Document ofThe World Bank

Report No: 20231 GE

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SRD 29.8 MILLION(US$40.0 MILLION EQUIVALENT)

TO THE

GOVERNMENT OF GEORGIA

FOR A

ROADS PROJECT

May 1, 2000

Infrastructure Sector UnitArmenia, Azerbaijan and Georgia Country UnitEurope and Central Asia Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January 1, 2000)

Currency Unit = Lari1.85 Laris = US$

US$ 1 = 0.54 Laris

FISCAL YEARJanuary 1- December 31

ABBREVIATIONS AND ACRONYMS

CAS = Country Assistance StrategyECA = Europe and Central AsiaERR = Economic Rate of ReturnGPN = General Procurement NoticeLACI = Loan Administration InitiativeLIL = Learning and Innovation LoanMOE = Ministry of EnvironmentMOT = Ministry of TransportPIU = Project Implementing UnitPMR = Project Management ReportPMS = Pavement Management SystemSDR = Special Drawing RightsSDRG = State Department of Roads of GeorgiaTRACECA = Transport Corridor Europe Caucasus Asia

(European Union)TRP = Transport Rehabilitation ProjectTRRC = Transport Reform and Rehabilitation Centre

Vice President: Johannes Linn (ECAVP)Country Director: Judy O'Connor (ECC03)

Sector Director: Ricardo Halperin (ECSIN)Sector Manager: Eva Molnar (ECSIN)

Task Team Leader/Task Manager: Antti Talvitie (ECSIN)

GEORGIAROADS PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 8

C. Project Description Summary

1. Project components 92. Key policy and institutional reforms supported by the project I13. Benefits and target population 114. Institutional and implementation arrangements 12

D. Project Rationale

1. Project alternatives considered and reasons for rejection 132. Major related projects financed by the Bank and other development agencies 143. Lessons learned and reflected in proposed project design 154. Indications of borrower commitmnent and ownership 155. Value added of Bank support in this project 16

E. Summnary Project Analysis

1. Economic 162. Financial 173. Technical 174. Institutional 185. Environment 196. Social 217. Safeguard Policies 22

F. Sustainability and Risks

1. Sustainability 222. Critical risks 233. Possible controversial aspects 23

G. Main Credit Conditions

1. Effectiveness Condition 242. Other 24

H. Readiness for Implementation 25

I. Compliance with Bank Policies 26

Annexes

Annex 1: Project Design Summary 27Annex 2: Project Description 31Annex 3: Estimated Project Costs 33Annex 4: Cost Benefit Analysis Summary 34Annex 5: Financial Summary 37Annex 6: Procurement and Disbursement Arrangements 38Annex 7: Project Processing Schedule 53Annex 8: Documents in the Project File 54Annex 9: Statement of Loans and Credits 55Annex 10: Country at a Glance 57Annex 1 1: Policy Letter from the Government of Georgia 59

MAP(S)IBRD No.30786

GEORGIA

ROADS PROJECT

Project Appraisal Document

Europe and Central Asia RegionECSIN

Date: May 1, 2000 Team Leader: Antti P. TalvitieCountry Manager/Director: Judy M. O'Connor Sector Manager/Director: Ricardo HalperinProject ID: P040556 Sector(s): TY - Other TransportationLending Instrument: Specific Investment Loan (SIL) Theme(s):

Poverty Targeted Intervention: N

Project Financing DataOI Loan M Credit C Grant C Guarantee O Odier (Specify)

For Loans/Credits/Others:Amount (US$m): 40.0 million

Proposed Terms: Standard CreditGrace period (years): 10 Years to maturity: 35Commitment fee: 0.50 % Service charge: 0.75% l

GOVERNMENT 15.00 0.00 15.00IBRDIDA 2.22 37.78 40.00

Total: 17.22 37.78 55.00

Borrower: GOVERNMENT OF GEORGIAResponsible agency: STATE DEPARTMENT OF ROADS OF GEORGIA (SDRG)Transport Reforn and Rehabilitation Center (TRRC)

Estimated disbursements (Bank FY/US$M):

Annual 5.0 12.0 12.0 11.0Cumulative 5.0 17.0 29.0 40.0

Project implementation period: 4 yearsExpected effectiveness date: 07/17/2000 Expected closing date: 12/31/2004

OCS PAD Fo- R. w 2CO

A. Project Development Objective

1. Project development objective: (see Annex I)

The project has three objectives: (i) reduce road transport costs and improve access in Georgia's majortraffic corridors; (ii) provide a steady and adequate level of funding for road maintenance (including routineand periodic maintenance, rehabilitation and reconstruction) based on charges related to road use and roadaccess; and (iii) improve management and effectiveness of the entire road network, including local roads,through the institutional strengthening of the State Department of Roads of Georgia (SDRG) and thedevelopment of the private road construction industry.

2. Key performance indicators: (see Annex 1)

Reduction of total road transport costs by: (a) reducing the roughness of the road network through theperiodic maintenance of 281 km of roads and rehabilitation of 162 kms of roads; and (b) increasing the lifeof the pavements through the revision of Georgia's technical standards and specifications for pavementstructures by the year 2003.

Provision of a stable and adequate level of funding for road maintenance by: (a) introduction of anindependent Board and audit of Road Fund operations commencing in calendar year 2001; (b) increases inroad financing equal to at least the increases in general Government revenues; and (c) introduction of arevised set of road user and road access charges reflecting the costs of road use by the time of projectcompletion.

Improvement of road management and its effectiveness: (a) new functional classification for all publicroads under way by Dec. 2001; (b) a Pavement Management System (PMS-HDM4) is in place as anoperational management tool for the main road network rehabilitation and maintenance planning andprogramming by December 2002; (c) a road data bank for the most important attributes is established byJune 2002 for the main roads, and for the entire public road network by the Credit closing date; (d)monitoring of road conditions and costs of road improvements is initiated and road sector performanceindicators adopted by Dec. 2003; (e) all project related civil works are implemented by private contractors;and (f) a three year rolling road program covering all proposed investments in the national road networkplanned to be undertaken by SDRG is prepared and made public by November, 2001, and updatedannually thereafter.

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 17000-GE Date of latest CAS discussion: 10/21/97

The Bank's strategy in Georgia rests on four themes: (i) strengthening public finance, (ii) deepening anddiversifying sources of growth, (iii) protecting the environment, and (iv) reducing poverty. The Bank's firstpriority is to assist the Government to increase revenues and improve efficiency in expenditure managementand allocation in view of Georgia's weak public finance situation and fiscal 'crisis', while continuing toprovide balance of payments and budgetary support. The second priority is to help deepen and diversifyGeorgia's sources of growth by removing barriers to private sector development. This will includemaintenance and rehabilitation of basic infrastructure, together with strengthening the regulatoryframework needed to attract available investment. Reducing barriers to private sector development andinvestment is seen as vital to both the growth objective and poverty reduction. Protecting the environmentis important in view of the neglect of environmental issues during Soviet times, and reducing poverty is

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essential to Georgia's long term growth objective in a country where the income of a large portion of thepopulation is still below the minimum subsistence level.

This project is consistent with the Bank's overall strategy in that it provides for an improvement in the basicroad infrastructure and its management that is essential for expanding Georgia's sources of growth andreduction in poverty. This will be achieved through improvements in the main road network, throughimproved allocation of available road resources among all roads, and, above all, through improvedgovernance and institutional capacity for maintaining and modernizing the entire road network. At themacro level, the project will contribute to increasing the competitiveness of the Georgian private sector inworld markets by lowering transport costs and reducing delivery times. This will support investment, jobcreation, and value added activities, with a commensurate positive impact on poverty. At the local level theproject will have a direct impact on poverty by creating jobs in the short term; for the long term, improvedroads are necessary for trade and economic growth. In the short term, jobs generate income and have amultiplier effect on consumption of locally produced (primarily agricultural) goods and services. While itis difficult to estimate the precise numbers, a conservative estimate is that about 3000 man years ofemployment will be added to the economy. It is generally believed that the transport sector multiplier effecton the rest of the economy is approximately two, translating into additional jobs and income.

Engineering, construction and maintenance of road segments supported by the project and the road fund,and the technical co-operation activities, will be undertaken by the private sector with maximum localparticipation. The project will thus have a direct impact on the development of the private sector. It isimportant to note also that the Road Fund successfully contributed to the collection of taxes from the roadusers in a country where generally tax and duty collection capacity is weak. This is indicated in thestability and increase in the monies available for road management in the Road Fund. The Road Fundaudits by independent auditors, which will commence in 2001, will make road spending transparent andimprove road sector governance.

2. Main sector issues and Government strategy:

1. Deterioration of road infrastructure. The most visible sector issue is the deterioration and inadequatelevel of service of Georgia's road network. It is a critical barrier to private investment and growth inGeorgia. The deterioration has resulted from a combination of factors: (a) a precarious Governmentfinancial situation; (b) lack of maintenance and investment in transport infrastructure since 1991; (c)application of obsolete technology; and (d) lack of modem management and changes in the transport sectorinstitutional and governance structures.

A number of steps have already been taken to improve the financial situation in the transport sector andreduce the Government's fiscal burden: (i) a Road Fund dedicated to preserving the road infrastructure witha revised set of road user charges was introduced in 1995; (ii) State enterprises in road construction andmaintenance, road design institutes, and road transport carriers were privatized; and (iii) the staff andactivities of the remaining State entities were streamlined.

Ultimately, financing available for road management should be increased to a level appropriate to thecondition of the Georgian road network as determined using the Pavement Management System, with thetiming for realizing this objective related to the realities of Georgia's overall economic and financialsituation. By way of comparison, and adjusting for the road network length, Hungary is spendingapproximately US$20 million per year for total road maintenance, and Finland approximately US$27million per year. While Hungary does underfund its road maintenance, Finland does not. Both referencecountries also have much less maintenance backlog and more efficient road management than Georgiatoday which is spending US$20-25 million annually on road maintenance, including the municipal roads

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and streets (see table on p. 7). It is of critical importance to determine, using the road managementsystems, the annual funding targets for road maintenance to catch up with the backlog, and move towardrealizing this target as soon as realistically possible considering Georgia's difficult economic situation.

2. Ministry of Transport (MOT) Organizational Structure. The MOT was created in 1996 by the GeorgianGovemment to formulate and manage policy and regulation of the transport modes. Although useful, theestablished structure did not appear to meet the policy making and regulatory needs of a market economy.The Ministry's functioning has been hampered by overlapping and unclear responsibilities, unclearlegislative support for independent and commercial operations of the State's transport departments, andinadequate capacity for sector policy development and management. To address sector organization issues,the MOT decided to carry out an in-depth restructuring of the Ministry itself. This is being supported bythe World Bank through a technical assistance credit (LIL) of USD2.3 million (Credit No. 31290) forRestructuring of the Ministry of Transport. The restructuring includes revising the Ministry's organizationand functions, staffing, skills mix and staff capacity, the Ministry's relationship with sectoraladministrations and departments, and implementation of management information systems.

3. Road Mananement issues. The State Department of Roads (SDRG) is responsible for managingGeorgia's road network covering 21,600 Ions of roads, of which 9,720 are paved and 11,800 kms aregravel or earth roads. Of these, 1221 km are considered national (main) roads, 4792 km are secondaryroads, and 15,564 km are local roads. Streets are the responsibility of the municipalities, including theurban sections of the main roads in Tbilisi and Kutaisi. SDRG is an independent organization reportingdirectly to the State Chancellery. With meager appropriations from the central budget in the first yearsafter Independence, SDRG could not fulfill its mission. The establishment of the Road Fund in 1995, withrevenue collections from user or road access charges, has provided additional resources that are usedmainly for road maintenance.

SDRG was the recipient of the Bank's first transport project in Georgia, the Transport RehabilitationProject, through which it received assistance to initiate and implement reforms. Under that project, anindependent entity called the Transport Reform and Rehabilitation Centre (TRRC) was set up within theMinistry of Transport to assist SDRG in project implementation. TRRC was responsible for theadministration of the Special Account, project accounting and financial management, procurement, andproject reporting. Since 1995, SDRG has gone through a substantial restructuring, making most of theconstruction and maintenance units independent entities, shifting most of its periodic maintenance fromforce account to private contractors through competitive bidding, acquiring new road maintenancetechnology and equipment, strengthening laboratory and quality control procedures, reducing the amount ofstate property owned by SDRG, and improving administrative procedures. SDRG's ongoing reformprocess covers, inter alia, (i) continued privatization of road construction and maintenance units equipmentand materials (13 of the 14 construction plants have been privatized, 88 maintenance units are undergoingconsolidation into 10 units which are being privatized and approximately 75 percent of the State-ownedquarries, crushing plants, and asphalt plants have been privatized); and (ii) rationalization of SDRG's staffafter completion of the privatization program. The proposed project will continue to provide a soundplatform for sustaining the privatization and restructuring.

The project will focus on institutional strengthening and capacity building in order to modernize roadmanagement. Accordingly, the project will support a broad technical assistance program whose aim is toclarify the mission of the SDRG and improve its capacity to carry out this mission. Both the project's civilworks and technical assistance are scheduled to be undertaken with maximum local participation fortechnology and knowledge transfer. Issues for which support is desired and indicated include managementsystems, supported by appropriate data resources, for preparing budgets and for day-to-day decisionmaking; improved technical standards and specifications; an expanded traffic safety program; and

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improved contracting, procurement and financial management. To round out the technology transferprocess, many project implementation activities will be transferred from TRRC to SDRG, with TRRCproviding support to SDRG as necessary to assure satisfactory project implementation.

4. Road Priorities. The first priority of the Government is to improve its most heavily used roads servingboth intemational and domestic traffic. Transit traffic is important to Georgia in view of its strategiclocation as a link in the east-west corridor that forms part of the Silk Road. This traffic will increase, andwill be an important source of income, if it can be provided with a convenient and reliable freight routefrom Central Asia to the Middle East and Europe. There has been a shift in emphasis from trade withRussia to increased trade from the Caucasus and Central Asia to the Black Sea ports. Recognizing theconstraints of the road network on economic development, the Government has decided to improve thecapacity and quality of its main highways. It has identified the major roads for the transit traffic and thedevelopment strategy as the roads from the Azeri border to the Black Sea, the road from Tbilisi toArmenia, and from Tbilisi to Russia. These important roads are in poor condition due to a combination ofdeferred maintenance and increased traffic. The road link to Russia, which also serves the ski and touristareas in the southern Caucasus, was originally built to different standards and now suffers from severedrainage-related damage. Further deferral of rehabilitation and maintenance of these roads would onlyincrease the costs both to the users and the Government. Rehabilitation of the East-West highway, theArmenia-Georgia road and the road to Russia are, therefore, accorded high priority by the Government.SDRG signed a loan agreement with the Kuwait Fund in March 2000 to rehabilitate a segment of theGeorgia-Armenia highway, and has sought the current IDA Credit for improvements on the East-Westhighway, the road to Larsi at the Russian border, and for the completion of the rehabilitation of the roadfrom Thilisi to Armenia.

The second priority of the Govemment is to obtain the maximum benefit from its road program. This isachieved by a broad institutional development program that supports improvements to the methods anddata resources to plan and prioritize civil works, modernization of the technical standards andspecifications used in engineering design, and progressive privatization and measurable accountability ofservice delivery.

The third priority is traffic safety. In spite of improvements in recent years, traffic safety remains aproblem in the road sector. This is due to speed, lack of road markings, inadequate road design and lack ofcoordination between the responsible organizations. Improvements to traffic safety will be sought bystudying the prevailing road safety situation and trends based on available data; proposing the legal basisand traffic engineering means to monitor, coordinate and improve road and traffic safety; establishing roadsafety policy; and developing a road safety program for Georgia.

5. Road Financino. Since Independence, the fiscal crisis in the country has prevented the Governmentfrom providing the road sector with sufficient funding. The financial shortfall has led to a backlog ofdeferred maintenance. A dialogue on road sector financing was started between the World Bank, Georgianroad sector agencies, and the Ministry of Finance under the Transport Rehabilitation project. This resultedin the creation of the Road Fund (RF) under the Road Fund Law of 1995. Its main characteristics arehighlighted below.

The Georgian Road Fund presently functions as a division within SDRG. The head of the Road Fund isappointed by SDRG's chairman and reports directly to him. However, road funds are often set up as aseparate legal entity, headed by a Chairman appointed by the minister (or even the President). A growingnumber have representative boards with members nominated from key government ministries and road usergroups. Sometimes the Road Fund Board also oversees the road administration. In Georgia, in the absence

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of an independent body that provides day-to-day oversight of the fund's activities, this role is filled by themanagement of SDRG. Final responsibility for appropriate use of Road Fund revenues lies with theGovernment of Georgia.

Approximately 15 staff members are employed in the Road Fund division of SDRG's headquarters unit.This includes accounting staff who are maintaining both SDRG and Road Fund accounts. One of the majoractivities of the Road Fund is monitoring collection of taxes. About 320 SDRG employees are involved inthis activity in the field.

The Georgian Road Fund derives its revenues from taxes on the fuel and lubricants, international transitfees, and vehicle registration fees. It also obtains revenues from a tax of 1 percent on enterprise turnover,and from tolls on tunnels. All of these sources except the enterprise turnover tax are user charges andconsistent with the notion that users' pay for road usage. The turnover tax, which is wholly used tomaintain local and municipal roads, can be considered a road access charge, which can be justified in theshort run by the fiscal constraints facing the Government. However, in the future it should be replaced bycharges more directly aligned to road use. The Road Fund law also addressed the rates in which usercharges are levied, but defines qualifying expenditures very broadly. Maintenance, repair, reconstructionof the roads network, and road related research expenditures are all eligible expenses within the law. Thelaw does not provide guidelines or formulae for the allocation of funds between competing road classes,road owners (e.g. national vs. local) or geographic areas. This function is left to the discretion of SDRG.

There is a need to revise the magnitude and type of user charges. For example, the intemational transit feeswill need to be made consistent with intemational practice. In Europe, such fees are now strictly limited,and consistent in all cooperating countries. Georgia will, as an important transit country, want to adoptsimilar practices, although the transition will need to be implemented in a regional context so that thechanges are made uniformly with Georgia's neighbors.

Financial status. Collection into the Road Fund was initiated in 1996, although revenues from the fuellevy are documented only from 1998 onwards. The fuel tax revenues and enterprise turnover tax eachaccounted for approximately 30 per cent of total Road Fund revenues in 1998, and the international transitfees contributed another 25 per cent. The relative shares of the various sources are approximately the samein the first 9 months of 1999 as in 1998, except for the fuel tax, which has increased to 32 percent and theenterprise turnover tax, which has declined to about 25 percent of total revenues. Recent efforts by theGovemment to reduce the smuggling of fuel into the country appear to have boosted the share of fuel taxrevenues.

Road Fund revenues increased steadily from 1996 to date. As these revenues have increased, the financialsupport from the central Government budget for roads has been progressively reduced, and is expected tobe zero this year. Last year, the Government reduced the Road Fund's share of fuel tax revenues from 100percent of collections to 30 percent. Despite this reduction in the Road Fund's share, total Road Fundcollections in 1999 ran higher than in 1998 in terns of Lari, but lower when converted into US dollars atthe average exchange rate for each year. Road Fund income for the year 2000 is estimated to be theequivalent of about US$26 million, still short of the amount needed to maintain the road networkadequately but substantially greater than before the introduction of the Road Fund.

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Income of SDRG(000 LARI)

1994 1995 1996 1997 1998 1999 2000.______ (est.)

Fuel taxes 11724.0 13591.4 22200Border Crossing Tax 321.0 7169.0 8563.0 9855.3 10670.6 11000

Tax for vehicle ownership 5913.0 5252.5 5541.1 5621.3 6500

Enterprise Turnover Tax 77.6 1051.1 5906.0 11659.3 10931.6 10461.8 10500

Tax from sale of oil/lubricants 62.0 859.0 969.8 1279.1 1294.0 1300

Tunnel user charges 407.0 451.4 496.6 500

Charges for advertisements along roads 60.0 78.7 59.2 200Total Road Fund Income 77.6 1434.1 19,847.0 26911.6 39861.2 42194.9 52200

Central Budget 1054.7 5083.0 8595.0 8492.0 3527.0 300.0 0

TOTAL SDRG INCOME 1132.3 6517.1 28442.0 35,403.6. 43,388.2 42,494.9 52,200

US DOLLAR EQUIVALENT* 1,028 5,091 22,754 27,234 30,772 21,248 26,100

*Converted at average exchange rate each year

It has been the Government's intention that all road maintenance financing (except project counterpartfinancing) would come from the Road Fund as collections increased. Thus, financing from the CentralBudget have steadily been decreasing since 1996. No financing from this source is expected in the year2000 or thereafter.

The financial situation of the country makes it impossible to allocate 100 percent of fuel taxes to the RoadFund. A formula for allocation that takes into account the projected financial needs of the road network,the growth in the fuel tax base, and other revenue sources of the central budget needs to be determined. Itis also important to establish independent governance for the Road Fund, including representatives of theroad users. The pace of sector development will be determined by the future level of resource mobilizationand its efficient utilization.

In discussions with the Government, it has been agreed that the restructuring of the Road Fund during theproject needs to address the following issues: (i) transformation of revenue to the Road Fund to genuineroad user and road access charges (based on functional classification and ownership of the roads), possiblyas a tariff on fuel, lubricants and vehicle ownership; (ii) benefit-cost based prioritization of Road Fundexpenditures (using the PMS); (iii) allocation procedures for Road Fund revenues between categories ofroads and geographic areas; (iv) setting up the Road Fund under the supervision of an independent Board(rather than as a department in SDRG), with representation from the road users, with transparent financialprocedures and management, including annual audits by independent auditors; and (v) a more efficientmonitoring and collection of Road Fund revenue. However, the Government prefers to make these changesgradually, since changes to the Road fund revenue sources and allocation mechanism has the potential ofupsetting State budget agreements. Also, some of the changes would benefit from the adoption and use ofthe Pavement Management System.

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The first step in the process of revising the Road Fund will be taken when the Fund legislation is extendedat the end of calendar year 2000. At that time, the Road Fund will be established as an independent legalentity governed by a Road Fund Board, with provision for transparency in its operations, including annualfinancial reports and audits by independent auditors. The Government will then work with IDA duringproject implementation to make revisions in the road user charges and in the structure of the Road Fundadministration, as provided in the Credit Agreement.

3. Sector issues to be addressed by the project and strategic choices:

Reduction in Road Maintenance Backlog. Reducing road transport costs through timely periodicmaintenance and improving maintenance effectiveness are one of the major objectives of the project Astudy carried out by an international consultant for a neighboring country with similar road conditionsestimated that the poor condition of the roads added from 28 to 44 percent to vehicle operating costs. Theproject addresses the need to reduce these costs by increasing periodic road maintenance and rehabilitationduring the next four years. Road improvements for Georgia's most traveled roads would reduce roadroughness and thus reduce both travel time and vehicle maintenance costs. In addition, the project includestechnical assistance to revise technical standards and specifications for pavement structures in order toincrease the life of pavements.

It is a strategic choice to focus first on the main roads for several reasons. First, the main roads are in theworst condition and carry the most traffic, much of it income-generating intemational transit traffic.Consequently, the direct benefits from improvements to these roads are high. Second, the project roadstraverse through or near the most populous areas and also serve the tourist areas in the Caucasus andBorjomi. Third, the project will have an immediate positive effect on both urban and rural employment andconsumption as workers are engaged to carry out the work, and as the population in the vicinity benefitfrom better access. And fourth, the project will increase the competitiveness of Georgian industries andtransit traffic. All of these benefits combined will serve a large segment of Georgia's population.

Restructuring the Road Fund. The project will assist the Government in establishing a long-term, stableflow of road user related funds for road management. Thus far the Road Fund has protected the roadsector funding in the face of demands from all sectors for budgetary resources, which has helped to create aviable private sector road construction industry. The next step is to commercialize the road sector, in partby restructuring the Road Fund and improving its management.

Improving Sector Management Capacity. Better quality and efficiency of road management operationsand continued improvement in road traffic safety are desirable in Georgia. This will entail better selectionof the roads to be repaired and the type and technology of repair employed; the use of modern managementsystems; better technical standards, material specifications and conduct of work; funding of traffic and roadsafety; and increased efficiencies from competitive contracting, improved quality control and bettertechnology. The TA program includes renewing the road management framework by revising thefunctional classification of roads; capacity building for planning and monitoring performance roadprograms and the SDRG, and underpinning them with adequate data resources and management systems;modernization of technical standards and specifications; training in the supervision of civil works;development of a program to improve traffic and road safety (including its institutional framework); andstrengthening in contracting, procurement, and financial management. In project implementation, TRRCwill support SDRG to improve its procurement, project accounting and financial management capabilities.

Improved Road Safety Conditions& The road safety component of the project will include the first stepsnecessary for setting up a road safety program for Georgia. The actual impact on road safety will be smallduring the project implementation period, since it will take some time to organize a program, train Georgian

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professionals, gather data, and then find the resources to carry out the measures indicated by the planningprocess. Nevertheless, this will be an important and necessary step that will pave the way for a programwith greater impact in the future. The institutional development program of the Credit will integrate theresults of the road safety component into overall road management to ensure that adequate resources in theSDRG budget will be directed to improving road and traffic safety over the medium term. The project alsoplans to involve the Global Road Traffic Safety Partnership (GRTSP) in SDRG's road traffic safetyinitiatives.

Continued Private Sector Support and Development. The project will provide a platform for sustainedprivate sector development. All project related civil works will be implemented by private contractors.Also, three year rolling road programs covering all proposed investments, including traffic safety work, inthe national road network planned by SDRG are made public in order to provide information for privatesector business planning.

Improved Regional Transport Links. The project will make an important contribution to regionaltransport in several ways. First, a substantial part of the civil works will go toward the improvement of theeast-west road running from the Azerbaijan border to the ports on the Black Sea, thus reducing the cost ofthe intemational traffic from Central Asia and Azerbaijan to Europe. This road, identified by TRACECAas the "Silk Road", is expected to be increasingly important for traffic between these points in the yearsahead. Second, the road section from Mamueli to Sadakhlo, which is part of the route from Tbilisi toYerevan, will be improved. This road, which is the shortest route between the two capitals, hasdeteriorated so badly that traffic volume has dropped from 3,000 vpd in 1994 to about 1,000 vpd atpresent, with vehicles now moving over the longer altemative route from Mamueli to Guguti.Reconstruction of this road will therefore reduce the cost of road transport between the two capitals.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

AU indicative cost figures include price and physical contingencies and all taxes. See Map No. 30786 forthe location of project works outlined below. The project description is based on designs made from surveyinformation of road conditions that are continually deteriorating. Therefore, designs for the second andsubsequent year work programs will be reviewed each year and updated as necessary to reflect theconditions of the road at that time. This will cause changes in the lengths and treatments, and projectindicators will of necessity be adjusted to reflect this.

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la. Periodic maintenance and repair of Highways 16.77 30.5 11.90 29.8priority sections of the main roadnetwork, including 470 km of drainageupgrading, and 281 km of surfacetreatment consisting of a leveling layerof asphalt concrete followed by eithera single or double surface dressing.lb. Rehabilitation of about 162 kms of Highways 29.38 53.4 20.90 52.3the main road network, including aleveling layer and either a single ordouble asphalt concrete overlay, plusrelated improvements in shoulders, roadmarkings and signs, and drainagelc. Reconstruction of two bridges. Highways 5.35 9.7 3.80 9.52. Strengthening institutional capacity Institutional 3.00 5.5 3.00 7.5of SDRG, including consultant services Developmentto update functional classification ofroads; modernizing the Road Fund andRoad User Charges; development of atraffic safety program; installing apavement management system and aroad data bank; updating existingtechnical standards and specificationsto international practice; installing afinancial management system;improving the management andadministration of contracts; planning ofmaintenance activities and sectoralperformance indicators; training for theabove; funds for financial audits of theproject accounts; and equipment forcarrying out road managementfunctions, including traffic counters, adeflectometer, mobile weighing scales,testing equipment, field laboratory,office equipment and supplies, andvehicles.3. Incremental operating costs for Institutional 0.50 0.9 0.40 1.0project management (TRRC) Development

Total Project Costs 55.00 100.0 40.00 100.0Total Financing Required 55.00 100.0 40.00 100.0

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While the revision of the Road Fund is not a distinct project component, it is nevertheless an importantaspect of the project as it is central to achieving the second objective of providing a steady and adequatelevel of funding for road maintenance. The Government has, in a letter dated December 21, 1999 (attachedin Annex 11), from the Minister of Finance, the Minister of Economy, and the Head of the SDRG to theWorld Bank, stated that a Commission has been appointed to prepare a package of proposals to ensure theestablishment of a permanent Road Fund dedicated to road maintenance with an allocation mechanism tosupport both the economic and social objectives of the SDRG, and with an objective system for sharing therevenues with the local administrations for the maintenance of local roads. The Road Fund will also have amanagement framework that includes representatives of road users and other private sector stakeholders,and operates under transparent financial procedures. Thus, there is agreement on the kind of Road Fundthat is to be established. The process will be facilitated by holding a workshop for all interested parties todiscuss the issues and to work out the details.

2. Key policy and institutional reforms supported by the project:

The project supports the following sector reforms:

(a) revision and updating of technical standards and specifications for pavement structures.

(b) restructuring the income sources and administration of the Road Fund, including the road user androad access charges, to support road management.

(c) broad-based strengthening and development of new institutional capabilities to manage the roadassets and provide affordable, high quality service to road users.

(d) the development and sustainability of a private road construction and consulting industry capable ofoperating in a competitive environment.

3. Benefits and target population:

The quantified benefits of investments in this project will consist of accident reductions and travel time andvehicle operating cost savings for passengers and goods transport. Savings derive from improved roadsand much improved level of service on the most trafficked roads. The high rates of return (ERR) and NetPresent Values indicate that the anticipated benefits are considerable. Beneficiaries include all road users,particularly domestic commercial freight transport operators, international shippers, public transport,private business and tourist passenger travel, and farmers who move their products to market. Due to apaucity of data, it was not possible to calculate the benefits separately for freight and passenger traffic, orfor different income groups. If the Georgian economy continues to grow, the estimated benefits represent aconservative estimate, given the present modest traffic volumes and poor conditions of the Georgian roadnetwork.

^-1 1-

Road user benefits will also have both short and long term multiplier effects for job creation, and formanufacturing, trade, land markets, and tourism. The project roads traverse through or near the mostpopulous and important cities and towns in Georgia. The project also improves road segments that servethe tourist and ski and historical areas in the Caucasus and Borjomi. It will have an immediate positiveeffect on employment and consumption as workers are engaged to carry out the work, as well as frombetter access to markets. The project will also improve the competitiveness of Georgian industries, andincrease the transit traffic (believed to constitute a high percentage of the truck traffic) to and from theBlack Sea ports. All combined will increase consumption of locally produced goods and services, includingfood stuffs, and will especially benefit the service industries and the farmers, large and small.

The project should also lead to reduced costs of road maintenance through the increased use of competitivebidding procedures. Until recently, all Georgian road construction was carried out by force account,through a network of regional branches of the SDRG. These are now private road construction and roadmaintenance firms that will compete for contracts under standard Bank bidding procedures andinternational supervision. It is expected that the competition in the market, an important developmentobjective of this project, will lead to reduced unit costs with immediate benefits to the road (and national)budget. Cost reductions are also expected from the adoption of modern standards and technicalspecifications, as the roads are expected to last longer and serve traffic better.

4. Institutional and implementation arrangements:

Implementation arrangements. The IDA credit will be channeled through the Ministry of Finance. Theproject will be implemented by the SDRG, with financial management assistance and support forprocurement from TRRC. TRRC has experience in implementing World Bank projects and will transferthat knowhow to SDRG during the project. SDRG will be responsible for all technical aspects of theproject, including but not limited to planning, procurement, and implementation of civil works, institutionalstrengthening and training. Supervision of works will be carried out by independent consultants. SDRGwill also have responsibility for preparing short lists of consultants, in accordance with IDA guidelines,pre-selected to participate in the bidding for supervision works. TRRC will be responsible foradministration of the Special Account and project accounting, including consolidating accounting andreporting for all project components. It will also assist SDRG in all matters, especially the commercialaspects of contracting civil works and procurement (for further details, see annex 6). A Project Agreementthat defines the respective roles and responsibilities of each organization, acceptable to IDA, has beenconsummated.

Project financial management (see Attachment 1 of Annex 6). A financial management system for theproject will be maintained within TRRC where project accounting, reporting, monitoring and auditingarrangements will be centralized. Accounts will be maintained in accordance with generally acceptedaccounting principles and practices satisfactory to IDA. The system will be documented in a ProjectFinancial Management and Operational Manual. Key actions relating to the financial managementcompleted before negotiations include: (i) establishment of an operational, integrated accounting systemsatisfactory to IDA, adequate to reflect the operations, resources, and expenditures related to the project;and (ii) beginning the selection of private independent auditors acceptable to IDA. Inadequacies identifiedin the project financial management system and actions required to remedy the situation are detailed in atime-bound Action Plan that was discussed and agreed at negotiations. The action plan and format ofagreed quarterly Project Management Reports (PMRs) are available in Project Files.

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Disbursements will initially be made on the basis of traditional disbursement procedures. TRRC will beresponsible for preparing and maintaining accounting records, preparing quarterly Project ManagementReports (PMRs) and annual Project Financial Statements. The PMRs will be submitted to the Bank withthe progress report on a quarterly basis. The financial statements will be audited annually by privateindependent auditors acceptable to IDA, and audit reports with accompanying audited financial statementssubmitted to IDA no later than six months after end of each fiscal year. The financial reportingrequirements and auditing arrangements were confirmed during negotiations.

In order to assure that counterpart financing is available to finance the Government's share of the civilworks contracts, a local currency Project Account will be set up. The Government will deposit sufficientfunds in this account to cover contractual obligations for the first four months (estimated at US$585,000),with replenishments made periodically as this amount is drawn down.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

A major alternative project design that included railways, ports, and aviation, with a substantial effort totransform the institutions in these modes to more market-oriented structures was- considered. This optionwas abandoned in favor of a project focused more narrowly on the road subsector for these reasons: (i)numerous organizational changes already made by the SDRG are still nominal, requiring continuedconcentration on this agency in order to make these changes truly effective in terms of investment selection,construction costs and performance; (ii) the reform of the port sector already has been included in theStructural Adjustment Loan Ill, with the promise of private sector funding of capital investments; (iii) othermulti-lateral and bi-lateral financial institutions have become involved in railways and the aviation sector,with a potential of bringing in both investment and technical assistance funds; and (iv) exclusion of othermodes from this project does not in any way affect either the need or opportunity for the Bank to beinvolved with transport sector reforms, including but not limited to the ongoing Ministry of TransportRestructuring Project (see below).

Other World Bank lending programs were considered, but were found to be less suitable than regulardevelopment lending. Adaptable Program Lending (APL) is not suitable for several reasons: (i) APLsrequire anticipating longer term Bank/IDA financing requirements, which is inappropriate for maintenancelending since this should be replaced by financing from domestic sources on the basis of appropriate roaduser charges; and (ii) future availability of IDA resources is uncertain. Sector adjustment lending is notappropriate for the same reasons. Regular development lending, with its mixture of institution building andfinancing for physical infrastructure over a four year time frame, is well suited for the financingrequirements that can be anticipated at this time.

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2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Inlementpton Development

Bank-financed Pr (HP) ObjectOve (DO)Sector Policy Reform Transport Rehabilitation S HS

Project in Georgia (completed)Commercialization of sector enterprises Transport Rehabilitation S HS

Project in Georgia (completed)Institutional restructuring LIL for a Restructuring of the

Ministry of Transport inGeorgia (ongoing)

Port sector reform Structural Adjustment Loan IIlin Georgia (ongoing)

Road Fund Road projects in Romania, S SPoland, Hungary, and the BalticStates have addressed the issueof Road Funds and roadfinancing.

Technical standards and specifications Road projects in Hungary and S SPoland have includedmodernization of the technicalstandards.

Road Management Systems Road projects in Hungary, S SPoland, and the Baltic Stateshave included the developmentof road data banks and roadand bridge managementsystems.

Competition and development of the Road projects in Georgia, S Sconstruction and consulting companies. Hungary, Poland, Romania,

and the Baltic States, haveincluded this component

Other development agencies -.......

Roads, Rail, and Ports restructuring TRACECA (EU) TA to Roads, ..............Rails and Ports, EBRD ( ................railways) ............

Port Reform USAID Port Privatization ............., .. .. ............ ..,...... .. ........ S... .. i. ....... .... ...

TRACECA, EBRD . ......Road rehabilitation, including a portion Kuwait Fundof the road corridor to ArmeniaImprovement of Road Transport TRACECA programServices .

.... :- .' . .--.-.- . .., -:-. -..'''.. .:::'-:;.'''--;.:.-:

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

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3. Lessons learned and reflected in the project design:

The Bank has broad experience in financing improvements of inter-urban roads in different parts of theworld, including Eastern Europe. Highway rehabilitation projects similar to this one have beenfinanced in the Baltic countries, Russia, Armenia and elsewhere. Past reviews of Bank-financedhighway projects have confirmed the importance of maintaining existing systems; this is something thatGeorgia is now well aware of and has incorporated in its road operations. Other lessons derived fromthe Bank's work in the sector relate to: a) the importance of improved road planning and programming,including more reliable information and management methods and the application of economic criteria;(b) the need to strengthen institutional performance, particularly by competitive contracting of roadmaintenance to the private sector; and (c) the need to assure a reliable source of financing for roadmanagement from a system of road user charges and the establishment of a Road Fund based on theprinciples of the 'second generation' road funds. These experiences will benefit the project and itsimplementation.

The Bank has extensive experience with Road Funds. It has learned that the details of a Road Fundmust be tailored to the country's conditions; many traditional road funds have foundered, and someorganizational arrangements work much better than others. To give the best chance for successfuloperation, a Road Fund should be governed by an independent Board or commission with a competentsecretariat. The Board should be composed of representatives of the government, business community,farmers and representatives of the country's road user organizations, and should meet on a regularbasis. It should operate in an open and transparent manner, keep accounts that are subject toindependent audit, have a clear legal basis for its establishment, and have a clear definition of whichexpenditures can be financed from the Fund. This experience has already been related to IDA'sGeorgian counterparts, and will form the basis for the revised Road Fund that will be establishedduring the implementation period of the project.

4. Indications of borrower commitment and ownership:

Since independence, Georgia has aspired to a role as the crucial link in a land corridor for tradebetween Europe and Asia for oil and container traffic. The Government is not only interested in thetransit revenues but also the ancillary domestic industry that such trade would generate. TheGovermment is committed to market oriented reforms throughout the transport sector not only insupport of its efforts to rebuild the Georgian economy but also for establishing Georgia as an importanttransport corridor. A major step in this direction is the institutional restructuring of the Ministry ofTransport, which the Government has started under the IDA-financed Learning and Innovation Loan.The Government has prepared a Transport Sector Policy that states in detail the overall direction thatGeorgia is committed to follow. The Bank also received a letter dated December 21, 1999, signed bythe Minister of Transport and the Director of SDRG, stating the Government's intentions regarding arevised structure and tax base for the Road Fund.

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5. Value added of Bank support in this project:

The Bank will help assure that the experience leamed to develop, manage, implement and operate amulti-year road program is available and applied in Georgia. This will include the use of economicanalysis techniques as a basis for prioritizing road improvements, competitive contracting, advancedroad maintenance technology, quality control systems, modem road financing practices, up-to-datetechnical standards, timely data and information sources and systems, and continued organization andhuman resource development. The Bank will also play a role in supporting the development andutilization of the private sector in road maintenance, engineering and construction.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):

* Cost benefit NPV-US$102.3 million; ERR = 50 % (see Annex 4)O Cost effectivenessO Other (specify)The road sections and bridges included in the project were selected from a preliminary list prepared bySDRG. A cost benefit analysis was carried out by the Georgian Transport Reform and RehabilitationCenter of the Ministry of Transport, supported by external consultants, and the final selection was based onthat analysis. The road investment component includes (i) periodic maintenance of sections of the mainroad network, (ii) rehabilitation of sections of the main road network, and (iii) reconstruction of twobridges. A set of maintenance, rehabilitation, and reconstruction strategies were compared using theHighway Design and Maintenance Model (HDM). Economic rates of return (ERRs) and net present values(NPVs) were calculated from incremental costs and benefits. The benefits included are savings in roaduser costs due to improved pavement conditions, and road agency savings in future maintenance costsarising from timely rehabilitation. The NPV is calculated using a 12 percent cost of capital and a 20 yearanalysis period. The ERR and the NPV by type of civil works are shown in the table below. Trafficvolumes over the road sections under consideration were in the range of 1000 to 8,000 vehicles per day,with an average traffic of 4,000 vpd. The network traffic was assumed to grow at about 8.8 percent peryear in the year 2000, and at 5.5 percent per year from 2001 and beyond.

ERR (%) NPV, (USS million)Routine and Periodic maintenance 64 10.4Rehabilitation 40 26.9Reconstruction of two bridges 65 65

The overall ERR and the NPV are estimated to be 50 percent and US$102.3 million, respectively.

A sensitivity analysis was carried out based on an increase in investment costs of 20 percent and a decreasein the rate of traffic increase of 30 percent. An increase in investment costs reduces the ERRs for the threecomponents shown above to 38, 37 and 44 percent, respectively, and the NPVs to US$7.6 million,US$21.8 million, and US$67.8 million, respectively. A 30 percent decrease in the rate of traffic increasereduces the ERRs to 25 percent, 29 percent, and 36 percent respectively, and the Net Present Values dropto US$3.1 million, US$12.1 million, and US$43.5 million respectively. All of these values are quitesatisfactory.

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2. Financial (see Annex 5):NPV=US$ million; FRR = % (see Annex 4)

There are no revenue-earning project entities.

Financial Management and Accoundng: See Annex 6

Fiscal Impact:

Counterpart funds at the level indicated below will be required:

US$ MiHlionCY 2000 CY 2001 CY 2002 CY 2003 CY 2004

IDA funds 3.0 11.0 11.0 11.0 4.0Counterpart 1.1 4.2 4.2 4.2 1.3finds

The Government counterpart funding will be provided from the Central Budget rather than from the RoadFund. The Government share of project financing, which equals 27.3 percent of total project costs, appearshigh for a country with Georgia's fiscal constraints. However, the reason for this is that the project costsinclude the 20 percent VAT, which will add to the Government's revenue collections by an equal amount.If VAT is excluded from the project costs, the Government's share of project financing is reduced to 14.4percent.

The fiscal impact of the repayment of the IDA credit will be borne by the Ministry of Finance, based onpayments to be made from the Road Fund. The Ministry of Finance gave assurances to the appraisalmission that Government budgets and Road Fund revenues would be increased as necessary to allow for anadequate level of resources for both counterpart funding of the project and for normal road maintenanceactivities. Even without an increase in Road Fund income, in the years of maximum impact the repaymentrequirements from the Road Fund would equal only 5.6 percent of the Road Fund revenues. At the sametime, the availability of IDA funds would increase the total amount of funding available for roadmaintenance during the next four years.

3. Technical:

The State Department of Roads of Georgia (SDRG) is still using the Soviet technical specifications for itsroad maintenance and construction works, although these specifications are no longer state of the art forroad work. They will be updated and revised to be consistent with the best practice in Europe. Also, roadrehabilitation techniques not yet in common use in Georgia, such as remixing and cold emulsions, will beintroduced where appropriate. These technical improvements are expected to make maintenance more costeffective through reductions in cost and extensions of the useful life of the roads.

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4. Institutional:A broad institutional development effort is proposed to be undertaken during the Roads Project'simplementation with the aim of maximum knowledge and technology transfer. This will be achieved withthe assistance of a qualified international consulting firm with extensive experience in all of the areas listed,utilizing a combination of long and short term consultant personnel. The program will consist of thefollowing elements:

(a) Technical standards and specifications for pavement structures:The existing specifications for materials, structures and the conduct of work need to be updated tomatch the European practice. The work includes quality assurance and the acquisition of theassociated laboratory.

(b) Development of the road data bank and a pavement management system:Modem road management requires timely information and management systems. A road data banksupports the information needs, and the (HDM4) pavement management system the planning,programming and engineering decisions.

(c) Strengthening contracting and procurement administration:Improved contracting and procurement, and contract management and contract supervision servesthe objective of creating the maximum level of competition and adoption of new technologies.

(d) A program to improve traffic safety:The program would consist of establishing a crash data base, road safety audit system, and thedevelopment of Road Safety Policy with attendant legal and institutional framework.

(e) Institutional development and training to encompass:o Capacity to develop a national road program. The improved data and management systems

and the Road Fund lend themselves to the development of multi-year road programs based oneconomic and other criteria The objective is to create an annual cycle of planning andprogramming to improve SDRG service delivery, serve community interests and private sectorbusiness planning.

* Improvement of SDRG financial management systems (See Annex 6).3 Definition of SDRG outputs and performance indicators for the road sector to assist SDRG

managers to define the most important performance indicators. The indicators should reflectthe important road management objectives (accessibility; equity; safety; environment;community and economic development; the road administration service delivery; roadcondition; and asset value). The indicators should also reflect he concerns of stakeholders, theGovernment, SDRG, and the user community.

(f) Functional classification of the road network:Functional classification of roads into arterial, collector and local roads is fundamental to roadmanagement. It is used for assigning jurisdictional responsibility (road ownership), systemplanning, distribution of funds, evaluation of road space needs, access management, designstandards, and data collection. The process of functional classification is important so that the roadnetwork is of right size and serves the entire country equitably.

(g) Supervision of the road works:The consultant who will provide the support for SDRG institutional strengthening will also beresponsible for the supervision of the project's civil works, with the maximum use of localprofessionals in carrying out this responsibility.

4.1 Executing agencies:

The State Department of Roads of Georgia (SDRG) will be the primary implementing agency, assisted byTRRC, as described below. The SDRG and TRRC have entered into a Project Implementation Agreementacceptable to IDA spelling out their respective responsibilities (see Section G).

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4.2 Project management:

SDRG will be the main implementing agency, with responsibility for preparation of the designs, biddingdocuments, letting and supervision of contracts, and satisfactory completion of works.

TRRC will be responsible for project accounting, financial management reporting, administration of theSpecial Account, auditing, assuring that the World Bank procurement rules are followed, and coordinationwith IDA and other donors.

A Tender Committee has been established in SDRG, with TRRC acting as the Committee's secretariat. Thecommittee will oversee the competitive bidding arrangements and the approval of civil works andconsultant contracts.

Each year by June 30, SDRG will prepare a work program of project activities for the coming year,including planned procurement activities and counterpart requirements. The work program will besubmitted through TRRC and reviewed with IDA before implementation. TRRC will, with inputs fromSDRG, prepare quarterly progress reports covering all major aspects (physical, financial, procurement,environmental, social) of project implementation progress. A comprehensive mid-term review will be heldby June 30, 2002, to review implementation progress of both physical and institutional components of theproject as defined and agreed in the Borrower's Project Implementation Plan. Within 6 months of closingof the project, TRRC will prepare an Implementation Completion Report (ICR), which will be reviewed byand discussed with IDA.

4.3 Procurement issues:

TRRC is experienced in World Bank procurement procedures since it was responsible for implementingtwo previous IDA-financed projects. While SDRG will now be responsible for procurement, TRRC will beavailable to assist and to make available its knowledge of Bank procedures.

4.4 Financial management issues:

As with procurement, TRRC is thoroughly familiar with World Bank financial management procedures.TRRC will have responsibility for project accounting, financial reporting and auditing arrangements. Itwill also be responsible for maintenance and operation of the Special Account and Project Account. Abasic accounting system is in place and meets Bank's minimum financial management requirements, butrequires customization to project required Project Management Reports (PMRs). The assessment of thefinancial management system is presented in Annex 6.

5. Environmental: Environmental Category: B5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

This is a maintenance and rehabilitation project in which existing alignments will be retained. Therefore,the environmental impacts will be related to project works. Direct negative impacts arise from: (i)production and application of bituminous products, (ii) quarrying of stone and gravel; (iii) short termimpacts as noise, dust, and traffic disruption from works execution, (iv) removal of waste materials, and(v) drainage and erosion. A mitigation plan to minimize potential negative impacts has been prepared bythe Borrower with assistance from IDA and is on file.

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5.2 What are the main features of the EMP and are they adequate?

The key issues requiring attention involve the asphalt plants, rock crushing stations, drainage and, in a fewareas, erosion. Because of the Government's fiscal situation, virtually no road maintenance or constructionhas taken place in the past several years. There has been no money or need to modernize the old asphaltplants. Furthermore, the old plants have been dismantled and only a few can (and need) be repaired foruse. Because it is only after the contracts have been awarded when it will be known which plants need tobe repaired, the environmental mitigation plan focuses on the process of certifying asphalt plants, and insome cases, the quarries, and improving the drainage design. Certification of the plants is a preconditionfor contract award. Whenever possible, specific actions have already been proposed and undertaken.Several quarries and crushing plants have been certified. It is anticipated that for most asphalt andcrushing plants, the first phase of environmental improvement consists of the installation of scrubbers andfilters to cleanse the dust. For drainage and erosion, the mitigation is approached through the design of thesubprojects.

The essence of the mitigation plan is observation to assure adherence to Georgia's environmental laws andrequirements. -If violations occur, the first step is to work with the firm or organization to correct theprocedure or device. If violations persist stoppage of work is imposed leading to contract cancellationunless corrective measures are taken. Because, for the most part, the environmental impacts in the projectare positive and there is an interest in the part of the Borrower to improve the asphalt plants, the EMP isadequate and appropriate.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: 11/02/1999

This analysis is based on an environmental review conducted in January 1999 as part of the Georgia RoadsProject preparation. Preliminary consultations took place in conjunction with a mission to Georgia inOctober 1998, and consultations with environmental specialists of the World Bank took place duringDecember 1998 and early January of 1999. The review included consultations with the State Departmentof Roads of Georgia, the Road Design Institute (SAKGZAPROJECT), the Road Research Institute(SAKGZAMETSNIEREBA), the Ministry of Environment, and with selected NGOs interested inenvironmental issues.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

The review included consultations with the State Department of Roads of Georgia, Road Design Institute,the Road Research Institute, the Ministry of Environment and with selected NGOs interested inenvironmental issues. A "stakeholder" meeting was organized by SDRG and TRRC and held in October,1999, to inform interested parties of the Credit, its likely content, and the environmental requirements. Thedraft environmental mitigation and monitoring plan was distributed at the meeting. Fifty personsrepresenting affected municipalities and interested contractors attended the meeting.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

A working group for liaison and auditing will be responsible for monitoring the mitigation plan andensuring that, certification processes are valid and followed. The working group will consist of

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representatives of the MOE, TRRC, SDRG, and one NGO working with environmental issues. TheDeputy Minister of the MOE will appoint the chairman. TRRC will serve as the secretary of the group.Compliance with certification will be verified by the conduct of site audits. The first set of audits will beconducted within six months of the commencement of road maintenance activities; subsequent sets will beconducted one and two years later. The group will meet as necessary but at least once between each IDAsupervision mission and after each annual audit. Finally, the supervision missions will follow-up on theappropriateness and success of the mitigation plan to counter negative environmental impacts (if any). Ifnecessary, remedial actions will be proposed and adopted. The monitoring plan is consistent with the EMP.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

Between 1990-94, real wages in Georgia fel by 90 percent, and unemployment is estimated to have risenfrom negligible amounts to about 20 percent in urban areas. The Government has gradually increased theshare of wages and social benefits in public spending, but poverty remains persistent and widespread. TheCAS emphasizes revenue enhancing actions and efficiency gains in public spending to assist in increasingthe compressed public expenditures and making their use more effective.

While not specifically targeted to the poor, this project contributes to poverty alleviation by job creation forimplementing the civil works components in the short run and in creating employment opportunities in thelonger run through support for overall economic development of the country. The principal beneficiarieswill be the commercial sector, but agricultural producers and small businesses winl also benefit from betteraccess to markets and employment opportunities. The wide geographical scope of investments implies thatalso the benefits will be widely distributed.

The project will provide direct benefits to transport operators, service providers, industries, and generalroad users through improvement of road transport efficiency and road safety on Georgia's mainintemational links.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The formulation of the Transport Rehabilitation Project, the Ministry of Transport Restructuring LIL, andpreparatory documents for this project were the result of collaboration between private and publicstakeholders led by TRRC. The list of parties consulted included: the Ministry of Finance, the Ministry ofEnvironment, the Intemational Monetary Fund, NGOs and transport companies (rail, road, air, maritime).Meetings and workshops have been held with affected interest groups such as the Chamber of Commerce,the Road Transporters Association, the Contractors, and the interested public regarding environmentalimpacts of the project and their mitigation, the likely contracts available for tendering, and the prospects forimprovements in road network conditions as a result of the project. The concept of participation will alsobe incorporated into the Road Fund by the expected composition of the Road Fund Board to includerepresentatives of road users in addition to Govemment agencies. It is also expected that the institutionaldevelopment and professional capacity building activities that will be undertaken in the technical assistancewill include participation of interested stakeholders.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

Not applicable.

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6.4 What institutional affangements have been provided to ensure the project achieves its socialdevelopment outcomes?

Not applicable.

6.5 How will the project monitor performance in terms of social development outcomes?

Not applicable.

7. Safeguard Policies7.1 Do an of the following safeuard olicies 1.R& to the roect?

El Environmental Assessment (OP 4.01. BP 4.01, GP 4.01) 0 Yes Oi NoLI Natural habitats (OP 4.04. BP 4.04. Gr 4.04) L Yes I NoEl Forestry (OP 4.36. gP 4.36) El Yes M NoEl Pest Management (OP 4.09) EL Yes M NoEl Cultural Property fOPN 11.03) O Yes O NoEl Indigenous Peoples (OD 4.20) L Yes M NoL Involuntary Resettlement (OD 430) EJ Yes 1 NoEl Safety of Dams (OP 4.37. BP 4.37 El Yes M NoLi Projects in International Waters (OP 7.50. BP 7.50. GP 7.50) L Yes M NoEL Projects in Disputed Areas (OP 7.60. BP 7.60. GP 7.60) EL Yes 1 No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

See para 5 for the Environmental Assessment.

F. Sustainability and Risks

1. Sustainability:

There are two main risks to sustainability. The first is the availability of a long term, stable source of roadsector financing, which the project addresses through its Road Fund component. The second is the qualityof civil works supported by the project, where adherence to acceptable standards will be assured by the useof intemational consultants for supervision of the civil works.

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2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

From Outputs to Objective1. Vehicle operating cost reduction as a N Ensure quality of works.result of road works is lower thanexpected2. No substantial improvements in road M Improve selection procedures for the staff andmaintenance from the use of the road their trainingmanagement system and new planningprocedures3. Administrative and financial S Dialogue with the Government and SDRG, andmanagement changes introduced in the improved selection procedures for the staff androad fund do not result in improved road their training. Letter of Development Policy.maintenance. Financial management Action Plan.4. Quality of design and materials of civil M Review of designs by intemational consultant,works is substandard. updating of technical standards and use of

intemational consultant for the supervision ofworks.

From Components to Outputs1. Government counterpart funds are not S Advance deposit of counterpart funds isavailable designed to reduce this risk; creation of an

effective Road Fund should also serve to reducethis risk.

2. Operational capacity of SDRG is not M Discussions with SDRG, and improved selectionsufficient procedures for the staff and their training.3. Insufficient competition in letting S Contract packaging and procurementcontracts supervision schedule are designed to mrinimize

this risk.4. Funding made available from the Road S Dialogue with and commitment fromFund to SDRG may not be adequate to Government.maintain the main road network5. The Govemment could decide not to N TRRC's role will be a condition of the Creditprovide financing for TRRC's operations Agreement

Overall Rlsk Rating SRisk Rating - H (High Risk), S (Substantial Rlsk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

SDRG generally prefers the use of local contractors for road rehabilitation works. Discussions with SDRGand road construction interest groups during the pre-appraisal and the appraisal missions focused onexplaining Bank procurement guidelines and opportunities for local participation in civil works, whetherthe bidding procedure used is LCB or ICB. Also, local contractors have an option to work in joint ventureswith international contractors and consultants. The discussions led to Borrower agreement with theproposed procurement plan (see Annex 6).

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There may be resistance to modified or increased road user charges, even when collected for the specificpurposes of the Road Fund. The willingness of road users to pay road user charges rests on publicinformation, involvement of the public in road program development, and public awareness that thecollected income is in fact spent on road improvements.

There also can be resistance to restructuring the Road Fund and opening the Road Fund Board to road userrepresentatives.

G. Main Credit Conditions

1. Effectiveness Condition

1. The Government has opened a project account and a special account in commercial banks satisfactory toIDA.

2. The Government will deposit in the project account counterpart funds sufficient to cover contractualobligations for the first four months (estimated at US$585,000).

3. The Government has submitted to IDA for review and approval a draft agreement making the proceedsof the Credit available to SDRG on the same terms and conditions as the IDA Credit.

2. Other [classify according to covenant types used in the Legal Agreements.]

Dated covenants. During negotiations, agreement was reached on the following:

1. The Government will implement the financial management action plan according to the TOR agreed atnegotiations by December 31, 2000.

2. The Govemnment will appoint auditors for the project accounts and SDRG acceptable to IDA byNovember 30, 2000.

3. The Government wiU cooperate in the institutional strengthening and technical development program asagreed in its TOR, and in accordance with the timetable and performance indicators of Annex 1.

4. SDRG and TRRC, in cooperation with IDA, will carry out a Mid-Term Review of project progress todetermine if there is a need for any revisions in project planning not later than June 30, 2002.

Other Covenants.

1. The Government will allocate sufficient counterpart funds to ensure satisfactory progress in projectimplementation throughout the life of the project

2. The Govemment, during the project implementation period, will each year allocate resources to roadmaintenance activities at the level that will be not less than the level of SDRG's budget for the year 1999,adjusted each year by the same proportion as the increase or decrease in the Government's overall revenuecollections.

3. The Government will take steps to extend the existing Road Fund.

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4. The Government will submit legislation to the Parliament to establish a restructured Road Fund and roaduser charges by the time of Project completion.

5. Not later than June 30 of each year, the Government will furnish IDA the annual road program for thenext year, including procurement and financing plans, and will review these plans with IDA beforeimplementing them.

6. The Government agrees to undertake only economically, environmentally and socially justified roadinvestments. Specifically, it will carry out a feasibility study for all road investment projects estimated tocost one million dollars or more, and will proceed to implement a project only if it has a positive NetPresent Value based on a cost of capital of 12 % per annum.

7. The Government will submit to IDA a quarterly Project Progress Report, in a format satisfactory toIDA, not later than 60 days after the end of the quarter outlining progress made in the implementation ofthe project, as well as the problems encountered and how they are being addressed.

8. The Government will monitor Project implementation and achievement of its objectives using indicatorssatisfactory to IDA. It will report to IDA within 60 days after each calendar year the results of themonitoring and evaluation activities, and will set out measures to ensure the efficient implementation of theProject during the following year.

9. The Government will prepare, not later than 6 months after the Closing Date, a plan for the futureoperation of the Project activities, and the Government's input into the Implementation Completion Report,both of which will be reviewed with IDA.

H. Readiness for Implementation

1 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

El 1. b) Not applicable.

1 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

[]4. The following items are lacking and are discussed under loan conditions (Section G):

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1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.F] 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

Antti P. Talvitie Ricado H ! YTeam Leader sectbr Manager/Director Country Manager/Director

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Annex 1: Project Design SummaryGEORGIA: ROADS PROJECT

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Reduce road infiastructure Increased road fund financing Quarterly progress reports and Improved planning andbottlenecks through increased for road improvements and Implementation Completion maintenance effectiveness willfocus on: (a) promoting road maintenance as Reports. lower infiastructurestate-level pohicy reforms and committed by GOG in bottlenecksimproving delivery Transport Policy letter.effectiveness of road sectorspending, (b) improving Improved transport systemstrategic planning and Improvement in will foster private sectormaintenance effectiveness; administrative and fnancial developmentand (c) facilitating private framework.sector involvement in roadengineering construction andmaintenance.

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~~~~~- - K Pr.i,c-, --Project Development Outcome I Impact Project reports: (from Objective to Goal)Objective: Indicators:1. Reduce road transport costs 1.1 Road user costs reduced by 1.1 Road roughness and other 1.1 Reduced transport costsin the main transport 15 percent. condition surveys of will help stimulate privatecorridors. completed sections. sector development.

1.2 Pavement life extended. 1.2 Report. 1.2 Better standards andspecifications will reduce roadmanagement costs.

2. Provide steady and adequate 2.1 Increases in road 2.1 Quarterly progress reports 2.1 Increased road financingroad maintenance funding financing equal to general and supervision missions. will reduce road user costsbased on charges related to revenue increases. Road Fund audits.road use and access. 2.1 Revised and efficient road 2.2 Quarterly progress reports 2.2 Road users will accept

user charges. and supervision missions. charges that reflect road use2.3 Increased representation of 2.3 Quarterly progress reports 2.3 More transparent Roadstakeholders in road and supervision missions. Fund operations will improvemanagement. Road Fund Board composition resource use.

and Road Fund audits.3. Strengthen Georgia's road 3.1 Improved resource 3.1 Reports and supervision 3.1 PMS and the road datamanagement and private allocation in the road sector. missions. bank will improve roadconstruction industry. maintenance planning.

3.2 Road sector performance 3.2 Reports and supervision 3.2 Performance indicatorsindicators adopted as a missions. will improve SDRG'smanagement tool. incentive to perform well.

3.3 Several private sector 3.3 Supervision mnissions and 3.5 Use of private contractorscontractors have the capacity reports. will improve quality andto participate in all SDRG reduce costscivil works in a competitiveenvironment.

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Output from each Output Indicators: Project reports: (from Outputs to Objective)component:1. Portions of the road 1I.1 Road upgrading and Quarterly progress reports and Upgraded roads will reducenetwork upgraded, using bridges completed according supervision mission. total road transport costs.competitive procurement, and to an agreed schedule (km).improved technical standards. 1.2 All (prqject) road works

are implemented by privatecontractors.1.3 Technical standards andspecifications updated andrevised.

2.1- 2.3 Revised functional 2.1 New functional Quarterly progress reports and Improved budget planning,classification, road data bank classification proposed. supervision mission. road management systems,and PMS are established. 2.2 Road data bank is Topic-specific technical and monitoring of

established, functioning, and reports. performance lead to betterkey data collected. road maintenance and more2.3 PMS system is installed, effective road managementfunctioning and used for roadprogram preparation.

2.4 Traffic safety program is 2.4 Traffic safety audit is There is a high leveldeveloped. completed and traffic safety government commitmnent for

workshop held. improving traffic safety.2.5-2.6 Improved institutional 2.5 Three-year rolling roadroad management framework program covering all roadand technical capacity at works is routinely preparedSDRG. 2.6 Sector performance

indicators are defined to trackroad program and SDRGperformance

2.7-2.9 Restructured Road 2.7 New Road fund law passed Government agrees andFund is established and road 2.8 Accounting and fnancial Parliament approves anuser charges defined. reporting systems installed improved Road Fund.

and Road Fund staff trained tonew financial processes. Improved administration and2.9 Financial audits of the revenue collection will lead toRoad Funid performed improved road maintenance.

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dressings and improvement of470 km of drainage.1.2 Rehabilitation of about US$34.73 million162 kms of the core networkand reconstruction of twobridges.2. Strengthening institutional US$ 3.0 million Quarterly progress reports, 2.1 SDRG will retain orcapacity of SDRG to manage supervision mission reports, employ staff trained to operateroad network. project evaluation. the new systems.2.1 Consultant services for 2.2 IDA's bidding procedurespreparation of engineering will result in an adequate leveldesigns, bidding documents. of competition.2.2 Consultant services for 2.3 Funding will be providedsupervision of civil works under the Road Fund to ensurecontracts. long term sustainability of2.3 Consultant services for road maintenance.technical assistance tomodernize road managementand traffic safety.2.4 Consultant services torestructure the Road Fund.2.5 Goods and equipment forroad management andvehicles.3. Incremental operating cost US$ 0.50 million Quarterly progress reports, 3. TRRC and SDRG share thefor TRRC (project supervision mission reports, project implementationimplementing unit). audit reports. management. TRRC will train

and support SDRG to carryout its part.

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Annex 2: Project DescriptionGEORGIA: ROADS PROJECT

1. The proposed project is a follow up operation to the Transport Rehabilitation Project that wascompleted in 1999. This project will address the most important priorities of the road subsector, and in sodoing, will reinforce the Bank's ongoing assistance in supporting Georgia' s economic recovery andrestructuring. Specifically, the project will (a) support rehabilitation and maintenance of the main roadnetwork to reduce the backlog of deferred maintenance and to prevent further deterioration of Georgia'sroad assets; (b) provide a stable road maintenance financing from local resources by restructuring the RoadFund; and (c) strengthen and improve road management and technical capacity at SDRG.

2. The proposed US$40.0 million IDA Credit will finance works, goods and services for threecomponents. First, IDA will support maintenance on the paved road network, and rehabilitation andreconstruction of critical sections and structures of the main road network to improve its condition to alevel that facilitates sustainable maintenance. The IDA credit will also support strengthening themanagement and technical capacity at the SDRG. Finally, the credit will provide incremental operatingcosts of the project implementation unit TRRC. Designs prepared by local consultants are under review byan international consultant to assure that they are of acceptable international standards. Consequently, thelengths of road works specified below could change somewhat based on the results of that review.

By Component:

Project Component 1 - US$51.50 millionThis component includes three categories of improvements of the main road network (see IBRD Map No.30786):

Periodic maintenance and repair (US $ 16.77 m