participants is given in Annex 1.

2. The workshop was built around a presentation identifying a number of problem areas regarding the maintenance of local roads and proposing solutions and ways forward. Although the focus was on local road maintenance, some of the issues are also relevant for Secondary and International roads. These problem areas were subsequently discussed with the workshop participants. The main issues discussed during the workshop are given below and will be treated in more detail in this report. The full presentation is given in Annex 2.

Main workshop discussion topics

Local road data Maintenance funding and prioritization for local roads Maintenance contracting, competition levels and the potential for introducing performance-

based contracting Maintenance teams or microenterprises for routine maintenance of good condition roads

LOCAL ROAD DATA3. One problem that was identified in the study was that accurate up-to-date local road data is not available. The available data regarding the total local road length is contradictory, and no accurate data is available regarding surface types and condition. Previously when the local roads were the responsibility of the Roads Department, this data was collected regularly and readily available. Now these local roads are the responsibility of the municipalities, however, this data is not available at national level, even where it is collected at municipal level.

4. Currently a specific project is being carried out to collect and update this data. However, after a few years this data will be outdated again and mechanisms need to be put in place to ensure this data is collected and updated regularly, and made available at central level.

5. This data is required in order to be able to monitor the road conditions over time and to see the impact of (the lack of) maintenance on road conditions. Such condition data can then also be compared to maintenance investments. Preferably the data collection should therefore also collect information on maintenance investments - not just the total amount but also the road length maintained and the type of work carried out. This would allow the assessment of the maintenance approach being applied, and permit the potential benefits of alternative maintenance approaches to be evaluated. The need for such local data was discussed with the participants, and the need to regularly update such data was stressed.

MAINTENANCE FUNDING AND PRIORITIZATION6. Maintenance funding is an important issue for road maintenance in any country, and this is also the case in Georgia. In Georgia maintenance funding for local roads comes from municipal revenue. As a result, the allocation to local road maintenance varies strongly between municipalities. Over half the municipalities spend less than GEL 50,000 and one third has no allocation whatsoever, with only seven municipalities allocating more than GEL 500,000 (these are mainly big cities). Of these allocations, a major part is spent on urban roads rather than local roads.

7. The result of these low allocations is that only part of the local road network is maintained, whereby the focus is on paved roads that are in poor condition. This focus on roads in poor condition means that the limited funding is spent on a very small part of the network due to the high

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maintenance costs, leaving the roads in good to fair condition to deteriorate unchallenged, increasing their future maintenance costs.

8. The study clearly demonstrates the benefits of prioritizing the maintenance of good and fair roads over poor roads, and expresses the need to increase the funding for local road maintenance in order to safeguard the investments currently being made in local road rehabilitation by the World Bank (Secondary and Local Roads Project - SLRP) and others. The study also recommends the identification of a core road network of important local roads in order to focus the investments in rehabilitation and maintenance in those roads.

9. The issue of a core local road network was discussed in more detail, and this is an issue that should be pursued by the World Bank as a means of increasing the impact of maintenance investments.

PERFORMANCE-BASED MAINTENANCE CONTRACTING10. Currently maintenance contracting is on a volume basis. Routine maintenance is defined by 109 different activities, many of which are variations stipulating the use of different types of equipment, while others go beyond normal routine maintenance to include repairs to the road base and other more extensive repairs that are generally not considered to fall under routine maintenance. The preparation of workplans and inspections under such a system put a high burden on the municipal staff. This could be alleviated by reducing the number of activities and limiting them to actual routine maintenance activities, and by making the form of execution of specific activities the responsibility of the contractor (e.g. whether to use a grader, labour or and excavator for side drain clearing). The number of activities could then be reduced to approximately twenty.

11. Another problem being faced is the very low level of competition and interest in routine maintenance, which has high management costs and low turnover and profits. This could be increased slightly by increasing the contract duration to be for 3 to 5 years, thus ensuring greater income security and enabling the investment in new equipment.

12. Another possibility that was discussed at great length is the introduction of performance-based rehabilitation and maintenance contracts. Here the contractor is made responsible for the rehabilitation of a number of roads, and the subsequent maintenance of these roads for a number of years. The maintenance may then also include other roads that are already in good condition. This would increase the contract size, and increase the potential benefits for the contractor as good work during rehabilitation would decrease the costs involved in maintenance, allowing management costs to be reduced and profits to be increased.

13. In the discussions the working of such contracts were explained in terms of payments and inspections. The participants still had a lot of questions, however, and especially the contractors were very interested in getting more information. The issue of profit tax was also discussed with the participants, as this had been mentioned as a potential problem for contractors in performance-based contracts. The conclusion from the discussion, however, was that this should not form a significant obstacle, although it is recommended to include the Tax Department in the development of such a system. The general conclusion was that there was definitely interest in piloting performance-based contracting for combined rehabilitation and maintenance contracts, although more exchange of information would be required beforehand.

MAINTENANCE TEAMS OR MICROENTERPRISES14. The main focus of the PPIAF study was on the potential of introducing maintenance teams or microenterprises for the routine maintenance of local roads. The study showed that this only really made sense for roads in good and possibly fair condition, where pavement repairs played only a minor role. It also showed that these teams would not be able to carry out winter maintenance.

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15. The benefit of introducing maintenance teams or microenterprises would be to enable low-cost basic maintenance aimed primarily at preventing (further) damage from occurring to the roads, as well as introducing performance-based contracting in a stepwise manner. The costs would be lower than those of contractors, primarily because the microenterprises would not need to pay VAT. However, it would result in a greater management burden on the part of the municipalities or the contractor. In addition, the work of the teams or microenterprises would need to be complemented by maintenance works carried out by the contractor using equipment, especially regarding pavement repairs and winter maintenance. This could easily be done in Georgia, however, as the contract with the contractors was on a volume basis, allowing both contractors and microenterprises to work on the same roads (as is the case in many countries in Latin America where microenterprises are widespread).

16. However, the benefits in terms of cost savings are limited, and no great interest was expressed by the participants to introduce the approach. A few municipalities voiced their desire to pilot the approach, but they were not willing to finance the maintenance investment (with the World Bank providing the technical assistance, as had been the agreement under this PPIAF project).

17. In conclusion it is considered that the improvements to local road maintenance are best sought in improving the current maintenance approach with bigger contractors, rather than promoting the introduction of a new complementary concept based on microenterprises. The introduction of performance-based contracting, either for combined rehabilitation and maintenance contracts or alternatively for separate routine maintenance contracts, should form the main focus of this improvement, given the interest expressed by all parties in such an approach. It is therefore recommended not to pilot the maintenance teams or microenterprises, nor to develop the related guides and manual. This was agreed to by the participants of the workshop.

CONCLUSION18. The workshop did not necessarily lead to very many decisive conclusions, but rather created a suitable platform for discussing the problems faced in local road maintenance, ensuring proper understanding by all actors concerned. The need for up-to-date local road data was understood by the participants, but this will need to be followed up by the World Bank to ensure this data collection is carried out regularly.

19. An important issue for the longer term is the funding of local road maintenance. As it is unlikely that municipal revenue allocation to road maintenance will increase significantly, other sources of funding need to be identified. The major investments in road rehabilitation taking place need to be matched by significant investments in their maintenance, in order to ensure the roads do not deteriorate in an accelerated manner and that the planned benefits of the internationally financed projects in terms of reduced agency and road user costs, are achieved.

20. The interest in performance-based contracting is clear, especially for combined rehabilitation and maintenance contracts. It is strongly recommended to follow-up on the momentum created in this respect. In the medium term this would mean a project of this type, but in the short term it is also recommended to organise a workshop with representation of the different contractors and government, to explain in more detail and discuss the different aspects of such contracts.

21. Finally, the conclusion of this workshop regarding the central objective of this study is that the benefits of introducing maintenance teams or microenterprises are not sufficient to continue with their piloting or the development of the necessary guides and manual. Greater benefits can be obtained by improving the current maintenance system based on larger contractors, and the focus should be put there. The study has identified a number of issues that need to be addressed in local road maintenance, which go beyond the maintenance teams and microenterprises, and can even be applied in international and secondary roads. As such the study has delivered a valuable contribution to improving local road maintenance in Georgia, and its conclusions regarding maintenance teams and microenterprises may be used at a later date once road conditions have improved, if considered suitable.

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ANNEX 1: LIST OF PARTICIPANTS

Name/Surname Institution Title

Shalva Kereselidze Ministry of Infrastructure and Regional Development

Regional Development Department

Givi Ambriashvili Roads Department Road Administration Department

Irakli Litanishvili Roads Department Deputy Chairman

Pavle Gamkrelidze Roads Department Chief Specialist

George Basiashvili Roads Department Head of Information Database Department

Tinatin Tsomaia Ministry of Finance Specialist Tax Service Methodology Department

Kote Gugeshashvili State Procurement Agency Information Analysis Department

Tedo Khosroshvili Telavi Municipality Deputy head

Lasha Gigauri Telavi Municipality Specialist

Koba Namoradze Akhmeta Municipality Construction Specialist

David Afriamashvili Gori Municipality Chief Specialist

Aleksandre Tsikaridze

Chokhatauri Municipality Chief Specialist

Zaza Endeladze Baghdati Municipality Head of Infrastructure Department

George Gulua Tsalenjikha Municipality Chief Infrastructure Specialist

Nukri Abalaki "Road Construction Company" LTD Commercial Director

Gocha Tsiklauri "Military road" LTD Deputy Director

Nugzar Sanikidze "Tsekuri" LTD Head of Technical Department

Goderdzi Mikava "Obolia" LTD Chief Engineer

George Tsagareli "Eurasia Transport Corridor Investment Center" Head

Mevlud Datashvili "Caucasautomagistral" Director

Ben Gericke World Bank Program Team Leader

Jiangbo Ning World Bank Highway Engineer

Jean-Franҫois Marteu

World Bank Team Leader

Serge Cartier World Bank Consultant

Archil Jorbenadze World Bank Consultant

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ANNEX 2: WORKSHOP PRESENTATION

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