Armenia - Highway Project

Document of The World Bank Report No.14301-AM STAFF APPRAISAL REPORT REPUBLIC OF ARMENIA HIGHWAY PROJECT AUGUST 22, 1995 Infrastructure Division Country Department IV Europe and Central Asia Region  CURRENCY EQUIVALENT Currency Unit - Dram I Dram = US$0.0024 US$1 = 425 Dram EXCHANGE RATES: DRAMS PER US$ (End of Period) Nov 22, 1993 14.0 (introduction) Dec 18, 1993 80.0 March 17, 1995 425.0 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ADT Average Daily Tratfic ARD - The Armenian Road Directorate EBRD - European Bank for Reconstruction and Development EIRR - Estimated Internal Rate of Return EU - European Union FSLU - Former Soviet Union GOA - Government of Armenia HDM - Highway Design Maintenance Model ICB - International Competitive Bidding IDA - International Development Association IFC - International Finance Corporation MNEP - Ministry of Nature and Environmental Protection MTC - The Ministry of Transport and Communications NCB - National Competitive Bidding NEAP - National Environmental Action Plan NPV - Net Present Value NS - National Shopping ntkm - net ton-km PIU - Project Implementation Unit PMS - Pavement Management System RUR - Russian Ruble SOE - Statement of Expenditures VPD - Vehicles per day FISCAL YEAR January I - December 31  REPUBLIC OF ARMENIA HIGHWAY PROJECT TABLE OF CONTENTS Page No. CREDIT AND PROJECT SUMMARY ................................ i CHAPTER 1. ECONOMIC BACKGROUND AND THE TRANSPORT SECTOR.. I A. Economic Overview. I B. Overview of the Transport Sector .1 II. THE HIGHWAY SUB-SECTOR .. 3 A. The Highway Network. 3 B. Road Safety. 4 C. Highway Organization. 6 D. Privatization. 8 E. Highway Planning and Expenditures. 8 F. Road User Charges .10 G. Design and Construction .11 H. Envirownental Procedures and Issues .13 Ill. THE BANK'S EXPERIENCE AND STRATEGY . .14 A. Bank/IDA Lending to Armenia .14 B. Country Strategy and Rationale for IDA Investment ................. 14 C. Lessons Learned from Previous Bank Projects in the Highway Sector 14 D. Highway Sector Strategy for Armenia .15 E. Government Attitude Toward Borrowing for the Highway Subsector 16 F. Budget Issues and Road User Charges .17 IV. THE PROJECT .......................................... 18 A. Project Objectives .18 B. Project Description .18 C. Cost Estimates and Financing .22 D. Implementaion .24 E. Status of Cofinancing .25 F. Retroactive Financing .25 G. Procurement .25 H. Disbursements .28 I. Reporting, Accounting and Auditing ........ ................... 30 J. Project Supervision ...................................... 31 K. Environmental Aspects . ................................... 31 L. Program Objective Categories ........... .................... 31 M. Participatory Approach . ................................... 32 V. PROJECT BENEFITS, RISKS AND SUSTAINABILITY ....... ........ 33 A. Project Benefits ....................................... 33 B. Project Risks .34  C. Project Sustainability ....................................34 VI. AGREEMENTS AND RECOMMENDATION ...................... 35  Annexes Annex A Organization Chart of the Armenian Road Directorate (ARD) Annex B Summary of the Resurfacing Program Economic Analysis Annex C Equipment to be Procured Annex D Summary of the Project Training Program Annex E Organizational Structure of the PIU Annex F Project Cost Estimate and Financing Plan Annex G Project Implementation Schedule and Monitorable Performance Indicators Annex H Procurement Arrangements Annex I Procurement Plan and Schedule Annex J Estimated Schedule of Disbursements Annex K Supervision Plan Annex L Environmental Assessment of the Project Impact Annex M Technical Assistance Provided Under the Project Annex N Contents of the Project Implementation Plan Tables Table 2.1 Armenian National Road Network Table 2.2 Traffic Accidents on Public Roads and Streets Table 2.3 ARD Equipment Table 2.4 ARD Annual Budget Table 2.5 Past Budget Allocation Table 4.1 Summary Project Cost Estimates Table 4.2 Financing Plan Table 4.3 Summary of Proposed Procurement Arrangements Table 4.4 Estimated Disbursements Map IBRD 26937 Project Preparation Anders Bonde, Task Manager Robert Nooter, Consultant Phillip Moeller, Consultant Peer Reviewers: Antti Talvitie, TWUTD Carlos Alvarez, EDINU   -i- REPUBLIC OF ARMENIA Highway Project Credit and Project Summary Borrower: Republic of Armenia Implementing Agency: Armenian Road Directorate Beneficiary: Armenian Road Directorate Poverty Category: Not applicable. Amount: SDR 10.3 million (US$16 million equivalent) Terms: 35 years, including ten years of grace on standard IDA terms. Financing Plan: See Table 4.2 Commitment Fee: 0.5 percent on undisbursed credit balances, beginning 60 days after signing, less any waiver Economic Rate of Return: The EIRR for the periodic maintenance component (57 percent of project costs) is 38 percent. No EIRR has been calculated for the routine maintenance component and supporting equipment purchases (26 percent of project costs), but typically routine maintenance has produced large savings in periodic maintenance costs. Project 1D Number: AM-PA-35765 Map: IBRD 26937   Economic Background and the Transport Sector I ARMENIA HIGHWAY PROJECT 1. ECONOMIC BACKGROUND AND THE TRANSPORT SECTOR A. Economic Overview 1.1 Armenia is a small (29,800 sq km), mountainous, landlocked country with a population of 3.65 million. GDP per capita was estimated at $670 in 1994. With few natural resources and only 15 percent of the land able to be farmed, Armenians have survived through strong traditions of education and entrepreneurship. Armenia formally declared independence on September 23, 1991 and elected a reform minded government the following month. The government has proceeded to implement far reaching reforms including the removal of restrictions on external trade, the privatization of agricultural land and industrial enterprises, and serious attempts to control monetary and fiscal expansion. Since Armenia had a large but uneconomic industrial base within the Former Soviet Union (FSU) that depended in large part upon imports and exports to the other parts of the FSU, the dissolution of the FSU and the blockades by two of Armenia's neighbors related to the hostilities over Nagorno-Karabakh have had a devastating effect on the economy. GDP fell by 52 percent in 1992 to about one-third of its 1989 level, and a further 15 percent in 1993. The decline leveled off in 1994, with a real GDP growth of 5.4 percent according to government estimates. 1.2 The Government succeeded in reducing inflation from 46 percent per month in the first quarter of 1994 to 2 percent per month in the first quarter of 1995. This was accomplished through a stabilization program undertaken from the Spring of 1994, with IMF advice. Financial assistance from the IMF commenced in December 1994 with the approval of a Systemic Transformation Facility. These gains have been consolidated through the support of a Standby Arrangement with the IMF that was concluded in June 1995. In parallel the Government is undertaking a comprehensive structural reform program supported by a Rehabilitation Credit from IDA approved in February 1995. It will now be critically important to stimulate output in a stable economic environment that will attract long term sustainable investment as a means of raising living standards and relieving the severe shortages affecting the entire economy. A functioning road network is a vital precondition for achieving this strategy. B. Overview of the Transport Sector 1.3 The Government inherited one segment of the FSU road system, a minuscule part of the massive FSU railway network, and one segment of the FSU air transport system, along with the responsibility for transport infrastructure and rolling stock. The entire system, including the maintenance and repair facilities, were in need of substantial overhaul and repair. 1.4 The railway system consists of an electrified main track of 825 km, two short branch lines to Gumri and Lake Sevan, and two international links to the north and one to the south. There is also an out-of-gauge connection with Turkish railways at Ahurian. The rolling stock consists of 100 diesel and electric locomotives, many that are 20-25 years old, and 80 diesel locomotives for shunting. There  2 Economic Background and the Transport Sector are road/rail container terminals operated by Armenian Railways (AR) at Yerevan, Gumri, and Kirivakan, and a rail/rail terminal at Ahurian. As spare parts are increasingly difficult to obtain, the locomotive fleet is now being cannibalized. 1.5 For air transport, Armenia acquired a collection of old and fuel-inefficient aircraft from the Aeroflot fleet, two major airports and six minor airports and strips. Armenia still shares arrangements with Aeroflot for fleet maintenance, reciprocal rights, and allocation of costs and revenues. The air freight business has already been turned over to a joint venture with a private company, while Armenia Airlines runs normal CIS passenger flights and international charters in collaboration with foreign agencies. The new terminal facilities at the Yerevan airport should be adequate, but the handling of both passengers and cargo is disorganized. 1.6 The Armenia national road network is adequate for the present level of traffic. Maintenance of the national network is carried out under the jurisdiction of the Ministry of Transport and Communications (MTC), and an additional number of smaller roads are maintained by local and regional authorities. At the time of independence, the vehicle fleet included around 100,000 vehicles owned by Ministries and public enterprises. The average age of the fleet was over 7 years and the daily availability was only about 70 percent due to lack of maintenance. The MTC had 102 garages and workshops for carrying out repairs. Some of the workshops have been privatized and the balance are run on independent profit-making lines. It is the Government's policy to privatize as many of these activities as possible during the next several years.  The Highway Sub-Sector 3 11. THE HIGHWAY SUB-SECTOR A. The Highway Network 2.1 Public Roads. The total road network in Armenia is just under 7,800 km (see Table 2.1), of which 77 percent are paved. The road network is divided into Interstate Highways (1,440 km), Regional Roads (2,621 km) and District Roads (3,727 km). The Interstate Highways include 60 km of four lane highways serving the highest density routes. The system includes 829 bridges, 13 of which are wooden. The mountainous terrain of Armenia determines where people can live, and in general also the need for location of the road networks. The existing road network with a density of 0.26 km per sq km is adequate for the traffic needs at this time. Table 2.1: Armenian National Road Network Type of Road Paved Unpaved Total km percent cm percent ckm Interstate 1,411 98 29 2.0 1,440 Highways Regional 2,192 83.6 429 16.4 2,621 District 2,247 65.1 1,300 34.9 3,727 TOTAL 6,030 77.4 1,758 22.6 7,788 2.2 Traffic. Traffic levels are very much lower than they were in the 1970s. This reflects the critical economic situation of the past few years when the size of the Armenian economy declined by more than 50 percent. Traffic counts on the Interstate road network were carried out in 1994 by TecnEcon (see para. 2.4), finding that nearly 83 percent of the network carries less than 3,000 vehicles per day. Heaviest traffic is concentrated on the dual highways radiating outward from Yerevan. Passenger car traffic accounts for around 75 percent of total vehicle kilometers, while heavy trucks of three or more axles make up only 8 percent of the total. Traffic will undoubtedly increase as the economy recovers from its seriously depressed present level, although no patterns have been established that can form the basis of an estimate of future growth. Other uncertainties relate to the future of the railway system, which is in need of massive investment to restore it to good condition and whose viability will affect road traffic patterns, and the closed borders with two of Armenia's neighbors, where their opening would also change the rate of use on several important routes. 2.3 Climate and terrain. Extensive areas of the highway network cross mountainous terrain and altitudes often exceed 1500 meters. Steep gradients, deep cuttings and high embankments are common in these areas, and landslides occur frequently. The severe winter climate, especially in the more mountainous areas of the country where heavy snowfalls are common, require substantial efforts  4 The Highway Sub-Sector to maintain access. In many areas of the network, high intensity rainfall and poor road drainage cause traffic problems and road damage. The extreme climate has an influence on the behavior of road pavements, particularly as a result of the action of freezing and thawing in the spring. 2.4 Road conditions. The road conditions were surveyed in July 1994 by a consultant (TecnEcon) financed by EU-TACIS, and assisted by the Armenian Road Directorate (ARD). The result of the survey is summarized as follows: 8.3 percent Visible defects of less than 5% of surface. No structural failures; 54.7 percent Defects over less than 30% of surface. In general structure is still sound, but localized reconstruction of top pavement layer required; 27.3 percent Defects over at least one third of pavement area with some signs of early structural failure. Critical condition, but appropriate pavement seal will save structure; 5.0 percent Extensive evidence of significant structural failure. Extensive repairs to prevent complete failure; 4.7 percent Pavements have failed. Complete reconstruction required. The cost of the rehabilitation of this portion of the road network, as calculated by the consultant and modified somewhat when reviewed by IDA, is US$20.3 million (see Annex B). A visible inspection of a portion of the main road network in 1995 revealed that serious additional deterioration had occurred since the EU-TACIS-financed survey. It is apparent that the road pavements are now deteriorating at an accelerating rate, a trend that can be expected to continue until the road maintenance activities match the rate of deterioration. Based on an extrapolation of this study, the total cost of the deferred maintenance for the entire road network is in excess of US$100 million. 2.5 Budget constraints starting in 1990 and accelerating through 1994 required ARD to reduce its pavement maintenance operations drastically. In 1994, the total road maintenance budget was only equivalent to US$2.4 million, and ARD had only received 20 percent of this amount by the end of the calendar year. This amount, less than one percent of the 1990 road maintenance budget, was not enough even to carry out the routine maintenance operations for the national road network such as the filling of potholes. B. Road Safety 2.6 The road safety situation in Armenia is very poor by international standards. The statistics show that the number of accidents and fatalities have declined during the past several years but this is due to the sharply declining traffic volumes and poor accident reporting. While no reliable figures exist for the number of vehicles in the country, a comparison of fatalities per 10,000 inhabitants in 1990, when traffic was at a more normal level, with 17 other countries with vehicle densities in the same general order of magnitude (100 vehicles per 10,000 inhabitants) such as Bolivia, Egypt, and the Philippines shows that the Armenian level of fatalities per 10,000 inhabitants was higher than all but two of these countries in 1990 before traffic levels declined.  The Highway Sub-Sector 5 Table 2.2: Traffic Accidents on Public Roads and Streets J All accidents with Personal Fatalities Fatalities per ___________ _ Injuries 10,000 pop. 1990 2069 721 2.0 1991 1876 633 1.7 1992 1416 519 1.4 1993 898 318 0.9 1994 (10 months) 620 207 0.6 2.7 Responsibility for road safety is shared by the MTC, ARD and the Traffic Police. While there is some overlapping of responsibilities, generally they are as follows: - MTC, through its Office of Road Safety and Line Control Administration, is responsible for inspecting the adequacy of road signs and markings, investigating road accidents, training of drivers for Government-operated vehicles, the condition of Government-owned vehicles, and the overall coordination of road safety. ARD, through its Road Utilization Office, is responsible for assuring that safety considerations are included in the design of new roads and that the safety designs are installed, assessing the need for road signs and markings, and keeping records on the most dangerous road sections. The Traffic Police are responsible for vehicle registration, driver training, testing and licensing, recording and analyzing road accidents, preventing any violations of the traffic regulations, and controlling the safety aspects of the installation of road works. 2.8 In practice, these responsibilities have not been effectively carried out in recent years because of the shortage of budget resources, which has resulted in inadequate facilities to carry out the work. Road markings and signs have not been maintained, both because of budget constraints and because the sign posts are frequently removed to use as building materials in a country where there is a shortage of everything. There has been very little if any active cooperation between the Traffic Police and ARD, and accidents have been recorded but not analyzed as to cause. 2.9 IDA has assisted the Government to secure a grant from The Netherlands for the preparation of a Road Safety Plan aimed at the improvement of road safety conditions in the country. The grant will fund consultant services to carry out the following tasks: (a) undertake a Road Safety Survey recording the present situation and identifying existing strengths and weaknesses; (b) in close cooperation with the bodies responsible for Road Safety in Armenia, assist in developing a comprehensive Road Safety Plan. TIe Plan will identify priority actions needed to improve the institutional aspects, and priority road safety activities to be undertaken during the next four years. The Plan will  6 The Highway Sub-Sector cover: (i) organizations, management and policy development; (ii) review of laws and regulation (traffic, vehicle, penalty, police/court procedures); (iii) law enforcement improvements (surveillance methods, equipment, procedures, training); (iv) review of driver training and licensing road safety education in schools and improvement of public awareness through public media and campaigns; (v) review of accident reporting system, data collection and accident analysis; (vi) address the road safety issues related to road infrastructure and traffic management; (vii) review the vehicle inspection system; (viii) improvements of assistance to road accident victims; (ix) establish suitable financing mechanisms for the Road Safety organization and its activities. (c) assist in developing and implementing priority institutional items identified in the Road Safety Plan; (d) assist to arrange a National Road Safety Conference to launch the Road Safety Plan and to raise awareness within the Government and the public; (e) assist in starting up priority road safety activities pilot schemes as identified in the Road Safety Plan; (f) arrange visits by local stakeholders to institutions in countries with well developed Road Safety Programs. The Road Safety Plan prepared with the assistance of this grant would become the basis for road safety activities to be carried out with the assistance of grant funds to be secured from other sources during the life of the project. C. Highway Organization 2.10 ARD, which operates as a semi-independent public agency under the authority of the MTC, has the responsibility for the construction and maintenance of the national road network. ARD has used the Armgiprodor Institute in Yerevan, another public body now functioning like a private organization, for the design of new roads, reconstruction and rehabilitation schemes, and for identification of maintenance activities. The Institute is also responsible for carrying out highway surveys and checking materials and workmanship. Another public organization, the Armgiprotrans Institute, has been responsible for the design of bridges and tunnels as well as several major highways. ARD also uses its own highway inspectors for quality control and cost assessments. Road construction and maintenance have been carried out by 37 state-owned District Enterprises and seven specialized construction enterprises that operate under the direction of ARD, although the construction companies have recently been merged into some of the District Enterprises.  The Highway Sub-Sector 7 2.11 Each District Enterprise has an equipment pool and is responsible for the maintenance of its own equipment, although not all of the Enterprises have their own storage and equipment repair facilities. The result is considerable duplication of equipment and extensive over-staffing. The District Enterprises have in the past made their own decisions as to priorities for periodic maintenance operations within the limits of the budget allocation channeled through the MTC and ARD. 2.12 Eguipment. ARD and its District Enterprises have the following major equipment: Table 2.3: ARD Equipment Equipment Categories in Ordr- To Be -o Be Total Repaired Scrapped 01. Passenger cars 49 9T 59 02. Buses 51 10 6 67 03. Cargo trucks 101 It 18 130 04. Dump trucks 209 41 43 293 05. Bitumen sprayers 19 5 7 31 06. Bitumen sprayers 23 6 10 39 07. Fuel tank trucks 27 6 1 34 08. Water sprayers 45 11 14 70 09. Multipurpose trucks 26 2 5 33 10. Crane trucks 38 14 15 67 11. Road painting machines 13 5 4 22 12. Low loader trailers 14 5 2 21 13. Chipping spreaders 11 I 0 12 14. Snow Blowers 38 6 5 49 15. Crawler Tractors 81 23 23 127 16. Excavators 55 24 24 103 17. Motorgraders 88 26 23 137 18. Motorscrapers 41 11 7 59 19. Asphalt plants 36 9 9 54 20. Asphalt Pavers 19 11 10 40 21. Bucket Wheel Loaders 28 22 26 76 22. Compactors 46 29 29 104 23. Air compressors 29 7 23 59 24. Wheel tractors 44 12 9 65 25. Steam units 44 5 9 58 26. Electric welding machines 84 10 28 122 27. Electric generators 18 8 12 38 28. Crushing plants 50 6 12 66 Total 1319 335 351 2035 Ratio 64.82% 16.46% 18.72% 100% Much of ARD's equipment is not in operational condition, as is evident from the above table, or is poorly designed for its task. The equipment repair facilities are generally poorly equipped and there are  8 The Highway Sub-Sector difficulties in obtaining spare parts for any items manufactured outside of Armenia. 2.13 Personnel. The total current employment level in ARD-related operations was estimated by ARD to be 4,280 people in 1994. This is a reduction from about 10,000 people employed three years ago. The District Enterprises employ about 3,800 people (89 percent of the total number of employees), the central ARD office has 68 employees, and the rest are employed by the Institutes. 2.14 ARD personnel appear to be competently trained in engineering skills. However, the engineering staff has been isolated from the advances in road techniques developed in the Western economies over the last few decades. Also, there is a general lack of awareness by ARD's staff of the techniques for using cost analysis as a basis for making choices regarding pavement management strategies, materials and equipment, as well as knowledge about contracting and procurement procedures. D. Privatization 2.15 Under the Government's general policy of privatization, the Armgiprodor Institute has been partially privatized. The employees rent the company's facilities from the Government, and income is limited to the contracts that the Institute can obtain on a paying basis from clients, most of whom are Government agencies such as ARD. Also, private engineering firms have begun to emerge, and a few are capable of providing services to ARD for road design and supervision. The Government has announced that it intends to continue to privatize substantial portions of the economy, and the 37 District Enterprises have been put on the Government's 1995 privatization list. Privatization will be carried out under the Privatization Act of 1992, under which the privatization process is being regulated. The first step in the process is to issue certificates of entitlement to shares of 20 percent of the value of the enterprise to the employees based on longevity and position within the firm. These certificates are to be converted into shares at no cost to the employees at the time the privatization takes place, which occurs when the Privatization Commission has placed a value on the stock and put the remaining 80 percent up for sale. In the interim while waiting for the privatization to take place, each enterprise will be placed under a Managing Council, with 40 percent of the members elected by the employee certificate holders and 60 percent appointed by the Ministry of Transport and Communications. The Council will elect a President and will appoint an Executive Director to manage the enterprise, which will begin to function like a private company even before its legal status is changed. After the stock sale takes place, the enterprise becomes a fully private stock company, owned and controlled by its stockholders. 2.16 During the interim period, the Government is not expected to subsidize the partially privatized entities. The ability of the privatized enterprises to survive will depend on how quickly and well they acquire new skills in business management, cost accounting and control, bidding and contracting, and quality control. For ARD, this will mean that its staff will have to acquire new skills in contract management, including contracting procedures and quantity and quality control, since all civil works functions irncluding routine and winter maintenance will be carried out on a contract basis. E. Highway Planning and Expenditures 2.17 Planning and Expenditure Procedures. Before independence, the highway authority organization obtained its budget from Moscow, which was agreed between the GOSPLAN in Moscow and the Armenian Government. Traditionally 20 year road development programs were prepared and  The Highway Sub-Sector 9 updated every five years. Since independence, budgets are requested through the MTC to the Ministry of Finance and passed on to the ARD. 2.18 A characteristic of the Armenian highway maintenance program is related to the weather conditions. The construction season during which bitumen products can be applied for surface dressings and overlays is generally limited to the May through October period because of the climate. Somewhat balancing the summer workload, the winter season requires snow clearing and sand/salt spreading to keep the roads safe and open to traffic. However, the unpredictability of the winter conditions makes the planning and budgeting during the winter season difficult. 2.19 Budget Levels. The ARD's budget and its conversion into constant 1992 prices, as calculated by ARD, is: Table 2.4: ARD Annual Budget (Rubles million) 1988 1989 1990 1991 1992 1993 Current 105.7 113.8 129.4 191.1 718.3 4946.8 prices ___ _ Constant 105.7 113.8 129.4 119.4 28.6 13.0 prices I _ _ _ _ _ _ _ _ _ _ _ _ _ _ _I_ _ _ _ _ _ I__ __ _ Thus inflation has caused a reduction in ARD's budget for 1993 when measured in constant prices to about 12 percent of the 1988 level. The 1994 level was further reduced to about I million drams, equivalent to about US$2.4 million, which is about 3 percent of the 1988 level. Only about 20 percent of this amount was actually made available to ARD in 1994, although the balance of the 1994 budget was paid to ARD in early 1995. Some of the decrease in budget resources was absorbed by a reduction in real average wages, and some work was carried out by borrowing funds or supplies from local authorities interested in keeping the roads open. At present, the average monthly pay for ARD employees is exceptionally low, as it is for all Government employees, averaging no more than the equivalent of US$4.40 for administrative staff and US$3.60 for the other staff. The budget level for ARD for 1995 has been increased to the equivalent to US$3.8 million, which is an improvement over the 1994 level but still inadequate for maintaining the national road network. 2.20 The budget allocations for new roads, capital expenditure/reconstruction, periodic and routine maintenance were as follows:  10 The Highway Sub-Sector Table 2.5: Past Bud2et Allocations 1990 1 1991 1992 199 Current prices (Rubles million) New Roads 40.8 52.4 80.2 10. 1,234.6 Capital Expenditure/Reconstruction 1 40 45.5 55.4 2 14.0 Periodic Maintenance 1 15.0 33.9 99.2 926.9 Routine Maintenance 165 i 267. 1,645.3 TOTAL 11T3. 129.4 191.1 1718.3 4,946.8 Constant prices (Rubles million) New Roads 408 52.4 50.1 4.3 3.2 Capital Expenditure/Reconstruction 43.2 45.5 34.6 11.3 3.0 Periodic Maintenance i3.0 21.2 4.0 2.4 Routine Maintenance W6. 16.5 13 9.1 4.3 TOTAL 113.8 129.4 119.4 -T2T8 13.0 F. Road User Charges 2.21 During the Soviet era, funds were collected from enterprises, collective farms and trade organizations by a form of business turnover tax devoted to upkeep of the road network. These taxes are no longer collected due to the low level of business activity, and so there are virtually no road user charges in effect in Armenia at this time. Several months ago, however, as part of a package of measures worked out with the IMF, the Government put forward to the Parliament a proposal for a vehicle registration fee to be charged for all vehicles at a rate equivalent to about US$7 per vehicle, which has now been put into effect. Also, an import duty was proposed at a rate of 10 percent for all fuel imports from non-CIS countries (the Government stated that it could not impose an import duty on CIS goods because of a reciprocal agreement with the CIS countries). These proposals are still under consideration by the Parliament. It is not possible to estimate accurately what collections will be generated by these taxes since there are no reliable statistics on imports of fuel from non-CIS countries. However, it is unlikely that the total of both taxes and fees will exceed the equivalent of US$2 million per year in 1995 even if approved by the Parliament and if fully collected. 2.22 During project preparation, Government agreed on the need to increase road user charges. It is now putting into effect a revised schedule of road user charges to be used for the maintenance of national and local roads. Collections are expected to begin in 1995. The principal source of revenue will be a charge on the total revenue of all enterprises at the rate of 0.4 percent except for transportation companies, where the tax will be 2.0 percent. Estimated income from this source is estimated to be on the order of US$5 million in 1995, rising to higher levels in future years as the economy improves. 2.23 The Government is also carrying out a study of additional road user taxes and charges to augment or replace the enterprise tax, including the following: -Fuel taxes on gasoline and diesel fuel for vehicles  The Highway Sub-Sector 11 -Transit tax -Axle load tax on large trucks -Tax on the procurement of buses and trucks. The level of the taxes has not yet been fixed, and the collection mechanisms present some problems that require careful study. One such problem is that fuel in Armenia is imported in small quantities on trucks and sold in 20 liter jerrycans at temporary sites alongside the road. This makes tax collection difficult, especially since the authorities would like to tax road users of diesel without taxing the use of diesel for other purposes such as for generators or farm machinery. The study will consider solutions to these problems and is expected to provide a basis for Government decision and action when it is completed. 2.24 In the longer run, the Government will need to make provision to collect a sufficient level of revenues from road users to finance an adequate level of road maintenance for the national road network. That level is difficult to calculate under present unstable economic conditions, but is on the order of US$25 million (the maintenance budget under the old system was around US$60 million, a level that was probably excessive). An amount of this size is beyond Armenia's present ability to raise, given the present state of the economy (total Government revenues in 1995 from all sources for all purposes is now estimated to be about US$180 million). However, the increase in revenues will have to be phased in gradually as the economy recovers in order to avoid aborting the recovery. Also, the institutional and technical improvements for highway maintenance included in the project are expected to yield savings in the cost of maintenance, but some operating experience with the new procedures will be needed in order to make an accurate estimate of the level of funding required for future maintenance operations. G. Design and Construction 2.25 Road classification and design standards. The Armenian roads are classified into five categories defined on the basis of traffic volume only. The design standards are based on those used by the former Soviet Union. The geometric standards of the existing roads are generally adequate except in difficult mountainous terrain where hairpin bends and other reduced standards are common. The road carriageway and shoulder design width are often too wide for the present traffic needs. The original pavement design was adequate, and in most cases the bearing capacity of correctly constructed roads will suffice subject to axle-loads being controlled and pavements maintained. However, with an expected increase of heavy load traffic on some international routes, pavement strengthening will be required, and drains, which are often substandard, will need upgrading. 2.26 Condition survey. Regular visual highway inspections were carried out on parts of the network in the spring and autumn of each year, but the survey and reporting system was poor. Roughness surveys have also been carried out over a part of the network every year, but the equipment used has not been calibrated to any standards. The equipment used for these surveys is described more fully below. 2.27 Axle load information. Although the pavements of the most recently constructed main roads are designed to the Soviet GOST design standards based on 10 tons standard design axle load, most roads are constructed for 6 ton axle load only. Presently the legal single axle load limit is 10 tons, but no information is collected on actual axle loads. ARD is aware, however, that loads of scrap metal and bulk goods considerably heavier than this limit are being hauled on the highways, causing serious wear  12 The Highway Sub-Sectr and deterioration to the pavements. 2.28 Highway database, The Armgiprodor Institute in Yerevan has commenced development of a highway database. It contains detailed construction data, including road curvature and elevation, camber cuttings and embankments, and details of structures such as retaining walls and culverts. Some information on roughness and skid resistance is stored, but nothing is yet available on pavement strength, pavement layer thickness, cracking, rutting or any other defect types. No traffic data is recorded. Up- to-date accident data is available, but not sufficiently complete to satisfy the need for accident analysis and is not recorded in the road database. The database is being developed on the principle of providing maximum detail from the beginning so that only a small part of the network is covered. From a maintenance and pavement management point of view it would have been more useful to have started with less detailed data covering the whole main road network and then adding the detail as and when available. Most crucially, no network wide data referencing system has been established and inventory and condition data are intermixed and usually stored in terms of averages and general descriptions. 2.29 Highway inventory. A file ("passport") is kept for each route in which details about the route are stored. These are maintained manually on paper, and are not up-to-date. The file contains road section lengths, the location of highway structures along the route and sometimes when highway maintenance was carried out. Much information is duplicated, but there is no information on road signs, road markings, guardrails, speed limits, or details of pavement construction. Unfortunately the road file information is of limited value for maintenance planning. 2.30 Highway survey equipment. The Armgiprodor Institute has several items of Russian made highway survey equipment, including: a falling weight deflectometer (FWD); two towed bump integrators; a towed skid resistance wheel; and two Russian-made survey buses with on-board equipment for measuring horizontal and vertical alignment, rutting and distances. The FWD equipment and one of the survey buses have never been used because they were delivered incomplete and lack the software and user instructions required to run the equipment. The skid resistance wheel has inherent deficiencies in the way it is operated, and its results are unlikely to be reliable. One of the bump integrators is working, but it is not in good condition. 2.31 Laboratory testing facilities. The Armgiprodor Institute has laboratory testing facilities with a limited amount of equipment for testing cement, concrete, aggregate, soil and rudimentary bitumen samples. The equipment available for these purposes includes presses, bitumen penetrometers and viscosity measuring, cube making and other common devices. All the equipment is said to work. 2.32 Materials. Bitumen for road construction and maintenance came in the past entirely from Russia, and the quality varied. Because of import difficulties from Russia, recently some bitumen has been imported from Iran. Armenia has granite rock suitable for stone aggregate production in a few places only, but has a substantial supply of basalt of marginal quality. 2.33 The combination of woefully inadequate financial resources, physical difficulties to import because of the blockade by Turkey and Azerbaijan, and substantial price increases have caused considerable shortage of essential highway maintenance supplies. The 1993 bitumen consumption was only 15 percent of the 1991 quantity, there is a continuous shortage of fuel, ARD's spare parts stores are empty, and much equipment is being cannibalized to keep the most necessary units running. 2.34 Construction quality. Almost all of the road network was constructed during the FSU  The Highway Sub-Sector 13 period to a generally adequate design standard, followed by a period of generous maintenance. However, poor quality control and poor workmanship have offset these advantages. In particular poor drainage provisions, poor compaction, poor control of vertical finish, incorrect grading of aggregate, use of unsuitable types of bitumen for surface dressing, and uneven bitumen distribution have resulted in a road network with many problematic areas where reconstruction/strengthening is now required. 2.35 Although little maintenance has been carried out since 1991 in Armenia, some stretches of the network have received surface dressing and pothole repairs. However, the quality of these treatments has generally been poor. Patched potholes are not cut out cleanly or properly filled and compacted. Consequently, they do not stop further deterioration, and treatment is often required at the same place within a year or two. Although greater care appears to be taken when surface dressing is carried out, substantial damage to the treated pavement occurs because the road is opened to traffic immediately after the treatment has been applied, with no speed restrictions in force. As a result, significant stripping occurs, and poor control of the quantities of bitumen applied to the road surface results in extensive areas of bleeding. H. Environmental Procedures and Issues 2.36 Until recently, environmental considerations were given only marginal consideration. The Armgiprodor Institute provided limited consultant services to determine pollutant counts from alternative materials relative to asphalt production, but has had no experience with the application of either mechanical or electrical filters for effluents. After serious environmental problems with their chemical industry, Lake Sevan and a debate about reopening of the nuclear power station, the public is now more environmentally aware than in the past. In 1991 the Ministry of Nature and Environment (MNEP) was established with responsibility for making policy and promulgating standards relevant to environmental protection. Regulatory and licensing systems were put in place that require the consideration of environmental issues in the design and implementation of development projects. The MNEP must sign off on all designs for road works, and MNEP-issued licenses are required for the operation of all quarries. Also, the MNEP is in the process of preparing a National Environmental Action Plan (NEAP), which will be ready by June 30, 1997, as well as reviewing a variety of policies and regulatory standards. In addition, the State Engineering University now offers a Masters degree course in Environmental Engineering. In general, the measures already in place and under preparation appear to be adequate to safeguard the environment in connection with road work.  14 The Bank's Experience and Strategy 111. THE BANK'S EXPERIENCE AND STRATEGY A. Bank/I]DA Lending to Armenia 3.1 Armenia joined the World Bank in June 1992. In March 1993 an Institution Building Loan (Ln. No. 3585-AM) was approved, directed to providing institutional support to government institutions that are critical to the restructuring of Armenia's economy. This was followed by an Earthquake Rehabilitation Credit (Cr. No. 2562-AM) for the reconstruction of houses and industry buildings in the area most severely affected by the 1988 earthquake. Also, a Power Maintenance Credit (Cr. No. 2666-AM) to strengthen the energy sector and an Irrigation Rehabilitation Credit (Cr. No. 2667- AM) were approved on December 8, 1994 and a Rehabilitation Credit (Cr. No. 2683-AM), designed to support the Govermnent's reform program through the provision of foreign exchange to finance critically needed imports, was approved on February 28, 1995. B. Country Strategy and Rationale for IDA Involvement 3.2 The key objectives of the Bank's country assistance strategy for Armenia as outlined in the Rehabilitation Credit are to deepen structural reforms to complete the transition to a market economy and to alleviate the large pockets of poverty that have emerged over the last few years. In terms of structural reforms, emphasis is being placed on promoting private sector development and establishing a targeted system of social protection. Sector specific interventions to complement the economy-wide efforts will focus on the delivery of social services, on energy efriciency and on the rehabilitation of critical infrastructure. While overall transport infrastructure is generally considered adequate to meet the short term requirements of the economy, there is an urgent need to prevent the further deterioration of the road network, particularly for those routes that connect Armenia to its sources of essential imports and to its export markets. In the longer run, there is a need to improve the efficiency and adequacy of road maintenance operations, and to build an effective maintenance organization that can develop a road network that is adequate to meet the needs of the expected expansion of road traffic as the economy expands. C. Lessons Learned from Previous Bank Projects in the Highway Subsector 3.3 The proposed project will be the first Bank/IDA highway project for Armenia. However, the Bank has had considerable experience in financing highway projects in other parts of the world, including Eastern Europe. Much of the Bank's lending for highway operations was for road construction up to about 1980. However, the road building boom of the 1960s and 1970s created an infrastructure that began to deteriorate rapidly in the late 1970s. Road networks had expanded much faster than the corresponding maintenance budgets and institutional capacities. Traffic was also increasing at a higher than projected rate, and axle loads often exceeded the design capacity of pavements. The serious magnitude of the problem was demonstrated in a policy study undertaken by the World Bank in 1987.1 The study, which analyzed the extent of deterioration of inter-urban main road networks in 85 countries receiving highway subsector assistance from the Bank (including IDA), came to some startling 'World Bank Policy Study. Road Deterioration in Developing Countries: Causes and Remedies. 1988.  The Bank's Experience and Strategy 15 conclusions. A quarter of the paved roads outside urban areas required reconstruction in the mid-1980s, as did a third of unpaved roads. In addition, another 40 percent of the paved roads of these countries required strengthening. The estimated cost of restoring these roads was US$90 billion. If the countries did not improve their management of roads, the eventual cost could easily increase by two or three times, and the cost to road users would rise even more. 3.4 Concerned at the ever-growing backlog of road maintenance in borrowing countries, the Bank has adopted many of the recommendations of the above policy study in its sector work and investment projects. These include: (a) improvement in road planning and programming, including more reliable information and management methods and the application of economic criteria, (b) strengthening and reform of institutional performance, particularly by contracting out more maintenance activities to the private sector, (c) reallocation of resources to balance construction and maintenance with increased allocation of expenditures to reduce the maintenance backlog, and (d) improving the financing of roads, particularly by the adoption of rational road user charge systems. Lending for roads is generally conditional on countries having an appropriate balance of expenditure among new construction, restoration and maintenance, depending on the level of road deterioration, and on having a system of road user charges that generates most of the resources needed to keep the roads in reasonable condition. 3.5 Also, the experience with the Earthquake Rehabilitation Project provided valuable lessons about how to create competitive conditions in the construction industry. While the Highway Project will involve different companies and Government institutions, these lessons have been drawn upon in the design of this project, as has the Bank's experience with road maintenance generally. D. Highway Sector Strategy for Armenia 3.6 The recommendations of the Bank's Road Deterioration Policy Paper are reflected in the Armenian government's strategy for the highway subsector, along with other factors that are specific to the Armenian situation. The strategy includes: (a) restructuring the highway maintenance organization by turning over the maximum amount of its operations to private sector contractors operating on a competitive basis, (b) building a small but strong road management organization that utilizes the most efficient technology and effective quality control over the private contractors that it employs, (c) developing a competitive contracting industry for both construction and periodic and routine maintenance; (d) improving road planning, including the development of various road management systems; (e) shifting the utilization of budget resources to an emphasis on maintenance rather than new construction, and (f) instituting road user charges as a basis of providing the resources needed for an adequate level of maintenance. 3.7 In the past, the level of road maintenance was adequate, but budget constraints during the past three years have reduced maintenance activities below the levels needed to preserve a functional road system. Also, some of the materials and equipment used in highway maintenance were of inferior quality, construction and maintenance equipment is now old and technically inferior, and operational systems have not kept up with improved methods now in use in most developed and some developing countries. The transition from an operation run entirely as a state enterprise to private contracting has begun but is still in its infancy. 3.8 The challenge for Armenia is to increase its highway maintenance operations on an urgent  16 The Bank's Experience and Strategy basis before pavement deterioration proceeds to the point where costly rehabilitation is required, and to improve the efficiency and effectiveness of its highway maintenance operations for the future. This will require a higher level of spending on periodic and routine maintenance in the short run, combined with the use of strict quality control, better equipment, and operational procedures including cost benefit analysis as a basis for decision-making. It also includes the strengthening of ARD so that it becomes an effective agency for managing the road maintenance program for the country, developing the skills necessary for operating the road maintenance program on a contract basis instead of by force account operations, privatization of the country's other road construction and maintenance organizations and developing an effective private sector construction industry that can carry out road maintenance and construction on a competitive basis. 3.9 The Bank's strategy for the highway subsector is to assist the Government in meeting this challenge through a lending operation that would support expanded maintenance operations with priority given to the main connecting routes that link Armenia to its sources of supply and its export markets, improvements in operational procedures and techniques used in road maintenance activities, and assisting in the institutional changes outlined in the previous paragraph, while encouraging the Government to increase the resources available to meet the future need for road maintenance through instituting appropriate road user charges. The project would also include assistance by several bilateral donors that are providing technical assistance and training in support of these objectives. The IDA credit would help to coordinate these various donor activities in the subsector. In the longer run, the Bank's strategy would include assistance to expand the road network's capacity as the need for this expansion becomes more apparent and if requested to do so by the Government. 3.10 The proposed project would, however, only meet a portion of the deferred maintenance requirements of the national road network, which exceed US$100 million based on the best available information at this time (see para. 2.4). The periodic maintenance requirements of the 1,411 km of paved Interstate highways were estimated to cost US$20.3 million based on the survey carried out by TecnEcon in 1994 (see Annex B), while the project provides for only US$18.6 million for this purpose. Furthermore, the pavements are undergoing continual deterioration, and the actual cost of this work will no doubt be greater because more costly forms of treatment will be required on some sections of road than was the case in 1994 when the study was made. Also, the project does not provide any financing for periodic maintenance for the remaining portions of the road network. While the project will make an important contribution to preserving the most important part of the network, substantially more funds will be needed to restore it fully, and a substantially higher annual budget allocation will be required to maintain the roads thereafter. Therefore, this project can be considered as an interim step in a longer process that will encourage the mobilization of domestic resources but which will also require further donor support in the future to address the large backlog of deferred maintenance. E. Government Attitude Toward Borrowing for the Highway Subsector 3.11 The Government is fully committed to the transition to a sustainable, growing market- based economy. It recognizes the need to maintain economic stability through the exercise of budget restraint, but also realizes the importance of an adequate level of maintenance in order to preserve the infrastructure that is critical for its future development. Specifically, it recognizes the key role of the highway network as part of that infrastructure. The Government sees foreign borrowing as a means of expanding its maintenance spending levels on a non-inflationary basis in the short run while it improves its ability to levy taxes through the introduction of user charges. At the same time, the Government is  The Bank's Experience and Strategy 17 reluctant to borrow any more than necessary, and prefers to utilize grant funds for technical assistance requirements wherever possible. F. Budget Issues and Road User Charges 3.12 The Government's ability to carry out its strategy for the road sector will depend on its ability to generate the resources needed to do so. As described in para. 2.19, spending for road maintenance has been drastically reduced over the past three years because of the collapse of the Government's tax base. While foreign borrowing can mitigate the effects of that reduction for a limited period of time, over the longer run the Government must be able to generate the resources needed for maintenance from its own recurrent revenue collections. Also, road users should be required to pay the costs associated with maintaining the road network in order to put decisions made in the transport sector on a comparable basis with other transport modes. The newly proposed levies on fuel imports from non- CIS countries and vehicle registration fees are a move in the right direction but do not go far enough to meet the cost of road maintenance. The Government has already decided on some, at least interim, measures, as described in paras 2.22 and 2.23.  18 The Project IV. THE PROJECT A. Project Objectives 4.1 The objectives of the Highway Project are to assist in preserving the Armenian road network, thereby avoiding costly rehabilitation or reconstruction at a later date, and to improve the efficiency of Armenia's road maintenance operations for the future. The specific objectives are to: (i) Help preserve the Armenian national road network and reduce transport operating costs by expanding maintenance operations, including bridge and tunnel rehabilitation. (ii) Help develop an institutional framework adapted to the requirements of the road sector of a market economy. (iii) Expand the resource base for road maintenance by encouraging appropriate road user charges. (iv) Assist in developing an effective private road construction and engineering industry. (v) Improve road safety. 4.2 The first and second objectives stated above would help to preserve a functioning transport network needed to support the development of a vigorous market-based economy in accordance with the objectives of the Bank's strategy in Armenia. The third and fourth objectives are consistent with IDA's desire to assist in the transformation from a centrally planned economy to one based on cost analysis and private sector operations, and the fifth objective has obvious social benefits for the economy. The project would also serve to identify the size and scope of future highway maintenance requirements. B. Project Description. 4.3 An IDA Credit of US$16 million combined with co-financing from the Kuwait Fund, France and the EU would finance a four year program of urgently needed highway maintenance and a program of technical assistance and training directed toward institutional strengthening and improved efficiency of Armenia's road maintenance operations. The total project cost is estimated at US$36.9 million. The main components of the proposed project are: (a) Periodic Highway Maintenance (US$18.6 million). Surface dressing of about 1,200 km, overlays for about 205 km, and reconstruction of about 23 km of roads of the Interstate Road Network. Priority would be given to the main trade routes that connect Armenia to its external suppliers and markets for its exports. (b) Bridges and Tunnels (US$2.8 million). The repair of priority bridges and tunnels, and the provision of equipment needed to establish and begin operation of a bridge inspection system. (c) Materials for Routine Maintenance (US$2.6 million). Bitumen for the routine  The Project 19 maintenance of the entire paved national road network and fuel for winter maintenance would be financed under the project in order to expand the amount of routine and winter maintenance to be carried out by ARD. (d) Eguipment and Spare Parts (US$5.7 million). Equipment needed to permit the introduction of new technology and improved quality of road repairs, and spare parts needed to keep existing equipment functioning. (e) Institutional Strengthening and Technical Upgrading (US$2.2). Consultant services, equipment and training to assist ARD to reshape its organization and operational procedures so that both routine and periodic maintenance can be carried out on a contract basis with private contractors instead of on a force account basis, to introduce cost benefit techniques, to improve quality control, to improve planning, road research and technology transfer capabilities, to develop and start implementing a road safety plan, to install a system of axle weight controls, to carry out a study on financing of road maintenance and generally to improve the efficiency of operations for road maintenance. This component would also include training for the private road construction industry in contracting procedures, business administration and project management. (f) Project Implementation (US$0.6 million). Support for an office within the ARD to manage project activities, including the preparation of specifications and bidding documents, handling procurement and project accounting, and the arrangements for training activities financed by the project. The project cost estimate also includes physical contingencies as well as price contingencies calculated on the basis of estimated worldwide inflation over the project period for a total of US$4.4 million. 4.4 Selection for Periodic Maintenance. An analysis of the need for periodic maintenance for the main road network was made by TecnEcon, a British consulting firm, and published as "The Armenia Highway Survey" dated September 1994. The study was financed by the Commission of the European Communities. TecnEcon surveyed the entire 1440 km of main roads and evaluated their condition, traffic volume, and the cost of alternate types of treatment, selecting the treatments and segments with the highest internal rates of return. On this basis, TecnEcon recommended surface dressings, overlays and reconstruction on the basis of the highest Economic Internal Rates of Return (EIRR) for each road segment. TecnEcon recommended that the use of the "mixed-in-place" recycling process should be considered for overlays, whereby the old surface is milled and reprocessed, mixed with some new materials, and reapplied. The use of slurry seals was suggested for consideration for surface dressings. Rates of return ranged from 11 to over 100 percent. The World Bank Highway Design and Maintenance Model (HDM.III) was used, based on a Net Present Value (NPV) discount rate of 10 percent, to rank the various road segments. 4.5 The IDA staff reviewed the cost estimates used in the TecnEcon report and concluded that lower costs could be achieved under Armenian conditions. Revised cost estimates were used as a basis for recalculating the optimal type of surface treatment, and the EIRRs were recalculated. The revised results are shown in Annex B. Additional deterioration can be expected over the life of the project, and consequently the choice of the repaving to be carried out would be based on annual inspections and a recalculation of rates of return based on the same methodology as used by TecnEcon and the IDA staff in making the original selection. Because of the continuing deterioration of the road network before  20 The Project resurfacing can be carried out, the proportion of overlays and reconstruction will be higher than shown in Annex B and the total cost of the repaving of the Interstate network will be substantially greater, although the overall project EIRR is expected to be around the same level as shown for the original calculations. The HDM methodology will also be used by ARD for all investments in the road sector during the life of the project, whether financed by the project or by other sources, and only investments with a positive Net Present Value, based on the cost of capital of 12 percent, will be undertaken. Assurances on these points were obtained during negotiations (see para. 6.1 (i)). 4.6 Support for Routine Maintenance. The condition of the remaining 6400 km of the national road network is also now deteriorating rapidly, but considered of somewhat lower priority than the 1440 km of main roads because of their lower traffic volumes. It is important, however, that these roads receive some emergency treatment during the four year life of the project even though budget constraints will limit this to the filling of potholes and other priority routine maintenance activities, at least in the early years. Also, the difficult winter conditions in Armenia's mountainous terrain makes it necessary to devote some resources to winter maintenance if the roads are to remain operational during the winter months. Therefore, the project includes funding for the provision of imported materials needed for these purposes such as bitumen, vehicle fuel and spare parts. The Government's own budget will need to finance the other costs of the routine and winter maintenance operations as well as some repaving of this part of the road network as its budget resources increase during the life of the project (see para. 4.17). 4.7 Bridges and Tunnels. Several important bridges are in poor condition and need repairs to assure that the highways remain functional. The highest priority bridges to repair have been identified through visual inspection and costed. Also, one tunnel has been identified that needs relining, a new drainage system and other repairs to remain operational. This component also includes the equipment and technical assistance needed to start and begin operation of a bridge inspection system, something that has been totally lacking in Armenia up to now. The introduction of the bridge inspection system would be carried out under contract with one of the design institutes, supported by an international consultant. (see para. 4.31). 4.8 Procedures for Awarding Civil Works. In the past, all work was carried out on a force account basis, as described in Chapter II. However, the Government's decision to privatize all of the construction capacity and most of the engineering capability of the ARD requires a new modus vivendi. In the future, resources will be allocated through the use of contractual arrangements, with competitive bidding used. Specifically, all repaving work (surface dressing, overlays and reconstruction) and bridge and tunnel repairs will be procured through competitive bidding procedures, with bidding open to the District Enterprises (subject to their eligibility under clause 1.8 (c) of the 1995 World Bank Procurement Guidelines) and also to other emerging contractors as well as foreign firms. Routine and winter maintenance, financed from ARD's budget, will in the first two years be awarded through negotiated contracts with the District Enterprise in each geographic area. In subsequent years this work will also be awarded after competitive bidding. This will allow ARD and the newly privatized District Enterprises some time to adjust to the new arrangements. Engineering design, the preparation of bidding documents and the supervision of the civil works contracts will be awarded on a competitive basis after the submission of proposals from a short list of qualified engineering firms. All IDA financed contracts will be processed in accordance with the January 1995 World Bank Procurement Guidelines and August 1981 Consultant Guidelines.  The Project 21 4.9 Equipment and Spare Parts. There is an abundance of equipment available to the ARD's District Enterprises (see Table 2.3), but much of it is in poor condition or is not capable of producing work of adequate quality. It is not the intention of the project to re-equip the District Enterprises completely, since they will be privatized soon. However, it is necessary to provide some types of equipment that are essential to the use of new technology and to improve the quality of the work, as well as to provide critical spare parts, as identified in Annex C, while relying on the existing equipment pool for the bulk of the needs during the next few years. In order that the new equipment can be available to all aspiring contractors on an equal basis, title to these items will be kept by the ARD, held in an equipment pool and made available to successful bidders on a rental basis for carrying out the work contracted with ARD. Rental rates will be set at a level adequate to cover the depreciation of equipment, its maintenance, and a reasonable rate of return on the investment, and adjusted annually to ensure that the amounts collected in the equipment rental account are adequate to maintain its value in real terms. Rental rates for this equipment will be published prior to bidding dates so that all bidders will have an equal cost basis for its use. Assurances were obtained at negotiations regarding these rental procedures (para. 6.1 (ii)). Also, there is an urgent need for spare parts to make existing equipment operational. Project funds up to a total amount of US$ 500,000 will be used in the first year for this purpose. 4.10 Institutional Strengthening. Technical Up,eradinR and Training. This component of the project will assist the ARD to revise its organization to be consistent with the revised operational mode described above, which relies primarily on contracting of both routine and winter maintenance for carrying out the work. This change is so fundamental that it calls for a radical restructuring into a smaller, highly efficient and concentrated organization rather than a gradual, long-term development of the existing institution. New skills including strategic planning based on the use of cost benefit techniques, the management of competitive contracting, improved construction quality control through the use of engineering consultants, improving the data bank for recording the condition of roads, bridges and tunnels, and upgrading the design and construction standards and material specifications will all be needed. A road safety program, based on the Road Safety Plan being prepared with a grant from the Netherlands (para 2.9), will include road safety measures to reduce the high accident rate in Armenia. Axle weight controls will be instituted, with the addition of a mobile weigh bridge and a monitoring system to enforce the legal load limits in order to protect the road network from overloaded vehicles. 4.11 The basic approach to development of a new organizational structure to manage the maintenance of the public road network would be through the establishment of a Project Implementation Unit (PIU) within the ARD and under the supervision of the ARD Director General (see Annex E). The office would be staffed by high quality staff recruited in part from the ranks of ARD and augmented by new hires from outside of the organization in cases where new skills are required. This office would be responsible for planning, budgeting, contracting and procurement, and management of the equipment pool. It would manage the road safety program, and would be responsible for the installation of axle weight controls. It would also be responsible for the institutional strengthening of ARD and the road contractors through arranging of training programs, serving as a channel for technical information available from outside of Armenia, and serving as the link to foreign technical assistance. The PIU would over time become the nucleus of a revised and strengthened ARD, and would be merged with the remainder of the ARD's operations at the completion of the project. During project implementation the PIU would utilize the services of the several design institutes as well as private engineering firms for the preparation of specifications and bidding documents, and for providing engineering supervision for the civil works components of the project. Six months before the expected Closing Date, a study would be carried out with technical assistance provided under the project to determine the best way to integrate the PIU into the ARD structure after project completion.  22 The Project 4.12 The institutional strengthening component of the project would be supported by a grant from the EU that would fund the technical assistance to develop the new administrative skills needed such as contracting, procurement, and budgeting, and the expertise needed to carry out the Road Safety Plan that is being developed with financial assistance from The Netherlands, as described in para. 2.9. The qualifications of the consultants will be to the satisfaction of the Bank. Technical assistance would also be provided to help the Ministry of Transport and Communications establish a viable system of vehicle registration, and for the collection of other road user charges as these are enacted into law. The technical upgrading that would be undertaken would be provided through technical assistance financed by a grant from the French Government and administered by the French Road Directorate. A list of consultants to be provided under the project for institutional strengthening and technical upgrading is in Annex M. 4.13 Training would be provided from both of these funding sources, supplemented by funding from the IDA credit. The training would also include a program to address the most urgent needs of the evolving private road construction industry, including subjects such as: bidding, bid evaluation, cost and quality control and general conditions of contract. On issues such as business administration it would be broad-based, intended as a means of familiarizing industry personnel with the needs of private sector operations. This training would be provided by consultants through seminars and training sessions held in Armenia for all members of the industry who wish to participate. Existing training institutions in Armenia would be utilized to the extent possible. The need for further training would be identified and if possible incorporated in the curricula of existing training institutions. A summary of the Project Training Program is included as Annex D. In addition to the formal training program, the contracts let in connection with the maintenance program and for engineering design and supervision would also provide growth opportunities for the construction industry. It is likely that not all of the District Enterprises would survive the transition from public to private companies. However, the application of training, routine maintenance contracts and competitive bidding for repaving and reconstruction should provide an opportunity for the more competent of these organizations to evolve into successful contractors during the life of the project. 4.14 Proiect Administration. The PIU described in para. 4.11 would be supported by the project through the provision of office equipment and supplies, vehicles, a generator to assure a supply of electric power, and office operating costs including salaries for the staff of the PIU in addition to the technical assistance described in Annex M. C. Cost Estimates and Financing 4.15 The estimated total cost of the project is US$36.9 million, net of taxes and duties (as agreed by the Government), including physical and price contingencies. The foreign component is US$29.6 million, equivalent to 80 percent of total project costs. Foreign costs were estimated in US$ at March 1995 prices and include physical contingencies of 10 percent for materials, equipment and civil works. Price contingencies for foreign costs, amounting to US$1.2 million, were based on average annual forecasts of inflation for foreign supplied goods and services of 2.2 percent per annum. Local cost estimates took into account a significant real increase in wages and other local costs that is expected to occur by the end of 1995. Price contingencies for local costs, amounting to US$0.3 million, were based on the assumption that further real increases in local costs would be relatively modest after 1995. The estimated cost of the project is given in detail in Annex F and is summarized in Table 4.1 below.  The Project 23 Table 4. 1: Summary Project Cost Estimate (Net of Duties and Taxes) USS million (US$ million) Foreign as % of Total Local Foreign Total Periodic Road Maintenance 4.9 13.7 18.6 74 Bridges and Tunnels 0.7 2.1 2.8 75 Routine and Winter Maintenance 2.6 2.6 100 Equipment and Spares 5.7 5.7 100 Consultant Services and Training 0.4 1.8 2.2 82 Project Administration 0.4 0.2 0.6 33 Base Cost 6.4 26.1 32.5 80 Physical Contingencies 0.6 2.3 2.9 79 Price Contingencies 0.3 1.2 1.5 80 TOTAL 7.3 29.6 36.9 80 4.16 IDA would finance US$16.0 million or 43 percent of total project costs; the Kuwait Fund would finance US$15 million of the civil works and equipment components; France and the EU would provide US$2.0 million equivalent of grant financing for technical assistance and training; and the Government of Armenia would finance US$3.9 million, plus any duties and taxes payable on items procured for the project. The IDA credit would finance part of the contracted civil works; part of the imported materials, equipment and supplies; a portion of the contract services, technical assistance and training; and operating expenses for the PIU, including salaries, office equipment and vehicles, office supplies, and other operating costs. France and the EU would finance the balance of the technical assistance and training. The Financing Plan for the project would be as follows: Table 4.2: Financing Plan (Net of Duties and Taxes) (US$ million) Local Foreign Total IDA 3.2 12.8 16.0 Kuwait Fund 15.0 15.0 France 0.1 0.9 1.0 EU 0.1 0.9 1.0 Government 3.2 9 _9. TOTAL 7.3 29.6 36.9 4.17 One of the project objectives is to expand the resource base for road maintenance by encouraging appropriate road user charges. An initial set of road user charges is to be activated on the  24 The Project basis of laws already on the books, and a more appropriate set of charges is to be put before the Parliament sometime after July 1995, as described in paras. 2.22 and 2.23. Given the country's present economic conditions, recovery from the road users of a level of charges adequate to cover all of the road maintenance costs will be difficult to achieve until the country achieves higher levels of economic growth. Ultimately, however, the Government should be seeking to collect a level of such charges of at least US$25 million annually, based on preliminary estimates of the level of resources needed to maintain the national road network (see para. 2.24). In order to secure the maximum possible financing for road maintenance under present conditions, assurances were obtained at negotiations that: (i) the Government will make available to ARD each year during the life of the project the level of budget resources needed to finance its share of project activities; (ii) the Government will provide ARD with an increased level of resources, as a minimum increased at the same rate as increases in the Government's overall revenues, to provide for road maintenance not covered by project activities; (iii) not later than January 1, 1997 the Government will complete a study to: (a) review the experience with the road user charges already in effect; (b) determine the required level of financing needed to maintain the entire road network; and (c) recommend possible financing and collection mechanisms necessary to achieve this level; and (iv) by not later than July 1, 1997 the Govermnent will implement the recommendations on financing and collection mechanisms agreed with IDA (see paras.4.41 and 6. 1(iii)). Also, as a condition of effectiveness for the IDA credit, the Government will put into effect a revised schedule of road user charges acceptable to IDA (see para. 6.2). D. Implementation 4.18 Project implementation would be the responsibility of ARD for all project components. ARD is in the process of establishing the PIU under a Government decree that established an oversight committee to authorize the creation of PIU's and to monitor their activities. The PIU will be integrated into ARD upon project completion, based on the results of a study to determine the best way to integrate the PIU with ARD (para. 4.11). ARD has already appointed a Project Director as head of the PIU who is acceptable to IDA, and ARD would maintain and staff the PIU at a suitable level and operate it in accordance with the implementation arrangements agreed between ARD and IDA during the life of the project (para. 6.1 (iv)). The Project Director would serve as the primary person responsible for assuring that the project is implemented efficiently and on schedule and for coordinating the inputs of the cofinancing partners and the other Government agencies. He would be responsible for the preparation of an Annual Work Program for the work that ARD plans to carry out in the coming year. The Annual Work Program would be prepared by November 15 of each year and reviewed with IDA prior to being put into effect (para. 6.1(v)). He would also be responsible for assuring that project accounts are kept, commissioning audits, preparing periodic project progress reports, and would be the primary point of contact with IDA. 4.19 Project Preparation Facility (PPF). A PPF for US$300,000 has been made available to facilitate the completion of project preparation. The PIU has been set up and staff selected. Accounting procedures are being established and contracts are being let for the preparation of specifications and bidding documents for the first year's civil works, and for the training of staff in procurement procedures. The PPF is also financing the transport of testing equipment needed to complete the strength testing of pavements, which will be carried out with the assistance of the French Road Directorate. Funds are being used for office equipment and supplies, a generator, transport of the testing equipment, consultant fees for the preparation of bidding documents, a study tour by key members of the ARD staff to observe how contracting arrangements work in other countries, and local salaries for the project  The Project 25 administration office staff. E. Status of Cofinancing 4.20 The Kuwait Fund has indicated its willingness to provide US$15 million for the civil works components of the project, subject to completion of an appraisal and the approval of its Board. It is planning on an appraisal in October 1995, which will be joined by IDA, and expects to present the project to its Board in February 1996. Kuwait's financing would be on a parallel financing basis, and the division of components between the Kuwait Fund and IDA has been arranged so that each financing package would be economically valid on its own. France and the EU would provide the support for the technical improvements and institutional strengthening as noted above. The Netherlands has already agreed to finance the preparation of the Road Safety component of the project, and Japan has financed the preparation of the institution strengthening component. IDA and the cofinanciers would arrange joint supervision missions during project implementation. F. Retroactive Financing 4.21 There is considerable urgency to expand the maintenance work on Armenia's road network after three years of greatly reduced budgets, as discussed in para 2.4. Therefore, the Government has requested that retroactive financing be permitted so that work can begin at an increased level even before the credit financing becomes available. While this would only be useful if the Government can advance some additional financing to ARD prior to the effectiveness of the IDA Credit, the Minister of Finance indicated that this could be done if the funds could be reimbursed promptly after the Credit becomes effective. Therefore, the proposed Credit Agreement contains a provision for retroactive financing for project expenditures incurred after March 15, 1995 for up to US$1 million, which is the maximum amount that the Government is likely to be able to advance to ARD in 1995. G. Procurement 4.22 The procurement arrangements over the project period are included in Annex H while Table 4.3 summarizes the project elements, their estimated costs and proposed methods of procurement. The details of procurement arrangements are set forth in the Procurement Plan and Schedule in Annex 1. ARD will use the Bank's Standard Bidding Documents and procurement procedures for IDA financed contracts will be in accordance with the January 1995 World Bank Procurement Guidelines.  26 The Project Table 4.3: Summary of Proposed Procurement Arrangements US$ million equivalent) Procurement Method Proj ect Element ICB NCB Other NIP' Total Cost 1. Civil Works a. overlays, surface dressing, 1.8 8.9 12.8 23.5 reconstruction, bridges & (1.5) (7.6) (9-1) tunnels 2. Equipment, goods a. bitumen, fuel 1.0 0.317 1.7 3.0 (1.0) (0.3) (1.3) b. equipment, spare parts, 3.1 0.8" 2.8 6.7 office equipment & supplies (3.1) (0.8) (3.9) 3. Consultant services & training 1.0d 2.0 3.0 (1.0) (1.0) 4. Miscellaneous a. operating expenses 0.4 0.4 (0.4) (0.4) b. refinancing of PPF 0.3 0.3 l _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (0 .3) (0 .3) TOTAL 5.9 8.9 2.8 19.3 36.9 l ____________________________ L (5.6) (7.6) (2.8) (16.0) Note: Amounts in parentheses are financed by IDA *I Non-IDA Financed, financed by the Government (3.9); Kuwait Fund (15.0), EU (1.0); France (1.0) b/ International Shopping (0.3) c/ International Shopping (0.6); and Direct Contracting (0.2) d/ of which, by shortlist (0.8); and by sole source (0.2 ) 4.23 Goods, The procurement is designed to assist the development of a construction industry in Armenia. Spare parts for existing equipment owned by the District Enterprises, which are presently part of ARD, will be purchased by International Shopping during the first year of the project. Bitumen for routine maintenance at a total value of $1.0 million will be financed by IDA and procured using ICB. There would be two ICB contracts of around $500,000 for imported bitumen for two construction seasons and there would be three ICB contracts for packages of equipment financed by IDA of around $1 million each. All contracts for imported materials estimated to cost more than $300,000 equivalent each would be procured through ICB. Bitumen and fuel for the first construction season estimated to cost up to an aggregate amount of $300,000 may be awarded on the basis of International Shopping. This is for urgent routine maintenance to be carried out on a force account basis during the first year of the project, financed from the Government's own resources but with the goods purchased from abroad subject to retroactive financing. For the equipment and supplies, items or groups of items estimated to cost $300,000 or less per contract, up to an aggregate amount of $600,000, may be procured under contracts awarded on the basis of comparison of price quotations obtained from at least three suppliers from at least two different countries, and contracts up to an aggregate amount of $200,000, may be awarded under  The Project 27 direct negotiations with suppliers. Prior review by IDA would apply to all goods contracts above $300,000, and to all Direct Contracting regardless of contract value. In order to encourage domestic production, goods manufactured in Armenia will be given preference in bid evaluation for goods to be awarded on the basis of ICB, as specified in Appendix 2 of the Procurement Guidelines. 4.24 Civil Works. There would be one ICB contract around $1.8 million for an asphalt pavement recycling contract. Other civil works contracts less than US$500,000 for surface dressing, overlay works, and reconstruction would follow the NCB procedure using the Standard Bidding Documents- Bidding Documents for Procurement of Works-Local Competitive Bidding (Small Works), July 1994, with foreign contractors allowed to bid. Sections of roads selected for overlays would be grouped into suitable contract packages and each contract period would be kept within one construction season. There would be around 20 NCB civil works contracts financed jointly by IDA and the Government, each contract valued at an average of US$445,000 for an accumulated cost estimated at US$8.9 million (including contingencies). In order to encourage the development of the local contracting industry, domestic contractors will be given preference when comparing bids for works to be awarded on the basis of ICB, as specified in Appendix 2 of the Procurement Guidelines. 4.25 Prior review would apply to all ICB works contracts and all NCB works contracts above $300,000 and is expected to include 70 percent of the total value of IDA financed contracts. In any event the first two NCB contracts would be subject to prior review. This level of review for NCB contracts should be adequate to assure good quality preparation considering the repetitive nature of these contracts, and may be revised upward during implementation subject to prior approval by IDA. Prequalification would be used for the ICB works contract. For NCB work contracts the postqualification method would be used and the qualification criteria would be set out in the bidding documents. 4.26 The introduction of competitive bidding procedures raises a number of issues that grow out of the restructuring of force-account agencies and an infant industry. Where NCB for works would be used, the criteria would be suitable to the size and kind of work to be carried out. An anticipated area of difficulty is the perceived inability for the newly established private firms to meet financial criteria. The construction firms have their accounts audited for control purposes only, if at all. Their accounting methodology does not include western type depreciation of assets and it might be difficult to determine their credit-worthiness. It may be necessary to accept nominal solvency with a performance guarantee and retention money to limit potential damage or default. The project will include training that would assist the construction firms to update their accounting systems and to facilitate western style audits. 4.27 NCB contracts would be in US dollars, but Armenian contractors would be paid in Drams at the official exchange rate prevailing at the time of payment. Disbursement for local contracts would be made from the Special Account since it will be important to ensure that the contractors receive payment promptly. 4.28 Bid bonds, performance bonds, and advance payment guarantees might become a problem as neither contractors nor most of the banks are experienced in this area and because of the uncertain credit worthiness of the local contractors. The post qualification criteria will be adopted to address the above problems, and it will be necessary to be flexible with regard to the kinds of security that will be considered acceptable for contract guarantees. 4.29 Advances of up to 10 percent against a bank guarantee are recommended for works contracts to assist with the execution of the project when materials are supplied by ARD and up to 20  28 The Project percent when materials are supplied by the contractor. 4.30 The eligibility of the contractors would be subject to their meeting the criteria outlined under clause 1.8(c) of the January 1995 World Bank Procurement Guidelines. As described in para. 2.15, the Government is in process of privatizing the District Enterprises, which are expected to become the principal road contractors since they possess the equipment and expertise to carry out the work. 4.31 Consultancies and Training. Consultants to be financed by IDA will be selected according to the Bank's Guidelines for Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (August, 1981). The major consultancy contracts financed by IDA are for project implementation assistance such as preparation of bidding documents, designing the periodic maintenance components, engineering supervision (estimated cost, US$600,000) and introduction of Bridge Inspection and Bridge Data Bank Systems and reviewing the bridge rehabilitation design (estimated cost, US$200,000). The PIU will also need a number of miscellaneous minor consultant services and training programs, from consultant firms or individuals, estimated to cost less than US$50,000 each, for an accumulated cost estimated at US$200,000. Since one of the objectives of the project is to develop an effective road consultant industry, international and local consultants will be encouraged to associate with local consultants. Selection of consultants would be made from proposals submitted by shortlisted firms, except for some of the minor consultants services that will be sole sourced. Prior review by IDA would apply to all IDA financed contracts for consulting services supplied by firms valued at more than US$100,000 per contract, for individuals at more than US$50,000 per contract, and for all Terms of Reference for assignments. Consultancies financed by other donors will be selected following their selection procedures. 4.32 Miscellaneous. The Miscellaneous category includes the refinancing of the PPF for US$300,000 and the payment of operating expenses for the PIU for US$400,000, which would include staff salaries, utilities and maintenance, furnishings, and communications. The operating expenses would be paid out of the Special Account against an annual budget prepared by ARD and approved by IDA. 4.33 ARD does not have experience in implementing this type of project. Therefore, technical assistance would be provided under the project in such areas as preparation of bidding documents, procurement, project management and supervision (para 4.31). 4.34 Procurement information will be collected by the PIU and reported to IDA as follows: (a) prompt reporting of bidding, bid evaluation results and contract award information; and (b) quarterly reports indicating: (i) project progress and problems; (ii) revised cost estimates for individual contracts and the total project, including best estimates for physical and price contingencies; and (iii) revised schedules of procurement actions, including advertising, bidding, contract award, and completion time for individual contracts. H. Disbursements 4.35 Disbursements are expected to be completed in four years. An estimated schedule of disbursements is shown in Annex J. The expected closing date is December 31, 1999.  The Project 29 4.36 The expenditures for contracts for goods and works valued at less than US$300,000, contracts for services of consulting firms valued at less than USS 100,000, individual consulting services valued at less than US$50,000 and operating expenses valued at less than US$20,000 would be financed on the basis of statements of expenditure (SOE) procedures in order to assist the borrower in making timely payments. The supporting documentation for these contracts would not be sent to IDA, but would be retained by the borrower for inspection by supervision missions and by external auditors. All other disbursements would be fully documented. The minimum size of applications for direct payment and for the issuance of Special Commitments would be 10 percent of the amount of the deposit to the Special Account. 4.37 To facilitate project implementation, the Borrower would establish a Special Account in one of the major commercial banks on terms and conditions satisfactory to IDA to cover IDA's share of expenditures. The Authorized Allocation to the Special Account would be US$1,000,000, representing about four months of average expenditures made through the Special Account. During the early stage of the project, the initial allocation to the Special Account would be limited to US$500,000. However, when the aggregate disbursements under the Credit have reached the level of US$3,000,000, the initial allocation may be increased up to the Authorized Allocation of US$1,000,000 by submitting the relevant Application for withdrawal. Applications for replenishment of the Special Account would be submitted monthly or when one-third of the amount has been withdrawn, whichever occurs earlier. Documentation requirements for replenishment would follow the standard Bank procedure as described in the Disbursement Handbook, Chapter 6. Monthly bank statements of the Special Account, which have been reconciled by the Borrower, would accompany all replenishment applications. 4.38 The proceeds of the IDA credit would be disbursed on the following basis:  30 The Project Table 4.4: Estimated Disbursements Percent of Expenditures Category Amount of Credit to be Financed (US$ million) 1. Civil works 8.0 85 % 2. Equipment, materials & supplies 4.6 100% of foreign expenditures, 100% of local expenditures (ex- factory) and 85% of local expenditures for other items procured locally 3. Consultant Services & Training a. Misc. Consult.Serv. & Trng. 0.2 100% b. Engineering Design & Super. 0.8 100% 4. Project Administration 0.4 100% 5. Refunding of Project Preparation 0.3 Amount due pursuant to Advance Section 2.02 (c) of the Credit Agreement 6. Unallocated 1.7 TOTAL 16.0 1. Reporting, Accounting and Auditing 4.39 The accounting for all Special Account transactions and for all other project-related accounts will be maintained in accordance with international accounting standards. Annual financial statements of IDA-financed components will be prepared in a format acceptable to IDA and audited in accordance with International Auditing Guidelines by suitably qualified independent auditors acceptable to IDA, and submitted to IDA within six months of the close of ARD's financial year. Audits will also be carried out, at the same time, and for corresponding periods in accordance with IDA guidelines, for SOEs against which disbursements have been made or are due to be made out of the credit proceeds, and specific reference will be made in the audit reports accompanying the financial statements. 4.40 Quarterly progress reports covering all project components will be prepared by ARD and sent to IDA within one month after the end of each quarter. These reports will include: (a) progress achieved against agreed implementation and disbursement schedules, and key performance indicators, including number of contracts awarded and length of roads rehabilitated, maintained; and (b) work programs and cost estimates for the coming quarter and for the total project. The main purpose of the reports will be to provide ARD timely and updated information on implementation of project components, highlighting issues and problem areas, recommending actions and commenting on progress in resolving previous recommendations. ARD will also prepare an Implementation Completion Report (ICR) in  The Project 31 accordance with IDA guidelines and submit it to IDA promptly after completion of the project but in any event not later than six months after the credit closing date. J. Project Supervision 4.41 Three Bank supervision missions each year, each staffed by a senior highway engineer and such specialists as may be appropriate for each phase of the project (such as a procurement expert, training expert, traffic safety specialist or financial analyst) would be required over the life of the project, each of about one or two week duration. The total amount of supervision envisaged annually would be 18-24 staff weeks. A Project Launch Workshop would be held in October 1995 with instruction on Bank Procurement Guidelines, accounting procedures and reporting requirements. Subsequent missions would review physical progress and would assist in coordinating the cofinanced elements of the project. Cofinanciers would be invited to participate in all supervision missions.The project implementation schedule and monitorable performance indicators are given in Annex G, and a schedule of supervision missions is included as Annex K. A mid-term review would be held not later than November 1, 1997, to assess the effectiveness of the project arrangements, to review the adequacy of Government budget allocations for road maintenance and of road user charges, and for the reallocation of funds between project categories if necessary based on the long term study described in para. 4.17 (para. 6.1 (vi)). K. Environmental Aspects 4.42 The routine and periodic maintenance operations included in the project are not expected to generate any significant environmental problems since work would be done on existing roadways, utilizing existing quarries and asphalt plants. Since the environmental risks are limited, this project has been designated as Category B, indicating that an Environmental Assessment is not required. A brief environmental review was carried out during project appraisal and the results are included in Annex L. The review found that ARD's asphalt plants are generally located in remote areas, where the emission of fumes is not an environmental problem, and the asphalt plants near Yerevan will not be used for the project unless emissions are within MNEP standards. The MNEP must approve and license all quarries from an environmental aspect, and this requirement, combined with monitoring by ARD, should control the environmental problems relating to quarrying operations. Training to improve environmental analysis and mitigation capabilities in the ARD, in particular in regard to design, construction and maintenance activities, is included in the project. The MNEP is preparing a NEAP, which is expected to be available in 1997, (See para. 2.36) as required by IDA for all IDA-recipient countries. L. Program Objective Categories 4.43 The project would contribute directly to the sustainable development of Armenia by preserving the road network, which is an important part of the country's essential infrastructure. It would also make a significant contribution to the development of the private sector in Armenia through the privatization of the road construction industry, and would assist small farmers and tradesmen in their efforts to begin to develop private business ventures by assuring that they have access to markets for their products.  32 The Project M. Particpatory Approach 4.44 During project preparation, the concept of participation was introduced by holding workshops in which the managers and staff of ARD, the District Enterprises, the design institutes and the related Ministries took part in discussions of the project methodology, the concepts of privatization and competitive bidding, and the requirements of a market-based economic system. This approach was an entirely new concept for a system used to an authoritarian command structure, but was accepted and generally appreciated by all of the participants. The project would continue the participatory approach begun during preparation by continuing to involve the important stakeholders in the road sector, including the extensive network of persons employed by the District Enterprises, the design institutes, the Traffic Police and the various Ministries involved in the sector.  Project Benefits and Sustainability 33 V. PROJECT BENEFITS, RISKS AND SUSTAINABILITY A. Project Benefits 5.1 Periodic Maintenance Component. The project would greatly increase ARD's capacity to carry out periodic highway maintenance of Armenia's public road network during a four year period (1996-1999), thus prolonging the life of the highway system and avoiding costly rehabilitation and reconstruction. The program would also reduce vehicle operating costs and maintenance as well as reduced road accident risks, making Armenia a more attractive investment choice for potential investors. An additional project benefit would be the experience that would be gained by the private construction industry in carrying out road maintenance work on a competitive basis. The Estimated Internal Rate of Return (EIRR) for the periodic maintenance component, which accounts for 57 percent of total project cost, is expected to be 38 percent compared to not carrying out the project, based on savings in vehicle operating costs and avoided costs of reconstruction. A sensitivity analysis was carried out with variable estimates of traffic growth. The results showed that the economic returns are relatively insensitive to quite large variations in assumed traffic growth, with most variations making no more than a two percent difference in the EIRR compared to the medium traffic growth estimate used in the basic calculation (see Annex B). The tunnel and bridge rehabilitation component (9 percent of total project cost) will only go forward if the calculated results show a positive net present value, based on a capital cost of 12 percent. No EIRR has been calculated for the routine maintenance component and supporting purchase of equipment (26 percent of total project cost), but typically routine maintenance has produced large savings in periodic maintenance costs. 5.2 Institutional Strengthening and Technical Improvement. This component provides for the radical reform of ARD through the redesign of its organizational structure and a revision in the way it carries out its responsibilities. The effect of these changes is expected to be improved cost- effectiveness in future highway maintenance through the use of cost-benefit analysis to determine pavement management strategies, competitive contracting, improved quality control, and improved technical methods through the introduction of new technologies and research. This component, which accounts for seven percent of total project costs, does not lend itself to conventional economic rate of return analysis, but typically reductions in maintenance costs through the adoption of similar techniques in other countries have been substantial. It would also result in the development of an effective road construction and engineering industry. 5.3 Road User Charges. The introduction of road user charges would result in an increased ability of the Government to provide financing for road maintenance in the future, thus putting the road network on a more sustainable basis. 5.4 Trade Facilitation. The maintenance of the main highway links to Armenia's external markets and suppliers would increase Armenia's prospects for economic growth and development. This is especially vital for a land-locked country with limited geographic access to other markets and with a railway system in serious need of rehabilitation.  34 Project Benefits and Sustainability B. Project Risks 5.5 The major risks to the project are the ability of ARD to establish an effective road maintenance organization capable of carrying out the project activities, and the ability of the revised ARD to use contracting techniques effectively. Also the imposition of road user charges at a time when the economy is extremely depressed will be difficult and unpopular. And the importing of essential materials is difficult and uncertain, and adds to the difficulty of accurately estimating costs. Regarding the first point, this should be mitigated by the technical assistance being provided and the use of private contractors that are not Government employees for the civil works requirements. In regard to user charges, the Government has displayed keen interest in adopting a reasonable level of charges, and seems to recognize that this is essential for the maintenance of the road network. As to importing, while there are still some difficulties in this regard, the situation is improving as peace negotiations go forward. Regarding the use of contracts, provision has been made to provide guidance to ARD by IDA procurement specialists even before Board approval so that the bidding process gets off to a good start. Familiarization sessions will also be organized for local construction industry personnel. C. Project Sustainability 5.6 Project sustainability will depend to a large extent on the Government's ability to mobilize an adequate level of resources for road maintenance after the end of the project period and to adjust Government pay to reasonable levels after project disbursements are no longer available. This in turn will depend on the level and kind of road user charges that are enacted. The Government appears committed to the enactment of road user charges, and the kinds of charges that are under consideration are appropriate ones. The efficiency improvements expected from the improved systems, technical assistance and training components are likely to have a sustained impact on ARD's future operations if salary levels can be increased to levels adequate to retain its technical staff. Also, the development of the private road construction and engineering industries is likely to have a lasting impact.  Agreements & Recommendations 35 VI. AGREEMENTS & RECOMMENDATION 6.1 During negotiations, agreement was reached on the following points: (i) ARD will use cost benefit analysis, in accordance with the principles agreed between ARD and IDA, to determine the actual road segments to be repaired under the project, as well as for all investments in the road sector during execution of the project and will only undertake projects with a positive Net Present Value, based on the cost of capital of 12 percent (para.4.5); [DCA, Schedule 4, para 21. (ii) Prior to inviting bids for civil works, ARD will make public the list of equipment available on a rental basis for work to be carried out by contractors under the project, with uniform rental rates for all bidders; the rental rates will be set at a level adequate to cover the depreciation of equipment, its maintenance, and a reasonable rate of return on the investment (para. 4.9); [DCA, Schedule 4, para 31. (iii) The Borrower will make available to ARD each year during the life of the project the level of budget resources needed to finance its share of project activities [DCA, Section 3.01 (a)l; the Borrower will provide to ARD, promptly as needed the budgetary resources for road maintenance not covered by the project activities, at an increasing level not less than the rate of increase in the Borrower's overall revenues [DCA, Section 4.02 (a)l; not later than January 1, 1997, the Borrower will carry out a study on: (a) the required level of financing needed to maintain the Borrower's road network; and (b) the possible financing and collection mechanisms for road maintenance [DCA, Schedule 4, para 6 (a)l; not later than January 1, 1997, the Borrower will review with IDA the results and recommendations of the above-mentioned study and not later than July 1, 1997, the Borrower will implement the recommendations on financing and collection mechanisms agreed with IDA (para. 4.17); IDCA, Schedule 4, para 6 (b)l. (iv) ARD will maintain and suitably staff the Project Implementation Unit and will operate it in accordance with the implementation arrangements agreed between the Borrower and IDA (para. 4.18); [DCA, Schedule 4, para 11. (v) Before November 15 of each year during execution of the project, ARD shall prepare annual work programs for the next calendar year and review these programs with IDA before implementing them (para. 4.18); [DCA, Schedule 4, para 41. (vi) Before November 15 of each year until completion of the project, the Borrower shall submit to IDA an annual financing plan for the next fiscal year which shall include, inter alia: (a) budget allocations for ARD to finance its share of project activities; and (b) budget allocations for ARD to finance road maintenance not covered by the project activities (para 4.18); IDCA, Section 4.02 (b)l.  36 Agreements & Recommendations (vii) the Borrower shall: (a) maintain policies and procedures adequate to enable it to monitor and evaluate on an ongoing basis, in accordance with indicators satisfactory to IDA, the carrying out of the project and the achievement of the objectives thereof; and (b) review with IDA, by November 1, 1997, the progress made in the implementation of the project; and shall take all necessary measures to execute the actions identified and agreed upon between the Association and the Borrower during such review. (para.4.41); IDCA, Schedule 4, para 51. 6.2 There are no conditions of Board Presentation. As a condition of effectiveness, the Borrower will have adopted a revised schedule of road user charges acceptable to IDA (para. 4.17); [DCA, Section 6.01]. Retroactive financing is proposed up to a level of US$I million for project expenditures incurred after March 15, 1995 (para. 4.21). 6.3 Subject to the above, the proposed Highway Project is suitable for an IDA credit of US$16 million equivalent to the Republic of Armenia at the standard IDA terms of 35 years, including a grace period of ten years.  Present Structure of the Armenian Road Directorate L Dicor General Special Consulltant| Frt Deputy - Deputy Director . Persoi,el | | Plauting and | Accounting and Technical fjrrIO~ Econ. Atalysis ItI Tnspectioit aintenance and Equipment and Administrative Supply and Udlization Division Vehicles Division Services Dniision Control Division  Annex B Page I of 2 REPUBLIC OF ARMENIA HIGHWAY PROJECT Summary of Resurfacing Program Economic Analysis Preferred Pavement Base Year Estimated Length of Estimated Total Cost Cumulative Treat- Condition Traffic (vpd) IRR (%) Network Costtkrn (US$) Cost (US$) ment Category (km) (in (USS) Option June '94) Alt 2.1 4 >5000 1389 0.1 32,000 3,000 3,200 Alt 2.1 3 > 5000 216 13.9 32,000 444,800 448,000 Alt 2.1 4 3000.5000 199 2.3 32,000 73,600 521,60 Alt 1.1 2B 2000.3000 107 0.4 7,000 2,800 524,400 Alt 2.1 2A > 5000 105 26.9 32,000 860,800 1,385,200 Alt 2.1 4 2000.3000 103 0.4 32,000 12,800 1,398,000 Alt 2.1 3 3000.5000 81 53.2 32,000 t,702,400 3,100,400 Alt 1.1 2B 1000.2000 72 26.8 7,000 187,600 3,288,000 Alt 1.1 1 >5000 71 5.5 7,000 38,500 3,326,500 Alt 1.1 2A 3000.5000 61 134.5 7,000 941,500 4,268,000 Alt 2.1 4 1000.2000 60 27.2 32,000 870,400 5,138,400 Alt 1.1 2B 500.1000 54 23.5 7,000 164,500 5,302,900 Alt 3.1 2A 3000.5000 51 0.2 132,000 26,400 5,329,300 Alt 2.1 3 2000.3000 49 37.0 32,000 1,184,000 6,513,300 Alt 1.1 1 3000.5000 47 10.8 7,000 75,600 6,588,900 Alt 2.1 4 500.1000 42 31.5 32,000 1,008,000 7,596,900 Alt 1.1 2A 2000.3000 40 112.8 7,000 789,600 8,386,500 Alt 1.1 3 1000.2000 34 204.9 7,000 1,434,300 9,820,800 Alt 1.1 1 2000.3000 31 22.1 7,000 154,700 9,975,500 Alt 1.1 2A 1000.2000 30 338.1 7,000 2,366,700 12,342,200 Alt 1.1 3 500.1000 25 104.6 7,000 732,200 13,074,400 Alt 1.1 2A 500.1000 23 173.9 7,000 1,217,300 14,291,700 Alt 1.1 1 1000.2000 22 59.7 7,000 417,900 14,709,600 Alt 1.1 2B <500 21 6.0 7,000 42,000 14,751,600 Alt 3.1 5 1000.2000 19 13.2 132,000 1,742,400 16,494,000 Alt 2.1 4 <500 17 12.4 32,000 396,800 16,890,800 Alt 3.1 5 500.1000 15 9.3 132,000 1,227,600 18,118,400 Alt 1.I 1 500.1000 11 12.2 7,000 85,400 18,203,800 Alt 3.1 5 < 500 7 11.8 132,000 1,557,600 19,761,400 Alt 2.1 3 <500 6 16.4 32,000 524,800 20,286,200 Alt 0 1 <500 0 7.4 0 0 20,286,200 Alt 0 2A < 500 0 27.8 0 0 20,286,200 1526.8 20,286,200 Weighted Average EIRR for whole network = 38% (7he weighted average IRR excludes those individual cases where IRR < 10%)  Annex B Page 2 of 2 NtM: The analysis was based on a visual inspection that evaluated the road surface according to the following categories: Category 1: Good condition (average IRI below 4.0) Category 2A: Fair condition (IRI from 4.0 to 5.0) 2B: Fair condition (same IRI with cracking) Category 3: Moderate condition (IRI from 4.5 to 6.0 with up to 40 percent deteriorated) Category 4: Poor condition (IRI from 6.5 to 8.0 and 60 percent of surface deteriorated) Category 5: Very poor condition (IRI 8.0 or above and 75 percent of surface deteriorated) The World Bank's Highway Design and Maintenance Model (HDM III) was used to evaluate fine alternative maintenance strategies, and an economic interest rate of return (EIRR) was calculated on the basis of the most cost effective strategy compared to not carrying out the repairs. The fine strategies were: Alternative Treatment Initial Initial Subsequent Treatments Over Project Treatment Code Treatment Treatment Appraisal Life Cycle Options Econormic cost (USS 000) Alternative 0 ALTO Routine 1.0 Reconstruction a IRI 12 m/km (Ref. case) maintenance (Do min. case) Alternative 1.1 ALT 1.1 Surface dressing 7.0 Repeat every 7 yrs + thin overlay @ IRI 6 m/km Altemative 1.2 ALTI.2 Surface dressing 7.0 Repeat every 7 yrs + thick overlay e IRI 6 rn/km Altemative 1.3 ALT1.3 Surface dressing 7.0 Repeat every 7 yrs + thick overlay @ IRI 7 rn/km Altemative 2.1 ALT2.1 Thin overlay 32.0 Routine maintenance + surface dressing every 7 (40-50 mm) years + thick overlay @ IRI 6 m/km Alternative 2.2 ALT2.2 Thick overlay 64.0 Routine maintenance + surface dressing every 7 (100 mm) years + thick overlay @ IRI 6 m/km Alternative 2.3 ALT2.3 Thin overlay 32.0 Routine maintenance + surface dressing every 7 (40-50) years + thick overlay @ IRI 6 m/km Altemative 2.4 ALT2.4 Thin overlay 32.0 Routine mnaintenance + surface dressing every 7 (40-50) years + thick overlay @ IRI 7 m/km Alternative 3.1 ALT3.1 Reconstruction 132.0 Routine mnaintenance + surface dressing every 7 years + thin overlay @ IRI 6 m/km A sensitivity analysis was carried out with variable estimates of traffic growth (high, medium and low). Tle results showed that the economic returns are relatively insensitive to quite large variations in assumed traffic growth, with most variations making no more than a two percent difference in the EIRR compared to the medium traffic growth estimate.  Amex C Republic of Armenia Armenian Road Directorate Armenia Highway Project - Equipment Component Table 2 - Proposed Equipment to be Procured during the Project Equipment Types Q Unit Price ($) Total Price ($) Routine Maintenance Units (4) Air compressor (8-lObars) with jack hammers (2) 4 20 000 80 000 Crack sealing unit & Manual Bitumen sprayer 4 25 000 100 000 Manual double drum compactor 4 20 000 80 000 Winter Maintenance Units Snow blower 4 70 000 280 000 Snow blade/Salt-Sand equipment (removable) 4 30 000 120 000 Surface Dressing Units (4) Mobile emulsion plant 1 300 000 300 000 9tt12t Tyre compactor 4 50 000 200 000 Mobile Chipping spreader 4 30 000 120 000 Multipurpose truck 4 120 000 480 000 Bitumen spayer (removable) 4 60 000 240 000 Bitumen tank (removable) 8 20 000 160 000 Mecanical brooms 4 6 000 24 000 Periodic Maintenance Units (2) 2.1 m Grinding machine 1 250 000 250 000 9tl12t Tyre compactor 2 50 000 100 000 Asphalt paver (3.5m) 1 300 000 300 000 Miscellaneous Equipments 4WD Station wagon 2 40 000 80 000 4WD DC trucks 6 20 000 120 000 Short distance communication system 20 1 000 20 000 Long distance communication system 45 2 000 90 000 4WD DC truck with tool boxes 2 25 000 50 00 Workshop tools and Equipment LS 250 00 Mobile weight bridge 1 20000 20 000 Road painting machine 1 20 000 20 000 Steam unit 4 5 000 20 000 Laboratory equipment (To be determined) LS 200 000 sphalt Plants Electric bitumen pump 5 2 000 10 000 Diesel bitumen pump 5 2 000 10 000 Spare Parts For asphalt plants LS 200 000 For equipments (including crusher spare parts) LS 500 000 Total 4 424 000 4WD: Four Wheel Drive, DC: Double Cab  Annex D Page I of 2 SUMMARY OF TRAINING PROGRAM Armenian Highway Project 1.1 A unified project component including institutional strengthening, technical upgrading, and training will assist the Armenia Road Directorate (ARD) to revise the existing organization in order to support operations keyed to cost effectiveness and the contracting of the majority of work to the private sector. The training program will contain several elements based on the needs of specific target groups. 1.2 The ARD, local design institutes, and the district enterprises will all require training in order to operate as client, supervising consultants, and contractors. A package of training in business management and contracting will target all three groups. A summary of this element is provided in the attached matrix. In terms of numbers it represents the single largest training activity under the project and will be administered under a contract to be negotiated with the American University of Armenia (AUA). The majority of this training will be conducted during the calendar year 1995. 1.3 Three other types of training are proposed. Senior managers and engineers and will participate in study tours to expose them to new approaches or technology; special training will upgrade design and testing skills; practical technical training will offered for equipment operators and mechanics. These elements would be implemented independently of but, as appropriate, in consideration of or in coordination with the contract with AUA. 1.4 In view of radical transformation process underway, the training program will be iteratively structured in order to enable revisions and supplemental actions over time. A Project Administrative Office (PAO) will be established in the ARD to administer the project. The PAO will be responsible for monitoring institutional strengthening, technical upgrading, and training; it will serve as the coordinator for the overall package of training activities to be offered under the project.  Annex D Page 2 of 2 TRAINING PROGRAM: Table 1 Overall Summary Title of Course Length in Trainees 1 2 3 Or Activity Hours Total, 1-4 PIU ARD Design | District Institutes Enterprises AUA Phase I 1 Orientation Workshop: Cost Effectiveness, New Directions and 16 124 10 17 10 87 Transformation for the Road Sector Procurement in Accordance with World Bank Guidelines 20 27 12 9 6 - Construction and Consulting Industry Seminar 40 123 7 9 10 97 Construction Management for the Road Industry 40 86 8 8 10 60 Highway Econ. and Planning 40 17 4 5 8 Accounting 40 76 6 9 10 51 AUA Phase II 20 43 1 2 1 39 Stores Management Road Safety Workshop 24 73 7 7 10 39 Supervision (Foreman) 8 60 l I - 58 Environment 32 74 5 9 10 50 Other Approaches to Road System Management 120 6 2 4 . Equipment Operation 120-190 1 2 80 Mechanics 120-190 - - 80 Accounting (General and Disbursement) 80, 80 5 3-5 Privatization 80-200 3 1-2 - I I j4J (801 NOTES: * To be defined further in conjunction with French assistance; NA= Not Applicable; ( I enclosed figure is not a project costed activity, see notes in table 3 0 0D I-t  Organiz ational Structure of the Project Imp!lementationk Unit (I 5ED Iirector-General| | IU Project Adviser| lDirector Director Roaasd it sCb'd Project Director Ingtitutionsl Co-ord t lCo-ordinatior Civil Worlcg ICo-ord. Tran- mgt. 111110~ ~ ~lan1Pbo Note: 'Me organizational structure of ARD will be revised to accommodate the transfer of some Of its activities to the PIU.  Annex F Page I of 2 REPUBLIC OF ARMENIA HIGHWAY PROJECT Detailed Project Cost Estimate (Net of Duties & Taxes) ______________US$ Thousand Local Foreign Total 1. Periodic Road Maintenance Surface Dressing (1200km @ US$7,000/km) 2,192 6,208 8,400 Overlays (205km @ US$32,000/km) 1410 5,147 6,557 Reconstruction (23km @US$132,000/km) 713 2,323 3,036 Engineering Design and Supervision 600 600 4,915 13,678 18,593 II. Bridges & Tunnel Civil Works 500 2,000 2,500 Bridge Inspection Program 200 100 300 III. Routine & Winter Maintenance Materials only 2,600 2,600 IV. Equipment & Spares 5,700 5,700 V. Technical Assistance & Training 400 1,800 2,200 VI. Project Administration Equipment, Supplies and Vehicles 235 235 Operating Expenses, including local salaries 383 383 VII. Contingencies Physical 579 2,261 2,840 Price 312 1,218 1,530 TOTAL 7,289 29,592 36,881 19.8% 80.2%  Annex F Page 2 of 2 Detailed Finandng Plan USS Million IDA Kuwait France Govt. Total Fund & EU Repaving & Reconstruction 8.0 7.0 3.0 18.0 Engineering Design & Supervision 0.6 0.6 Bridges & Tunnels: Civil Works & Design 2.0 0.5 2.5 Bridge Inspection 0.3 0.3 Materials for Routine & Winter Maint. 1.1 1.5 2.6 Equipment & Spare Parts 3.2 2.5 5.7 Misc. Consultant Services & Training 0.2 2.0 2.2 Project Administration: Office Equipment & Supplies 0.2 0.2 Operating Expenses 0.4 0.4 Contingencies 2 a 2 0 4 4.4 TOTAL 16.0 15.0 2.0 3.9 36.9  Annex G Page I of 2 REPUBLIC OF ARMENIA HIGHWAY PROJECT Project Implementation Schedule and Monitorable Indicators Activity Start Finish Establish Proiect Implementation Unit Nominate Project Mgr. 3.15.95 3.15.95 Nominate Secretary and Accountant 4.30.95 4.30.95 ICB Bitumen II Prep. of specification, quantities & bid 8.15.95 12.15.95 documents Bank reviews bid package 1.05.96 1.15.96 Bid preparation 2.01.96 3.20.96 Bids, received, opened and evaluated 3.20.96 4.05.96 Bank review of evaluation report 4.10.96 4.15.96 Contracts awarded 4.20.96 4.20.96 Supply period 6.01.96 9.01.96 Equipment I Preparation of specifications, quantities and bid 1.01.96 1.20.96 documnents Bank reviews bid package 2.01.96 2.10.96 Bid preparation 2.15.96 2.22.96 Bids received, opened and evaluated 4.01.96 4.05.96 Bank review of evaluation report 4.05.96 4.15.96 Contracts awarded 4.15.96 4.15.96 Supply period 5.01.96 10.01.96 NCB. overlay/surface dressing/reconstruction" Design 6.01.95 10.1.95 Preparation of LCB documents 8.01.95 2.1.96 Bank comments 2.01.96 2.10.96 Issue LCB documents, submission of bids 2.15.96 4.1.96 Evaluate bids and post qualification 4.01.96 5.1.96 Bank review 5.01.96 5.15.96 Award of contracts 5.20.96 5.20.96 Contractor mobilize and construct 5.30.96 8.15.96 ICB Recvcling Design 6.01.96 10.01.96 Preparation of ICB documents 8.01.96 1.01.97 Prequalification, 9.01.96 1.15.97 Bank comments 1.01.97 1.20.97 Issue - submission by bids 1.20.97 3.10.97 Evaluate bids 3.10.97 4.10.97 Bank review 4.11.97 4.20.97 Award of contract 4.20.97 4.20.97 Contract mobilize and construct 4.20.97 9.15.97 I Similar schedules will apply to the 1997 & 1998 coistruction seasons.  Annex G Paee 2 of 2 Monitorable Targets & Performance Indicators Monitorable Items Units At Start Dce 95 Dec 96 Dce 97 Dec 98 At Completion Civil Works Engineering Design % 20 50 80 100 100 100% Surface Dressing km 0 0 400 800 1200 1200 Overlays km 0 0 70 140 205 205 Reconstruction km 0 0 7 15 23 23 Bridges number 0 0 1 2 2 2 Tunnel number 0 0 0 1 1 1 TA & Training Research Program % 0 10 50 90 100 Road Safety Program % 0 50 100 100 100 Establish PIU % 0 30 100 100 100 Private Industry Prog. % 0 10 40 70 100 Cost-Benefit Application Portion of ARD Budget spent on maintenance subject to ADM analysis % 0 0 50% 50% 50% 50% Competitive Bidding % of ARD contracting subject to competitive bidding % 0 50 50 60 70 70%  Annex H REPUBLIC OF ARMENIA HIGHWAY PROJECT Procurement ArraneementsS' Calendar Year (US$ million) Project Element 1995 1996 1997 1998 Total Credit Timing: Sign/Effective/Close l l l 1. Civil Works" 1.1 ICB (a) Recycling 1.5 1.5 1.2 NCB (a) surface dressing; overlays, 2.6 2.5 2.5 7.6 reconstruction 2. Equipment, Goods 2.1 ICB (a) bitumen 0.5 0.5 1.0 (b) equipment 3.1 3.1 2.2 IS (a) equipment, spareparts 0.6 0.6 2.3 IS (a) fuel, bitumen 0.05 0.25 0.3 2.4 DC (a) office equipment and supplies 0.2 0.2 3. Consultancies (a) consultant services a 0.5 0.3 0.1 0.1 1.0 (b) training 4. Miscellaneous 0.3 0.1 0.2 0.1 0.7 TOTAL 1.05 7.45 4.8 2.7 16.0 Reflects the ID contribution only. v US$.6m for engineering design and supervision and USS.2m for a bridge inspection program will be short- listed from qualified firms; US$0.2m will be used for sole-source small contracts for pavement inspection and specialized investigations.  Annex I Procurement Plan & Schedule Major Activities Schedule (Dates) Nature of Package Total Methodl Cost of Issue Submission Award of Comp- Est. Proc. of of Contract letion of US$000 Doc. Bids/Prop Signing package Civil Overlay 1200 NCB 2.15.96 4.01.96 5.20.96 8.15.96 Works Overlay Contracts 1200 NCB 2.15.97 4.01.97 5.20.97 8.15.97 Overlay Contracts 1200 NCB 2.15.98 4.01.98 5.20.98 8.15.98 Surface Dressing 600 NCB 1.15.96 4.01.96 5.20.96 8.15.96 Contracts Surface Dressing 600 NCB 2.15.96 4.01.97 5.20.97 8.15.97 Contracts Surface Dressing 600 NCB 2.15.97 4.01.98 5.20.98 8.15.98 Contracts Reconstruction Con. 700 NCB 2.15.98 4.01.96 5.20.96 8.15.96 Reconstruction Con. 700 NCB 2.15.96 4.01.97 5.20.97 8.15.97 Reconstruction Con. 700 NCB 2.15.97 4.01.98 5.20.98 8.15.98 Recycling Contract 1800 ICB 2.15.96 3.01.97 4.01.97 12.1.97 Goods Bitumen I 200 IS 7.01.95 7.15.95 7.30.95 09.15.95 Bitumen 11 500 ICB 2.01.96 3.20.96 4.20.96 09.01.96 Bitumen III 500 ICB 2.01.97 3.20.97 4.20.97 09.01.97 Fuel 1 50 IS 7.01.95 7.15.95 7.30.95 12.31.95 Fuel II 50 IS 5.15.96 5.30.96 6.15.96 12.31.96 Equipment I 1100 ICB 1.01.96 2.20.96 4.15.96 10.01.96 Equipment II 2000 ICB 8.01.96 9.20.96 11.15.96 06.01.97 Equipment III 200 IS 9.01.96 10.01.96 11.1.96 05.01.97 Spare parts I 300 IS 9.01.95 12.01.95 2.15.96 6.15.96 Spare parts 11 200 IS 7.15.96 9.01.96 10.15.96 4.15.97 Office Equipment 200 DC 8.01.95 9.15.95 10.01.95 1.01.96 Cons- Eng., Design and Sup. 600 Short- 9.15.95 11.15.95 12.10.95 11.15.98 ultants Bridge Ins. Program 200 listed 4.15.96 6.15.96 7.15.96 12.15.98 Sole Misc. Consultants 200 source Sole Sole 3.15.96 6.30.98 source source  Annex J REPUBLIC OF ARMENIA HIGHWAY PROJECT Estimated Schedule of Disbursements Disbursements (US$ million) Cumulative % IDA FY Semester Semester Cumulative Disbursement FY 96 December 95 0.2 0.2 June 96 2.0 2.2 14 FY 97 December 96 2.0 4.2 26 June 97 3.0 7.2 45 FY 98 December 97 3.0 10.2 64 June 98 2.0 12.2 76 FY 99 December 98 2.0 14.2 89 June 99 1.2 15.4 96 FY 2000 December 99 0.6 16.0 100  Annex K REPUBLIC OF ARMENIA HIGHWAY PROJECT Supervision Plan The schedule below is in addition to the regular needs for the review of procurement documents, progress reports, and correspondence, estimated to require 6 staff weeks per year for four years. Approximate Dates Activity Expected Skill Staff Weeks * l ___________________ ____________________ R equirem ent FY 96 10/95 Supervision (project Engineer, Procurement, 8 launch) Economist, Eq. Spec. 2/96 Supervision Engineer, Economist 4 6/96 Supervision Engineer, Procurement 6 Economist. Subtotal 18 FY 97 10/96 Supervision Engineer, Fin. Analyst Economist 6 2/97 Supervision Engineer, Economist 4 6/97 Supervision Engineer, Economist, Procurement Subtotal 16 FY 98 10/97 Supervision Engineer, Fin. Analyst 6 Economist 3/98 Supervision Engineer, Procurement 4 6/98 Supervision Engineer, Economist 4 Subtotal 14 FY 99 10/98 Supervision Engineer 4 3/99 Supervision Engineer 4 6/99 Supervision Engineer 4 Subtotal 12 FY 20 9/99 Supervision, and PCR Engineer, Economist, 6 Preparation Fin. Analyst F~IDANt-t LF7niy  Anrex L Page 1 of 5 I. INTRODUCTION 1.1 The environmental review for the Armenia Highway Project (AHP) was conducted in March 1995 in conjunction with the appraisal mission for the AHP. The review addressed the requirements for IDA projects classed as "Category B" as opposed to the full Environmental Assessment (EA) required for "Category A" projects. The requirements for a full EA, however, were discussed as part of a workshop held under the sponsorship of IDA in conjunction with the conduct of the appraisal mission for the AHP.1 1.2 The conduct of the review included consultations with the Armenian Road Directorate (ARD), the Ministry of Nature and Environmental Protection (MNEP), the ARMGIPRODOR Design Institute, the Forestry Department of the Ministry of Agriculture, the Center for Environmental Management of the American University of Armenia (AUA), and the State Engineering University of Armenia (SEUA). Discussions with these agencies considered existing policies and procedures as well as inter-agency consultative practices. 1.3 The review found the road rehabilitation and maintenance proposed for the approximately 1440 kms of main highway under the AHP to be environmentally sound. Although there are several long-term considerations relative to the environmental impact of future road construction projects which will require further review, such issues lie outside the context of activities proposed for the AHP. II. DIRECT ENVIRONMENTAL IMPACTS 2. 1 The environmental impact of most rehabilitation and maintenance projects in the road sector is seen as positive rather than negative. Assuming the retention of the existing alignments--as is the case in this project--such projects offer not only more efficient vehicle operation and a corresponding reduction in the emission of pollutants but also reduced noise and vibrations from traffic as well as the opportunity to introduce mitigation actions relative '/ The workcshop introduced road-related environmental issues within the broad context of future projects which might also include new road construction as well as maintenance.  Annex L Page, 2 of 5 to existing threats.2 The major sources of directly negative impacts arising from maintenance projects, therefore, are considered to arise from (1) the production and application of bituminous products, (2) the quarrying of stone and gravels, and (3) such short-term impact as noise, dust, and the disruption of traffic resulting from the execution of work under the project. These three areas were each examined in the course of the review. 2.2 Asphalt Plant Production- According to the information provided by the ARD there were over 50 different asphalt plants which had been under the authority of the ARD and had been involved in the production of asphalt for the road sector (See Annex 1). When all were in production they had a combined capacity of about 2,240 tons per hour. The ARD reported that only about two-thirds of these plants were operational, and selected visual inspections indicated that the figure was probably even lower. The plants in the best condition--and seemingly the most efficient operations--were the ten Teltomat units produced in the former East Germany. Assuming that production were limited to these ten plants, the production of asphalt would be more than adequate in terms of the quantity of production and geographic distribution for the purposes of the AHP. 2.3 In view of the highly limited operation of any of these plants during the past two to four years, it was difficult to access either their efficiency or the potential threat from effluents and suspended particles, except on the basis of a review of historic data. This issue was discussed with both the ARD and the MNEP. Both organizations felt that since only the better plants would be put back in operation for the AHP, compliance with national regulatory guidelines could be maintained. Impact was expected to minimal, moreover, because only the plants located near Yerevan were adjacent to densely populated areas. If the plants near Yerevan failed to pass regulatory guidelines, they would not be used within this project. 2.4 QuaOrations- According to the ARD there were approximately 37 different quarries which had provided materials for use on road projects. About half of these produced gravels. The others either produced rock for subsequent crushing or maintained crushers on site to further process stone taken from the sites. The quantities estimated for the AHP did not indicate the need for opening any new sites. The quarry sites expected to be used for this project were distant from densely populated areas. 2.5 Instances were on record in the past when gravels were improperly taken from such non-quarry sites as river beds, resulting in at least one case in a change in the course of the river. In order to control such activities and to ensure minimum erosion and proper restoration after the conclusion of quarry operations, the MNEP has established a new licensing system for all quarry operations in Armenia. Under this new system all operations 2/ In those cases where rehabilitation under the project would require design, existing procedures would call for an assessment of the environmental impact of the proposed work. The review would be provided by ARMGIPRODOR or another design source and be subject to approval by the MNEP.  Annex L page 3 of S would be submitted to an environmental review in order to be licensed. The AHP would use no sources for materials which were not licensed and reviewed under the new system. 2.6 Short-term Impact- Its is inevitable that there will be short-term impact from noise, dust, and traffic congestion during the execution of works. The minimization of such impact will be included in one of the modules on Construction Management which will be offered to the district enterprises as part of the training program under the project; certification of completion of these courses will be required by all enterprises interested in bidding on work funded by the project. Contractors will be required to prepare a mitigation plan for any site where the scale of impact is judged sufficiently significant; particular attention will be given to road segments adjacent to residential areas. Im. INDIRECT ENVIRONMENTAL IMPACTS 3.1 Indirect environmental impacts possibly arising from such a project as the AHP include such long-term developments as increased traffic growth and increased traffic speed. Although the rehabilitation and maintenance of the main network is a pre-requisite for such developments, a far higher correlation exists between such developments and national economic recovery. 3.2 The project does place considerable importance on the promotion of road traffic safety, and resources will be made available for the initiation of a meaningful road traffic safety program. Dialogue has already been initiated to ensure better communication and cooperation between the organizations responsible for road traffic safety, and technical assistance in support of road safety is to be provided under the project. The placement of signs along right of ways to indicate wildlife crossings would be included under this component. IV. INSTITUTIONAL AND REGULATORY CONSIDERATIONS 4.1 The Ministry of Nature and Environmental Protection, upgraded from the status of a State Commission in 1991, is the government organization responsible for making policy and promulgating standards relative to environmental protection. The responsibility and authority of the Ministry is broadly defined in Parliamentary decree No. 269, dated July 9, 1991. Included under its mandate is environmental public education, research, and the support for symbiotic solutions for infrastructure development and environmental protection. The MNEP is in the process of preparing the National Environmental Action Plan (NEAP) as well as reviewing a variety of policies and regulatory standards. 4.2 Regulatory and licensing systems currently exist which specifically require the consideration of environmental issues in the design and implementation of development  Annex L Eag 4 of projects. The MNEP must sign off on all designs for road works ranging from simple modifications for rehabilitation to more comprehensive new construction. A review of regulatory procedures indicates the need for a more pro-active stance by the MNEP and design institutes relative to environmental protection. Increased attention should be given to consistent application of the existing policies and procedures and continued monitoring throughout the implementation of projects. This need was a subject discussed in the workshop referenced above. As an initial step in capacity building for managing future projects, this workshop also presented the basic documents and requirements of IDA relative to EAs. 4.3 Air pollution has been a major problem for urban areas in Armenia for at least two decades. Current levels have fallen as a result of the drastic down-turn in industrial production, but average levels in certain cities in the early 1990s exceeded the average daily Maximum Permissible Concentrations (MPC) by several times. Analysis included in the Environmental Sector Report for Armenia prepared in early 1995 included the production of construction materials--road materials being only one of several components-- among major contributors to the air pollution in two of the five most heavily impacted areas (Yerevan and Razdan).3 The MNEP is confident, however, that existing regulatory procedures are adequate to ensure compliance by the AHP with national standards; additional review would be required, however, for future projects involving major construction components. 4.4 Responsibility for environmental issues currently falls under the Technical Division of the ARD. The Chief Engineer heading this division participated in the workshop held during the Appraisal Mission and has been nominated for participation in a regional seminar on environmental issues to be held in mid 1995. Although the current levels of skills are adequate for the requirements of the AHP, training will be provided under the project as part of a long-term institutional strengthening effort to upgrade the capacity of the ARD relative to environmental issues. Particular emphasis will be given to the monitoring responsibilities of the PIU relative to work undertaken under the AHP. Technical training to be provided to ARMGIPRODOR and other design institutes, especially in conjunction with overseas training and study, would also take into account environmental issues. V. BROADER ENVIRONMENTAL ISSUES 5.1 During the Soviet Period Armenia was cut off from research and studies conducted outside the Soviet Bloc relative to road construction and maintenance. During this period a wide range of findings evolved with environmental implications relative to both the use of materials and appropriate technologies. These findings needed to be reviewed by environmental and design specialists in Armenia. Additional study may be required, 3/ Although there were some difficulties in making comparisons, the Sector Report suggests the need to review the current Armenian standards in comparison to US/international standards. See Annex 2.  Annex L Pge S of S however, to assess the validity of these findings for the Armenian road network. 5.2 The project design phase has already resulted in the resumption of international contacts and exchanges. Funding under the project would assist the resumption of internal research at the design institute which would be primarily responsible for considering optimal solutions for materials selection and technology keyed to environmental protection. 5.3 One of the central concerns of the AHP is quality control and the assurance of compliance with design standards and specifications. This emphasis will also ensure future compliance with specifications mandated in conjunction with the environmental clearance process.  Annex M Paze I of 3 REPUBLIC OF ARMENIA HIGHWAY PROJECT Technical Assistance to be Provided (Grant-Financed Except as Noted) Project Advisor Assist the Deputy Minister in the starting up of the project. $ 120, 000 8 months of which 4 Assist in overall project management and coordination. In months 1995, particular to: set up office and the project organization and 2 months 1996, assist in starting up the detailed design and preparation of I month 1997, and bidding documents for all civil works; assist in the I month 1998 institution building process and the starting up of the road safety component. A Senior Highway Administration and project management expert. Training Expert Short term consultant to identify training needs and to $ 40,000 2 months arrange training contracts. Local training coordinator will be employed. Training will be carried out with the assistance of the American University of Armenia and the Birmingham University. ( See Training plan ) Development of in-house training programs and training center, possibly individual career planning. Research / Laboratory Review existing road pavement design practices , initially $200,000 Expert for repair and strengthening, testing rmethods and construction practices and assist in the introduction of new 4 months 1995 or improved technique (emulsion, slurry seals, recycling etc) 2 months 1996 and standards. Equip laboratories, procure and introduce 2 months 1997 field survey equipment, train laboratory staff, train and I month 1998 supervise pavement survey and design staff . Introduce and I month 1999 supervise the enforcement of an appropriate quality control system.(provide lab services). Set up a research program to identify the optimum design and maintenance standards, including a technical economical evaluation of indigenous (marginal) pavement materials for different road and traffic situations. Initiate the use of new methods to prospect materials. Establish the pavement strengths in relation to expected future traffic load, and the consequences of introducing the EU legal axle load. Provide training for the local staff as required. Consultant on Establish a long termn strategy for information technology, $200,000 Planning I including setting the criteria for the road data bank and road Information planning systems, and to provide related training. Establish technology an adequate Road Data Bank. Propose suitable hardware and 10 months software.  Annex M Page 2 of 3 Assist in carrying out economic evaluations of project components using the HDM3 mnodel. Prepare and provide training for the introduction of PMS, BMS, etc. that might be introduced towards the end of the project. Training for local staff. Consultant on Develop appropriate strategies for maintenance and $ 80,000 Planning strategies, investment, and the related planning models and program models and program control functions. Review budget preparation and budget control justification system, and assist in developing a fund 6 months distribution model. Includes training for local staff. Contracts The objective of the construction Management consultant is $ 140,000 Management Expert to ensure cost-effective, contractual and timely execution of 8 months the civil works components. The tasks include procurement, project planning and follow up, and project supervision, including quantity and quality control. The contracts manager will have ARD engineers in charge of units for Contracts procurement and administration; and for Contracts Supervision including quantity and quality control. Testing services will be undertaken partly by the contractor but on behalf of the ERA by the ARD Laboratory and Research center. (Initially consultant). Includes training for local staff. Supervision Manager Supervision/ training of local consultants to undertake S 80,000 4 months proper supervision including quantity and quality control. Co-operate with Research/ Laboratory expert, including training for local staff. Bridge Consultants Introduce a Bridge Inspection and Bridge Data Bank $200,000 System. Advise on pilot Bridge Inspection and Rehabilitation component, including advise on procurement of required equipment, and provide training for local staff. Routine Maintenance Assist ARD to develop interim contracting methods for $ 40,000 by Contract Expert routine maintenance works, and develop a strategy and plan 2 months for the introduction of a system to properly contract and control routine naintenance works, including training for local staff. 1/ Financed by IDA  Annex M Page 3 of 3 Equipment Expert Survey existing equipment, identify need of new $60,000 2 months equipment necessary for the introduction of new technologies and for appropriate quality workmanship. Review by Civil Engineering expert. Prepare specifications and bidding documents, ICB, and assist in the evaluation of proposals. Equipment Expert- Introduce appropriate systems for plant-hire, plant $ 100,000 Plant Pool/Training maintenance, spare part stores and sales etc. Provide 6 months training for ARD and Contractors on Plant Management and Maintenance ( See Training Plan). Weather Assist in establishing a weather forecasting system $200,000 Forecasting capable of alerting the winter maintenance crews to System possible storms; includes training locally and abroad 10 months for local staff. Landslide Carry out a survey of potential slides, establish a data $400,000 Prevention bank for slide prevention, and recommend prevention & Research measures. Provide training locally and abroad for local staff. Procurement World Bank Standard Training courses in Armenia in Bank Staff Disbursement cooperation with other World Bank projects Expert I month  Annex N Page 1 of 1 REPUBLIC OF ARMENIA HIGHWAY PROJECT Contents of the Project Implementation Plan I. Introduction II. The Project - Project Objectives - Project Summary - Detailed Project Description - Cost Estimates and Financing - Risks III. Implementation Arrangements - Organizations Responsible for the Project - Procedures for Awarding Civil Works -Project Preparation Facility - Cofinancing Arrangements - Retroactive Financing - Role of IDA in Project Implementation IV. Implementation Plan - Implementation Schedule - Procurement - Disbursements - Principal Actions Required to Achieve the Project Objectives - Project Accounting and Auditing - Participatory Approach V. Monitoring and Evaluation - Key Monitorable Indicators - Annual Work Programs - Quarterly Progress Reports - Implementation Completion Report - Major Credit Covenants Annex A Organization Chart of the Armenian Road Directorate (ARD) Annex B Summary of the Resurfacing Program Economic Analysis Annex C Equipment to be Procured Annex D Summary of the Project Training Program Annex E Organizational Structure of the PIU Annex F Project Cost Estimate and Financing Plan Annex G Project Implementation Schedule and Monitora'le Performance Indicators Annex H Procurement Arrangements Annex I Procurement Plan and Schedule Annex J Estimated Schedule of Disbursements Annex K Supervision Plan Annex L First Year Annual Work Program Annex M Technical Assistance Provided Under the Project and Detailed Terms of Reference.  IBRD) 26937 To5oo' 44 418 GEORGIA GIToADma,,,'