Georgia - Transport Rehabilitation Project

Document of The World Bank Report No. 15029-GE STAFF APPRAISAL REPORT REPUBLIC OF GEORGIA TRANSPORT REHABILITATION PROJECT DECEMBER 26, 1995 Infrastructure Division Country Department IV Europe and Central Asia Region  CURRENCY EOUIVALENTS (as of September, 1995) Currency Unit = Lari 1 Lari = US$0.8403 US$1 = 1.19 Lari AVERAGE EXCHANGE RATES (Prior to September, 1995) Coupons per US$1 December 1993 January 1994 April 1994 July 1994 120,000 200,000 1,200,000 1,500,000 August 1994 May 1995 July 1995 2,000,000 1,300,000 1,300,000 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS ATC Air Traffic Control IRI International Roughness Index CAS Country Assistance Strategy MoEP Ministry of Environmental Protection CIS Commonwealth of Independent States NCB National Competitive Bidding CLAU Caucasus Logistics Advisory Unit NEAP National Environmental Action Plan CMEA Council for Mutual Economic NGO Non-Governmental Organization Assistance NIF Non-IDA Financed DC Direct Current NPV Net Present Value EA Environmental Assessment PHRD Policy and Human Resources EBRD European Bank for Reconstruction and Development Development SDR Special Drawing Rights EMU Electric Motorized Unit SEIC Socio-Economical Information ERR Economic Rate of Return Committee EU European Union SOE Statement of Expenditure FSU Former Soviet Union TA Technical Assistance FY Fiscal Year TACIS Technical Assistance for CIS countries GDP Gross Domestic Product TCC Transport Coordination Committee GSC Georgian Shipping Company TRP Transport Rehabilitation Project GTZ German Agency for Technical TRRC Transport Reform and Rehabilitation Cooperation Center IAS International Accounting Standards TSM Transport Sector Memorandum IBRD International Bank for Reconstruction USAID United States Agency for International and Development Development ICB International Competitive Bidding VAT Value Added Tax ICR Implementation Completion Report vpd vehicles per day IDA International Development Association WFP World Food Program GEORGIA - FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT REPUBLIC OF GEORGIA TRANSPORT REHABILITATION PROJECT CONTENTS CREDIT AND PROJECT SUMMARY ................ COUNTRY AND SECTOR BACKGROUND A. Country Context .................... 1 B. Macroeconomic Background .................... 2 C. The Transport Sector .................... 3 D. Transport Sub-Sectors .................... 7 E. Bank's Experience and Strategy ................................ 12 II. THE PROJECT A. Project Origin and Formulation ................................ 16 B. Project Rationale and Objectives ................................ 16 C. Project Components and Description ............................. 17 D. Cost Estimates and Financing ................................ 19 E. Status of Cofinancing ................................. 21 F. Implementation .......................................... 21 G. Procurement ................................ 22 H. Disbursements ................................ 25 I. Monitoring, Reporting, Accounting and Auditing .26 J. Onlending Terms .27 K. Project Supervision .... .................................... 27 L. Environmental Aspects .28 M. Program Objective Categories .28 III. FINANCIAL ANALYSIS A. Highway Concern .................... 30 B. Railway Department .................... 33 IV. PROJECT BENEFITS AND RISKS A. Project Benefits ................ 36 B. Project Risks .38  V. SUMMARY OF RECOMMENDATIONS AND CREDIT CONDITIONS A. Agreements Reached ....................................... 39 B. Conditions of Effectiveness ................................... 39 C. Conditions of Disbursement .................................. 40 D. Recommendation ......................................... 40 ANNEXES 1. Project Cost Estimates 2. Project Implementation Schedule and Monitorable Indicators 3. Estimated Disbursement Schedule 4. Sector Technical Assistance - Cost Estimate 5. Implementation Unit - The Transport Reform and Rehabilitation Center (TRRC) 6. Cost Estimate - Road Sub-Component 7. Financial Projections - Highway Concern 8. Contracting of Road Construction and Maintenance Units 9. Rental and Leasing of Highway Concem Equipment 10. Cost Estimate - Rail Sub-Component 11. Financial Projections - Railway Department 12. Railway Department - Current Infrastructure and Equipment Situation 13. Organization of Project Implementation 14. The Training Unit of the Transport Reform and Rehabilitation Center (TRRC) 15. Procurement Arrangements 16. Schedule of Supervision Missions 17. Environmental Analysis 18. Economic Rate of Return Analysis 19. Highway Concern - Technical Assistance 20. Selected Documents Available in the Project File MAP IBRD No. 26918 TABLES Table 11. 1 - Summary of Project Cost Estimate ............................. 20 Table 11.2 - Financing Plan .......................................... 20 Table 11.3 - Summary of Proposed Procurement Arrangements ................... 24 Table II.4 - Estimated Disbursements ................................... 26 Table III.1 - Highway Concern: Summary Cashflow Projections .................. 32 Table 111.2 - Railway Department: Summary Income Statement Projections .... ....... 35 Table III.3 - Railway Department: Summary Balance Sheet Projections .............. 35 FIGURES Figure 1. 1: Roads - Freight Traffic ................................... 6 Figure 1.2: Dry Cargo Turnover in Batumi and Poti Ports .................... 6 Figure 1.3: Railway - Freight Traffic. 6  REPUBLIC OF GEORGIA TRANSPORT REHABILITATION PROJECT Credit and Project Summary Borrower: Republic of Georgia Implementing Agencies: Transport Reform and Rehabilitation Center, Highway Concern, Railway Department Poverty Category: Not applicable Amount: SDR 8.1 million (US$12 million equivalent) Terms: 35 years maturity, including a 10 year grace period, on standard IDA terms Commitment Fee: 0.50 % on undisbursed credit balances, beginning 60 days after signing, less any waiver. Onlending Terms: Funds would be on-lent to modal agencies for 5 years, plus 1 year grace period, at a fixed rate equal to 7.07%, and repayable in local currency, determined as of the date or respective dates of repayment. Financing Plan: See Table II.2, page 20. Net Present Value: US$ 12 million discounted at 10% (36 % Economic Rate of Return on 86 % of project costs). Map: IBRD no. 26918 Project ID Number: GE - PA - 39892  REPUBLIC OF GEORGIA TRANSPORT REHABILITATION PROJECT STAFF APPRAISAL REPORT I. COUNTRY AND SECTOR BACKGROUND A. Country Context 1.1 The Republic of Georgia is a relatively small country with a population of 5.4 million and a geographical area of 70,000 square kilometers. The capital, Tbilisi, has a population of 1.5 million. Georgia occupies the western portion of the isthmus between the Caspian and Black Seas. The eastern portion is the Republic of Azerbaijan while the land-locked Republic of Armenia takes up a part of the southern portion. The three republics together constitute a buffer region between Russia to the north and Iran and Turkey to the south. Two major mountain ranges (the Main and Lesser Caucasus Chains) run through this region in an east-west direction and constitute major barriers to north-south movements. Georgia controls most of the valley between the two ranges, and the pass (of less than 1,000 m) that separates the east and west portions of the isthmus. 1.2 Georgia was the first of the non-Baltic states to declare independence from the Former Soviet Union (FSU), on April 9, 1991. Formal contacts between the World Bank and the Republic of Georgia (hereinafter referred to as Georgia) began in March 1992, and the country joined the World Bank in August 1992. One year later, Georgia joined the International Development Association (IDA). 1.3 At the time of its independence, Georgia appeared to be a relatively well-off republic with fairly good potential for growth. Its sources of strength were its educated labor force, its long tradition of entrepreneurship, the existence of a significant underground economy, non-negligible private sector activity in agriculture, tourism on the Black Sea coast, and mineral and natural resources. Furthermore, the country's location made it a primary transit conduit for goods, providing important access to and from the Black Sea for Armenia, Azerbaijan, Central Asia, and Iran. 1.4 Soon after its independence, however, the country became embroiled in political and civil strife. The consequences have had a devastating effect on the nation's economy, infrastructure and social stability, further compounding the difficult transition to a market economy. Conflicts in Ossetia, located in north-central Georgia, resulted in numerous casualties and refugees; since 1992, peace-keeping forces have stabilized the situation. A separatist war in Abkhazia continued throughout 1992-1993, resulting in an estimated 260,000 refugees migrating to other parts of Georgia, including Tbilisi and the coastal cities of Poti and Batumi. During the same period, the Government also fought armed supporters of a previous administration, generating additional casualties and destruction. A cease-fire in Abkhazia is now in effect, and although the Government does not control the region, an agreement involving Russia and the United Nations has been signed to work out a peaceful solution of the conflict. Georgia joined the Commonwealth of Independent States (CIS) and Russian peacekeeping forces are now in Abkhazia to work out the return of refugees to the province and to reopen the route to Russia.  2 1. Country and Sector Background B. Macroeconomic Background 1.5 Georgia currently remains in the trough of a recession, and much of the country's agricultural and industrial plant stays idle. At present, it ranks among the poorest countries of the FSU with the Gross Domestic Product (GDP) per capita estimated at about US$410 in 1994. The decline in production began in 1989 but has been particularly sharp since 1991. In the period 1991-1993, GDP fell by a cumulative total of 70%, affecting all sectors. The causes of the recession are many and to a large extent inter-linked: civil war; disruption of traditional trade patterns; lack of foreign exchange; hyper- inflation until July of 1994; and an all pervasive shortage of energy. 1.6 Extemal trade with the states of the FSU used to play a big role in the Georgian economy. Total external trade (average of imports and exports) amounted to almost 43% of GDP in 1988-1990, with inter-republican trade accounting for about 86% of total trade. Georgia relied heavily on imports of energy from other republics, notably Russia (for electricity and crude oil) and Turkmnenistan (natural gas). Imported energy amounted to about 80% of the total energy supply in 1990. Wheat, sugar, and some heavy machinery were the other major imports. Exports included citrus, tea, tobacco, wine and mineral water. By far the biggest trading partner was Russia. 1.7 In 1991-1993, trade with the other FSU republics and the rest of the world collapsed. This was due to several factors, which include the self-imposed embargo on trade with other republics following the declaration of independence, the general breakdown of the trade channels in the FSU, the disruption of transport routes due to the fighting in Abkhazia and Ossetia, the disruption of production from input shortages, and the disintegration of the state order system. Today, there is some improvement as active trade with neighboring countries, in particular Turkey, is taking place, although it remains largely unrecorded. Although the importance of oil and gas increased greatly as a share of total imports, enery shortages have been acute, sharply affecting industry, agriculture and transportation. 1.8 Georgia, until April 1993, used the Soviet ruble as its currency. Inflation, low before 1991, increased to reach about 120% in 1991 and almost 1,000% in 1992. In early 1993, as a step towards creating its own currency, the Government issued "coupons" valued at par with the ruble and circulating in parallel with it. The inflationary process accelerated, however, and the "coupon" soon lost its value. By August 1993, it had sunk to 1/6 of the ruble, and at the end of 1993, the annual rate of inflation had reached 8,400% and was ten times that of Russia. The depreciation of the coupon continued thereafter and was finally halted by the stabilization program initiated in the Fall of 1994. After appreciating from 5 million coupons per dollar to 1.3 million coupons per dollar at the end of 1994, the exchange rate has stabilized, and in July 1995, the exchange rates were 260 coupons to the rouble and 1.3 million to the dollar. Effectively, only the ruble, the dollar and other hard currencies were being used for trade and as a unit of account, and very few commodities besides food stuffs could be purchased with the coupon. This situation has changed since the introduction of the new national currency, the Lari, in September, 1995. 1.9 The economic recession has had a major impact on the state-controlled sector. Major structural changes are taking place spontaneously, without any explicit policy intent on the part of the Government. Salient examples are the slow disappearance of functions traditionally performed by the civil service. This contraction of the civil service, apart from an intended reduction in state employment levels, is also the result of a rapid loss in the purchasing power of governmental salaries. Those who can find something more remunerative to do move on, with the predictable result that institutional capacity is being reduced in a haphazard and disruptive fashion, faster than the level of Government employment. In this context, for instance, the Ministry of Transport was dismantled in early 1994.  1. Country and Sector Background 3 1.10 Furthermore, the drop in the supply of goods and services by the public sector has prompted the informal private sector to respond. This growth of an unrecorded economy is amplified by the fact that Georgians have long had an entrepreneurial tradition and such response is rooted in ancient history. The case of fuel is a relevant example. Prior to the liberalization of fuel prices, fuel at controlled prices was not available, while fuel sold directly from "importing" trucks was widely available at a market price quoted in hard currency for foreigners and in Russian rubles for the local population. The price of a gallon of gasoline approaches world prices: in July 1995, it was comparable to the price of gasoline in Washington D.C. at that time. The same entrepreneurial response is evident throughout the economy, with small shops, bakeries, garages, car rental services appearing spontaneously despite difficult conditions. 1.11 Recent developments. Since the beginning of 1994, the Government has begun to consolidate its control over the country. There is some improvement in the law and order situation, and a new governmental team has renewed efforts to rebuild the economy through market-oriented reforms. Besides macroeconomic stabilization, progress has already been made in implementing structural reforms in several areas. Small-scale enterprise privatization has already reached 90 % of enterprises, most prices have been liberalized, and the import regime is relatively open. Georgia is initiating a comprehensive program of stabilization policies and structural reforms, however, under very difficult conditions and stringent financial constraints. Without drastic measures, as well as strong conmmitment to reforms on every level of Government, it will be difficult to achieve success in this process. C. The Transport Sector 1.12 A detailed description of the structure and investment priorities of the transport sector in Georgia, and an action plan for policy and institutional reforms, are presented in the Transport Sector Memorandum (TSM -- Report No. 13978-GZ, dated May 26, 1995) prepared by the Bank in collaboration with Georgian authorities and other international institutions. Agreement with its recommendations has been confirmed by the Government of Georgia in a Letter of Sector Development Policy, which has been attached to the minutes of negotiations (see paras. 2.12(b) and 3.15). The Transport Sector Before Independence 1.13 Prior to independence, Georgia's transport system was closely integrated with that of the FSU, and the country served as an important transit channel for the other republics. Land trade with the FSU was mostly by rail, estimated in 1988 at 37.8 million tons, but another 2 million tons moved by truck. Georgia's two principal cargo ports (Batumi and Poti)' moved 11.5 million tons of cargo in 1988; 85 % of this cargo, in value terms, was cabotage traffic to other parts of the FSU. 1.14 Not only was Georgia's transport system oriented to the FSU but the characteristics of the system were determined by central authorities in Moscow and reflected patterns encountered throughout the FSU. These included: (a) overuse of transportation because of specialization of production in a few locations; (b) over-reliance on rail transport, especially for short hauls and for moving cargo to and from ports; (c) centralized control of investments affecting all international transport; (d) undoubted 1/ The third port Sukhumi, located in Abkhazia, was essentially a passenger port (see para 1.54).  4 I. Country and Sector Background technical competence of administrative and managerial structures coupled with unfamiliarity of benefit/cost or other market-based analyses; and (e) the almost exclusive use of transport equipment made within the Council for Mutual Economic Assistance (CMEA) trading area, equipment that typically was not competitive by world market criteria. 1.15 Georgia also made use of the same institutional arrangements for its transport system that were the pattern generally in the FSU: the Ministry of Transport received budgetary proposals of various enterprises in the transport sector, setting their charging policies and the level of mandatory payments to the Government, authorizing investments and providing support from general government finances if revenues were inadequate. In addition, maritime and aviation fleets were based in ports or airports and operated as combined enterprises with them; freight booking and follow-up was handled through central organizations; transport enterprises typically provided many social services (health, education, etc.) to their staff at little or no cost; and the design, construction and maintenance of roads and other infrastructure was carried out by units which were not subject to competition. 1.16 Up to 1990, Georgian statistical authorities compiled summaries of the performance of the transport system based on reports from various operators, whether they functioned on a "for hire" or "own account" basis. With some privatization and with a general decline in discipline, the reporting system has now broken down, and sample surveys have not yet been instituted on a routine basis. The Transport Sector Today 1.17 Today, Georgia still retains much of the Soviet-style transport system, concerning institutions and procedures, but without the funding that it enjoyed in the Soviet era. Physical manifestations of the shortcomings of this system abound across the sector: lack of resources for all the modes; * an eroding asset base; - lack of technical innovation and upgrading; * absence of a meaningful statistical base for the sector; and absence of reliable financial indicators. 1.18 Asset Base. Little, if any, maintenance (even basic routine maintenance) has been done in all sub-sectors except air transport since 1991. This is the case, for instance, of critical transport infrastructure assets such as the main road system (the main east-west road from Azerbaijan to the Black Sea coast and north-south from the Armenian to Russian borders) which is deteriorating badly, of several railway bridges which are near collapse, and of crucial port infrastructure. This eroding asset base may, within the next five years, deteriorate to the point at which maintenance and rehabilitation are no longer possible. If this occurs, the only option will be costly and complete reconstruction. 1.19 Worsening the picture, the conflict in Abkhazia severely damaged road and particularly railway infrastructure: several bridges were blown up on the critical link between the Black Sea ports and eastern Georgia; railway electric wires were vandalized, and the signalization system was destroyed. 1.20 Traffic. The transport sector was particularly affected by the economic downturn of the last four years in Georgia. Today, traffic flows in all modes are significantly reduced when compared with those of only a few years ago. Less than one fourth of 1990 levels were observed in 1993. In addition, most of the remaining traffic for ports and rail is humanitarian food-aid cargo, and such traffic is temporary.  1. Country and Sector Background 5 1.21 Transit traffic also fell drastically from 204,000 tons in 1989 to 22,800 tons in 1991 and with further reductions since, although transit traffic has recovered somewhat due, again, to shipment of humanitarian assistance to Armenia and Azerbaijan through Georgia. Figures 1. 1, 1.2 and 1.3 below give an indication of freight traffic decline in roads, ports and rail. 1.22 Since independence from the FSU, Georgia has aspired to a role as the western and crucial link in a land corridor for trade between Europe and Asia, by providing transit facilities for oil and gas pipelines from central Asia, and container transit traffic for trade between Europe and central and eastern Asia, and the Persian Gulf. Today, Georgia envisages not only the transit revenues but also the impetus to domestic ancillary activities that transit trade would generate. 1.23 A shift in external trade relations is already taking place. Although cargo turnover remains very low, the quantity, range and origins of the comrnmodities handled at Poti port have become more diversified. The outward shipment of ores through Poti has now stopped, and trade with Turkey and countries in the Mediterranean has increased. The possible competition by corridors through Russia, and through Turkey and Armenia, needs to be kept in mind: the significance of transit traffic for the Railway and ports would grow in tandem with an easing of tensions in the Caucasus region. 1.24 Financial Aspects. Since Government revenues have decreased significantly, from about 25 % to 3 % of a much smaller GDP base, most transport enterprises are having to rely on self-generated funds to cover their urgent needs, i.e., to provide essential spares and replacements for maintenance of existing operations. With the exception of urban transport, transport enterprises are not receiving official "subsidies" anymore2. As for the Highway Concern, it has not received any payments from the state budget, has not been able to maintain the road network and has difficulties paying its staff. 1.25 Budgeting arrangements for the four transport modes of the erstwhile Ministry, now that they report directly to a Deputy Prime Minister, do not exist. It is also clear that under present conditions, transport enterprises in Georgia, whatever the formal designation of their financial status, are not maintaining their assets and are depleting their capital stock. 1.26 Institutional Aspects. Institutionally, the sector is in disarray. The Ministry of Transport was dismantled in early 1994. Four modal agencies for rail, road transport, ports and air report directly to a Deputy Prime Minister responsible for the infrastructure sectors, and a fifth, (the road infrastructure sub-sector) reports to the Council of Ministers. This structure is expected to be adjusted under the new Government, the modal agencies will continue to be responsible for policy and regulatory functions. In addition, under the modal agencies there exist operational units. These are public entities, established by law which requires them to conduct their activities in accordance with Georgian Corporate Law. There is no reliable, consistent, information base, and transport statistics are not being systematically collected. 1.27 The Ministry of Transport was abolished in 1994 in the context of a needed contraction in the civil service, with more and more responsibilities concentrated in fewer hands. This trend has adversely affected the ability of policy-makers to formulate sector policy, carry out reforms and adjust to new realities. The sector, with the exception of the aviation sub-sector, still operates under the organizational and policy structures of earlier days. Since the restoration of the Soviet-style civil service 2/ The terms 'profit" 'loss" and "subsidy' as used in the former Soviet system do not correspond to accounting concepts in the industrialized world, most notably because Soviet accounting made no provision for either compensation of capital or reserves for depreciation.  6 1. Country and Sector Background Roads - Freight Traffic mlh wn.kn slow b#_ ow~~~~ m . ^.j. -t _ lo4w r i i Io i lw fl*1~~99 bL B Flgure 1.1 Source: SoiR Eooge Maical InonsultionGMH Commite ofSPoiC DrSaroturnove In993;m and PBa otsm n oiPrsfr19 *e.*_ ~ ~ ~ ~ j 1~~~~~~~~00 ~ ~ ~ ~ ~ 9 1,000 201 Figure 1.3 Source: SEIC of the Supreme Council of the Republic of Georgia; and Railway Department for 1994  I. Country and Sector Background 7 would not be advisable, this presents a unique opportunity to organize reforms and privatize the sector. Improved sector performance is indispensable for the economy to recover, and the sector may need to be restructured and market-oriented to be able to perform under increasing traffic volumes. In an effort to focus and accelerate efforts to reform the sector, two State Committees have been recently formed under the authority of the Chief of State with somewhat overlapping responsibilities. They are a Transport Coordination Committee (TCC), dealing with domestic transport issues, and the Transport Reform and Rehabilitation Center (TRRC), responsible for trans-caucasian transport issues. Both entities are involved in project implementation (see Annex 13, page 1), the TRRC as coordinator of the project, and the TCC as a participant in the project steering group. 1.28 Recent Developments. As part of the efforts undertaken by the current governmental team to rebuild the economy through market-oriented reforms (see para. 1. I1), some encouraging changes are already taking place in the transport sector. The aviation sub-sector was restructured in 1994, with the Aviation Department acting as a regulatory body, and airports, airlines, and air traffic control (ATC) operating under commercial principles as separate entities. In addition, some steps towards commercialization of ports have occurred, a program of privatization of road transport entities is underway, and a recent decree reorganized the road transport sub-sector, liberalizing it and defining a regulatory body. The implementation of the road transport privatization program started in April 1995, and about 75% of the assets were privatized in November, 1995 (see paras. 2.11 (a)), and laws on foreign investments and road user charges were approved in July and September 1995. 1.29 Remaining Issues. Despite these efforts, many issues remain to be addressed, both institutionally and regarding the necessary rehabilitation of the key transport infrastructure of Georgia. Institutionally, the issues refer to commercialization, deregulation and further privatization in the sector with attendant restructuring of operational units concerned. On the rehabilitation side, the issues refer to the need for cost recovery, giving priority to the maintenance of critical sections, and improving technologies in use to reduce unit costs of operations and civil works. The deterioration of the transport system is affecting other economic sectors that rely upon transport. If not addressed, this deterioration is likely to create transport bottlenecks which will further discourage economic activity and would need to be removed as a matter of urgency. D. Transport Sub-Sectors 1.30 The following paragraphs describe the current physical situation of each of the transport sub-sectors (roads, railway and ports), as well as on traffic levels, past (significant), current (depressed) and prospective (limited growth). Chapter III - Financial Analysis presents information on the financial situation of the Highway Concern and the Railway Department. Road Infrastructure 1.31 The dominant institution in the road construction and maintenance sub-sector is the Highway Concern, a public entity with management autonomy, that operates independently of the rest of the transport sector, reporting directly to the Council of Ministers. 1.32 The Road System. The total length of the Georgian road network consists of 21,600 km of roads, of which 9,720 are paved and 11,800 are gravel or earth. The road system of Georgia in the Soviet era was oriented essentially for trade with other republics of the Union, to the east (Azerbaijan), but more importantly to the north (the Russian Federation). The aspirations of Georgia as an independent nation, and specifically the possibility of becoming part of an east-west corridor linking the Caucasus and central Asia with the Black Sea, require a radically different emphasis for the road system from that  8 1. Country and Sector Back round previously envisaged, one in which the road from the Azeri border to Georgia's Black Sea ports would play the dominant role. 1.33 The Principal Road Through Georgia: "The Magisterial". The principal road in Georgia, measuring about 728 kIn, runs from the Azeri border, through Tbilisi, to the Black Sea (Sukhumi), and on to the Russian border. At Samtredia, close to the Black Sea, two roads take off from the Magisterial to provide access to the ports of Poti and Batumi. The Magisterial runs generally along the valley between the two ranges of the Caucasus. 1.34 Geometry. The alignment, longitudinal gradients and slope stability of this principal highway are generally acceptable except for two mountainous sections (100 km west of Tbilisi, and in the area of Rustavi, the major industrial complex, between the Azeri border and Tbilisi). The Magisterial is however beset by long tangents (straights) that may cause problems from headlights at night and that certainly encourage speeding by drivers of automobiles. 1.35 Pavement. Apart from a few short concrete sections in and adjacent to the cities, the Magisterial pavement is of flexible construction. The bituminous surfacing looks dry, potholes have appeared, there is some evidence of use of uncrushed gravel, and of stripping, but there is no widespread deformation of surface that would indicate base or formation failure; probably the relatively high embankments on which the road has been constructed have helped to keep the critical pavement strata dry and hence conserve their strength. The lane markings are faded to the point of not being visible any longer. The standard design for the pavement is a total depth of 30 cm (5 cm of carpet, 5 cm of bituminous base and a stone base of 20 cm). This construction is adequate for today's reduced traffic, but less so if and when previous traffic levels return or if there were to be an increase in heavy traffic from the central Asia region. 1.36 Structures. The structures, principally bridge decks, piers, abutments and wing walls, are characterized by thoroughly poor concrete. The side elevations of the decks exemplify the problem -- crumbling concrete and reinforcement exposed. This shortcoming carries over to railway overpasses. The condition of the concrete could be attributable to working in frosty conditions, or to use of ingredients that have chemicals inimical to concrete, or to skimping on the cement content, but more likely the condition is the result of poor compaction or even the total absence of compaction. 1.37 A further negative feature associated with the bridges, is inattention to the side drains in the cuttings that form the approaches to the structures. These approaches, and therefore the side drains, are often steep, but there appears to be no practice to protect the drains either by lining or by use of scour checks, with the consequence that the drains are deeply scarred into the shoulders of the road, and the wing walls of abutments tend to be undercut. 1.38 Other Roads. The remaining roads comprise secondary and tertiary roads leading off the Magisterial, and feeder/agricultural roads and tracks. The secondary/tertiary system also is in poor condition. The limited means now at the disposal of the Highway Concern, however, are concentrated on the "magisterial" road in preference to the other roads. 1.39 The lowest class roads (feeder roads, agricultural roads and tracks) are important to move agricultural inputs and produce. Because of lack of funds, these vital access roads are not being maintained. According to the staff of NGOs assisting agricultural development, lack of farm to market access roads is the second most significant impediment to agricultural development, after the lack of agricultural inputs and energy.  I. Country and Sector Background 9 1.40 Traffic. Based on counts from the engineers of the Highway Concern whose construction/maintenance units are positioned along the Magisterial, current traffic levels are in the range of 250-500 vehicles per day (vpd), down from previous levels of up to 10,000 vpd. These latter flows could materialize again as agricultural activity in eastern Georgia and in the western plain, and industrial activity in Kutaisi, Tbilisi and Rustavi resumes. There is no credible evidence, however, that this recovery is imminent. The concept of Georgia being part of the Central Asia-Black Sea corridor, if it materializes, would obviously augment the flow on the Magisterial, probably with container traffic; at best, and certainly in the short term, this transit traffic would only be a small proportion of the locally- generated flow. Since May, 1995, a moderate increase of this traffic has become apparent. 1.41 Maintenance and Rehabilitation. Work on the road system as a whole is virtually non- existent, a result of lack of funds and cost recovery from users. The funding currently available does not even cover all wages and salaries of Highway Concern employees. The Legislation approved on September 2, 1995 (para. 1.28), introduces a new cost recovery and road user charges system to finance road maintenance and rehabilitation. However, this system introduces some distortions to the "road user = road payer" principle, in the form of discriminatory taxation between local and foreign road users. Adjustments to correct this situation will be made later, in light of the recommendations of a Pavement Management Study (see paras. 2.11 (c), 3.4, and 5.1 (e)). Competitive contracting of both maintenance and construction of new roads would help to lower unit costs, but privatization of these operations would require an appropriate and steady level of funding. 1.42 Maintenance Units and Equipment. Few of the 14 road construction and repair units and of the 88 road maintenance units appear to be in working condition. Maintenance equipment is of rather heavy design, and capacity to mix and lay bituminous base and carpet is far larger than the construction and maintenance function would dictate. Possibly road maintenance units in the past had received equipment that happened to be available and not necessarily that which was needed. 1.43 Private Sector Participation. Today, there are intentions to privatize road construction and maintenance, with eventual divestiture of related assets, and requests for assistance have been made to the Bank. This has been explicitly included as part of the project (see paras. 2.11 (c), and Annexes 8 and 19). The Rail Sub-Sector 1.44 The Railway Department is a public entity operating under Georgian Corporate Law. At its peak (in the mid 80's), it had 41,000 employees - 18,000 in transport operations and 23,000 in support and social functions. At that time, annual freight traffic was in excess of 40 million tons. Today, the downturn in activity has brought total staff to about 18,000, and freight traffic to only 5 to 6 million tons. 1.45 Infrastructure and Equipment. Georgia has 1,569 km of railways. The main line between Poti and Tbilisi dates back to 1872 but other lines were built as recently as 1970. Currently, most of the country lies within 50 km of a railway line, and the densely populated areas are in the 20 km catchment of the railways. About 80% of the network is in mountainous terrain with grades reaching 4.9%; 247 km have curves with radii of less than 300 m. The main lines are all electrified (Georgia was the first republic of the FSU to undertake the electrification of its railway network) with DC at 3.3 kv.  10 I. Country and Sector Background 1.46 The condition of the network and related civil engineering structures is poor (see Annex 12 for a detailed description). Tracks are old, embankments are not well maintained, overhead lines are in need of repair; most structures and buildings are more than 80 years old. Many sections are subject to slow orders, and communications are difficult because of stolen wires. In addition, the Railway was adversely affected by the unrest in Abkhazia: the track to the north and Russia remains closed because of physical damage; specifically, the complete destruction of two bridges and severe damage to several others, as well as vandalized electric wires and signalization equipment. Although main lines are electrified, poor power supply and vandalized equipment have made electric locomotives and trains unreliable. 1.47 The rolling stock of Georgian Railways was supplied from the erstwhile Soviet system, which purchased its requirements not only within the FSU but from suppliers elsewhere in the CMEA and even in Western Europe and Japan. Little of this non-CMEA equipment, however, was passed on to Georgia. The main traction equipment consists of a total of 496 units, of which 280 were reported in working order in May, 1995. This includes 230 (in working condition: 110) electric locomotives -- mostly assembled at a plant in Georgia --, 159 (90) diesel-electric locomotives and 107 (80) electric motorized units (EMU). Of nearly 20,000 freight wagons in 1991, about 5,000 were said to be out of use in 1993, and in May, 1995, only 5,000 were reported in operation. 1.48 The low availability of rolling stock is due to: (i) delayed maintenance (about 90% of the locomotives need periodic overhaul, work that was normally done in Russia but has until recently been impossible due to political conditions); (ii) lack of spares (the Railway does not have the hard currency to procure them); and (iii) operational and organizational flaws. 1.49 Traffic. In 1988, nearly 13 billion ton.km moved by rail. Today (in 1994 and in the first half of 1995), this number barely exceeds 1 billion ton.km per year. Most of the remaining traffic is grain, flour and liquid fuel, as part of the emergency assistance for maintaining food and energy supplies to Georgia, Armenia and Azerbaijan. 1.50 Collapse of traffic on Georgian Railways reflects weak demand but also the lack of railway capacity. Both have been declining but not necessarily on parallel paths. The problems in railway operations include slow-orders on track and unserviceable rolling stock, both of which reduce the movement of trains and the supply of wagons to customers. For example, a typical transit time from Poti to Tbilisi is 17 hours for 324 km (for an average operational speed of 19 km/hr), and the Railway cannot supply more than 100 grain wagons per day to either Batumi or Poti port for unloading of ships. Wagon turn-around times (in days) also have deteriorated sharply from about a week in 1992 to more than two weeks today. 1.51 These statistics, and the complaints from users since 1994, point to the possibility of further declines of railway service in Georgia. If the urgent maintenance and rehabilitation and managerial needs are not met, the Railway will not be able to cover such basic needs as fuel and food supply, let alone new traffic once economic activity picks up. 1.52 External Assistance. The Railway is benefitting - both financially and operationally - from the United Nations World Food Program (WFP), and specifically from the work of its Caucasus Logistics Advisory Unit (CLAU); the latter has representatives in Tbilisi, Batumi, Yerevan and Baku. Through its primary concern for movement of food shipments, WFP/CLAU is impacting beneficially on operation of the railway system (and of the ports) by its continuous and obviously very professional, "hands-on" diagnoses of operational shortcomings. WFP, to add force to its diagnoses, has provided funding for the leasing of 10 diesel locomotives in 1994, and has programmed US$4.5 million of grant  I. Country and Sector Background 11 funding for the Railway for 1995. Furthermore, CLAU issues periodical "Situation Reports" analyzing the general logistical situation in the Caucasus, and specifically the situation in the ports and on the Railway. These situation reports have become the only reliable source of current information on transport. Also, the German Agency for Technical Cooperation (GTZ) has funded technical assistance to make a detailed assessment of the physical and technical condition of the Railway, as a first step towards the determination of future assistance levels. This work has been recently completed. Ports 1.53 Georgia has three ports, Batumi near the Turkish border, Sukhumi in the West, not far from the Russian border, and Poti in the central coastal plain. Sukhumi is in Abkhazia and is reported to have been used in the past primarily for passenger traffic and to have only limited cargo facilities. Operations at Sukhumi have been affected by the unrest in Abkhazia. The territory around the other two ports is also subject to some political constraints. Batumi is the capital of the (former Soviet) Adzhar autonomous Republic, which still has certain differences with the Central Government, while Poti lies in the Mingrelia region. 1.54 In 1994, Batumi handled only about 0.7 million tons of dry cargo, whereas Poti's dry throughput was at 1I.1 million tons. Today, most of the dry cargo handled by both ports (95 % of the total in Batumi, and 89% in Poti) is the humanitarian food aid for Georgia, Armenia and Azerbaijan. Almost no liquid cargo moved through the ports in 1994. This low level of traffic contrasts with past pattemrs: Batumi's throughput in 1988 of 6.9 million tons was about three-quarters in petroleum and petroleum products and the rest of Batumi's cargo in 1989 (no data available for 1988) was nearly all in grain and alumina with only 0.2 million tons represented by other dry cargo. Poti, on the other hand, handled no bulk liquids, but 70% of the 4.4 million tons of dry cargo in 1989 was in four commodities (grain, ores, bauxite and coal). 1.55 The role of the ports is likely to change. During the era of the FSU, Batumi and Poti served mainly traffic to and from other Soviet republics, but now they are expecting to provide a channel for an increasing volume of imports to the Caucasian republics from the world market and for exports of the products of these republics, most importantly oil. The ports are expecting also to serve the transit traffic to and from central Asia and beyond and to and from Iran and other countries in the near and middle East. 1.56 Current Situation at Batumi and Poti. This assessment of the situation at Batumi and Poti is based on World Bank findings in 1993, 1994 and 1995, and reflects the remedies suggested by the US Embassy in Tbilisi and WFP/CLAU.3 Both of these sources rightly touch on the role of the Railway as it affects port operation. 1.57 At both ports, the general impression remains that the facilities available, if properly operated to maximum capacity, should be able to accommodate current traffic and any traffic growth foreseeable in the medium-term, without the need for major investments. The longer-term flows at the ports will depend on (i) the timing and magnitude of the economic recovery, and (ii) the extent to which Georgia will be used as a transit corridor for trade to and from central Asia. In this context it should be noted that Georgian ports may face competition from Turkish ports on the Black Sea, the latter sending their traffic by rail through Armenia by-passing Georgia. Certainly for movement of oil from Georgian 3/ See Georgian Sea Ports. 1994, US Embassy in Georgia, Ref. 93 USDOC 19 439; and Situation Report, 17 Februarv 1994: External Transport, Caucasus Logistics Advisory Unit, World Food Program.  12 1. Country and Sector Background ports, the concern of Turkey over the passage of laden tankers through the Bosphorus will also need to be addressed. 1.58 At Batumi (five oil berths and one off-shore oil terminal, four dry cargo berths, an offshore mooring for lightering, and a small container handling capacity) there is limited dry cargo storage, hence virtually all discharging is direct, primarily to rail. This is a shortcoming of port design, the lack of railway wagons constraining port throughput. The oil pipeline across Georgia is corroded and remains closed, hence oil has had to move by rail. The principal operational problems at Batumi persist as (i) inability of rail to provide adequate and timely wagonage for evacuation of cargoes, (ii) a work force with little motivation, (iii) an inadequate and unpredictable electric power supply, and (iv) lack of spares for cranes and handling equipment. 1.59 At Poti, the cargo terminal has ten berths (two for grain, six for other bulk, one for containers, and one for general cargo) all served by rail. There are additionally a passenger berth, two fishing piers, one berth for coastal traffic and one being rehabilitated. The principal operational problems are similar to those at Batumi: (i) the inability of the Railway to adequately serve the port, and (ii) uncertainties and interruptions in the electric power supply. The port has a stand-by generator, but this in turn is beset by periodic lack of fuel. Poti has an advantage in its working areas behind the berths being more spacious than those at Batumi, which is surrounded by a densely-settled community and hemmed in at the foot of steeply-rising mountains. Unlike Batumi, however, Poti has the problem of littoral drift, and maintenance dredging is needed. Since 1993, Poti has been contracting a foreign company to dredge the approach channel to 12 m and to make corresponding adjustments alongside the berths. Using its own resources, the port of Poti spent about US$ 0.9 million in 1994 for dredging, and is planning to spend an additional US$ 2 million in 1995 to continue dredging maintenance of the access channel. 1.60 External Assistance. GTZ has recently financed and completed field work to define an in-depth study of the technical and institutional conditions of the ports, their potential for development, and required assistance for institutional reform, rehabilitation, and private sector participation. A formal agreement with the Government of Georgia to carry out this work is expected in the near future. In addition, EBRD has identified a Grain Terminal Project in Poti which would have private sector participation. E. Bank's Experience and Strategy Bank's Role and Past Experience in Georgia 1.61 The intention of the reform program of the Georgian Government has been to reverse the economic decline of the past few years and to move to a private sector led, market-based economy. Through the end of 1993, however, given the civil conflict and resulting lack of focus and impossibility to send Bank missions, lending from the Bank was not feasible. Instead, the focus was on building macroeconomic and sector knowledge and providing limited technical assistance to the extent possible. 1.62 In response to the Govermnent's new focus on economic reform, the Bank has initiated a broader program of lending and sector work in municipal infrastructure, energy, health, agriculture, transport and environrment. Three lending operations were approved in FY 1995: The Institution Building Credit (US$10.1 million, approved by the Board in July 1994), which provides support to the country's  I. Country and Sector Background 13 privatization efforts, financial sector reform, tax and customs administration strengthening, and economic policy development; the Municipal Infrastructure Rehabilitation Credit (US$18 million, approved in November 1994); and the Rehabilitation Credit (US$75 million, approved in March, 1995) which supports the Government's economic reform program, aimed at restoring macroeconomic stability and at promoting the resumption of growth and improvement in living standards. The Transport Rehabilitation Project will be the first operation of the Bank to support essential needs of transport infrastructure in Georgia. Bank's Assistance Strategy in the Transport Sector 1.63 The need for assistance to Georgia's transport sector is substantial. The macro economic situation, the role of transport in assisting supply responses to policy reform (see para. 1.39), and regional trade being one of Georgia's comparative advantages, give a sense of extreme urgency to this assistance. The situation is quite desperate, aggravated by institutional breakdowns, financial imbalances, and the stoppage of practically all maintenance work. Support for rehabilitation and improvements in the efficiency of the transport sector is a key element of the proposed 1996-1998 country assistance strategy (CAS). These elements were also included in the lending strategy as outlined by the Rehabilitation Credit approved by the Board in March 1995. The Bank discussed an action plan of sector reforms with the Government in the context of the TSM (para. 1.12) in May 1995. The cornerstones of the discussed medium-term assistance strategy are: (a) Sector Policy Reform and Legal Frameworks: The sector institutions which will be assisted range from the ministries and modal agencies formulating the sector's reform program, such as ports, Railway, and the Highway Concern. The assistance will cover: formulation of legal frameworks; attributions and functions of the sector institutions in a market economy; restructuring of public enterprises in the sector to enable their independent operation in a competitive environment and prepare their privatization; liberalization of transport and of freight forwarding markets; and privatization of road freight and passenger transport. (b) Privatization or Commercialization of Sector Enterprises: The privatization and commercialization of sector operations, and attendant restructuring, will help determine the corporate structure and costs of viable transport enterprises. If left untouched, these enterprises would not be credit worthy, would be unable to raise capital to assure their sustainability, and would be candidates for liquidation. (c) Cost Recovery for Transport Services and Infrastructure: Cost recovery and financial restructuring do not guarantee minimum transport costs. This can only result from competition among suppliers of transport services within and across sub-sectors. Competition and market determined prices will be ensured by liberalization of entry and pricing for transport services. (d) Maintenance and Rehabilitation of Key Infrastructure: Maintenance is the top priority, followed by rehabilitation. Georgia should start considering investments in new infrastructure only when the existing services are brought back to a reasonable level of operation and traffic has started flowing again.  14 1. Country and Sector Background 1.64 In the short-term, the assistance strategy aims at: * The initiation of the institutional strengthening; and * Avoidance of potential capacity constraints by carrying out critical infrastructure maintenance. 1.65 For rehabilitation and maintenance, the Bank's assistance strategy will primarily focus on the roads, rail and, to a lesser extent, port sub-sectors. Civil aviation in Georgia is well on its way towards reform and commercialization while following an "open skies" policy. In addition, two operations, a recently approved EBRD-financed project of about $13 million for the refurbishing and modernization of the Tbilisi terminal building, and a possibly private sector-funded project for the rehabilitation and renewal of air traffic control, are currently under consideration. 1.66 For ports, there already exists private sector interest in rehabilitation investments. This interest has not developed into concrete investments yet, mainly because of the lack of a legal framework for foreign investment in Georgia, and because it would be pointless to increase current port capacity as rail and road transport cannot match this capacity today. 1.67 The Transport Rehabilitation Project (TRP) is the Bank's first response to the pressing short term needs of the transport sector in Georgia. It will address directly existing bottlenecks and be a catalyst for the adjustment of the sector and the restructuring of its institutions. The TRP will amount to a necessary first step and will lay down the basis on which to develop a program of financial assistance for transport once economic recovery is established. 1.68 Further support of rehabilitation, restructuring, and orientation towards a market economy of operations in the sector could be assisted with additional lending over the next five years. The extent of this medium term assistance would be subject to: (i) the successful implementation of the TRP; (ii) economic recovery in neighboring countries and demand for transit services; and (iii) increased domestic economic activity and transport demand. 1.69 In any case, technical assistance and training, so far accepted and welcomed by the Government, have an obvious role to play. The continuation of current technical assistance and direct operational support to maintain the flow of humanitarian aid to both Georgia and Armenia would be needed during the transition to a more comprehensive approach to the sector's problems. Rationale for IDA Involvement 1.70 Given that in the transport sector debt capacities are small and revenues limited, any financing made available to the sector, and to Georgia generally, needs to be on concessional terms. Most external donors are focusing their assistance efforts in Georgia almost exclusively on humanitarian aid. Up to now, IDA is the only concessional source available to help finance programs to address the severe transport dysfunctions in Georgia. Assistance from IDA will play a significant role in helping foster an environment in which economic stabilization and growth can take root while laying the foundation for improved management and operations in the transport sector. Lessons Learned from Previous Bank Projects in the Transport Sector 1.71 The Transport Rehabilitation Credit will be the first Bank/IDA transport project for Georgia. The Bank's experience in the transport sector has been substantial over the last fifty years.  I. Country and Sector Background 15 This experience has highlighted the need to address, in addition to investment needs: (i) the institutional capacity to carry out the project; (ii) cost recovery mechanisms; (iii) policy reform; and (iv) emphasis on maintenance and rehabilitation of existing assets. The project incorporates these experiences in its design as exemplified, in particular, by recent developments in Eastern and Central Europe and Latin America. 1.72 Traditionally, transport projects financed by the Bank have been designed to respond to expanding demand for infrastructure and services. In Georgia, as in other economies in transition to a market economy, this is not the case. Infrastructure is deteriorating, traffic is about a fourth of the volume it used to be six years ago, and the public administration has been sharply reduced. Policy making functions have suffered, and implementation capacity has been affected. This has led to a project design which addresses the need to alleviate severe bottlenecks, while assisting the implementation of broad-based policy and institutional reform.  11. THE PROJECT A. Project Origin and Formulation 2.1 The Bank's involvement in the transport sector in Georgia started with two transport sector review missions, in August 1993 and June 1994, which led to the Transport Sector Memorandum report and policy note (Report No. 13978-GZ). In late 1994, the Government expressed interest in a project to address the pressing rehabilitation needs of the transport system. The project was prepared between May and August 1995. Project preparation addressed: (i) the policy and sector reform recommendations of the Transport Sector Memorandum; and (ii) the possible composition of the Transport Rehabilitation Credit. Project preparation has been assisted by a PHRD grant from the Government of Japan. The project supports the Country Assistance Strategy (CAS), has a favorable fiscal impact on the basis of cost recovery measures, and makes substantial contributions to economic efficiency in other sectors while reducing transport costs. An environmental analysis leading to a mitigation program integral to the project has been carried out. B. Project Rationale and Objectives Project Rationale 2.2 The rationale for the project rests on the urgent need to avoid: (i) potential collapse of the transport system; (ii) excessive transport costs; and (iii) early reconstruction of infrastructure. Simultaneously, the project minimizes the risks of major accidents from the use of extremely damaged road and rail networks, and assures the delivery of humanitarian assistance to the Caucasus region. 2.3 The project scope also paves the way for a wide range of reforms in sector policy and regulatory framework. As such it will address environment and safety issues, avoid service breakdowns, and restore a minimum of safe physical capacity in road, rail, and port transport. Air transport, being quite advanced in the development of its policy framework and in the updating of fixed facilities and privatization of services, is not included in the Transport Rehabilitation Credit. 2.4 In identifying the project, the following questions were addressed: (a) Given the scarcity of resources, how best to address the significant road rehabilitation and maintenance backlog? (b) Is rail a truly viable option? (c) Should rail passenger traffic be stopped altogether to concentrate on freight and food aid? (d) Is there a long term need for the East-West railway or would the road suffice? 2.5 How to address the road rehabilitation backlog? Road is a key transport mode and traffic has been increasing. Its importance can be expected to grow as the economies of the Caucasus republics improve and local and international traffic develops. At this point, road repairs are needed as a priority for safety reasons and to avoid the need for reconstruction. The government has not been able to make the financial contributions sufficient to deal with the maintenance and rehabilitation backlog, estimated as a minimum at US$85 million (see Annex 6, page 5). It is, therefore, proposed to allocate resources to kick off a priority program of road repairs. It would consist initially of emergency works to stabilize and avoid further destruction of about 1,000 km of the main road network of Georgia. Later, as  I1. The Project 17 resources generated by the recently approved cost recovery system become available, the Highway Concem would start addressing the backlog of rehabilitation on main roads and of maintenance on secondary roads, totalling about 7,000 km. 2.6 Is rail viable? Under the current conditions in Georgia, there is no alternative to rail for the transport of humanitarian aid to Georgia, Armenia, and Azerbaijan. The road access to ports has limited capacity for heavy trucking, and the truck fleet is also limited; the cost recovery system needed to maintain the roads is not yet in place; and the destruction of the roads would be accelerated if the Railway were to be closed. Selected expenditures to rehabilitate existing locomotives, maintain track to minimum safety standards, and prevent the collapse of key bridges are, therefore, justified. If freight and passenger tariffs are established to reflect economic costs, the payback period could be of about five years and would recover the costs of the investments. This payback period would be well within the near term expectations of no significant traffic growth. 2.7 Should all rail passenger traffic be stopped and emphasis given to freight? The emphasis for the Railway should be to discontinue all services where full cost recovery is not possible, be it passengers or freight. As a result of a review of costs and tariffs included under the institution building component, the tariff increases necessary to recover costs will affect real demand for services, and passenger traffic is expected to fall. 2.8 Is there a long termn role for the East-West rail? The long term role of the Railway is linked to the recovery of the Caucasian Region, increases in trade, in particular with the west, and an improvement in the stability of the region. The uncertainties are such that the potential importance of the Railway, significant as it may be, is not a sufficient reason to embark on full rehabilitation and ambitious investments at this time. Project Objectives 2.9 The Transport Rehabilitation Project, which will be the first transport sector investment project in Georgia, will have the following objectives: (a) to support policy reform in the transport sector and restructure its institutions to operate in a market economy; and (b) to repair and maintain some of the most critical elements of the transport system. C. Project ComRonents and Descripfion 2.10 The project has two main components, each of them associated to one project objective. They are presented in detail in para. 2.11 below. Their summary description is as follows: (a) Institution Building Component (US$ 4.9 million). It will include consultant services for: (i) advice and support to teams preparing policy sector reforms; (ii) technical assistance for the formulations of technical and legal frameworks necessary to the restructuring, commercialization and privatization of sector entities; (iii) managerial assistance for public and private transport enterprises;  18 II. The Project (iv) a training program to update transport technical staff from the private and public sectors; and (v) project management. (b) Investment Component (US$ 13.2 million). It will include financing for: (i) a road maintenance program, including selected equipment and spares for road maintenance, emergency repairs, and the necessary imported road building materials; (ii) a railway sub-component, including bridge repairs and the required structural steel, track materials (ties, rails and fastenings), spares for locomotives, and communications and selected signalling equipment. The component cost estimates above are without physical and price contingencies. 2.11 Institution Building Component. This project component will include the following: (a) Policy Reform (US$ 0.6 million): Provision of consulting services to modal agencies to assist in (specific topics and cost estimates are shown in Annex 4): (i) revising legal frameworks; (ii) advancing cost recovery policies; (iii) deregulating the sector ; and (iv) privatization of road transport enterprises (see para. 1.28). (b) Support to the Transport Reform and Rehabilitation Center (US$ 0.9 million): Provision of short term consultant services, equipment, and recurrent cost financing for the Transport Reform and Rehabilitation Center (TRRC). Paras. 2.17 to 2.20 and Annex 5 present the functions of the TRRC. These will include coordination of: project preparation and implementation; procurement; policy fornulation; and sector reform. In particular, the TRRC will be responsible for arranging training activities financed under the project. (c) Consultant services to modal agencies and operational units, including: For the Highway Concern (US$ 1.3 million): e to elaborate a revised road user charge system (see paras. 3.3 and 3.4) to address existing financial issues and allow the start of road rehabilitation, as cost recovery flows and recommendations of the Pavement Management Study become available. * to improve road user charge collection performance and procedures. * to implement: (i) a program of privatization of road construction and maintenance units -- submission of an implementation schedule of this program acceptable to IDA, will be a condition of disbursement for civil works contracts (para. 5.3 (a)) -- see Annex 8 for the nature of contracts with these units; (ii) a program of rentals, leasing and sale of road construction and maintenance equipment (see Annex 9); and (iii) competitive bidding for all maintenance and rehabilitation contracts. (Work on (ii) and (iii) has started under a PHRD grant.) * Pilot winter road maintenance techniques and equipment. * Carry out feasibility studies of road rehabilitation works already identified.  II. The Project 19 For the Railway Department (US$ 1.2 million): 0 Assistance to: (i) elaborate and implement a financial restructuring and adjustment plan, including a program of cost and staff reductions and tariff adjustments sufficient to recover costs (see Financial Analysis, chapter III); (ii) assist management to execute a program of minimal renewal and rehabilitation; (iii) organize seminars on modern railway management practices; and (iv) draft legislation to change the railways status into that of an independent corporation. For the Ports (US$ 0.9 million): * Assistance to: (i) elaboration of the regulatory framework necessary to the commercialization/privatization of ports and related adjustments; and (ii) financial restructuring focusing on cost and staff reductions and tariff increases to provide the ports with some investment capacity of their own. This investment capacity would be later used on carefully evaluated projects, in collaboration with private partners. 2.12 Investment Component. The investment component of the project (US$ 13.2 million) will include: (a) Road Maintenance Program (US$ 6.6 million): The assistance under the project will consist of urgent road repairs (road clearing, drainage rehabilitation, surface dressing and selected bridge rehabilitation on about 1,000 km of roads, costing an estimated US$ 5.3 million, and US$1.3 million worth of road maintenance equipment and spares), see Annex 6 (cost estimates) and Annex 18 (economic evaluation). (b) Railway Sub-component (US$ 6.6 million): The sub-component will consist of urgent investments to remove bottlenecks. The western part of the network requires stabilization and protection of bridges, track repairs in critical sections, and traction capacity sufficient for ten trains per day in both directions as a maximum, as well as basic communications equipment and signalling to ensure a minimum of safety and reliability for humanitarian aid and trade. For a detailed cost-estimate, see Annex 10. As the Railway does not have any investment capacity of its own, these investments will be conditioned on the generation of the ability to serve debt by a combination of cost reductions and tariff increases (see Financial Analysis (Chapter III) and Annex 11). Assurances in this regard have been included in the Government's letter of Sector Development Policy (see para. 3.15). Specification of an investment program acceptable to IDA and in such detail as the Association shall reasonably request is a condition of disbursement for this sub- component (see para. 5.3 (b)). D. Cost Estimates and Financing 2.13 The estimated total cost of the project is US$20 million, net of taxes and duties, including physical and price contingencies ($1.9 million). The foreign exchange component is US$11.1 million, or about 56% of total project costs. Costs were estimated in US$ at July 1995 prices and include physical contingencies of US$ 1 million, i.e. 5.5% of base costs, for materials, equipment and civil works. Price contingencies amounting to US$0.9 million were estimated based on a constant 2.6% price increase per year for foreign supplied goods and relative fluctuations in foreign exchange rates applicable  20 II. The Project to the project. Estimated cost recovery flows (para. 3.2) are sufficient to cover unexpected increases in local costs. The estimated cost of the project is given in detail in Annexes 6 and 10 and is summarized in Table 11.1 below. Table II.1: Summary of Project Cost Estimate Component US$ million Foreign as % of Total Local Foreign Total I. Institution Building 1.8 2.6 4.4 59% II. Investments Road Maintenance Program 4.5 2.1 6.6 32% Railway Sub-component 1.7 4.9 6.6 74% Project Management 0.2 0.3 0.5 60% Base Cost (July 1995 prices) 8.2 9.9 18.1 55% Physical Contingencies (5.5%) 0.7 0.3 1.0 30% Price Contingencies (5%) -- 0.9 0.9 100% . TOTAL 8.9 11.1 20.0 56% 2.14 IDA will finance US$12.0 million, or 60% of total project costs, to be applied to items under paras. 2.11(b); 2.11(c) (i), (ii) and (iii); 2.12 (a); and 2.12 (b). Other donors will finance US$ 6.0 million to be applied as follows: (i) the EU will address technical assistance items under para. 2.11 (a)(i) and (c) -- Highway Concem; (ii) the Government of Germany has been asked to consider Technical Assistance under para 2.11 (c) for the Railway department and Ports; (iii) USAID is considering a request to finance the training elements of the project (Annex 14); and (v) the World Food Program is considering extending its direct operational support to the Railways Department under 2.12 (b). Local Funds will finance the remaining US$ 2.0 million which will be applied towards road repair contracts under 2.12 (a). 2.15 The financing plan for the project will be as follows: Table 11.2: Financing plan (Net of duties and taxes) Sources of Funds Local Foreign Total IDA 4.0 8.0 12.0 Other Donors (to be determined) 2.9 3.1 6.0 Local Funds 2.0 -- 2.0 TOTAL 8.9 11.1 | 20.0  II. The Project 21 E. Status of Cofinancing 2.16 Contributions to project finance by other donors and the private sector are still under discussion. Tentative allocations still to be confirmed and subject to independent, parallel, appraisal and disbursement procedures, are the following: EU Germany USA WFP | Total] [ US$ million 1.00 2.50 1.00 1.50 6.00 ] The effectiveness of project implementation and the development impact of IDA's contribution to project finance would not be affected by unforeseen major delays in securing project cofinancing for technical assistance. The impact of IDA's contribution to project financing for investments does not depend on the availability of co-financing funds, since: (i) it would be applied to self contained, high priority project components; (ii) the TA needed initially is already in place at the Highway Concern (PHRD), the Railway (Germany) and project implementation (EU); and (iii) the repair capacity of the agencies is adequate. All items indicated in para. 2.14 have been the subject of formal requests by the Government of Georgia to the respective donors and are currently under consideration. F. Implementation 2.17 Project implementation will be the overall responsibility of the Transport Reform and Rehabilitation Center (TRRC - see para. 2. 11). This arrangement (see Annex 13 for details) has been confirmed during negotiations. Each individual modal agency (the Highway Concern and the Railway Department) will appoint a component manager and provide the necessary staff support, under the supervision of the head of the agency and the overall coordination of the TRRC, to implement its sub- component. The component manager will serve, in each agency, as the person responsible for assuring that the component is implemented efficiently and on schedule. Additionally, each agency will be responsible for sub-component accounting and will submit periodic implementation progress reports to the TRRC. The TRRC will also coordinate the inputs of cofinancing partners and other Government agencies, and will be responsible for assuring that implementation, including procurement, is in compliance with Bank/IDA Guidelines and other agreements. The TRRC will also be responsible for hiring auditors for all project audits, be the primary point of contact with IDA, and consolidate all project reports and disbursement requests for their submission to IDA. IDA disbursements will be made directly to contractors and suppliers of goods and services on the basis of this documentation or directly by TRRC from the Special and Project Accounts. 2.18 Each component manager will be assisted by high quality staff recruited in part from the ranks of each agency and augmented by consultants in case new skills are required. Each component management team will be responsible for planning, budgeting, contracting and procurement of his component. These functions will be carried in accordance to project implementation agreements between the borrower and the implementing agencies the conclusion of which is a condition of credit effectiveness (see para.5.2(a)). During the project, the component managers may utilize the services of the 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 sub-components of the project, provided that they are technically competent and eligible to participate. Over time, the component management teams could become the nucleus of revised and strengthened project management skills within the agencies. As a minimum, each component manager will be assisted by a procurement and contracts  22 II. The Project specialist and an administrative assistant/accountant, in addition to support staff. See Annex 13 for suggested organizational charts for each of the component management teams. 2.19 The TRRC will also be responsible for arranging training programs, will serve as a channel for technical information available from outside of Georgia, and will coordinate foreign technical assistance (see Annex 5 and Annex 19). The training programs will focus on environmental protection, contracting, procurement, budgeting, and will address the most urgent needs of the evolving private construction industry in the transport sector, including subjects such as: bidding, bid evaluation, cost and quality control and general conditions of contract. On matters such as business administration, the training will be broad-based, intended as means of familiarizing transport industry personnel with the needs of private sector operations. This training will be provided by consultants through seminars and training sessions held in Georgia. The need for further training will be identified and if possible incorporated in the curricula of existing training institutions. See Annex 14 on a proposed training coordination unit within the TRRC. 2.20 Staffing arrangements to assist the component manager for the road and rail subcomponents and manage technical assistance for ports and road transport privatization and liberalization have been confirmed during negotiations. The appointment of key staff to the TRRC (deputy director, accountant, procurement specialist, transport operations), the Railway Department and the Highway Concern ( for each a component manager, a project preparation officer, a contract manager and a financial officer) is a condition of credit effectiveness (see para 5.2(b)). Technical assistance for Ports will be managed by the TRRC. G. Procurement 2.21 The procurement arrangements under the project are included in Annex 15, while Table 11.3 below summarizes the project elements, their estimated costs and proposed methods of procurement. Each project agency will use the Bank's Standard Bidding Documents and procurement procedures in accordance with the World Bank Procurement Guidelines, January 1995, and Consultant Guidelines, August 1981. All IDA financed contractsfor this operation - goods and works - above US$ 100,000 will be subject to Bank Prior Review. Prior review will also apply to consultantfirms contracts above US$ 50,000, and above US$ 25,000 for individual consultants. 2.22 Bank standard bidding documents will be used for the Project. Procurement matters were addressed in a Project Launch Workshop (October 9-14, 1995) and are included in the training program financed under the project (see Annex 14). A General Procurement Notice will be published on December 31, 1995. Procurement packages are being prepared, and those for goods and works will be ready for review at the time of negotiations. 2.23 Contracts for civil works may be awarded by NCB, subject to an aggregate ceiling of US$ 5 million, if they are under US$250,000 for small contracts; and between US$ 250,000 and under US$ 450,000 for medium size contracts. All contracts greater than US$ 450,000 shall be subject to ICB. In this project, contracts for road repair works will be small, dispersed, and of a diverse nature, not suitable for grouping into bigger contracts for ICB, and may not interest foreign bidders. These contracts will be awarded by NCB, and bids invited on the basis of locally advertised calls to tender. However, qualified foreign contractors shall not be prevented from submitting bids. Regional Sample bidding documents will be used for contracts below US$ 250,000, (issued September, 1995) and contracts  II. The Project 23 between $250, 000 and $450,000 (issued August, 1995). The construction and maintenance units which operated under the Highway Concern may participate in NCB, provided that they are found eligible under Bank guidelines. These units have technical expertise to perform the work and some equipment of their own, and are legally independent entities operating without any budgetary support. Equipment owned by the Highway Concern may be made available under rental or leasing arrangements, on a first come first served basis, with equal accessibility to any bidder who may indicate a need for them. Grouping of contracts to allow for individual or combination bids will be done where possible. 2.24 Contracts under implementation support including office equipment and materials, and vehicles, will be subject to the same arrangements as goods and equipment (see para. 2.25). The remaining items including local administration costs such as salaries for project staff, utilities, and travel and per diem, will be subject to Statements of Expenditure (SOE) (see para. 2.30), according to an annual budget pre-approved by IDA, and are included in Table 11.3. 2.25 Contracts for goods and equipment (see Procurement Arrangements, Annex 15) may be awarded according to the following thresholds: (i) International Competitive Bidding (ICB) for contracts valued above US$ 200,000; (ii) International Shopping (IS) for contracts valued between US$200,000 and US$ 30,000, up to an aggregate amount not to exceed US$ 1 million; and (iii) National Shopping (NS) for contracts valued below US$ 30,000, up to an aggregate amount not to exceed US$ 650,000. In cases (ii) and (iii) the list of suppliers invited to bid will be agreed upon by IDA. Single source procurement is not anticipated. Under ICB contracting for goods, a margin of preference of 15% will apply to domestic bidders in accordance with paras. 2.54 and 2.55 of the Bank Guidelines. 2.26 Consultant services and technical assistance under the project (see para. 2.11 and Procurement Arrangements, Annex 15) which are financed by IDA will be procured in accordance with IDA guidelines. Subject to prior review ceilings (para. 2.21), and SOE thresholds (para.2.30), it is anticipated that contracts for consultant services, including technical assistance, financed by IDA will be for consulting firms on the basis of short listing, and their selection and terms of reference will be subject to prior review by IDA. In the event that contracting of individual consultants takes place under items 3.1 and 3.2 in Table 11.3, these contracts shall not exceed an aggregate amount of $ 200,000, and their selection and terms of reference will be subject to prior review. 2.27 Civil works, railway spare parts, supplies, and consulting services financed under parallel financing agreements by other donors, will be procured under the procurement rules of those donors. 2.28 The executing agencies will collect and record procurement information and will include it in quarterly progress reports to the TRRC, which will be responsible for the submission of such reports to IDA, indicating: revised cost estimates of physical and price contingency allowances and physical execution and payments made; and revised timing of procurement actions, including advertising, bidding, contract award, and completion times for individual contracts. The borrower will provide a completion report within six months of the credit's closing date (see paras. 2.36 and 5.1 (a)). 2.29 Contracts under implementation support including office equipment and materials, and vehicles, will be subject to the same arrangements as goods and equipment (see para. 2.25). The remaining items including local administration costs such as salaries for project staff, utilities, and travel and per diem, will be subject to Statements of Expenditure (SOE) (see para. 2.30), according to an annual budget pre-approved by IDA, and are included in Table 11.3.  24 II. The Project Table 11.3: Summary of Proposed Procurement Arrangements (US$ million equivalent, including price and physical contingencies) Procurement Method Project Element ICB NCB Other NIF'I Total Cost 1. Works 1.1 Road repairs 4.59 4.59 (2.59) (2.59) 1.2 Rail bridge rehabilitation 0.73 0.73 2. Goods, Spares and Equipment 2.1 Bitumen and fuel oil for road 0.61 0.61 resurfacing (0.61) (0.61) 2.2 Materials for road bridge 0.26 0.26 rehabilitation (0.26) (0.26) 2.3 Aggregates (road resurfacing) 0.39b' 0.39 (0.39) (0.39) 2.4 Structural steel for rail bridges 0.38 0.38 (0.38) (0.38) 2.5 Spares for: rail .1.......... 1.25 1.25 roads ...... 0.80 0.62d 1.42 (0.80) (0.62) (1.42) 2.6 Track Materials, Rails, Sleepers, 1.37 1.65 3.02 Communication, and Signalling (1.37) (1.37) 3. Consultant Services & Training 3.1 TA for project implementation 0.67 ' 0.67 (0.67) (0.67) 3.2 TA for modal agencies 1.42"v 2.37 3.79 (1.42) (1.42) 4.Implementation Support 4.1 Office Equipment 0. 36b rA u 0.36 (0.36) (0.36) 4.2 Vehicles 0.08" 0.08 (0.08) (0.08) 4.3 Administration and other 0.22" 0.22 logistical support (0.22) (0.22) 0.23 0.23 4.4 Emissions, Monitoring and Control (0.23) (0.23) 5. Unallocated Railway Investments 2.00 2.00 (2.00) (2.00) TOTAL 5.65 4.59 3.76 6.00 20.00 (5.65) (2.59) (3.76) - (12.00) ote: Amounts in paren tsis are tinanced by IDA. Non-IDA Financed, financed by any of EU, German bilateral aid, USAID, and the Govemment of Georgia. National Shopping, NS. International shopping, IS d/ IDA would finance consultants, in accordance with IDA Guidelines on use of consultants (SL & IC). Includes utilities, operating costs (including local staff salaries), and supplies, payable under Statements of Expenditure(SOE) 2.30 Contracts for goods and equipment (see Procurement Arrangements, Annex 15) may be awarded according to the following thresholds: (i) International Competitive Bidding (ICB) for contracts valued above US$ 200,000; (ii) International Shopping (IS) for contracts valued between US$200,000 and  II. The Project 25 US$ 30,000, up to an aggregate amount not to exceed US$ 1 million; and (iii) National Shopping (NS) for contracts valued below US$ 30,000, up to an aggregate amount not to exceed US$ 650,000. In cases (ii) and (iii) the list of suppliers invited to bid will be agreed upon by IDA. Single source procurement is not anticipated. Under ICB contracting for goods, a margin of preference of 15% will apply to domestic bidders in accordance with paras. 2.54 and 2.55 of the Bank Guidelines. 2.31 Consultant services and technical assistance under the project (see para. 2.11 and Procurement Arrangements, Annex 15) which are financed by IDA will be procured in accordance with IDA guidelines. Subject to prior review ceilings (para. 2.21), and SOE thresholds (para.2.30), it is anticipated that contracts for consultant services, including technical assistance, financed by IDA will be for consulting firms on the basis of short listing, and their selection and terms of reference will be subject to prior review by IDA. In the event that contracting of individual consultants takes place under items 3.1 and 3.2 in Table 11.3, these contracts shall not exceed an aggregate amount of $ 200,000, and their selection and terms of reference will be subject to prior review. 2.32 Civil works, railway spare parts, supplies, and consulting services financed under parallel financing agreements by other donors, will be procured under the procurement rules of those donors. 2.33 The executing agencies will collect and record procurement information and will include it in quarterly progress reports to the TRRC, which will be responsible for the submission of such reports to IDA, indicating: revised cost estimates of physical and price contingency allowances and physical execution and payments made; and revised timing of procurement actions, including advertising, bidding, contract award, and completion times for individual contracts. The borrower will provide a completion report within six months of the credit's closing date (see paras. 2.36 and 5.1 (a)). H. Disbursements 2.34 The Credit will finance procurement of spare parts, goods, emergency repairs and technical assistance. Because of their nature, disbursements are expected to be completed in about 30 months. The expected closing date is June 1999. An estimated schedule of disbursements is shown in Annex 3. To ensure prompt availability of credit funds, the Government will establish a Special Account in a comrmercial bank at terms and conditions satisfactory to IDA, to cover IDA's share of eligible expenditures (Table 11.4 below). The Authorized Allocation would be US$ 500,000 -- approximately four months of average expenditures made through the Special Account. During the early stages of the project, the initial allocation to the special account will be limited to US$ 250,000. However, once the aggregated disbursements under the credit have reached the level of US$ 3,000,000 , the initial allocation may be increased up to Authorized Allocation of US$ 500,000 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 will 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, will accompany all replenishment requests. 2.35 All disbursements under the project will be made against standard documentation except for contracts valued at less than US$100,000 equivalent, which may be claimed under Statement of Expenditures (SOEs) -- with related documentation retained by the project agencies for review by IDA supervision and project audit missions. The minimum size of an application for direct disbursement from  26 II. The Project the Credit Account will be 20% of the current Authorized Allocation to the Special Account. In addition, the Government will establish a Project Account for counterpart funds in a commercial Bank with an initial allocation equal to 10% of the estimated local funds contribution to the project. The opening of the Project Account is a condition of credit effectiveness (see para. 5.2 (c)). 2.36 The estimated schedule of disbursements (Annex 3) is based on the project implementation schedule (Annex 2). Delays in implementation are less likely to occur given the emergency nature of the project. Table II.4 below shows the estimated IDA disbursements and the percentage of eligible expenditures financed. In the case of goods, the eligible expenditures and percentages of financing will be: 100% of foreign expenditures, and 100% of local expenditures (ex factory cost). For all other items procured locally, the eligible expenditure is the price amount net of VAT or 80% of the invoice amount. Table 1A.4: Estimated Disbursements Category Amount of Credit % of Eligible (US$ million) Expenditures to be Financed 1. Civil Works 2.36 57% 2. Goods, Spares and Equipment 4.67 100% (a) Railway track materials 1.25 100% (b) Materials 1.51 100% (bitumen,aggregates, steel) (c) Spares 1.30 100% (d) Office Equipment and Vehicles 0.40 100% (e) Emissions, Monitoring and Control 0.21 100% 3. Consultant Services and Training 1.90 100% 4. Operating Costs of TRRC* 0.20 100% 5. Unallocated 2.87 n.a. TOTAL 12.00 Includes local costs such as utilities, salaies (not for Government employees), transport and per diem. I. Monitoring. Reporting. Accounting and Auditing 2.37 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 and of project implementing agencies will be prepared 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 the project agencies' financial year. 2.38 Audits of SOEs, against which disbursements have been made or are due to be made out of the credit proceeds, will also be carried out in accordance with IDA guidelines. Specific reference will be made in the audit reports accompanying the financial statements.  11. The Proiect 27 2.38 Audits of SOEs, against which disbursements have been made or are due to be made out of the credit proceeds, will also be carried out in accordance with IDA guidelines. Specific reference will be made in the audit reports accompanying the financial statements. 2.39 Auditors acceptable to IDA will be retained by the project agencies to: (i) review the accounting systems and supporting internal procedures and practices for the special and project accounts and SOEs; and (ii) recommend any needed changes that would be implemented not later than 3 months after the issuance and acceptance of the auditors report by IDA. 2.40 During negotiations, it was agreed that by June 30 each year, the TRRC will submit to IDA the auditor's report and audited financial statements for the Special Account, Project Accounts and SOEs for the preceding calendar year. 2.41 Quarterly progress reports, including monitoring of progress on project targets and performance indicators (see Annex 2, page 3) and covering all project components, will be prepared by TRRC and sent to IDA within one month after the end of each quarter. These reports will also include: (i) progress achieved against agreed implementation and disbursement schedules, and number of contracts awarded; (ii) work programs and cost estimates for the coming quarter and for the total project; and (iii) financial indicators outlined in paras. 3.8 and 3.15. The main purpose of the reports will be to provide the project agencies timely and updated information on implementation of project components, highlighting issues and problem areas, recommending actions follow up on previous recommendations (see para. 5.1 (a)). 2.42 The project agencies will also prepare, under the coordination of the TRRC, an Implementation Completion Report (ICR) in 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. During negotiations, agreement has been reached on the preparation of progress reports (see para 5.1 (a)), including a Mid-term Implementation Report to be submitted to IDA on June 30, 1997, and the ICR. J. Onlendini Terms 2.43 The beneficiary of the credit will be the Republic of Georgia. Funds on-lent to modal agencies will have the following terms: the principal amount to be denominated in US$ equivalent as of the withdrawal date, no more than one year grace, plus no more than a 5 year repayment period, at a fixed rate equal to 7.07 %, and repayments in local currency, determined as of the date or respective dates of repayment (see para. 5.1 (c)). K. Project Supervision 2.44 Three Bank supervision missions each year, each staffed by a senior engineer and such specialists as may be appropriate for each phase of the project (such as procurement expert, training expert, traffic safety specialist or financial analyst) will be required over the life of the project, each of about one to two weeks duration, for a total of 96 staff weeks, including time at head quarters. Missions will assist in project start-up, will review physical progress, and will assist in coordinating the cofinanced elements of the project. Cofinanciers will be invited to attend all supervision missions. The project implementation schedule and monitorable performance indicators are given in Annex 2, and a schedule of supervision missions is included as Annex 16. A Mid-Term Review will be held not later than July 15, 1997, to assess the effectiveness of project implementation arrangements and reallocate funds between project categories if necessary.  28 II. The Project L. Environmental Asaects 2.45 The project will have a positive impact on safety, with potential saving of human lives which would otherwise be lost due to road and rail accidents. The different components included in the project are not expected to generate any significant environmental problems since all work will be done on existing infrastructure, utilizing as much as possible existing equipment. In the case of the Railway, for example, the repair of bridges, repacking of ballast, and replacement of track to be included under the project will be confined to the existing right-of-way. In the case of the road maintenance sub- component, however, some environmental concerns may arise from: (i) the production and application of bituminous products; (ii) the quarrying of aggregates; (iii) noise, dust and disruption of traffic during the rehabilitation and maintenance work. Since these environmental risks are limited, this project has been designated as Category B, indicating that a full Environmental Assessment (EA) is not required. In compliance with OD 4.01 however, a brief environmental analysis has been prepared and a summary of it is included as Annex 17. 2.46 Included in this analysis is a mitigation plan (Annex 17 Table 1) addressing the five areas of concern mentioned in para. 2.40, and ensuring the minimization of the limited environmental risks under the project. Important elements under the plan include: (a) the initiation of emission testing to determine actual rather than projected levels of pollution emitted as a result of the resumption of production at asphalt plants (2.40 (i)); (b) a review of procedures and formats for the environmental reports and licenses for asphalt plants, landfills, and the quarrying of gravels (2.40 (i,ii)); (c) training in environment aspects of construction management and road maintenance including asphalt application and disposal of wastes (2.40 (i,iii,iv)); and (d) contractual guarantees and monitoring to assure compliance by contractors with environmentally sound and safe standards for the performance of civil works (2.40 (ii,iii,iv)). Additionally, a portion of civil works under the project, will address the need for improved drainage to avoid the risk of localized instances of erosion (para. 2.40 (v)). 2.47 The mitigation plan is expected to be in place no later than March 15, 1996. The Ministry of Environmental Protection (MoEP) has been recently empowered with reinforced and consolidated responsibilities to make policy and promulgate standards relevant to environmental protection. The MoEP is in the process of preparing a National Environmental Action Plan (NEAP) as required by IDA for all IDA-recipient countries as well as reviewing a variety of policies and regulatory standards. In addition, the MoEP has been empowered to overhaul the current licensing system for such facilities as asphalt plants and gravel quarries. Priority will be given to reviewing the licenses currently held by the State Concern of Highways. The MoEP will also establish a special task force to assist with environmental monitoring relative to the mitigation plan of this project. Thus, the minimal chance of risk and the above discussed safeguards would make the project environmentally sound. Agreement has been reached during negotiations on the implementation of all measures required by the project's environmental mitigation plan no later than March 15, 1996, and included as a side letter to the Credit Agreement (see para. 5.1 (d)). M. Program Objective Categories 2.48 The project will contribute directly to sustainable development of Georgia by preserving key transport infrastructure. It will also make a significant contribution to the development of the private sector in the country through the competitive bidding of public works contracts and privatization of the road construction and maintenance industry, the introduction of licensing of port and railway operators, and the divestiture of some non-transport activities currently under the ownership of transport entities.  II. The Project 29 Submission of a privatization schedule acceptable to IDA is a condition of disbursement for civil works contracts (see para. 5.3(a)). The project will also assist small farmers and tradesmen in their efforts to begin to develop private business ventures by assuring that they have improved access to markets for their products.  III. FINANCIAL ANALYSIS A. Highway Concern 3.1 Current Financial Situation. In recent years, the state could not fulfill its statutory obligation to fund the Highway Concern. In 1995, only proceeds from a "Road Tax" on enterprises estimated at about $150,000 were available. The cost recovery issue was recently addressed by the Government in the context of its program of reforms, and in September 2, 1995 the Georgian Parliament approved legislation establishing a cost recovery system based on specific road user charges, aiming at generating revenues for road construction, maintenance and rehabilitation. 3.2 This cost recovery system, which will be referred to as the "initial road user charge system" in the following paragraphs, includes: * A fuel tax of 5% on value-added of diesel, gasoline and lubricants; * A border crossing tax on vehicles registered abroad entering Georgia (this tax averages $20 for cars, $80 for buses and $160 for trucks); and * A yearly domestic vehicle registration tax of $0.2 for cars, $1 for buses and $1.5 for trucks. This cost recovery system also keeps the previous so called "Road Tax" (1 % on most enterprises' gross revenues). All proceeds would be directed into a Road Fund, directly managed by the Highway Concern. In addition, State budget allocations to the Highway Concern would be eliminated. 3.3 Issues on the Initial Road User Charge System. Although acceptable as a first step, and expected to yield sufficient resources to start addressing the road maintenance backlog, the initial road user charge system introduces some distortions to the "road-user = road-payer" principle: 3 Border crossing taxes are too high (they alone would generate about 45 % of all revenues under the current system), making foreign vehicles pay an unreasonably high share of road maintenance costs in Georgia. Road user charges within Georgian borders need to be indistinguishable with regard to ownership or provenance, and each vehicle, local and foreign, should be taxed according to the damage it produces to the roads (i.e., according to its axle load). * Fuel and lubricants taxes, on the other hand, appear to be too low. Fuel and lubricants would only be taxed on the value-added portion of the retail price, thus only generating less than 1 % of total road user charge revenues. * The "Road Tax" on enterprise gross revenue also generates distortions since it does not tax enterprises according to their use of roads. 3.4 The Revised Road User Charge System. The need for revising road user charges to remove distortions and discriminatory practices was agreed during negotiations, including: (i) the need for the execution no later than October 31, 1996 of a study to determine a pavement management system and refine levels of cost recovery; and (ii) the Government's approval and implementation, after consultation with IDA no later than January 31, 1997, of a revised road user charge system as shall be appropriate for the maintenance and keeping up of its primary road network no later than June 30, 1997 (see para. 5.1(e)). The revised system would yield resources which would become directly available to the Highway Concern and would include revenue sources such as:  III. Financial Analysis 31 * A fuel surtax of 10% on the full price of diesel, gasoline and lubricants; * A charge on vehicles registered abroad entering Georgia (this tax would be defined on an axle-load basis, and would amount to $2.5/ton of axle load); and * A yearly domestic vehicle registration tax, also based on axle-loads, of $7/ton of axle load. The "Road Tax" on enterprise income would be eliminated. All road maintenance and rehabilitation works would be exclusively financed by proceeds from the revised road user charge system. The parameters of the revised system will correspond to the actual road damage from each type of traffic, and would be subject to adjustment on the basis of a Pavement Management Study to be carried out under the project (see para. 5.1 (e)). 3.5 In addition, collection procedures would need to be put in place to ensure proper collection performance and that all the proceeds from this user charge system are exclusively used by the Highway Concern for road maintenance and rehabilitation (see para. 3.8). 3.6 The charges on the entry of foreign vehicles is subject to reciprocal measures in neighboring countries. This is less than ideal, since it raises the costs to trade, and in the case of Georgia, might divert traffic away as alternative routes become available. Such discriminatory practices would need to be discontinued under the revised road user charge system . 3.7 Future Financial Performance. Total resources generated, on the basis of the present level of road traffic and once collection is well established under the initial road user charge system, will reach US$30 million per year. Cashflow projections for the Highway Concern are presented in summary form in Table Ill.1, and in their entirety, including a detailed list of notes and assumptions used, in Annex 7. The projections include a US$5 million borrowing from the proposed IDA Credit to make the most urgent repairs to start the process. A significant road rehabilitation program averaging about $20 million per year could be put in place. This is subject to the successful implementation of collection and enforcement procedures. 3.8 Key monitorable actions factored in the projections will be discussed during negotiations, and are the following: - Tax Collection Performance: The projections assume that road user charge proceeds would start to be collected no later than March 15, 1996. On the basis of systematic enforcement, collection performance for the border crossing tax is expected to improve from 20% of potential revenues in 1996, to 60% by year 2000, and from 20% to 70% for the vehicle registration tax. Collection performance for the fuel tax is assumed to improve over time, to reach full collection by the year 2000. Assurances in this regard, and on enforcement of national environmental and fuel quality standards, will be sought during negotiations (see para. 5. 1 (f)). * Highwav Concern Staff: Highway Concern staff levels would be brought down to 1,000 employees by 1999; this matches Highway Concern officials estimates. The 5,500 staff estimated to work in maintenance and construction units would become private sector employees as these units become private. About 1,500 of the remaining 2,500 employees would be laid-off by 1998 in a staff reduction program. Full operation of a national competitive bidding process is expected to take place in 1997 as the construction and maintenance units undergo privatization (see para. 5.3 (a)).  32 III. Financial Analysis 0 Severance. Salaries and Wages: Staff reduction would be compensated by severance payments of up to 2 years of salary, a total of US$ 720,000 over three years. At the same time, in order to retain qualified human resources, average salaries would be initially increased from current US$4.7 per month to about US$20 per month. * Divestiture of Assets: The privatization of maintenance and construction units, as proposed in the road sub-component of the project, could generate up to an estimated US$1 million in sales of assets, mostly real estate and equipment. Alternatively, these assets could be leased out. In any case the resulting revenues would be used by the Highway Concern as additional resources for road rehabilitation. Table III.1: Highway Concern - Sunmmary Cashflow Projections US$ million (On the basis of initial Road User Charge System) 1995 1996 1997 1998 1999 2000 2001 2002 Highway Concern Staff 8,000 7,000 1,500 1,250 1,000 1,000 1,000 1,000 Sources of Funds 1.00 16.00 16.86 22.22 28.09 33.95 33.95 33.95 of which: Divestiture of Assets .50 .50 Budget Allocation 0.85 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Border Crossing Charge 0.00 5.04 7.56 10.07 12.59 15.11 15.11 15.11 Vehicle Registration Tax 0.00 5.23 8.51 11.78 15.05 18.32 18.32 18.32 Fuel Tax 0.00 0.07 0.14 0.22 0.29 0.36 0.36 0.36 Road Tax on Enterprises 0.15 0.15 0.15 0.15 0.16 0.16 0.16 0.16 IDA (Approximate) 5.00 Applications of Funds 1.00 15.51 17.08 22.32 28.07 33.97 33.89 33.82 of which: Road Maintenance/Rehab 0.50 13.25 16.12 20.42 26.43 32.40 32.40 32.40 Surplus Funds 0.00 0.49 -0.22 -0.10 0.01 -0.02 0.06 0.14 Closing Cash Balance 0.00 0.49 0.26 0.17 0.18 0.16 0.22 0.36  111. Financial Analysis 33 B. Railway Denartment 3.9 Current Financial Situation. The accounts of the Railway Department are on accrual basis4 and show a poor cashflow situation, although substantial "profits" are indicated for 1994 (about US$ 11 million). These "profits" are explained by an underestimated asset value (today, assets are valued at about US$ 13 million, i.e., less than the purchase price of 10 locomotives), and very low allocations to depreciation. This situation makes the Railway pay more profit taxes than it should if assets were revalued and depreciation charges applied. The Railway is decapitalizing at a fast pace, and even if all "profits" were allocated to the rehabilitation of the asset base, the erosion of the capital base would not be stopped. 3.10 Most of the revenues of the Railway come from freight operations (most of which is food aid transport), where the average tariff was of about USCents 2.2 per ton.km in 1994. Passenger transport, where the average tariff was of only USCents 0.03 per passenger.km in 1994, is far from covering its costs. 3.11 Despite its "profit", the Railway has difficulties in paying its bills. Payables, mainly to Sakenergo, the power supplier, amounted to about US$ 11 million at the end of 1994, or about 16 months of total expenses. This situation partly results from the fact that the Railway's accounts are considered, de facto, as treasury accounts by the Government, and do not belong to a truly independent commercial enterprise. 3.12 Adding to these difficulties, current legislation in Georgia requires all companies, including the Railway Department, to sell 32 % of all hard-currency revenues to the National Bank. The railway has therefore limited capacity to import rolling stock, spares and track maintenance materials. Hard currency can be bought back from the National Bank, provided that an importing license has been requested and obtained. 3.13 Today, the Railway is not able to invest its surpluses. Unless significant efforts to move towards financial adjustment and restructuring are undertaken with urgency (see para. 3.15), no funds would be available for the necessary rehabilitation of the railway system. 3.14 Future Financial Performance. Given the current financial situation, the proposed credit for the Railway sub-component would require the generation of an ability to service debt. This can be achieved by starting the implementation of a financial adjustment and restructuring plan (see below), including a combination of cost reductions and tariff increases. Financial projections5, based on the assumption that the proposed financial adjustment restructuring plan is effectively put in place, and including about US$6.6 million in borrowing, some of which in concessional terms, are presented in a summary form in Tables 111.2 and 111.3 below, and in their entirety, including a list of notes and assumptions used, in Annex 11. 4/ i.e., revenues and expenditures are reported at the time of billing, as opposed to cash-basis accounts, where revenues and expenditures are reported at the time of payment. 5/ Financial projections were prepared in US$. Company accounts have been restated to approximate International Accounting Standards (IAS) and have been converted from Georgian coupons into US$ for easier comparability.  34 III. Financial Analysis 3.15 The need for a financial adjustment and restructuring plan has been recognized in the Letter of Sector Development Policy which was signed during negotiations. It will require the establishment of the railways as an independent commercially operated, state owned enterprise, with improved operating and financial practices to avoid further decapitalization of the Railway Enterprise, and allowing rail operations by other private operators. The specific areas to be addressed include: (i) asset revaluation; (ii) tariff adjustment; (iii) staff reduction and salary increases; and (iv) a cost-reduction program. The necessary technical assistance will be made available under the Institution Building Component. (i) Asset revaluation: A recent Government decree, to be implemented on October 1, 1995, will revalue assets 12.7 times, from current US$ 13 million equivalent to about US$ 171 million to account for distortions from past inflation. This revaluation factor was calculated by the Ministry of Finance for all enterprises in Georgia to account for inflation. The asset revaluation factored in the projections is in line with the decree; full depreciation of these assets was estimated to take place over 11 years, their average useful life remaining. A detailed railway-specific asset revaluation, however, made by qualified auditors is needed, taking into account all assets in working condition. All other assets would be written off the accounts, and eventually used as a source of spare parts. The average remaining life of the revalued assets, along with the corresponding average depreciation rate, would then be assessed and revised as necessary. (ii) Tariff Adjustment: In order to reflect the costs of the services provided and to generate enough funds to cover the necessary rehabilitation investments, average passenger transport tariffs would need to be sharply increased from current USCents 0.05/pass.nkm to an estimated USCents 3.00/pass.km by the year 2000, and average freight tariffs from USCents 3.07/ton.km to about USCents 4.00/ton.km by 1998. The Railway would have to discontinue all services where cost recovery is not possible, be it passengers or freight. In other words, lines may remain open, and given transport services can remain part of the Railway's operations, only if revenues from these services cover all the costs involved in providing them. (iii) Staff reduction and salary increase: Today, the Railway Department employs about 18,200 people in transport operations. Of these, about 6,600 are not paid ("technical unemployment"). The current number of employees would need to be reduced, according to current traffic levels and given the size of the railway network, to about 10,000 as a first step. Staff reduction would be compensated by severance payments of 2 years of salary. These payments of about US$ 4 million over four years, are financially feasible, and have been factored in the financial projections (see Annex 11). This would give employees incentives to consider leaving the entity, and would increase the number of voluntary departures. At the same time, in order to retain qualified human resources, salaries would be initially increased 3 times to about US$20/month. (iv) Cost-reduction program: This program would include divestiture of all non-transport related activities, returning to the state public services and selling (e.g., auctioning) assets, and enable private companies to operate activities which may or may not be directly linked with railway operations. These steps would be discussed during negotiations, and made part of the project implementation plan.  111. Financial Analysis 35 Table 111.2: Railway Department - Summary Income Statement Projections US$ million, unless otherwise indicated 1994* 1995 1996 1997 1998 1999 2000 2001 2002 TraMc Passenger.km (million pass.km) 1,032 428 381 334 297 240 193 195 197 Freight (million ton.km) 1,030 1,231 1,184 1,139 1,102 1,113 1,124 1,135 1,147 Tariffs Avg. pass. tariff (USc/pass.km) 0.03 0.16 1.00 1.50 2.00 2.50 3.00 3.00 3.00 Avg. freight tariff (USc/ton.km) 2.16 3.33 3.50 4.00 4.00 4.00 4.00 4.00 4.00 Railway Department Staff 18,191 18,000 14,801 11,601 10,000 10,000 10,000 10,000 10,000 Operating Revenues 22.63 41.65 45.27 50.57 49;82 50.51 50.76 51.27 51.79 Operating Expenses 8.25 19.70 21.30 19.52 17.56 16.37 15.96 15.79 15.64 Depreciation 0.45 5.02 20.22 22.13 24.00 25.93 27.93 30.00 32.20 Net Profit After Tax 11.15 13.55 3.00 6.73 6.21 6.25 5.26 4.23 3.08 Ratios (Expenses+Deprec.) / Revenues 38% 59% 92% 82% 83% 84% 86% 89% 92% Net Profit after tax as % of 49% 33% 7% 13% 12% 12% 10% 8% 6% * Actual, 1994 3.16 The financial projections also take into account actions to improve billing and collection performance. Accordingly, payables would be brought down to less than 3 months of expenses over the next 7 years. Table III.3: Railway Department - Summary Balance Sheet Projections US$ million 1994* 1995 1996 1997 1998 1999 2000 2001 2002 Total Assets 37.4 138.5 145.6 149.5 152.5 156.2 159.5 162.4 164.1 Fixed Assets 16.9 115.2 123.6 129.5 134.5 138.5 141.6 144.6 146.4 Current Assets 20.5 23.3 22.1 20.1 18.0 17.7 17.9 17.7 17.7 Total Liabilities 37.4 138.5 145.6 149.5 152.5 156.2 159.5 162.4 164.1 Equity and Reserves 22.1 121.0 124.0 130.8 137.0 143.2 148.5 152.7 155.8 Long-Term Debt 0.0 0.0 6.6 6.6 5.3 4.0 2.6 1.3 0.0 Current Liabilities 15.3 17.5 15.0 12.2 10.2 9.1 8.4 8.3 8.3 Ratios Current Assets/Current Liabilities 1.34 1.33 1.47 1.65 1.76 1.96 2.14 2.13 2.13 Days of Receivables 52 50 45 40 35 30 30 30 30 * Actual, 1994  IV. PROJECT BENEFITS AND RISKS A. Proiect Benefits and Costs 4.1 Benefits - Institution Building Component. This component will support the program of reforms under preparation by the Government of Georgia, by accelerating the development of the policy framework in the transport sector. The reforms will result in lower costs and better transport services and are summarized in a Letter of Sector Development Policy signed by the Government. Although the Institution Building component, which accounts for about 25 % of total project costs, does not lend itself to conventional economic rate of return analysis, it will help to: (i) consolidate a new and downsized role for the State in transport; (ii) create an enabling environment for the development of competitive transport markets; (iii) introduce fiscal discipline in the sector; and (iv) privatize and divest from state owned transport entities. All these actions tend to increase entrepreneurs' perception of fairness, openmess and freedom from intervention, and will make Georgia a more attractive investment choice for potential investors. For the purpose of the economic evaluation, technical assistance to the Highway Concern and the Railway Department has been included in the total costs of the respective investments. 4.2 Benefits - Investment Component. This component, by maintaining and rehabilitating key transport infrastructure, will remove a real risk of facing critical bottlenecks in the transport system. In the short term, it will ensure that the basic transport infrastructure remains available to transport humanitarian assistance to Georgia, Armenia and Azerbaijan, and that trade activities which are developing in other economic sectors can actually take place. More specifically, ror each of the ir-estment sub-components: (a) Road Maintenance Program: This sub-component, representing about 40% of total project costs (inclusive of technical assistance), will greatly increase the capacity of the Highway Concern to carry out key maintenance and rehabilitation of the public road network in Georgia, by introducing an equitable road user charges system. It will prolong the life of the highway system and delay and/or avoid costly reconstruction. The program will also reduce vehicle operating costs and maintenance as well as road accident risks. An additional sub-component benefit will be the experience that would be gained by the private construction industry in carrying out road maintenance work on a competitive basis. The economic evaluation has been performed separately for the primary and secondary roads included in the project, a traffic growth of less than 2 % per year has been used, and the same traffic applies to both the without the project and with the project alternatives, i.e. there is no expectation of generated traffic in this case. The main economic benefit quantified is vehicle operating cost savings. The economic life of the repairs is three years for the main roads and five years for secondary roads, and no reconstruction expected in the intervening years in the without the project case. The Economic Rate of Return for this sub-component is expected to be in excess of 46% (see Annex 18 Table I). (b) Railway Sub-Component: This sub-component (about 46% of total project costs, inclusive of technical assistance) has been evaluated on the basis of: (i) reduced rail operating costs, and (ii) generated freight traffic benefits resulting from increased levels of service resulting from the project, and (iii) reduced passenger traffic after tariff  IV. Project Benefits and Risks 37 adjustments. There are other benefits of the project which were not quantified, such as the removal of potential bottlenecks which, if left untouched, would lead to the complete stoppage of railway transport to and from the Black Sea ports. This would be critical for the transport of food-aid and capital goods to Georgia and neighboring countries. In addition, the railway sub-component will also enhance cost-effectiveness and management skills for future railway operations in a market-oriented economy, and will improve safety on the railway system by rehabilitating bridges, track, and some selected telecommunications and signalization elements. The economic life of the investments has been estimated at seven years. The Economic Rate of Return for this sub-component is expected to be about 29% (see Annex 18 Table II). 4.3 Project Costs. The estimation of project costs in an economy in transition such as Georgia poses some difficulties which come in part from remaining price distortions, less than perfect market operations and incomplete information on the level of economic activity. The effects of these difficulties have been reduced by means of: (i) a systematic use of US dollar based estimates at a time of improved fiscal management and exchange rate stability, and (ii) use of unit costs for project cost estimates following the experience in other countries in the region. As a result, adjustments in key parameters such as the wage rate, which are likely to occur over the next few years, are not expected to have an extreme impact on actual project costs to be observed during project implementation. 4.4 Sensitivity Analysis. The weighted Economic Rate of Return for the Investment Component (inclusive of technical assistance, and excluding taxes and contingencies), representing 86% of project costs, will be in excess of 36%, with a Net Present Value discounted at 10% of US$ 12 million. A sensitivity analysis has been performed (see Annex 18, Table III) for: (a) traffic varations of + 5%, reflecting the awareness that a sharper contraction or sudden increases in economic activity are not likely in the near future in Georgia; (b) Changes of + 20% in project costs, which could result from the fact that this is a first project in the sector in Georgia and there is no prior experience with competitive bidding systems; and (c) Changes in operating costs of + 20% resulting from imperfect knowledge of operating costs parameters such as the economic wage rate, equipment and maintenance real costs and the valuation of foreign exchange. The results indicate a robust project with a significant return on investments under likely scenarios, as follows: (i) a slight sensitivity to traffic levels, a reduction of about 2% in the ERR would result from traffic levels 5% lower than estimated; (ii) a damped sensitivity to project costs, a 20% increase in project costs would have a proportionally smaller impact on the ERR, which would decrease by about 17%; and (iii) the variations in the ERR due to changes in operatring costs estimates, are similar in magnitude and opposite in sign to the effects of project cost changes, and will tend to offset each other. 4.5 Project Sustainability. The ERR of the project in excess of 36% on 86% of project costs is far greater than could be achieved by any other measures to improve transport infrastructure to a comparable extent. This results from the selection of priority sections using economic criteria as well as the rehabilitation nature of the project, with emphasis on infrastructure maintenance, and equipment repairs. The sustainability of the project will be assured by: (i) the implementation of cost recovery measures (road user charges and adjustment of railway tariffs); (ii) restructuring of State owned enterprises on a commercial basis, including divestiture of non transport and non performing assets; and (iii) privatization and liberalization of road transport and road and construction industries. A financial analysis from a Government as well as an agency perspective, has shown that subject to the implementation of the measures proposed, the project would be sustainable.  38 IV. Project Benefits and Risks B. Project Risks 4.6 In light of the results of the sensitivity analysis, remaining project risks mainly relate to the ability of the Govermment of Georgia, after setting-up the Transport Reform and Rehabilitation Center, to create the framework for the project agencies (the Highway Concern and the Railway Department) to establish effective implementation units capable of carrying out project activities and perform contracting and procurement effectively. 4.7 Institution Building and Policy Reforms. The risks of this component relate to the degree of commitment of the Government and of project agencies to continue the chosen program of sector reforms. Although the government has taken a series of decisive and courageous measures over the last few months, and there is a growing number of top government officials committed to reform, there is not yet unanimous support for all the aspects of the reform program. For example, such matters as the implementation of equitable road user charges and collection procedures are likely to challenge the local capacity to effect change. 4.8 Road Maintenance. Risks in this sub-component include: (i) the ability of the Highway Concern to put in place a contracting system for road rehabilitation and maintenance works; (ii) availability of a steady flow of resources necessary to implement the program; and (iii) the lack of experience of newly privatized construction companies. Risks (i) and (iii) which are more irprortant for the future will be mitigated by technical assistance being provided under the project. Regarding (ii), a condition of Board presentation, fulfilled on September 2, 1995, was the enactment of legislation to introduce a road user charge system, which will provide the necessary funds even under gradual enforcement and compliance schedules. 4.9 Railway Rehabilitation. The risks relate to the capacity and commitment of the Railway Department to undertake a major restructuring, including in particular divestiture of non-transport related activities, a staff reduction program and significant tariff increases. Even though these aspects are included in the Letter of Sector Development Policy, and technical assistance would be made available under the project, the long-term commitment of the Railway Department to reform is still to be determined. This aspect has been addressed by the inclusion of a disbursement condition on all railway investments which are subject to the submittal to IDA of an acceptable railway investment plan and related financial statements (see para. 5.3 (b)). 4.10 Other Risks. Another risk of the proposed project is delayed implementation due to inadequate capacity within the Govermnent and the project agencies. Given the state of disrepair of the transport network, a timely implementation and rapid materialization of benefits from the proposed Transport Rehabilitation Credit are essential to its success, To reduce that risk, continuous effort has been provided by the Bank during project preparation by setting up training and working sessions by procurement specialists through a PHRD grant, by additional training financed under the Credit, and through the mobilization of further external technical assistance. 4.11 Finally, there is a risk that civil strife in Georgia might resurface. Negotiations are taking place in search of a lasting resolution to problems in Ossetia and Abkhazia, but there is still uncertainty regarding their final outcome.  V. SUMMARY OF RECOMMENDATIONS AND CREDIT CONDITIONS A. Agreements Reached 5.1 The following actions were agreed during negotiations, and included in the Letter of Sector Development Policy which has been attached to the minutes of negotiations: (a) preparation of comprehensive quarterly progress reports, including a Mid-Term Implementation report and a completion report within six months of the credit's closing date (see para. 2.28); (b) implementation of project accounting and auditing arrangements and reporting under (a) above by June 30 of each year (see para. 2.35); (c) on-lending terms for project funds as follows: funds would be on-lent to modal agencies for 5 years, with one year grace period, at a fixed rate equal to 7.07 %, and repayable in local currency, determined as of the date or respective dates of repayment (see para. 2.38); (d) implementation of all measures required by the project's environmental mitigation plan no later than March 15, 1996 (see para. 2.42 and Annex 17, Table 1); and (e) execution of a pavement management system study no later than October 31, 1996, and revision and adjustment of road user charges to implement the recommendations of a Pavement Management Study no later than June 30, 1997 (see para. 3.4); (f) establishment of a system of collection of fuel taxes and road user charges at border crossings, and enforcement of national environmental and fuel quality standards no later than March 15, 1996 (see para. 3.8). B. C,nditions of Effectiveness 5.2 The conditions of credit effectiveness are the following: (a) Conclusion of project implementation agreements between the Borrower, and the Railway and the Highway Concern (see para. 2.18); (b) appointment of key staff to the TRRC and to component implementation units (see para. 2.20); and (c) establishment of a Project Account on terms and conditions satisfactory to IDA (see para. 2.30)  40 V. Summarv of Recommendations and Credit Conditions C. Conditions of Disbursement 5.3 The conditions of disbursement are the following: (a) Road repair works - submittal of an implementation schedule of a program of privatization of road construction and maintenance units acceptable to IDA(see paras. 2.11(c)); and (b) Railway investments - specification of an investment program acceptable to IDA and in such detail as the Association shall reasonably request (see para. 2.12 (b)). D. Recommendation 5.4 With the above agreements and conditions to be obtained, the project is suitable for an IDA credit to the Government of Georgia of Special Drawing Rights (SDR) 8.1 million (US$12 million equivalent) on standard IDA terms of 35 years, including a grace period of 10 years.  Annex 1 Page 1 of I GEORGIA TRANSPORT REHABILITATION PROJECT Project Cost Estimates (Net of Duties and Taxes) Component US$ million | Foreign as % of Total Local Foreign Total I. Institution Building 1.80 2.60 4.40 59% General TA for the sector 0.20 0.40 0.60 67% Support to the TRRC 0.10 0.30 0.40 75% TA to modal agencies 1.50 1.90 3.40 56% II. Invest'nents 6.20 7.00 13.20 53% A. Road Recovery Program 4.50 2.10 6.60 32% Equipment and Spares 1.30 1.30 100% Road Repair Program 4.50 0.80 5.30 15% B. Railway Sub-Component 1.70 4.90 6.60 73% Bridge rehabilitation 0.65 0.35 1.00 35% Track capacity enhancement 0.55 2.72 3.27 83% Traction capacity enhancement 0.50 1.50 2.00 75% Communication and signalling 0.33 0.33 100% Project Management 0.20 0.30 0.50 60% Base Cost (May 1995 prices) 8.20 9.90 18.10 55% Physical Contingencies (5.5%) 0.70 0.30 1.00 30% Price Contingencies (5%) 0.90 0.90 100% TOTAL | 8.90 11.10 20.00 56%  Annex 2 Pane I of 3 GEORGIA - Transport Rehabilitation Project - Proposed Project Implementation Schedule Activity (Responsibility) Start Finish Credit Processing (Bank, Government of Georgia) Board Approval 12.15.95 12.15.95 Effectiveness 3.1.96 3.1.96 Project Implementation Units (Railway, Highway Concern, Port & Transport Depts.) Establish the TRRC and Project Implementation Units 8.15.95 2.1.96 Nominate Project Coordinators for each sub-component 9.15.95 2.1.96 Nominate Secretaries and Accountants 9.15.95 2.1.96 Technical Assistance- Institution Building (TRRC, Railways, HC, Port & Transport Depts.) Issue of documents 4.1.96 6.1.96 Submission of proposals 6.1.96 8.1.96 Award of contract signing 9.1.96 9.1.96 Completion of services 6.1.98 6.1.98 Highway Concern (HC, TRRC) Bitumen. Fuel Oil, Aggregates. Bridge Materials Preparation of specification, quantities and bid documents 8.15.95 1.15.96 Bank reviews bid packages 1.15.96 1.31.96 Bids preparation 3.1.96 8.1.96 Bids, received, opened and evaluated 5.1.96 10.1.96 Bank review of evaluation reports 5.1.96 10.15.96 Contracts awarded 6.1.96 10.30.96 Supply period 7.1.96 6.1.97 Equipment and Spares Preparation of specifications, quantities and bid documents 8.15.95 12.15.95 Bank reviews bid packages 12.15.95 12.31.95 Bids preparation 3.1.96 5.1.96 Bids received, opened and evaluated 4.1.96 7.1.96 Bank review of evaluation report 4.1.96 7.15.96 Contracts awarded 5.1.96 7.30.96 Supply period 7.1.96 3.1.97 Road Repairs Designs 9.1.95 5.1.96 Preparation of bidding documents 11.15.95 6.1.96 Bank comments 6.1.96 6.15.96 Issue bidding documents, submission of bids 6.15.96 8.15.96 Evaluate bids and post qualifications 8.15.96 9.1.96 Bank reviews 9.1.96 9.15.96 Award of contracts 9.30.96 9.30.96 Contractors mobilize and repair 10.30.96 6.15.98  Annex 2 Page 2 of 3 Proposed Project Implementation Schedule (Continued) Activity (Responsibility) Start Finish Railway Department (Railway, TRRC) Bridges - Civil Works* Designs 4.1.96 7.1.96 Contracts awarded 10.1.96 10.1.96 Mobilization and rehabilitation/construction 11.1.96 11.1.97 Equipment and Spares (Steel for Bridges, Tracks, Traction, Communication and Signalling) Preparation of specifications, quantities and bid documents 9.15.95 12.31.95 Bank reviews bid packages 1.5.96 1.15.96 Bids preparation 5.1.96 8.1.96 Bids received, opened and evaluated 7.1.96 8.15.96 Bank review of evaluation report 8.20.96 8.30.96 Contracts awarded 9.15.96 9.15.96 Supply period 9.15.96 9.15.97 Likely to be co-financed and procured under different rules  Annex 2 Page 3 of 3 GEORGIA - Transport Rebabilitation Project Monitorable Targets and Performance Indicators Monitorable Items Units At Start Dec'95 Dec'96 Dec'97 At Completion (Oct'95) (Dec'98) Institution Building (TA&Tralning) Establishment of TRRC % 0 0 100 100 100 Establish Management Units % 0 0 100 100 100 TA Program % 0 0 20 60 100 Number of Staff being trained 0 0 20 40 185 Pavement Management Study % 0 0 100 100 100 Comp. Bidding of Public Works % 0 0 60 80 100 Ports Reorganization % 0 0 50 100 100 Railway Restructuring % 0 0 35 75 100 Legal Frameworks Road User Charge Legislation % 10 100 100 100 100 Railway Reform Legislation % 0 20 55 90 100 Ports Restructuring % 0 15 35 75 100 Privatization of Road Transp. % 65 100 100 100 100 Privatization of Construction Units % 0 70 100 100 100 Highway Concern Surface Dressing/Road Repairs km 0 0 50 800 987 Procurement of list of equipment and spares % 0 0 90 100 100 Collection of User Charges % 0 5 40 55 70 Pavement Management (network) % 0 0 35 65 100 Competitive bidding Staff (reallocation/reduction) % 0 100 100 100 100 5,500 2,500 1,500 1,000 400 Railway Department Civil Works-Bridges (execution) Procurement of list of track % 0 40 70 80 100 materials, spares and structural steel Asset revaluation Tariff adjustments 0% 40 80 100 100 (UsCents/traffic unit): % 15 30 60 85 100 passengers (pass.km) freight (ton.km) Staff (reallocation/reduction) units 0.05 .80 1.0 2.0 3.0 Cost reduction program units 3.07 3.3 3.5 3.8 4.0 (divestiture of non-transp. 18,200 10,000 8,000 6,000 4,000 activities, and reorganization) % 0 25 45 70 100  Annex 3 Page 1 of 1 GEORGIA TRANSPORT REHABILITATION PROJECT Estimated Disbursement Schedule IDA Quarter Disbursements Cumulative Cumulative Fiscal Year ending by Disbursements by Disbursements Quarter end of Quarter (% of total) l ____________ ________ (US$ mln) (US$ mln) FY 96 Dec-95 0 0 0% Mar-96 0 0 0% Jun-96 0.5 0.5 5% FY 97 Sep-96 0.5 1.0 10% Dec-96 2.0 3.0 30% Mar-97 2.5 5.5 55% Jun-97 1.5 7.0 70% FY 98 Sep-97 1.5 8.5 85% Dec-97 0.5 9.0 90% Mar-98 0.5 9.5 95% Jun-98 0.3 9.8 98% FY 99 Sep-98 0.1 9.9 99% Dec-98 0.1 10.0 100%  Annex 4 Page I of I Georgia Transport Rehabilitation Project Sector Technical Assistance -- Cost Estimate Cost (US$) 1. Review and revision of legislation ruling foreign investment. 30,400 2. Cost recovery of public investments. 56,000 3. Simplification and revision of commercial legislation. 63,500 4. Simplification of import and export procedures. 40,400 5. Determination of the personnel needs in downsizing the public administration related to the transport sector. 29,600 6. Determination of the market conditions under which qualified staff can be attracted and retained. 29,200 7. Measures to expand the availability of financial services. 46,000 8. Deregulation of the transport sector. 72,500 9. Refonn of taxation applicable to enterprises in general, and to the sector in particular. Simplification of applicable taxation. 62,500 10. Price Liberalization. Monitored liberalization of prices. Stimulus to free competition. 75,000 11. Privatization of transport enterprises. 76,500 12. Implementation of technical and emission inspection units for the motorized vehicles of Tbilisi. 29,200 Total Cost: US$ 610,800 Cost Breakdown (US$1 Task Consultants Local Translation Trips Subsistance Total No. of #____________ ____________ Assistance Months 1 20,000 na 2,400 4,000 4,000 30,400 1.0 2 40,000 4,000 2,000 4,000 6,000 56,000 2.0 3 40,000 4,500 2,000 8,000 9,000 63,500 2.0 4 30,000 na 2,400 4,000 4,000 40,400 1.5 5 20,000 na 1,600 4,000 4,000 29,600 1.0 6 20,000 na 1,200 4,000 4,000 29,200 1.0 7 30,000 6,000 2,000 4,000 4,000 46,000 1.5 8 50,000 4,500 2,000 8,000 8,000 72,500 2.0 9 40,000 7,500 2,000 4,000 9,000 62,500 2.0 10 50,000 5,000 2,000 8,000 10,000 75,000 2.0 11 50,000 6,000 2,500 8,000 10,000 76,500 2.0 12 20,000 na 1,200 4,000 4,000 29,200 1.0 Total 410,000 37,500 23,300 64,000 76,000 610,800  Annex 5 Page 1 of 3 Georgia Transport Rehabilitation Project Implementation Unit - The Transport Reform and Rehabilitation Center (TRRC) Introduction 1. One of the great challenges of the Government of Georgia in the short term is to plan and organize the reform of the transport sector. Such efforts would follow up on indicators reflecting changes in property ownership and means of production, from the state to the private sector. In this context, the reform of the transport sector would affect the structure and functions of various sectoral agencies and their mutual relationships. Their staff will have to adapt to new management styles and objectives. Changes, which would take place gradually, would affect all levels and all sub-sectors. In order to minimize upheavals, the approach to sector reform must be carefully planned and designed and the process well managed. Basic Requirements 2. To succeed in this process, reforms need to build on existing technical skills and consider cultural and social aspects. Remedies must be applied judiciously so that disruptions of functions and linkages within the system are minimized. In order to successfully implement and sustain the proposed changes, it is important, that: i) the Government of Georgia is committed at the highest level and provides leadership and support; ii) such agencies of the transport sector as Directorates, Enterprises and Services, participate in their own process of conversion; iii) the development of the legal and regulatory framework and sectoral policies is coordinated; iv) the law and policies established are adapted by each organization and agency according to its function, and the organizations can benefit from the reform process; v) the plan and programs for transformation are flexible to increase credibility; and vi) human resources receive adequate training according to the need. Most importantly, to succeed, Georgia needs an organization which would enunciate the development goals, validate them at the highest level, allocate authority and responsibility, and coordinate and control the process of the reform. In this process, such an organization would determine the required action steps and their timing, as well as allocation of capital and human resources. Basically, it would manage and coordinate the entire process of reform of the sector.  Annex 5 Page 2 of 3 Coordination and Management of the Reform Process 3. Existing sectoral institutions are not well suited to a market-based economy and there are few people in the sector who may have in-depth knowledge on how a transition from centralized to market- based economy should happen and be managed. Georgia does not have presently an organization in the sector which would be capable of carrying out these tasks. 4. However, the recently established Center for Problems of the Euro-Asian Transport Corridor under the Head of State could become a core element and play an integral role in the process of converting the sector. The Center could be expanded in manpower to include the existing transport coordination group. The name will be changed and simplified to Transport Reform and Rehabilitation Center (TRRC). The staff of this TRRC will be empowered by training to obtain the necessary skills to carry out the tasks necessary for conversion of the sector. It is envisaged that the activities of the TRRC would be supervised by a Steering Committee appointed by the Head of State. The Steering Committee would include representation from the Council of Ministers. Additionally, there will be a Training Unit attached to the TRRC. This Unit will have a small number of permanent staff and a well defined program for training young professionals, and re-training sector executives, to prepare them for dealing with the sector's challenges. It has to be emphasized that only by establishing a clear institutional structure and defining responsibilities of all people and organizations involved in the conversion process, the sectoral reform could succeed. TransRort Reform and Rehabilitation Center (IRRC) 5. TRRC Structure and Function. As described in the above paragraph, it is envisaged that the TRRC will become responsible for converting the transport sector to a market-based economy. The project staff of the TRRC will consist of its Director, his deputy, an accountant, a procurement specialist, a transport specialist, a lawyer, one policy/institutional specialist, and the necessary administrative support staff. Their duties will be to: i) represent the TRRC in contacts with project agencies; ii) be in charge of specific actions corresponding to the reform program in the sector; iii) coordinate issues resolution among sub-sectors as necessary; iv) contribute to the planning process and development of new policies; v) carry out other tasks to promote national transport safety; vi) keep the project accounts; and vii) coordinate and manage procurement. 6. In order to sequence correctly the steps in the process of sector reform, it may be desirable for the TRRC to employ services of an expatriate transport economy expert, who could work in the country on the basis of a medium term contract. Such expert would be in an advisory position to the Chief of the TRRC and his main task would be to ensure consistency of the reform process. 7. In addition to the responsibility for conversion of the sector, the TRRC will coordinate the preparation of the Transport Rehabilitation Project. This is expected to be prepared within one year. In the context of sector reform and project preparation, the TRRC may consult with the top executives of the land (road, railways and pipelines), maritime (ports and shipping) and air (airlines and airports) transport.  Annex 5 Page 3 of 3 How the System Will Operate 8. Besides carrying the main responsibility for reforming the sector, the TRRC will propose periodically and formally to the Head of State the policies to be adopted in the sector. Acceptance of the policies will be followed by official executive and legal action. The TRRC, once the decree or the respective legal document has been dictated, will be responsible for the follow-up on its dissemination, implementation, and enforcement. Subsequently, the TRRC will comment on action programs proposed by each sector agency. If the TRRC would determine that a newly established policy would require some additional program, then the TRRC may recommend it to the agency. The action programs will designate the tasks and the time involved to their completion, as well as the frequency of reporting, monitoring and controls. Extensions of agreed-on time tables will be handled as an exception, by special request through the TRRC to the Head of State. This request will be evaluated by the TRRC and, following its approval, might be presented to the Head of State. Main Policy Subjects 9. The main policy subjects that are expected to be addressed by the TRRC are the following: (a) Sector Deregulation. Sector deregulation refers to: simplification of laws, decrees and rules. It aims at generalizing the right of entry to sector activities and removing controls and procedures which make transport services complicated and more expensive. It is expected that the size of the public services associated with the sector would decrease. The public function would amount to recording and monitoring, ex-post, of sector activities. (b) Privatization of Transport Services. The transport services will be transferred to the private sector on the basis of specific plans and programs after appropriate selection and announcement of the mechanism to be used in each case. Every opportunity and juncture allowing the privatization of any enterprise, or part of it, will be taken. (c) Price LUberalization. Price liberalization represents a stimulus to free competition. Fixed prices are incompatible with a market economy and their elimination will be a subject of a specific program. Under this concept it will be important to adopt legislation and establish some rules and an organization in charge of preserving free competition, penalizing monopolistic practices and defending the freedom of personal and corporate initiative. (d) Cost Recovery. The only way to maintain a healthy balance between public investment and availability of the necessary infrastructure in a country, is to create mechanisms to recover the associated costs from the users. Every person or enterprise will pay for the full costs of the goods or services which they use. The different ways to recover those amounts are, for example, various taxes, license fees, tolls, etc. They will be the subject of specific programs. In this way, infrastructure could be maintained, improved, and expanded. (e) Foreign Investment. The regime under which foreign investments will be approved will operate centrally, and its rules will apply to all economic sectors. In this context, the TRRC's role will be limited to providing information regarding the relevant legislation and/or regulation.  Cost Estimate - Road Sub-Component Annex 6 Page 1 of 5 Georgia Transport Rehabilitation Project - Road Sub-Component A. Road Maintenance and Construction Equipment Proposed Equipment and Spares to be Procured under the Project Type of Equipment Quantity Unit Price (US$) Total Price (US$) Flattening machinery - . 209,600 Loaders 200,000 Compactors 94,900 Crushers 9,900 Asphalt mixing plants (Ukrainian design) 60,500 Asphalt mixing plants (German design) 115,800 Electric motors 127,600 Spares for truck engines 22,100 Small Equipment (mainly electric wires) 48,500 Tires (mainly for road maintenance vehicles) 128,000 Batteries 22,500 Base Cost 1,039,400 Transportation Expenses and Other 260,600 Total, Equipment and Spares 1,300,000  Cost Estimate - Road Sub-Component Annex 6 Page 2 of 5 Georgia Transport Rehabilitation Project - Road Sub-Component B. Proposed Road Resurfacing and Bridge Rehabilitation under the Project B.l. Road Clearing and Drainage Rehabilitation Neme of Road Total Length Working Zones Unit Cost Unit Coat Total Cost _ _ _ _ _ _ __ _ (km) Length (km) Volume (rn3) IUS$/m3) (US*lkm) (US$) 1. Main Roads MI - Tbilisi-Senaki-Leselidze-Russian border 553 120 282,000 1.20 2,820 338,400 M2- Senaki-Poti-Sarpi-Turkish border 119 30 48,000 1.20 1,920 57,600 M3- Mtskheta-Lhazbegi-Larsi-Russian border 139 100 270,000 1.20 3,240 324,000 M4- Tbilisi-Tsiteli Hidi-Azeri border 58 20 12,000 1.20 720 14,400 M5- Tbilisi-Bakurtsikhe-Lagodehki-Azeri border 160 40 24,000 1 20 720 28,800 M6- Tbilisi-Marneuli-Guguti-Armeni border 106 60 36,000 1.20 720 43,200 M7- Marneuli-Sedakhlo-Armeni border 34 25 20,000 1.20 960 24,000 M8- Khashuri-Vale-Turkish border 103 20 12,000 1.20 720 14,400 M9- Tbilisi entrance highway 48 30 18,000 1.20 720 21,600 Total, Main Road. 1,320 44S 722,000 866,400 2. Secondary Roads Pt- Batumi-Ahaltsihe-Ninotsminia 279 83 43,938 1.20 637 52,726 P2- Tbilisi-Kolchor-Tsalka-Ninotsminla 165 30 27,850 1.20 1,110 33,420 P3- Kutaisi - Bardasi - Sairme 55 24 34,750 1.20 1,738 41,700 P5- Gori-Tsinvali-Oni 113 30 39,163 1.20 1,581 46,996 P6- Goupta - Djava - Roki 45 35 36,875 1.20 1,264 44.250 P7- Gomi-Sashere-Shiatura-Zestafoni 108 32 7,650 1.20 287 9,180 P8- Kutaisi-Tkibuli-Ambrolauri 76 15 25,000 1.20 1,993 30,000 P9- Kutaisi-Alpana-Mamisonsky 165 55 62,712 1.20 1,379 75,254 P10- Kutaisi-Tsaltubo-Tsageri-Lentehi-Larinli 160 26 62,500 1.20 2.848 75,000 P11- Zugdidi-Tsalendshiha-Chorotsky-Senaki 91 34 18,750 1.20 657 22,500 P12- Zugdidi-Dvari-Mestia-Lasdili 198 53 65,375 1.20 1,489 78,450 P15- Ahmeta-Telavi-Bakurtsihe 72 20 13,125 1.20 790 15,750 P16- Tianeti-Ahmeta-Psaveli-Ninrogon 129 49 13,750 1.20 340 16.500 P22- Tbilisi-Tianeti 79 30 18,750 1.20 757 22,500 P31- Zagez-Mtseta-Kav1isevi-Gori 62 21 12,875 1.20 747 15.450 P37- Samtrelia-Sohatauri-Ozurgeti-Kobuleti 81 30 14,000 1.20 551 16,800 P38- Sadshavaho-Lanshuti-Subsa-Ureki 48 18 27,438 1.20 1,823 32,926 Total, Secondary Roads 1,926 584 524,501 629,401 Base Cost, Total 3,246 1,029 1,246,501 1,495,801 Additional Expenses 304,199 Total B.L. Road Clearing end Drainage Rehabiltation 1,800,000  Cost Estimate - Road Sub-Component Annex 6 Page 3 of 5 Transport Rehaitation Project - Road Sub-Componant S. Proposed Road Rosurfacing end Brdge Rehabiitation under the Project tU1. Pothole Fixing Nans of Rood Totai Length Woring Zons Unit Cost Unit Cost Total Cost (km) Length lkm) Surface (m2) (US$tm2) (US$/kmi (US$) 1. Main Roads coating (4 cm) & bituminous concrete (Scin MI - Tbilisi-Senaki-Lszildzs-Russianborder 553 120 17,600 15.50 2,273 272,800 M2- Ssnaki-Poti-Ssrpi-Turkith border 119 20 6,770 15.50 4,472 89,435 M3- Mtskheta-Lhszb*gi-Lsrni-Russien border 139 70 18,100 1.550 4,008 280,550 M4- Tbilfi-Tsitefl Hidl-Azsri border 58 50 6,390 15.50 1,981 99,045 M5- Thilisi-Bakurtsikhe-godshki-Azeri border 160 20 3,500 15.50 2,713 54,250 M6- Tbi is-Mameuli-Guguti-Armani border 10o 40 15,100 15.50 5,851 234,050 M7- MameuH-S*dskhlo-Armrnsi border 34 15 14,250 15.50 14,725 220,875 M8- Khashuri-VaIs-Turkish border 103 20 1,800 15 50 1,395 27,900 M9- Tbilisi entrance highway 48 48 8,640 15.50 2,790 133.920 Total, Main Roads 1,320 403 91,150 1,412.825 of whkch Ouantity Unit I Unit Cost (USO I Total Cost (US$) Biturman 1,969 tons 150 295,348 Sand 5,834 m3 16 93,340 Gravel 5,834 m3 1 8 105,008 Mszut 109 tons 110 12,010 Sub-total, materials 505,706 2. Secondary Roads coating (15em P - Batumi-AhaltsihseNinotsminta 279 83 12.266 8.75 1,297 107,334 P2- Tbilisi-Ko(chor-Tsalka-Ninotsminvs 165 30 9,030 8.75 2,625 79,018 P3- Kutsis. Bardai - Sirms 55 24 3,360 8.75 1,225 29,402 .5 - Gori-Tsinvsli-Onl 113 30 5,757 8.75 1,674 50,377 P6- Goupta - Ojavs - Roki 45 35 9,450 8.75 2,363 82,693 P7-GoMi-Sssher-Shisturs-Zestsfoni 108 32 5,757 8.75 1,575 50,377 P6- Kutsisi-Tkibuli-Ambroluri 76 1 5 2.709 8.75 . 1,575 23,705 P9- Kutaisi-Alpana-Mamisonsky 185 55 186254 8.75 2,607 142.232 P10- Kutsisi-Tsaltubo-Tsageri-Lentehi-Larinil 160 26 7,901 8.75 2,625 69,138 PI 1 - Zugdidi-Tsalendshiha-Chorotsky-Ssnaki 91 34 10,272 P:75 2,625 89,886 P 12- Zugdidi-Dvari-M*stis-Lasdill 198 53 15,802 8.75 2,625 138,276 P1 5- Ahmata-Tslevi-Bakurtsihs 72 20 2,393 8.75 1,050 20,940 P16- Tisneti-Ahmset-Psaveli-Ninogori 129 49 7,675 8.75 1,384 67,161 P22- Tbilisi-Tbneti 79 30 6,321 8.75 1,861 55,312 P31- Zagez-Mtseta-Ksvtisevi-Gori 62 21 3,725 8.75 1,575 32,596 P37- Somtrelia-Sohatauri-Ozurgeti-Kobuleti 81 30 3.454 8.75 992 30,224 P38- Sedshavaho-Lanshuti-Subss-Ureki 48 18 10,114 8.75 4,901 88,503 Total. Secondary Roads 1.926 584 132.240 _ 1,157.175 of whkh Ouantity Unit Unit Cost (US$) Total Cost iUS$) Bitumen 1,587 tons 150 238,050 Sand 4,702 m3 16 75,232 Gravel 4,702 m3 18 84,636 Mazut 88 tons 110 9.680 Sub-tota/, materials 407,598 Total B.1., Pothole Fixing 2.570.000 of which materials: 913,304  Cost Estimate - Road Sub-Component Annex 6 Page 4 of 5 Georgia Transport Rehabilitation Project - Road Sub-Component B. Proposed Road Resurfacing and Bridge Rehabilitation under the Project 8.111. Selected Bridge Rehabilitation (Main Roads only) Name of Road Total Length Total Cost (km) IUS$) Main Roads-Civil Works Ml - Tbilisi-Senaki-Leselidze-Russian border 553 203,000 M2- Senaki-Poti-Sarpi-Turkish border 119 0 M3- Mtskheta-Lhazbegi-Larsi-Russian border 139 300,000 M4- Tbilisi-Tsiteli Hidi-Azeri border 58 30,000 M5- Tbilisi-Bakurtsikhe-Lagodehki-Azeri border 160 0 M6- Tbilisi-Marneuli-Guguti-Armeni border 106 170,000 M7- Marneuli-Sadakhlo-Armeni border 34 0 M8- Khashuri-Vale-Turkish border 103 0 M9- Tbilisi entrance highway 48 25,000 Sub-Total 728,000 Materials Steel v 80,000 Other Materials 160,000 Sub-Total 240,000 Total B.ll., Selected Bridge Rehabilitation 968,000 Grand Total, Equipment (A), Resurfacing (B.l. and B.ll.) and Bridge Rehabilitation (B.111.) 6,638,000 (excluding Physical Contingencies (8%) and Price Contingencies (10%)  Georgia Highway Concem Full Road Rehabilitation Program Name of Road Road Characteristics / Unit Poti - Senaki poti - Mtskheta - Khashuri- Total 0 Type of Rehabilitation Work Needed Tbilisl- Baturni - Khazbegi - Akhaltsikhe - _________________ Tsitelit Hildi Sarpi Larsi Turkish border _ Length of the road km 400 86 139 103 728 Asphalt/concrete overlays km 100 20 40 30 190 min US$ 3.00 0.50 1.00 0.75 5.25 Wayside reinforcement km 150 x 2 50 x 2 100 x 2 60 x 2 720 mln USS 3.00 0.50 2.00 1.20 6.70 Fence arrangement km 12 3 15 6 36 min US$ 12.00 3.00 15.00 6.00 36.00 Arrangement of signal bollards quantity 2,000 100 2,000 200 4,300 _ min US$ 1.00 0.15 1.00 0.10 2.25 Arrangement of standard road signs quantity 1,900 1,200 1,000 200 4,300 mln US$ 0.45 0.36 0.30 0.06 1.17 Arrangement of individual road signs quantity 200 200 200 50 650 mn US$ 3.00 0.50 0.50 0.20 4.20 Horizontal marking km 1,000 200 300 200 1,700 mmn USS 1.60 0.34 0.50 0.30 2.74 Vertical marking m2 500,000 100,000 200,000 100,000 900,000 min US$ 7.50 1.50 3.00 1.50 13.50 Routine maintenance mln USS 8.00 1.70 2.80 2.10 _ 14.60 Total i mmn US$1 39.55 8.55 26.10 12.21 86.41 A..  Annex 7 Page 1 of 5 GEORGIA - Transport Rehabilitation Project Financial Projections - Highway Concern Notes and Assumptions on the Attached Financial Projections 1. Cashflow projections for the Highway Concern were developed on the basis of the road recovery system defined in the draft law on road user approved by Parliament on September 2, 1995. It was assumed that proceeds from this road recovery system would not be available before 1996. Listed below are the other main assumptions used in the projections (tables pages 4 and 5). Table page 4: Key Assumptions for Cashflow Projections 2. Motor Vehicle Fleet: A conservative assumption that there would be no growth in the motor vehicle fleet was adopted. Data is based on 1993 information collected by the (former) Ministry of Transport. 3. Vehicle Operating Ratios: The ratios are defined as the number of vehicles in working condition divided by the total number of vehicles for each of the vehicle categories: cars, trucks and buses. These numbers were discussed with the Highway Concern and assumed constant over the projection period. 4. Incoming Border Traffic of Vehicles Registered Abroad: These numbers, shown in vehicles per day (vpd), represent the total incoming border traffic of vehicles registered abroad at Tsiteli Hidi (Azeri border), Lagodekhi (Azeri border), Sarpi (Turkish border), Vale (Turkish border), Larsi (Russian border), Leselidze (Russian border), Guguti (Armenian border), and Sadakhalo (Armenian border). It was assumed that no traffic was coming through Abkhazia (Leselidze), and that traffic at Vale was negligible. 5. In addition, based on traffic figures provided by the Highway Concern and after discussion with officials of the Highway Concern, it was assumed that 15% of the total incoming border traffic of vehicles registered abroad was cars, 55% trucks and 30% buses. 6. Finally, the conservative assumption that this traffic would not grow over the projection period was made. 7. Fuel Consumption: This item represents the estimated total consumption of fuel (diesel and gasoline) by vehicles in Georgia. Again, this estimate was held constant over the projection period. 8. Avg. Fuel Price (Gasoline and Diesel): Prices of gasoline and diesel in Georgia currently are at about the World levels. They were assumed to remain constant over the projection period. 9. Ave. Car-Truck-Bus Horse Power: These figures indicate the average units of horse power for each vehicle category in Georgia. 10. Incoming Border Crossing Tax: This item refers to the tax on vehicles registered abroad entering Georgia, as defined by the draft law on road user charges proposed to Parliament. The draft law defines the tax amounts according to the size, axle load and horse power of each vehicle. The figures given in  Annex 7 Page 2 of 5 the table refer to average tax levels for each vehicle category. The proceeds of this tax are calculated as the annual incoming border traffic of vehicles registered abroad times the tax (in $/entry), for each vehicle category (cars, trucks and buses), times the collection performance ratio (see below). 11. Collection performance for the incoming border crossing tax was assumed to increase from 20% in 1996 to 60% by year 2000, and remain constant thereafter. This assumption takes into account initial tax implementation and enforcement difficulties, and high incentives for tax evasion given the high tax levels. 12. Annual Domestic Vehicle Registration Tax: This item represents the yearly domestic vehicle registration tax, based on horse power, as defined by the draft law on road user charges proposed to Parliament. The tax was assumed to apply to all the domestic vehicles which are in working condition. In other words, its proceeds are calculated as the total motor vehicle fleet times the vehicle operating ratio times the tax (in $/horse power), for each vehicle category (cars, trucks and buses), times a collection performance ratio. 13. Collection performance for the vehicle registration tax was assumed to increase from 20% in 1996 to 70% by year 2000. This assumption takes into account initial tax implementation and enforcement difficulties, high incentives for tax evasion given the high tax levels, and the fact that part of the vehicle fleet is in conflict zones (e.g. Abkhazia). 14. Fuel Taxes: They are defined in the draft law on road user charges as a percentage (5%) of the value-added on fuel and lubricants. Full collection of these taxes is assumed to be reached by year 2000. 15. Road Maintenance and Rehabilitation Needs: Under this heading lies a possible road maintenance and rehabilitation program starting from 1996. This program was defined according to road user charge proceeds and priority needs. Surface dressing (potholes) as well as critical repairs on bridges and some road equipment would be fixed as a priority; overlays and reconstruction would be undertaken only where necessary and as funds become available (e.g., limited reconstruction would not start before 1998). Provisions for machinery and spares would only occur in 1996 and 1997, as road maintenance and construction units would be privatized by 1997. 16. For 1995, officials of the Highway Concern estimated that realistically only about $500,000 would be available from the state budget for road maintenance and rehabilitation. This translates into about 71 km of surface dressing (pothole fixing) at $7,000 per kilometer. 17. Highway Concern Staff: Highway Concern officials indicated that only about 8,000 of the original 22,000 employees are currently being paid. Staff of the Highway Concern would be brought down to 1,000 employees by 1999, as maintenance and construction units become private. Of the 8,000 paid employees of the Highway Concern, about 5,500 are estimated to work in maintenance and construction units, and would become private sector employees. About 1,500 of the remaining 2,500 employees were assumed to be laid-off by 1998 in a staff reduction program.  Annex 7 Page 3 of 5 Table page 5: Cashflow Projections 18. This table indicates the sources and applications of funds as a result of current and prospected budget allocations, road recovery system proceeds, and the above mentioned program of road maintenance and rehabilitation. All figures are in 1995 US$. 19. Budget Allocation: For 1995, the projections assume that the state budget allocation will be the only source of funds for the Highway Concern. This allocation, estimated at $1,000,000, would cover salaries, wages and administrative expenses and some pothole fixing (worth $500,000 or about 71 km of surface dressing, as mentioned earlier). Starting from 1996, as the road recovery system begins to be implemented, no state budget allocations would be directed to the Highway Concern. All expenditures, including salaries, wages, severance, administrative and headquarters expenses, as well as road maintenance and rehabilitation needs would be exclusively covered by road user charge proceeds. 20. Divestiture of Assets: This item indicates the revenues (estimated at about $1 ml) generated by the privatization of maintenance and construction units. The privatization process would be completed by 1997. 21. World Bank Loan Borrowing: The projections include a World Bank loan borrowing of about $5 ml in 1996. 22. Salaries and Wages: These were assumed to increase from current $4.7 per month to about $20 per month in 1996, and remain constant thereafter. 23. Severance: The projections assume that a severance payment of 2 years of salary would be given to the 1,500 employees laid-off in the staff reduction program (see para. 17 above). 24. Other expenses: These include administrative and headquarters expenses of the Highway Concern. 25. Road Maintenance and Rehabilitation: This heading includes all the expenses linked to the proposed road maintenance and rehabilitation program. The following cost estimates were factored in the projected expenses: - Surface Dressing (potholes): $7,000 per km. - Overlays: $32,000 per km. - Reconstruction: $132,000 per km. 26. Debt Service: The interest rate would be of about 7.6%, and the loan would be repaid over five years after a one year grace period.  Road Usr Charge System as Currently Drmfted Trnsport Rehabilitation Project - State Concorn of Highways Wortd Bank Preliminary EstImates. July 1995 Key Assurnptions for Cashflow Projections 1995 1996 1997 1998 1999 2000 2001 2002 Motor Vehicle Fleet [number of vehicles) 644.5 644500 4( 6445 0 6445 0 644 5 6445 644iQ Cars 489.200 489,200 489.200 489,200 489,200 489.200 489.200 489.200 Trucks 136,800 136,800 136.800 136.800 136.800 136,800 136.800 136f800 Buses 18.500 18,500 18,500 18,500 185600 18.500 18,500 18.500 Vehicle Operating Ratios 1% of vehicles in working condition) Cars 65% 65% 65% 65% 65% 65% 65% 65% Trucks 50% 50% 50% 50% 50% 50% 50% 50% Buses 50% 50% 50% 50% 50% 50% 50% 50% Incormina Border Traffic of Vehicles Redostered Abroad (vod) fiQQ 600 lQ fQ 6Q J Cars (15% of traffic) 90 90 90 90 90 90 90 90 Trucks (55% of total traffic) 330 330 330 330 330 330 330 330 Buses 130% of total traffic) 180 180 180 180 180 180 180 180 Fuel Consumption ('000 tonhyrl 100 100 100 100 100 100 100 100 Avg. Fuel Price (Gasoline and Diesel; $ltr) 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.40 Avg. Car Horse Power (units) 70 70 70 70 70 70 70 70 Avg. Truck Horse Power (units) 200 200 200 200 200 200 200 200 Avg. Bus Horse Power (units) 130 130 130 130 130 130 130 130 Incoming Border Crossing Tax for Cars($/entry) 0 20 20 20 20 20 20 20 Incoming Border Crossing Tax for Trucks (W/entry) 0 160 160 160 160 160 160 160 Incoming Border Crossing Tax for Buses (S/entry) 0 80 SO 80 80 80 80 80 Annual Domestic Vehicle Registration Tax for Cars (S/horse power) 0.0 0.2 0.2 0.2 0.2 0.2 0.2 0.2 Annual Domestic Vehicle Registration Tax for Trucks 1S/horse power) 0.0 1.5 1.5 1.5 1.5 1.5 1.5 1.5 Annual Domestic Vehicle Registration Tax for Buses 1S/horse power) 0.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 Fuel Taxes 1%, on value-added on fuel and lubricants) 0% 5% 5% 5% 5% 5% 5% 5% Road Maintenance and Rehabillation Needs Surface Dressing (Potholes) (km) 71 750 1.000 1.500 175 0 2.000 2.000 2.000 Overlays (km) 0 0 35 45 75 150 160 150 Reconstruction (km) 0 0 0 15 40 50 50 50 Bridges and Tunnels (min 6) 0.0 3.0 3.5 3.5 3.5 4.0 4.0 4.0 IV Road Equipment. Machinery and Spares ImIn SI 0.0 5.0 4.5 3.0 3 0 3 0 3.0 3.0 IrQ Highway Concern Staff 8000 7,000 1b500 1.250 1,000 1,000 1,000 1t000 U1  Road User Charge System as Curnently Drafted Transport RehabDitation Project - State Concern of Highways World Bank Preliminary Estimates, July 1995 Cashflow Projections, 1995 US$ 1995 1996 1997 1998 1999 2000 2001 2002 Sources of Funds Budget Allocation 850,000 0 0 0 0 0 0 0 Divestiture from Assets 0 500,000 500,000 0 0 0 0 0 Incoming Border Crossing Tax Revenues 0 5,037,000 7,555,500 10,074,000 12,592,500 15,111,000 15,111,000 15,111,000 Annual Domestic Vehicle Registration Tax Revenues 0 5,234.844 8,506,622 11,778.399 15,050,177 18,321,954 18,321,954 18,321,954 Fuel Taxes Revenues 0 72,000 144,000 216,000 288,000 360,000 360,000 360,000 Revenues from the Road Tax on Enterprise Income 150,000 151,500 153,015 154,545 156,091 157,652 159,228 160,820 Total, Internal Sources 1.000.000 10.995.344 16.859.137 22.222.944 28086.767 33 950.606 33.952.182 33 953.774 World Bank Loan Borrowing 0 5,000,000 0 0 0 0 0 0 Total, Sources 1.000 000 15.995.344 1859.137 22.222.944 28.086.767 33-950.606 33.952.182 33.953774 Application of Funds Highway Concern Operational Expenses Salaries and Wages 450,000 1,680,000 360,000 300,000 240,000 240,000 240,000 240.000 Severances 0 480,000 120,000 120,000 0 0 0 0 Other Expenses 50,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 Total. Hiahwav Concern Operational Expenses 50Q0Q.Q 2.2600.0Q 580.000 520.000 340.000 34000 340C 34000 Road Maintenance and Rehabilitation Surface Dressing (Potholes) 500,000 5,250,000 7,000,000 10,500,000 12,250,000 14,000,000 14,000.000 14,000.000 Overlays 0 0 1,120,000 1,440,000 2,400,000 4,800,000 4,800.000 4,800,000 Reconstruction 0 0 0 1,980,000 5,280,000 6,600,000 6,600,000 6,600.000 Bridges and Tunnels 0 3,000,000 3,500,000 3,500,000 3,500,000 4,000,000 4,000,000 4.000,000 Road Equipment, Machinery and Spares 0 5,000,000 4,500,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 Total. Road Maintenance and Rehabilitation 500.000 13.250.QO 16.120.000 20420.000 26.430.000 32.400.000 32.400O 32.4QQ.0QQ Debt Service Interest 0 0 380,000 380,000 304,000 228,000 152,000 76,000 Principal 0 0 0 1.000,000 1,000.000 1.000,000 1.000,000 1.000,000 Total. Debt Service Q Q 380.000 1.380.000 1.304. 1226.000 1.152.QOQ 1 076.QQQ Total Applications 1.000.000 15.510.00 17080.000 22.320. 28.074000 33.96800 33.892. 33,816 Surplus Funds 0 485,344 -220,864 -97,056 12,767 -17,394 60.182 137.774 > Opening Cash Balance 0 485,344 264,481 167,425 180,192 162,797 222,979 j Closing Cash Balance 0 485,344 264,481 167,425 180,192 162,797 222,979 360,754 O4 -4<  Annex 8 Page 1 of 2 GEORGIA Transport Rehabilitation Project Contracting of Road Construction and Maintenance Units Obiective I . The objective of each enterprise is to perform, under specific contract with the Highway Concern, works related to the maintenance, rehabilitation and construction of roads and associated structures. It will be privately owned and allowed to perform other construction work. Staff 2. Initially the enterprises will be formed by ex-professionals and interested workers previously employed by construction units operating for the Highway Concern. (How many to employ and under which conditions, is a matter to be decided by the enterprise's management.) Assets 3. The main asset of the enterprise will be the operative capacity of its staff, and capital assets (machinery and equipment) which could be owned, directly purchased, if the enterprise has the financial capacity, or acquired from the Highway Concern, in accordance with the rules established by the Ministry of Public Property, in the context of the privatization program. Contract 4. The initial contracts between the Highway Concern and the enterprise, provided that it is found eligible under Bank Guidelines, will be for road repairs, including all elements of the road cross section, and will be part of the Program of Emergency Repairs defined under the Transport Rehabilitation Project. Quality standards of performance would be included in the contracts. Price 5. The contract price will be given by such a formula as: Price = # road surface units to be repaired under the contract x unit repair cost */ [*/ Detemnined by bidding prcess] The unit repair cost would reflect the state of road disrepair, variable direct costs, indirect costs, mobilization costs, as well as profit and taxes to be paid by the enterprise.  Annex 8 Page 2 of 2 Payments 6. Payments from the Highway Concem will be made proportionally to the progress of the contracted work and will take place on a regular basis (e.g., monthly). This progress will be accredited by a designated supervisory unit of the Highway Concern. The supervisory unit will act as the technical counterpart of the enterprise for the purposes of the contract, including quality control. An advance payment of about 15% of the value of the contract may take place to facilitate the purchase of materials and provide some working capital. The equipment made available by the Highway Concern either under a rental, leasing or purchase agreement, will be reflected as a deduction in every statement of payments. Asphalt and Stone Crushing Plants 7. The Highway Concern will allow free choice to contractors to procure the most adequate materials to the work site(s). Any rental costs applicable, will be deducted from the gross amount due in each statement of payments. Payment Deductions 8. In each statement of payments, the gross amount to be paid would be reduced by: (i) a proportion of the 15% advance payment; (ii) any cost of equipment rental, leasing or purchase as agreed, including the rental cost of asphalt and stone crushing plants; and (iii) a 5% of the gross payment due, to serve as a guarantee for the delivery of the works to the satisfaction of the concern. The balance will be fully paid to the enterprise upon the satisfactory completion of the works. The guarantee funds will be deposited in a financial institution acceptable to the enterprise under the name of the Highway Concern, in accordance with mutually agreeable conditions. The Highwav Concern 9. The Highway Concern will cease to be responsible for the execution of road works. It will open and maintain a Registry of Contractors and will operate on the basis of competitive bidding among enterprises included in the registry. All contractors, local or foreign, fulfilling the criteria for such enterprises under Bank Guidelines, will be eligible for inclusion in the Registry.  Annex 9 Page 1 of 1 Georgia Transport Rehabilitation Project Rental and Leasing of Highway Concern Equipment 1. Under the Transport Rehabilitation Project, an Emergency Road Repair program is one of the established priorities. The required works will be carried out by private and independent enterprises. To assist the development of the a local contracting industry, the Highway Concern will make available under mutual agreement its equipment pool. The Highway Concern will purchase spares, make repairs, and when necessary, purchase equipment with Project funds. The equipment and parts will be valued at market prices and will be available to any contractor. On the basis of this value, for each item, a rental leasing fee or a sale price will be established. 2. As an example of the monthly fees involved, the following table has been calculated. It refers to an estimated market value of equipment of $10,000 with a life of 60 months, interest rate of 0.7 to 1.0% per month for rental and lease, and 1.0 to 1.5% per month for sales. - Rental: $258 for periods inferior to 40 months - Lease: $288 to $305 for 40 month leases $238 to $255 for 50 month leases $205 to $222 for 60 month leases - Sale: $500 to $524 with 20 months for full purchase 3. The alternative to use in each case will depend on the duration of the contract, type and future use of the equipment, and the financial capacity of the enterprises.  Cost Estimate - Rail Sub-Component Annex 10 Page 1 of 1 Georgia Transport Rehabilitation Credit - Railway Sub-Component Proposed Goods, Equipment and Works to be Procured under the Project Type of Equipment Quantity Unit Cost Total Cost or Length (US$) (US$) I. Stabilizing and Protection of Bridges Samtredia-Batumi line 750,000 Samtredia-Poti line 250,000 Sub-total, 1 1,000,000 of which materials (mainly structural steel) 350,000 tl. Track Capacity Enhancement (on 40 km of track)* Wooden sleepers 75,000 sleepers 25.00 1,875,000 Switches R-65 13 sets 30,000 390,000 Track links (ties and fastenings) 250 tons 4,000 1 000,000 Sub-total, 11 3,265,000 Ill. Traction Capacity Enhancement" Rehabilitation of electric locomotives 1 0 locos 135,000 1,350,000 Spares for electric locomotives & rehabilitation of sub-assemblies 651,800 Sub-total, IIJ 2,001,800 IV. Communication and Signalling Equipment Rehabilitation of communication means at: Samtredia-Senaki section 28 km 1,200 33,600 Senaki-Poti section 41 km 1,200 49,200 Tbilisi-Sadakhlo 59 km 1,200 70,800 Tbilisi-Gardabani 33 km 1.200 39,600 Rehabilitation of automatic bloc systems on key sections of the network 10 km 14,000 140,000 Sub-total, IV 333,200 Grand Total 6.600,000 (excluding Physical Contingencies (5.5%) and Price Contingencies (5%) Notes: Subject to definition of a detailed program of track capacity enhancement * Subject to detailed specifications of works and materials  Annex 11 Page 1 of 6 Georgia - Transport Rehabilitation Project Financial Projections - Railway Department Notes and Assumptions on the Attached Financial Projections 1. Financial projections for the Railway Department, reflecting the financial adjustment and restructuring plan proposed in Chapter IV (Financial Aspects) were developed. Listed below are the notes and assumptions used in these projections, presented by table. In all tables, the currency unit is constant 1995 US$. Table page 3: Key Assumptions and Income Statement Projections 2. Traffic: Passenger traffic was assumed to decrease from current levels (4.4 million passengers per year) to about 2 million passengers per year by year 2000, as a result of tariff increases. This traffic would then grow by 1 % per year. Freight traffic (in tons) was assumed to grow by only 1 % per year over the projection period. Today, the humanitarian food aid cargo makes up for most of the railway freight operations. Such traffic is temporary. In the short to medium term, humanitarian freight traffic is likely to decrease, whereas other freight traffic would progressively increase in line with the overall economic recovery of Georgia. The average trip for passenger transport was assumed to remain constant over the projection period; for freight, it was assumed to decrease from current 350km to about 300km by 1998 as the share of domestic traffic increases. 3. Average Passenger/Freight Tariffs: Average passenger tariffs were assumed to increase from current (1st half of 1995) UScents 0.05 per pass.km to UScents 3.00 per pass.km by 2000. As for average freight tariffs, they would increase from current USc 3.07 per ton.km to USc 4.00 per ton.km by 1997. An increase of up to 1.5 times the current freight tariff is already scheduled by the railway department, starting September, 1995. 4. Railway Staff: Currently, the railways employ 18,191 people, of which 6,590 are not paid (technical unemployment). Unpaid staff would be laid-off by 1996 and paid staff levels would be brought down to about 10,000 by 1998, as a result of a staff reduction program reflecting current traffic levels and the size of the railway network. 5. Average Salarv: It was assumed to increase from current (1994) $6.6 per month to about $20 per month in 1996, and remain constant thereafter. 6. Operating Revenues: Passenger and freight operations revenues grow with traffic and tariff increases. Baggage and mail revenues were assumed to grow by 15% per year, to reflect increased baggage and mail activity and tariffs which would cover costs. 7. Operating Expenses: Assumptions on operating expenses are as follows: Salary and Wages: calculated as the annual average salary times the staff level. Social Benefits: costs grow in line with salaries. Operation and Maintenance: costs grow by 5% per year, as costs of materials and services increase, and as aging equipment requires more maintenance. Fuel and Power: costs grow with electricity prices and traffic. Electricity prices were assumed to increase by 50% from 1995 to 1996, as a result of the restructuring of the power sector. Severance: 2 years of salary. Other expenses: these expenses mainly relate to capital repairs. As operations become more efficient and only necessary capital repairs are carried out, "other expenses" were assumed to decrease by 5% per year.  Annex 11 Page 2 of 6 Table page 4: Sources and Applications of Funds 8. World Bank Loan Borrowing and Other Donors Assistance: Total borrowing from the World Bank and other donors to be defined would amount to about $6.6 million, and would take place in 1996. 9. Debt Service: The interest rate on the borrowing would be of about 7.6%, and the repayment period five years with a one year grace period. Table page 5: Balance Sheets at Years Ending December 31 10. Gross Fixed Assets: A recent Government decree calls for an asset revaluation, to be implemented on October 1, 1995. Assets will be revalued 12.7 times, from current US$13 million to about US$171 million. This revaluation factor was calculated by the Ministry of Finance for all enterprises in Georgia to account for inflation. Although a detailed railway-specific asset revaluation is needed for the railway department, the asset revaluation assumptions in the projections follow the Government decree. 11. Accumulated Depreciation: It was adjusted for 1995 in line with asset revaluation. Old assets (prior to 1995) were estimated to be fully depreciated in 9 years (i.e., a yearly average depreciation coefficient of 1 1.1 %). New assets (incorporated in the asset base after 1995) would be fully depreciated in 15 years (i.e., a yearly average depreciation coefficient of 6.7%). 12. Capital Work in Progress: This item represents the first year of each capital investment. 13. Accounts Receivable: Receivables are assumed to decrease to 30 days of revenues by 1999, down from 52 days in 1994. 14. Inventories: They were assumed constant over the projection period. 15. Other Assets: These were assumed to decrease to about $5 million by 1998, as a result of the selling of unnecessary and non-transport related assets. 16. Capital and Capital Reserve: Both items were assumed constant over the period. 17. Accounts Payable: Payables are assumed to decrease to 3 months of expenses by 1999. 18. Advances, Short Term Borrowing and Other Current Liabilities: All of these are assumed to remain constant over the period. Table page 6: Ratios of Financial Performance 19. Profitability: Profitability for 1994 (and to a lesser extent, for 1995) looks high because of the high "profits" shown by the railways accounts. As explained before (para. 1, page 1), these "profits" do not take into account proper allocations for depreciation. 20. Debt Financial Leverage: Debt Service Coverage is defined as the ratio of internal sources to the total debt service (interest and principal). Interest Coverage is defined as the ratio of the operating profit before interest and tax to the interest on the debt.  RAILWAY Department - Wodd Bank Preliminary Forecasts, July 1995 Key Assumptions and Income Statement Projections (1995 US$) With Restructuring, Keeping Passenger Service Actual ........ -- - - --- --- Pr ... .e.c..t...d -- --- 1994- 19951 1996 1997 1998 1999 2000 2001 2002 KEY ASSUMPTIONS Traffic Passenger (pass) 10,876,800 4,433,760 3,947,008 3,460,256 2,973,504 2,486,752 2,000,000 2,020,000 2,040,200 Passenger-km kmln passkm) 1,032 428 381 334 287 240 193 195 197 Average trip (km) 95 96 96 96 96 96 96 96 96 Freight It) 5,655,500 3,564,720 3,600,367 3,636,371 3,672,735 3,709,462 3,746,557 3,784,022 3,821,862 Freight (min t.km) 1,030 1,231 1,184 1,139 1,102 1,113 1,124 1,135 1,147 Average trip (km) 182 345 329 313 300 300 300 300 300 Average passenger tariff (USc I pass.kml 0.03 0.16 1 00 1.50 2.00 2.50 3.00 3.00 3.00 Average freight tarff (USc / t.kml 2.16 3.33 3.50 4.00 4.00 4.00 4.00 4.00 4.00 Total Railway Staff 18,191 18,000 14,801 11,601 10,000 10,000 10,000 10.000 t0.000 including technical unemployment 6,590 6,399 3,200 0 0 0 0 0 0 Average Salary (S/month) 6.6 19.6 20.0 20.0 20.0 20.0 20.0 20.0 20.0 OPERATING REVENUES I1995 US$) Passenget Operations 306,355 694,980 3,807,280 4,990,120 5,736,477 5,984,924 5,787,593 5,845,469 5,903,924 Baggage end Mai 37,412 8,978 10,324 11,873 13,654 15,702 18,058 20,766 23,881 Freight Operations 22,286,043 40,947,660 41,450,400 45,567,242 44,072,815 44,513,543 44.958,679 45,408,265 45,862,348 Total OperatIng Reveue 22,629,811 41,651,618 45,268,004 50.569,236 49,822,946 50,514,170 50,764,32 9 51,274,501 51,790,153 OPERATING EXPENSES (1995 US$) Salary and Wages 1,432,020 4,275,158 3,552,120 2.784,240 2,400,000 2,400,000 2,400,000 2.400.000 2.400.000 Social Benefts 537,057 1.622,191 1,358,497 1,064,824 917,873 917,873 917.873 917.873 917,873 Operation and Maintenance 224.409 698,235 733,147 769,804 808,294 848,709 891,145 935,702 982,487 Fuel 925,486 1,961,999 1,850.995 1,742,103 1,642,384 1,599,885 1,557,515 1,573,090 1,588,821 Power 2,292,168 3,768,229 5,332,549 5,018,843 4,731,562 4,609,124 4,487,061 4,531,931 4,577,251 Severance 0 90,016 1,535,760 1,535,760 768,480 0 0 0 0 Other Expenses 2,834,778 7,280,401 6,933,715 6.603,539 6,289,084 5,989,604 5,704,385 5,432,748 5,174.045 Total Operating Expenss 8,245,917 19,696,229 21,296,783 19,519,113 17,557,678 16,365,194 15,957,978 15,791,343 15,640,476 Net Profit Before Depreciation. Interest and Taxes 14,383,894 21,955,389 23,971,221 31,050,123 32,265.269 34,148,976 34.806,352 35,483,157 36,149,677 Depreciation 446,022 5,020,153 20,224.911 22,131,578 23,998,245 25,931,578 27,931,578 29,998,245 32.198,245 Net Profit Before Interest and Taxes 13,937,871 16,935,236 3,746,310 8,918,545 8,267,024 8,217,398 6,874,774 5,484,913 3.951,432 Interest on Borrovings and Other 0 0 0 501,600 501,600 401,280 300,960 200,640 100.320 P' Net Profit Before Taxes 13,937,871 16,935,236 3,746,310 8,416,945 7,765,424 7,816,118 6.573.814 5,284,273 3,851.112 rs Profit Tax (20%) 2,787,574 3.387,047 749,262 1,683,389 1,553.085 1.563,224 1,314,763 1,056,855 770,222 Net Profit after TaX 11,150,297 13,548,189 2,997.048 6.733,556 6,212.339[ 8.252,894 5.259,051 4.2fl7,418 3.080.890 _ o - - I - As of the end of 1994: $1 - 1.300,000 Coupons; 1994 figures might not be accurate because of high inflation; 1995 projections were estimated based on actual figures for the liust half of the year  RAILWAY Department - World Bank Preliminary Forecasts, July 1995 Sources and Applicadons of Funds (1995 USS) -^--- ----- ----- ----- ---- ----- ----- Projected ----- ---- ----- ----- ----- ----- ----- 1995 1996 1997 1998 1999 2000 2001 2002 SOURCES Internal Sources Net Operating Profit Before Interest and Taxes 16,935,236 3.746,310 8,918,545 8,267,024 8,217,398 6,874,774 5,484,913 3,951,432 Depreciation 5,020,153 20,224,911 22,131,578 23,998,245 25,931,578 27,931,578 29,998,245 32,198,245 Total. Internal Sources 21.955.389 23971.221 31050,1232 32.265.269 34,148.976 34.806.352 35.483.157 36.149.677 World Bank Loan Borrowing 0 5,000,000 0 0 0 0 0 0 Other Donors Assistance 1,600,000 Total Sources 21,955,389 30,571,221 31,050,123 32,265,269 34,148,976 34,806,352 35,483,157 36,149,677 APPUCATIONS Capital Investments Project financed by World Bank (incl. local costs) 7,600.000 Other/Future Projects 18,000,000 21,000.000 28,000,000 29,000,000 30,000,000 31,000,000 33,000,000 34,000,000 Total Capital Investments 18.000 28.600.000 ,_ 28,0 0 9.000.000 3000.000 31,.000000 Q3QQQQQ 34.000 ooo Debt Service Interest 0 0 501,600 501,600 401,280 300,960 200,640 100,320 Principal 1,320,000 1,320,000 1,320,000 1,320,000 1,320,000 Total. Debt Service Q Q 501.600 1.B21.60Q 1 721.280 1620960 1 1520A4 1420-32 Profit Tax 3,387,047 749,262 1,683,389 1,553,085 1,563,224 1,314,763 1,056,855 770,222 Increase (Decrease) in Non-Cash Working Capital -910,191 1,187,901 1,632,970 12,099 542,406 707,122 84,173 80,688 Total ApplIcadons 20,476,856 30,537,163 31,817,959 32,386,784 33,826,910 34,642,845 35,661,667 36.271,230 Surplus Funds 1,478,533 34,058 -767,836 -121,515 322,066 163,507 -178,510 -121,554 Opening Cash Balance 3,543,494 5,022,027 5,056,085 4,288,249 4.166,733 4,488,799 4,652,306 4,473,796 Closing Cash Balance 5,022,027 S5.056,085 4,288,249 4,166,733 4,488,799 4,652,306 4,473,796 4,352,2431 Iosl  RALWAY Dep mnt - Woed Bank Prabsinwy Forecasts. J3y 1995 aI_ce SMeu at Yeo Ending Deownbr 3111996 US$) 1995 Asset Revalustion Coetticdent: 12.7 Old Assets Depreciation Coeff.: 11.1% New Assets DWedreton Coe11.: 6.7% Actual Projected_-_-_______-_________ _______________________________________ 1994 ' 1995 1996 1997 1998 1999 2000 2001 2002 | ASSETS Fixed Assets Gtoss Rxed Asts 12.819.805 171.224,202 189.224.202 217.824.202 245,824.202 274,824.202 304.824.202 335.824.202 368,824,202 Lass Accumulated Oeoreositon -4,329.138 -74,004,969 -94,229,880 -116,361,468 -140.359,703 -166,291,281 -194,222,859 -224.221,104 -256,419,348 Net Fixed Assets 8.490,667 97.219,233 94,994.322 101.462.744 105.464.499 108,532.921 110,601,343 111,603.099 112,404.854 Caital Work In Progress 8,412,677 18,000,000 28,600.000 28,000,000 29,000,000 30,000,000 31,000,000 33.000,000 34,000,000 Total, Fixed AsaX 16.903343| 115.219233 123E432Z 129.462744 134.464499 a1 38 | 141691.343 14.603.099 146 404.8 Long-Trrm hves_nt 0 0 0 0 0 0 0 0 0 Current Asst Cash and Bank Notes 3,543,494 5,022,027 5,056.085 4,288.249 4,166.733 4,488,799 4.652,306 4,473,796 4,352,243 Short-Termn Iestmetnts 0 0 0 0 0 0 0 0 0 Accounts Receivbbe 3,289,658 5,784,947 5,658.500 5,618,804 4,843,898 4,209,514 4,230,361 4,272.875 4,315,846 Inveritories 4.002,366 4,002,366 4,002,366 4,002,366 4,002,366 4,002,386 4,002,366 4,002,366 4.002,366 Othe Assets 9.672,321 8.504,240 7.336.160 6.1 68.080 5,000,000 5.000.000 5.000,000 5.000,000 5.000,000 Total, Current Assets 507 839| 2315 229536111 20.077 499 18012997 17Q22,7067 17f8S5.033 17.7497 03 17.670454 Total Assets 37,411,182 138,532,813 145,647.433 149.540,243 152,477,496 156,233.600 159,486,376 162.352,136 164,075,308 EQUITY and LUiABILTIES Equity Capital 40,436 40,436 40.436 40.436 40,436 40,436 40,436 40,436 40,436 Capital Resrve 22,101,241 22,101,241 22,101,241 22,101.241 22,101,241 22,101.241 22,101,241 22,101.241 22,101,241 Retained Earnings 0 13,548,189 16,545,237 23.278,793 29,491,132 35,744,026 41,003,077 45,230,495 48,311,385 Revaluation Reserve 0 85,336,042 85,336.042 85.336,042 85,336,042 85,336,042 85,336,042 85,336,042 85.336,042 Total FEuit 22_141677| 121025908 124.022.956 . 130.751 136.968.85I 143-221.745 148480-796 152708214 1559104 Long-Term Debt (Donors Project Loan) 0 0 6,600,000 6,600,000 5,280,000 3,960.000 2,640,000 1,320,000 0 Lialities Accounts Paysble 10,893,420 13,130,819 10.648,391 7,807,645 5,852.559 4,675.770 3.989,494 3,947,836 3,910,119 Adv_nces 2,136,500 2,1 ?6,500 2,136,500 2,136,500 2,136.500 2,136.500 2,136,500 2,136,500 2,136,500 Short-Termn 8orowvng 0 0 0 0 0 0 0 0 0 Other Current Liabilities 2.239.586 2,239,586 2,239,586 2,239,586 2,239.586 2,239,586 2,239,586 2,239,586 2.239,586 Tntliaht IL26iQ i l50L605 15i024.477 12.183.731 10228L6i4 9051855 8.365580 8.323-921 R-236-20M Total Equrt nd UabWs 37.4 11,182 138,532,1813 ,145,647.433 149,540,243 152,477,496 156,233,600 159,486,376 162,352,136 164,075,308 I~ ~ ~ ~ ~ ~ ~~ ~~ ~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~I ( tIQ 0\-  RAILWAY Departnmnt - Wo,ld Bank Preliminary Forecasts. July 1995 Ratios of Financial Performance Actual P-- --- Projected ------ 1994 1995 1996 1997 1998 1999 2000 2001 2002 Uuidqity Current Assets/Current Uabilities 1.34 1.33 1.47 1.65 1.76 1.96 2.14 2.13 2.13 Quick Assets/Current Uabilities 0.23 0.29 0.34 0.35 0.41 0.50 0.56 0.54 0.53 Operting Performance (Working Expenses + Depreciation)/Revenues 38% 59% 92% 82% 83% 84% 86% 89% 92% Prorntabity Return on Gross Fixed Assets 87% 8% 2% 3% 3% 2% 2% 1 % 1 % Return on Net Fixed Assets 131% 14% 3% 7% 6% 6% 5% 4% 3% Debt. Fmanal Lavag Debt Service Coverage na na na 61 .9 17.71 19.84 21.47 23.33 25.45 Interest Coverage na na na 17.78 16.48 20.48 22.84 27.34 39.39 Receivabe Receivables/Annual Billings (Days) 52 50 45 40 35 30 30 30 30 - ----- - -~~~~~~~~~~~~~~~~~~~~1l  Annex 12 Page 1 of 4 GEORGIA - Transport Rehabilitation Project Railway Department Current Infrastructure and Equipment Situation, Physical Description 1. Georgia has 1,569 km of railways, of which 725 km are main lines and 290 km with double track. The entire network is electrified (Georgia was the first republic of the FSU to undertake electrification of its railway network) with DC at 3.3 kV. Except for the narrow-gauge line Borjomi - Bakuriani (38 km), all lines are in Russian broad gauge (1520). 2. The backbone of the network is the former "Transcaucasian Railway" which, starting from Moscow, runs 575 km across Georgia from the Russian border station Veseloe in the north-west via Samtredia-Thilisi to the Armenian border town Airum in the south-east, and continues from there to Yerevan. In Leninakan (Armenia), there is a connection to the Turkish (standard gauge) rail network. From Tbilisi, 42 km of main line link the city to the border of Azerbaijan, providing via Baku the second connection to the Russian network. 3. The section between Zestafoni and Khashuri, climbing over the watershed between the Black and Caspian Seas, passes through topography similar to a low mountain range somewhere in Middle Europe (from 158 to 778 meters above sea level). The poor layout of the line with a minimum radii of 158 m and steep gradients of up to 29.9 0/00 makes operations extremely difficult, especially during hard winters. 4. The Transcaucasian Railway dates back to 1872 and was completed in 1890, but other lines were built as recently as 1970. Two branches connect the Black Sea ports with the Transcaucasian Line; these are Samtredia-Batumi (106 km) and Senaki-Poti (41 kIn). Work on numerous new projects, like the new Arkhot Pass Line from Orjonikidze to Tbilisi, or the completion of the second track between Ingiri and Moliti, the branch lines Samntredia-Zulukidze and Telavi-Achmneta, and the Samtredia bypass had to be abandoned. 5. For political reasons, railway traffic is disrupted on the Transcaucasian line between Veseloe and Ingiri (Abkhazia) and the Ossetia branch between Shindisi and Zkhinvali. Except for the Transcaucasian line and its branches to Azerbaijan, Poti and Batumi, train operations have been reduced to a minimum or abandoned. Thus, it is estimated that more than 95 % of the present traffic is performed on the core 764 kms (including the 2 km of line between Tbilisi Sort and the Armenia by-pass). 6. Within this core network, there are 79 stations and branching-off points, of which two are big marshalling yards at (Samtredia II and Tbilisi Sort). The average distance between operating points is 9.8 kan. Comparatively, the number of level crossings on the Transcaucasian Line (30 out of 75 on the whole network) is low. I/ This Annex is based on background information provided by M. Strohn, who has been working in Tbilisi since March, 1995 under contract with GTZ.  Annex 12 Page 2 of 4 Infrastructure and Equipment 7. Bridges and structures: There are not only several bridges which have been severely damaged as a result of the Abkhazia and Arrnenia/Azerbaijan conflicts but also many that need renewal for such other reasons as age, deffered maintenance, or damages from excessive road traffic or floods. As for the many tunnels--the most important one is between Zipa and Lichi on the main line with a lenth of 3,998m- -no survey of condition has been conducted, and even immediate renovation needs have not been reported. Buildings are generally in a hopeless condition, and do not accomnnodate modern signalling and telecommunications equipment. Passenger and freight platforms at stations and on sidings are damaged and unsafe in almost all cases. 8. Permanent Way: The through lines of the core network--open line tracks and their continuation in the stations--comprise 802 track kms with mainly heavy rails (R65); only 103 kms (13%) on the Senaki-Poti branch line and some of Batumi-Samtredia and Tbilisi-Sadakhlo sections are light rails (R50). Almost half of the sleepers are wooden and equipped with spike fastenings. On concrete sleepers, rails are usually welded up to 700 m length. The tracks represent the typical Russian practice of over-design and low levels of maintenance: there are 1,840 to 2,000 sleepers per km, which allows operation ofver the track even if one third of the sleepers and fastenings are damaged. Ballast is generally of poor quality and drainage is inadequate, especially along platforms. Embankments are not well maintained, and poor slope protection as well as lush weeds contribute to the contamination of ballast. All of this results--in spite of the fact that the average age of track is eleven years, and almost 50% of the tracks are less than ten years old--in only 28% of the tracks being in a tolerable condition. 51 km must be considered dangerous, and at least an additional 290 km need renewal within the next 5 years. Furthermore, it must be noted that more than two-thirds of the tracks renewed during the last five years have already deteriorated to an extent that speed must be restricted to 40 km/h or less. Turnouts are usually of type 300-1:11, or 200-1:9 if used only for freight trains. Double-slip and curved points are not in use. The condition of the 735 turnouts on the through lines is yet to be surveyed, but a result similar to that of the overall track condition must be expected. 9. The Railway claims to have a few permanent-way machines (ballast screening machines SM2, track/switch tamping machines WPRI200, renewal trains UK25, screwing machines, track recording coaches) at their disposal, but except for a tamping machine that handles 1200 sleepers per hour, no details about condition and availability were obtainable. There is a severe lack of such tools as saws, screw clamps, and drilling machines. 10. Signalling: On the routes of the core network there are 78 interlocking blocks comprising 5,177 switch units (a unit=switches + signals + track circuits). One third of the blocks are more than twenty- five years old, only 13% have been put into operation within the last ten years; as a result of damage and theft--mainly of impedance bonds (throttle transformers) and cables--only five of these are fully in operation. In another twenty-eight interlocking blocks, only 30-50% of switches, signals and even track circuits are in working order; this includes three key interlocking systems. In ten stations, all switches in the through lines have been locked. Additionally, eleven interlocking plants have been taken out of operation and the stations temporarily abandoned. In terms of switch units, it is estimated that only 36% of the equipment is in working order. Power is supplied through Railway's 10 kV (220/380 V) feed line system; there are no stand-by generators. 59 of the 74 line sections had been equipped with automatic block, in many cases even for two-way-traffic, totalling 691 signals and 355 impedance bonds. Except for signals and switch cabinets most equipment has been stolen, so that on almost the entire railway today  Annex 12 Page 3 of 4 there is no section blocking. The same goes for all level crossing equipment; some level crossings are worked locally but many remain unattended. 11. Telecommunications: The condition of telecommunications is even worse: line cables have been stolen partly or entirely on the sections Poti-Senaki-Abascha (53 kmn), Batumi-Saintredia (106 km), Marneuli-Sadakhlo (29 km) and Gardabani-Bejuk Kjasik (12 kIn), leaving only 327 km (62 %) in operation. In each of these sections there are two cables of type MKPAB (7*4*1.2+5*0.9+ 1*0.7) with an average age of fifteen years. Out of twenty-seven telephone exchanges presently only thirteen work. Radio systems are not state of art and also in a questionable condition. WFP's HF radio system has, of course, considerably improved communications but cannot be used to permanently restore regular station-to-station communication. 12. Overhead Line and Traction Power Supply: The 3.3 kV-DC-catenary has non-flexible carrying cable and is not in good condition. According to the last survey carried out six years ago, the contact wire is well below minimum (8.21 mm) on 214 track km (27% of the core network). Catenary supports are of either steel (minor corrosion) or concrete. The latter often topple after some time as a result of poor footings. Traction power for the core network is supplied through thirty-two rectifier-substations (plus three presently out of order) that are connected through 6, 10, 35 or 110 kV AC to the substations of the 110/220/500 kV public network which includes twelve power plants (one thermal, eleven hydro). The railway-owned rectifier-substations serve also a 10 kV AC feed line with drops to 220/380 V transformers for consumers like stations, interlocking plants and switch heating systems. Power cuts are still regular, lasting from four hours daily to up to several days. During the remaining time, contact line voltage is likely to drop recurrently below 2 kV. 13. Motive Power: In May 1995, the Railways had a total of 496 units of traction equipment: 280 were reported in working order. This includes 230 (in working condition: 110) electric, 159 (90) diesel-electric locomotives and 107 (80) EMU traction units. The electric locomotives belong mainly to the types VL10, VL1OU and VL11 (4600 kWh, 100 km/h, 184 to 200t, first years built 1961/1976); from the old type VL8 (3660 kWh, 80 km/h, 184 t, 1953) only 86 (46) double units are left. (Addition locomotives are also leased for use by the World Food Program). On the operational side, problems arise from locomotives having their own crew, frequent change of locomotives, excessive demand through increased travelling times, and the use of many light-engines in mountain pass sections. 14. Rolling Stock: The freight wagon situation is still in the dark. Of the estimated 20,000 wagons that jam not only sidings but also most of the main tracks, only some 5,000 are reported in operation. The ownership of the remaining number is uncertain--disruption of both rail links to Russia may have left many Georgian wagons in Russia and vice-versa--as is their technical condition. It must be expected that more than half of the freight wagons are not fit for use, in many cases obviously due to the theft of such important parts as even floors and walls for firewood or valuable metal parts, e.g. the aluminum covers over the bearings. Assisted by GTZ, the Railways started a detailed census in May 1995 but did not manage to complete it as of Aug 1, 1995. As far as operations are concerned, difficulties are linked to excessive demand through increased travelling times, laborious shunting in jammed sections, and the poor motivation of shunting crews. Many yards are jammed with damaged wagons and those waiting for unloading, thus obstructing train operations and increasing shunting time and costs.  Annex 12 Page 4 of 4 15. Power supply: Because trains exclusively use electric locomotives and signalling units get power from the same source, public supply of power to the railways is a crucial factor for operations. A schedule of switch-off times has been set up so that it should be possible to run a limited number of trains anyway, but railway officials say there are still many unannounced power cuts. An evaluation of control charts for two weeks in May 1995 (arbitrarily selected) shows, however, that except for the section Tbilisi-Sadakhlo, which is fed from Armenia and where power was available only 83 % of the time, the grade of power supply for the core network was between 92 % and 99 %. One must take into account that the situation is much worse during the winter months, but even then the current level of operations could be maintained almost unaffected if the supplier and the Railway stick to an agreed schedule. Total power consumption was 336.0 mln kWh (0.921 mln kWh/day) in 1994 compared to 1,233.8 mln kWh (3.380 mln kWh/day) in 1989 and has further come down to 77.9 mln kWh (0.866 mln kWh/day) during the first quarter of 1995. This includes 0.610 mln kWh/day for users other than the 3.3 kV DC traction; the consumption of such users represents one third of the 1989 level. Because of the lack of meters for power consumption, the share of users that are indispensable for operations cannot be determined. Between January and March 1995, the daily traction power was still 0.256 mln kWh or 16.5% of that in 1989; this is more than what the declined traffic performance would suggest. One reason for this--and probably the most important one--is the heavy grid loss occurring as a result of the questionable method of keeping all overhead lines powered to avoid theft even in cases where the track has been already removed. 16. Permissible Speed: In view of the overall condition of infrastructure, the Railway has decided to restrict maximum speed to 40 km/h in general. In addition, there are temporary speed restrictions between 5 and 25 km/h. This is as result of poor layout and geometry, lack of databases, operational rules determined in Moscow, and cattle having free access to the tracks. 17. Operating Program: The latest valid timetable dates back to 1987. Today, operations are carried out more or less on an on-the-spot basis, without any programmed operational strategy.  Transport Rehabilitation Project -- Organization of Project Implementation World _Agreements _| Governmont of Bank P roject Documents Gogia__ tmp(ementation delegates coordination to forms Steering Committee to control & supervise Reports implementation of reforms & project i i ~~~Invoices f l ........... Transport Reform & _ mmitt ll _ Rehabilitation Center * _ Deputy Prime Minister M. Basilia (TRRC - Coordination Function) Deputy Prime Minister M. Kervalishvili Supervisions & A Minister of Finance I Control of use of Credit Minister of Privatization Minister of Environment :Transport Coordination Center of the Head of State Invoices: Disbursements I ~~~.............. ....................... ... Railway Dpt. Highway Concern ' Road Transport Ports Component Manager Component Manager Department | . * ~~~~Invoices_____ l Suppliers Suppliers Suppliers Suppliers ffi ____+Goods & Goods & Services Ser