Document of The World Bank FOROFFICIAL USEONLY Report No: 45632-GE PROJECTPAPER ONA PROPOSED ADDITIONAL FINANCING CREDIT INTHEAMOUNT OF SDR 12.8MILLION (US$20.0MILLION EQUIVALENT) TO GEORGIA FORTHE SECOND EAST-WESTHIGHWAY IMPROVEMENTPROJECT(CREDITN0.4373-GE) October 1,2008 SustainableDevelopmentDepartment South Caucasus Country Unit Europeand Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective September 30, 2008) CurrencyUnit = GEL 1.40 GEL = US$l 1GEL = US$0.71 US$1.57 = SDRl FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CPS Country PartnershipStrategy CY Calendar Year EBRD EuropeanBank for Reconstruction and Development EDPRP Economic Development and Poverty Reduction Program EIB EuropeanBank of Investment EIRR Economic Internal Rate of Return EMP Environmental ManagementPlan FM Financial Management FMR Financial Monitoring Report GDP Gross Domestic Product GEL GeorgianLari (Currency Unit) GNI GrossNational Income IDA International Development Association IFR InterimUnauditedFinancial Report JBIC Japanese Bank for International Cooperation MoED MinistryofEconomic Development PRSP Poverty Reduction Strategy RDMED Road Department of the Ministry of Economic Development SDR Special DrawingRights (Currency Unit) SEWHIP SecondEast West Highway Improvement Project TRRC Transport Reform and Rehabilitation Center Vice President: Shigeo Katsu, ECAVP Country Director: D-MDowsett-Coirolo, ECCU3 Sector Director: Peter Thomson, ECSSD Sector Manager: Motoo Konishi, ECSSD Task Team Leader: Olivier L e Ber, ECSSD FOROFFICIAL USE ONLY GEORGIA SECONDEAST-WESTHIGHWAYY IMPROVEMENT PROJECT ADDITIONAL FINANCING Contents Page I. Introduction......................................................................................................................... 1 11. Background and Rationale for Additional Financing.. ........................................................ 1 111. Proposed changes ...........................................................................................................2 IV. Consistency with CPS ......................................................................................................... 3 V. Appraisal of Additional Financing..................................................................................... .3 VI. Expected Outcomes ............................................................................................................. 5 VII. Benefits and Risks ............................................................................................................... 5 VIII. Financial Terms and Conditions for the Additional Financing,......................................... .5 Annex ............................................................................................................................................. - 6 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Project Paper Data Sheet Country: Georgia Sector Manager: Motoo Konishi Improvement Additional Financing Environmental category: A (SEWHIPAF) Responsibleagency: Roads Departmentof the Ministryof Economic Development (RDMED) 12 Kazbegi Avenue 0160 Tbilisi Georgia Bank policies? Revisedproject development objectives/outcomes(Ifapplicable] There is no change inthe Proiect'sDeveloument Obiectives or exuectedoutcomes. Does the scaled-up or restructuredproject trigger any new safeguardpolicies? Not audicable For Additional Financing [ ] Loan [XI Credit [ ] Grant For Loans/Credits/Grants: Total IDA financing (US$m.): $20.0 million ProposedTerms: IDA terms of 20 years maturity with10 years grace. Financing Plan (US$m.)2 IDA Others 'The disbursementfor FY08 was faster than the original projection.The revised disbursement schedule reflects the 'actualdisbursementand incorporatesthe disbursement from additionalfinancing. Additional financingonly. I. Introduction 1. This Project Paper seeks the approval o f the Executive Directors to provide an additional credit in an amount o f US$20.0 million equivalent to Georgia for the Second East-West Highway Improvement Project (SEWHIP, Credit: IDA-4373 GE). The Additional Financing would contribute to cover a financing gap which was anticipated during the preparation o f SEWHIP, due to limitations on the amount o f IDA funding which Georgia was able to access at that time. About 40% of the original Credit has already been disbursed; the Additional Financing i s needed duringthe first quarter of CY2009 to maintain the pace of implementation and achieve seamless disbursements. 2. There will be no change to SEWHIP activities. While there is no co-financing from other donors for this project per se, there is close coordination among the various donors supporting (or willing to support) upgrading o f the East-West transit corridor in Georgia (of which SEWHIP i s an important part), including with the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), the European Bank o f Investment (EIB) and the Japanese Bank for International Cooperation (JBIC). 11. Backgroundand Rationale for Additional Financing 3. Original Project: SEWHIP was approved by the Board on November 15, 2007 for SDR 22.4 million (US$35 million equivalent) and became effective on March 10, 2008. The Project's development objectives are (i) to contribute to the gradual reduction o f road transport costs and improve ease o f transit and safety along the central part o f Georgia's East-West corridor through upgrading a segment o f the East-West Highway (E60) from Tbilisi to Rikoti, and (ii)to strengthen the capacity of government agencies (particularly RDMED) to develop and implement a traffic safety program. The Additional Financing involves no change o f the project's original objectives, designor scope. 4. The SEWHIP consists o f (i): upgrading of the Igoeti to Sveneti section of the E60 the Highway from two to four lanes including the construction o f four bridgesat Igoeti bypass, (ii) a road safety component and (iii)project implementation. The Government wanted IDA to process the upgrade from Igoeti to Sveneti as one operation, but due to phasing o f Georgia's access to IDA, which extended across two replenishmentperiods, this was not possible. To meet the Government's project implementation timeframe, however, the SEWHIP was designed as a single operation with an IDA credit o f US$35 million inFY08 and the remaining US$20 million to be financed in FY09 through additional financing, subject to IDA availability, good project performance, and progress in implementing a National Traffic Safety Strategy. In July, the Government sent a formal request to IDA for the Additional Financing. 5. Financinggap and cost overrun: The original total cost o fthe project was estimated at US$SO million, but this has since been revised upward to US$90 million mainly due to the depreciation of 18% o f the US$ against the GEL. 6. Project performance: The implementation o f SEWHIP is well managed and ratings in all the Implementation Supervision Reports have been satisfactory or better. The main contract for the highway upgrade i s under implementation; earthworks have started. The implementation 1 of the road safety component is also progressing at a good pace. O f the US$35 million credit amount for SEWHIP, about US$14 million has been disbursed and disbursement is ahead of original projection. 7. Traffic Safety: When the SEWHIP project was being finalized, the Government requested more time to develop its comprehensive traffic safety strategy3 IDA and the Government agreed during SEWHIP's negotiations that for IDA to proceed with the additional financing, the Government would need to show "good progress" in the implementation of the National Traffic Safety Strategy, andthis would be demonstratedby: (i) ANationalTrafficSafetyStrategyhavingbeenadoptedbytheGovernment; (ii)Instructionshavingbeengiventothelineministriestoimplementthestrategy;and (iii)Ahighlevelcoordinatingbodyoperatingtooverseeimplementationofthestrategy. 8. InJuly, the Cabinet of Ministersendorsedthe National Traffic Safety Strategy presented by the Ministry of Economic Development (MoED). The Cabinet also approvedthe amendment to the charter of the Transport Commission to cover traffic safety issues. The Transport Commission is a high level inter-ministerial coordinating body which meets regularly to discuss transport relatedmatters. 9. Country Context: In the last four years macroeconomic management in Georgia has been solid and able to mitigate internal and external shocks. GDP growth averaged 10.5% during 2005-2007 led by selected sectors, including trade services, construction, financial intermediation, and manufacturing industry. Strong economic growth and appreciation of national currency vis-a-vis SDR and US$ has resulted in a substantial increase of dollar denominated per capita income. The Gross National Income (GNI) per capita increased from US$680 in 2001 to US$1,990 in 2007. Georgia became a 'blend' country eligible for IBRD resourcesas of FY09. 10. The recent August conflict has resulted in shocks to the key pillars of economic development of Georgia. These shocks have included weakening investor and consumer confidence, physical and infrastructure damage and other infrastructure bottlenecks, increased numbers of internally displaced persons, and liquidity pressures in the banking system. A joint multi-donor needs assessment led by the World Bank will be completed in early October. The preliminary assessment is that direct damages to international, main, secondary, local and community roads are not very extensiveand can be handled inthe context of planned donor post- conflict support to Georgia, as well as through regular periodic and routine maintenance activities ofthe network. 111. Proposed changes 11. There are no changes of the project's original objectives, design, scope or components. The traffic safety component in SEWHIP was scaled back from a multi-sector pilot program for the E60 Highway to one focusing on RDMED and comprised o f works, specialized consultancy services, training and equipment to increase RDMED's traffic safety capacity. 2 IV. Consistencywith CPS 12. The SEWHIP is the second o f a series o f sequential upgrades o f the E60 East-West Highway in Georgia. The E60 upgrade was agreed as part o f the FY06-09 Country Partnership Strategy (CPS), which focuses new lending on economic and social policy reforms, infrastructure and education, as key pillars o f Georgia's sustainable development strategy. The first o f the E60 series, EWHIP (from Agaiani to Igoeti) was approved on December 5, 2006 for SDR 12.9 million (US$19 million equivalent) and became effective on March 5, 2007. The SEWHIP, from Igoeti to Sveneti, was approved on November 15, 2007 for SDR 22.4 million (US$35 million equivalent) and became effective on March 10, 2008. 13. InJanuary 2008, Georgia's Parliament approved a five year economic program for 2008- 2012, "Georgia without Poverty". Inter alia, the program emphasizes targeted infrastructure development, particularly in transport infrastructure and logistics. The Government plans to complete the rehabilitationo f a significant part o f the country's road infrastructure. V. Appraisal of Additional Financing 14. Economic and financial: The expected economic impact o f SEWHIP with the Additional Financing i s not material becausethe proposed financing does not amend the original project scope. The limited cost variation does not impact the economics o f the project because the price increase in US$ term is due mostly to inflation in the construction sector and US$ depreciation. It i s marginally due to the modification o f the bridge design and not due to underestimating o f the works (or the quantities). While costs (expressed in US$)are increasing, so i s the value o f the benefits (whether it is value o f time or vehicle operating costs). Furthermore, the original economic analysis included an EIRR sensitivity analysis for a 20% cost increase o f the civil works, which indicatedthat even at that level o f increase the resultant EIRRs would be respectively 15.2% for the 23 km Igoeti-Sveneti road and 10.9% for the construction o f the Igoeti bypass4. The impact ofthe conflict on future traffic growth cannot be determinedwith precision at this time. However, until August, the traffic growth on the E 60 highway had been muchfaster than initially projected(an increase of 30% inone year instead ofthe 7% assumed in the economic evaluation). Taken together, the team considers that the economic (cost-benefit) analysis i s marginally affected and should thus remain substantially unchanged or even show improved results ifthe traffic growth i s not too much affected by the conflict. 15. Technical: The main contract for the highway upgrade is under implementation. The works involve the construction o f two new lanes and the rehabilitation o f two existing lanes from Igoeti to Sveneti section o f the E60 Highway. The works are being implementedintwo stages; the first beginning with the construction of the new lanes to be followed by the rehabilitation. The works contract has been awarded to the lowest evaluated bidder and earthworks have already started. The section o f the SEWHIP improvement that i s near Gori did not sustain material damage during the recent events. The second works contract involves the construction of 4 bridges to allow for the crossing o f a small and narrow valley and the Lekhura River near Igoeti. RDMED has already started the designing process and has launched the prequalification process. 4 SEWHP, Project Appraisal Document Annex 9 (E) 3 16. Procurement: Procurement and consultant guidelines for World Bank loans and IDA credits, dated May 2004 and revised October 2006, are applicable to both the SEWHIP and the Additional Financing. The procurement capacity o f RDMEDhas improved since the appraisal o f SEWHIP. The procurement activities under the First East-West Highway Improvement Project were carried out by RDMED, assisted by the Transport Reform and Rehabilitation Center (TRRC). For the SEWHIP, RDMED has assigned a group o f staff to assume procurement responsibilities for IDA sponsored projects. These staff report to the Deputy Chairman incharge of all international investment projects, and they have become more familiar with procurement policies and procedures for World Bank loans and IDA credits. Also, the offices o f RDMED and TRRC have been consolidated into one building which has improved communication. These developments have resultedin more effective implementation, including procurement activities. The additional financing would not change SEWHIP's original procurement plan. Since the main contract representing 75% o f the project i s procured under satisfactory conditions, the residual procurement risk remains limitedandmanageable. 17. Financial and disbursement: The financial management functions of the additional financing including the flow o f funds, staffing, accounting, reporting, and auditing will be handled by RDMED through TRRC as set in the Implementation Support Agreement spelling out their respective roles and responsibilities. There will be no changes in financial management arrangements. The financial management function o f TRRC has been reviewed regularly by the Bank as TRRC i s responsible for a number o f on-going IDA financed projects and has been found satisfactory. The latest financial management supervision report (April 2008) concludes that financial management arrangements o f the project continue to be satisfactory and the internal control procedures are inplace. The overall FM risk for the project is moderate and the financial management arrangements o f the project are acceptable to IDA. There i s no audit o f the project since it started to disburse in 2008 (it is already 40% disbursed). The client is in compliance with audit covenants regarding all other projects implementedby the TRRC. Similar audit arrangements will be adopted for the additional financing. The project audit will be conducted by independentprivate auditors under terms o f reference acceptable to the Bank. The annual audited project financial statements will be submitted to the Bank within six months o f the end of each fiscal year and also at the closing o f the project. The cost of the audit will be financed from the proceeds of the credit. Project management-oriented Interim Un-audited Financial Reports' (IFRs) will be used for the additional financing monitoring and supervision. The existing formats ofthe IFRswill be usedand the TRRC will produce a full set of IFRsevery quarter throughout the life o f the project and will submit them to the Bank no later than 45 days after the calendar quarter end. There are no changes inthe disbursement arrangements. 18. Social: The Resettlement Action Plan has been submitted to and cleared by IDA. Some minor adjustments have beenintroduced because o f a slight modification inthe alignment. Once the new alignment i s determined, the revisedlist o f landowners and associated impacts would be submitted to IDA prior to the initiation o f negotiation with land owners. Based on RDMED's good track record in implementing the resettlement plan for the FEWHIP and its demonstrated commitment to comply with IDA social safeguards, the risk o f non-compliance i s low. 'Previouslyknownas FinancialMonitoring Reports(FMRs). 4 19. Environment: SEWHIP is rated Category A for the purposes o f environmental assessment because some significant environmental issues are anticipated inaccordance with the World Bank's safeguard policies and procedures, including OP/BP/GP 4.01 Environmental Assessment. A framework assessment was first conducted, followed by a full scale Environmental Impact Assessment and an Environmental Management Plan (EMP). RDMED has a satisfactory capacity to supervise implementation o f the EMP and ensure contractors' compliance. RDMED's staff responsible for environment and social safeguards received technical assistance from IDA aimed at enhancing the agency's capacity in environmental and social management o f roads rehabilitation and construction operations. This included on-the-job training and the provision o f an operational manual to guide RDMED's field work. Three RDMED staff participated inthe regional Safeguards Training Workshop offered in April 2008 by the Bank inTbilisi. VI. ExpectedOutcomes 20. There is no change to the Results Framework with the exception of three Intermediate Outcome Indicators about traffic safety for which no target value were not originally set, pending the adoption of the Traffic Safety Strategy by the Government. These three Intermediate Outcome Indicators have since been agreed upon. The revised "Arrangements for Results Monitoring" i s attached as an Annex. VII. BenefitsandRisks 21. Untilthe recent conflict, no new sector risks had developed since SEWHIP's approval. The risk profile o f the original project has decreased as the institutional capacity o f RDMEDhas improved6,the principal works contract has beenprocured, and RDMED is more aware o f road safety issues. Despite the recent August events, there i s no lasting damage to the E-60 highway, generally, or to the ongoing works financed under the SEWHIP inparticular. The only new risk for the project is that the remainder o f implementation will take place in a post-conflict setting during which economic slowdown is anticipated. However, the international community i s providing substantial financial and technical support to Georgia. The additional financingwill be helpful to the economic recovery process by freeing budgetary resources which can be used elsewhere for reconstructionpurposes. VIII. FinancialTerms and Conditionsfor the AdditionalFinancing 22. The existing SEWHIP Financing Agreement will be amended to reflect the terms and conditions for the Additional Credit (Article 11 and amortization provisions) and the disbursement table/schedule has been revised accordingly. The additional credit has a final maturity o f 20 years including a grace period o f 10 years. There is demonstrateddesire to modernize and the organizational structure of RDMED is such that there is now a core management team that has experience working with IDA and is familiar with IDA policies and procedures. Also the working relationship of TRRC and RDMED is closer as they are housed inone building. 5 I; a 8 2 b z z d d 3 3 3 3 6 6 6 6 3 6 I Fw F w 4- 0 VI it f 1 o z " .-M 0 L .d 3 \o w C E v) b `CI 8 8I? 8 Ele gY J8BB c8El 3 P