Document of The World Bank Public Disclosure Authorized Report No. 25942 ET

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED GRANT Public Disclosure Authorized IN THE AMOUNT OF SDR 93 MILLION (US$126.8 MILLION EQUIVALENT)

TO THE

FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA

FOR THE

ROAD SECTOR DEVELOPMENT PHASE IPROJECT IN SUPPORT OF THE

Public Disclosure Authorized SECOND PHASE OF THE ROAD SECTOR DEVELOPMENT PROGRAM

MAY 19,2003

Transport Sector Country Department 6 Africa Regional Office Public Disclosure Authorized CURRENCY EQUIVALENTS (Exchange Rate Effective )

Currency Unit = Ethiopian Birr (ETB) ETB 1.00 = US$0.1143 US$l.OO = Birr 8.75

FISCAL YEAR July 8 -- July 7

ABBREVIATIONS AND ACRONYMS

AADT Average Annual Daily Traffic ADLI Agriculture Development Led Industrialization AfDB African Development Bank APL Adaptable Lending Program ASM Accompanying Social Measures BADEA Bank for African Economic Development CADD Computer Aided Design and Drafting CAS Country Assistance Strategy CBFs Community Based Facilitators CBOs Community Based Organizations CDE Chemin de Fer Djibouti-Ethiopian Railway CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Review CPCB Central Program Coordinating Board CPPS Community Project Plans CSCBP Construction Sector Capacity Building Program DCA Development Credit Agreement DCI Domestic Construction Industry DFID Department for International Development DMOs District Maintenance Organizations EA Environmental Assessment EC European Commission EL4 Environmental Impact Assessment EIRR Economic Internal Rate ofReturn EMB Environmental Monitoring Branch EMPs Environmental Monitoring Plans EMSB Environmental Monitoring and Safety Branch Eo1 Expression of Interest EOP End of Project EPM Environmental Procedure Manual ERA Ethiopian Road Authority ERP Emergency Reconstruction Project ERTTP Ethiopia Rural Travel and Transport Program ESL Ethiopia Shipping Line ESW Economic and Sector Work FMRs Financial Monitoring Reports GIS Geographical Information System GOE Government of Ethiopia GPN General Procurement Notice GPS Global Positioning System GRTI Gender and Rural Transport Initiative GTZ Deutsche Gesellschaft fir Technische Zusammenarbeit HDM Highway Design Model HIPC Heavily Indebted Poor Countries IBRD International Bank for Reconstruction and Development IAPSO Inter Agency Procurement Services Office LAS International Accounting Standards ICB International Competitive Bidding ICR Implementation Completion Report IDA International Development Association IEC Information, Education and Communication LMT Intermediary Mean of Transport KfW Kreditanstalt fir Wiederaufbau (German Bilateral Aid) LBM Labor-based Maintenance MCB Ministry of Capacity Building MDGs Millennium Development Goals MMS Maintenance Management System MOF Ministry ofFinance NCB National Competitive Bidding NCPP Non Community Project Plans NDF Nordic Development Fund NGO Non-governmental Organization NMT Non-motorized Transport NMV Non-motorized Vehicle NPV Net Present Value PAD Project Appraisal Document PA0 Program Advisory Office PAPS Project Affected Persons PHRD Policy and Human Resources Development Fund (Japan) PS Private Sector PSD Private Sector Development PSP Private Sector Participation QCBS Quality and Cost Based Selection RAPS Resettlement Action Plans RFA Road Fund Administration RMI Regional Management Initiative ROW Right of Way RPCB Regional Program Coordination Board RPF Rehabilitation Policy Framework RRA Regional Roads Authorities RROs Regional Road Organizations RRP Road Rehabilitation Project RRTPS Rural Roads and Transport Policy and Strategy RSDP Road Sector Development Program RSDPSP Road Sector Development Program Support Project RTA Road Transport Authority RTTP Rural Travel and Transport Program SA Special Account SDPRP Sustainable Development and Poverty Reduction Program SDR Special Drawing Rights SFB Selection under a Fixed Budget SIA Social Impact Assessment SIP Sector Investment Program SME Small and Medium Enterprise SOE Statement ofExpenditure SSA Sub-Saharan Africa SSATP Sub-Saharan Africa Transport Policy Program TORS Terms of Reference UNDB United Nations Development Business VDC Village Development Committees VLTTS Village Level Travel and Transport Study vocs Vehical Operating Costs WDCs Wereda Development Committees WIDP Wereda Integrated Development Plans WTTPs Wereda Travel and Transport Plans

Vice President: Callisto E. Madavo Country ManagedDirector: Ishac Diwan Sector ManagedDirector: Maryvonne Plessis-Fraissard Task Team Leader/Task Manager: John D. Riverson ETHIOPIA ROAD SECTOR DEVELOPMENT PHASE IPROJECT

CONTENTS

A. Program Purpose and Project Development Objective Page

1. Program purpose and program phasing 3 2. Project development objective 15 3. Key performance indicators 16

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 16 2. Main sector issues and Government strategy 17 3. Sector issues to be addressed by the project and strategic choices 21 4. Program description and performance triggers for subsequent loans 25

C. Program and Project Description Summary

1. Project components 26 2. Key policy and institutional reforms supported by the project 27 3. Benefits and target population 27 4. Institutional and implementation arrangements 28

D. Project Rationale

1. Project alternatives considered and reasons for rejection 30 2. Major related projects financed by the Bank and/or other development agencies 32 3. Lessons learned and reflected in the project design 34 4. Indications of recipient commitment and ownership 34 5. Value added of Bank support in this project 35

E. Summary Project Analysis

1. Economic 36 2. Financial 37 3. Technical 38 4. Institutional 39 5. Environmental 41 6. Social 43 7. Safeguard Policies 47 F. Sustainability and Risks

1. Sustainability 48 2. Critical risks 48 3. Possible controversial aspects 49

G. Main Grant Conditions

1. Effectiveness Condition 49 2. Other 50

H. Readiness for Implementation 51

I. Compliance with Bank Policies 52

Annexes

Annex 1: Project Design Summary 53 Annex 2: Detailed Project Description 59 Annex 3: Estimated Project Costs 66 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 68 Annex 5: Financial Summary for Revenue-Eaming Project Entities, or Financial Summary 74 Annex 6: (A) Procurement Arrangements 82 (B) Financial Management and Disbursement Arrangements 89 Annex 7: Project Processing Schedule 94 Annex 8: Documents in the Project File 95 Annex 9: Statement of Loans and Credits 97 Annex 10: Country at a Glance 99 Annex 1 1: Transport Sector Background 101 Annex 12: Letter of Sector Policy 107

MAP(S) IBRD 32465 IBRD 32466 ETHIOPIA ROAD SECTOR DEVELOPMENT PHASE IPROJECT Project Appraisal Document Africa Regional Office AFTTR Date: May 19,2003 Team Leader: John D. Riverson Sector Manager/Director: Maryvonne Plessis-Fraissard Sector(s): Roads and highways (90%), Central Country ManagedDirector: Ishac Diwan government administration ( 10%) Project ID: PO44613 Theme(s): Rural services and infrastructure (P), Other Lending Instrument: Adaptable Program Loan (APL) envh"ent and natural r~OurceSmanagement (s), Infrastructure services for private sector development (S) Program Financing Data Estimated APL Indicative Financing Pian Implementation Period Borrower (Bank FY) I I IDA I Others I Total I Commitment Closing I US$ m % US$ m US$ m Date Date 126.80 57.8 92.47 2 19.27 0611712003 0613012009 Government of Ethiopia IDA Grant APL 2 174.20 63.5 99.99 274.19 0513012004 06130120 10 Government of Ethiopia Loanl Credit APL 3 150.26 66.5 75.68 225.94 0513 112006 0613012011 Government of Ethiopia Loan/ Credit APL 4 119.77 75.3 39.39 159.16 0513 112008 0613012013 Government ofEthiopia Loanl I Credit1Credit Total I 571.03 I 307.53 I 878.56 I [ ]Loan [ ] Credit [XI Grant [ ] Guarantee [ ] Other: For LoanslCreditslOthers: Amount (US$m): 126.80

64.44 0.00 64.44 AFRICAN DEVELOPMENT BANK 0.38 0.99 1.37 LOCAL COMMUNITIES 4.02 0.00 4.02 UK: BRITISH DEPARTMENT FOR INTERNATIONAL 1.41 3.62 5.03 DEVELOPMENT (DFID) EUROPEAN ECONOMIC COMMUNITY -WORLD BANK 0.04 0.84 0.88 IRELAND, GOV. OF 0.2 1 4.82 5.03 GERMANY: GERMAN TECHNICAL ASSISTANCE 0.35 0.90 1.25 CORPORATION (GTZ) IDA GRANT FOR DEBT VULNERABLE 13.52 113.28 126.80 JAPAN: MINISTRY OF FINANCE - PHRD GRANTS 0.02 0.66 0.68 NORDIC DEVELOPMENT FUND 0.39 9.38 9.77 I Total: 84.78 134.49 219.27 BorrowerlRecipient: THE GOVERNMENT OF ETHIOPIA Government of the Federal Democratic Republic of Ethiopia Responsible agency: ETHIOPIAN ROADS AUTHORITY Ethiopian Roads Authority Address: P. 0.Box 1770, Addis Ababa, Ethiopia. Contact Person: Ato Tesfamichael Nahusenay, General Manager Tel: 25 1-1-525392 Fax: 25 1-1-5 14866 Email: [email protected] Other Agency(ies): Regional Roads Authorities - Selected as per project proposal Address: C/o P. 0. Box 1770, Addis Ababa, Ethiopia Ministry of Capacity Building Address: P. 0.Box 1082, Addis Ababa, Ethiopia. Contact Person: Ato Wondwossen Kiflu, Director Tel: 251-1-636656 Fax: 251-1-542472 Email:

Ministry of Infrastructure; Address: P. 0.Box 1238, Addis Ababa, Ethiopia. Contact Person: H. E. Ato Haile Assegidie, State Minister Tel: 251-1-539029 Fn: 25 1-1-5 15665 Email: Estimated Disbursements ( Bank FY/US$m):

Project implementation period: Stage 1 for 5 years, Overall program for 10 years Expected effectiveness date: 09/30/2003 Expected closing date: 06/30/2009

-2- A. Program Purpose and Project Development Objective 1. Program purpose and program phasing: General:

1.1 The Transport System (for details see Annex 11). The transport infrastructure in Ethiopia comprises a road network estimated (in 2002) at 33,000 km (of which about 16,000 km are federal roads and 17,000 km regional roads); a 78 1 km railway line from Addis Ababa to Djibouti (about 709 km within Ethiopia); a national merchant marine; and air transport facilities including two international airports, seven major domestic airports, and over 30 other domestic runways and airstrips. Ethiopia is a land-locked country and almost 98 percent of the country’s export and import needs are presently served through the Djibouti port.

Road Transport Infrastructure. Road transport is the dominant mode of transport and it plays a pivotal role in supporting the economic and social development. The roads, in general, carry about 95 percent of the country’s passenger and freight traffic and provide the only form of access to most rural communities. In spite ofthe relative importance ofroad transport, the condition ofthe infrastructure has been generally poor: only about 12 percent of the road network is paved and road density remains one of the lowest in Africa. As a result ofthe investments made under RSDP I,the share of federal roads in good condition has improved from 14 percent in 1995 to 31 percent in 2002. The road density at 30 km per 1000 sq. km in 2002, although better than in 1994 (at 21 km per 1000 sq. km), is still below the average of 50 km per 1000 sq. km for Africa. The access to ports, markets and services is limited. It is estimated that about 75 percent ofthe total area of the country is more than half a day’s walk from all-weather roads. Responsibility for the road network is divided principally between (i)the Ethiopian Roads Authority (ERA), with an executive Board oversight, for federal roads and road sector policy implementation and coordination under the overall guidance ofthe Ministry ofInfrastructure; and (ii) Regional Roads Authorities for the regional roads within their boundaries.

Road Transport Services. The registered vehicle fleet is estimated at about 134,000 (in 2000), representing vehicle ownership of over 2 vehicles per 1000 population, which is low in comparison with other SSA countries and is inadequate for satisfying the overall transport needs of the country. Most of the vehicles imported into the country are used vehicles. Due to old age and long service life of the vehicles, there is a high incidence of breakdowns, relatively low operational availability and high vehicle operation cost. Some studies estimate that only about 70% ofthe fleet are operational at a time. Prior to 1992, motorized transport services were highly regulated both in terms of tariffs and modes of operation, and as a result, the size of the vehicle fleet in the 10 years before 1992 remained largely stagnant. Since 1992, the Government policy to de-regulate services, encourage market competition, and provide tax privileges for mass transport vehicles, has resulted in a significant increase in the fleet. Over the period 1994 to 1999, vehicle-kilometers travelled increased, particularly, for heavy vehicles, which is higher than for small vehicles. This increase in total vehicle travel can be attributed to an improvement in the quality of the road network, increase in vehicle fleet and greater utilization of trucks and buses. At the same time, there have been signs of much more efficient adaptation oftypes of trucks to types of market, for example, along the import-export corridor.

Vehicle ownership is concentrated in Addis Ababa and a few other major urban centers, and the impact of low vehicle supply is felt more in the rural areas. The use ofmotorcycles is also limited with the motorcycle fleet estimated at a total of 1172 vehicles (RTA 1997/98). Government and NGO staff mainly use these vehicles in rural areas. Bicycles and horse-carts are also mainly in use in and around urban areas and on bitumen roads. As a result, traditional modes of transport (including walking, head loading and animal transport) have continued to be of great importance for rural transport, while motor

-3- vehicles remain the predominant mode in Ethiopia for long distance freight and passenger movements. Pack animals, primarily donkeys and to a lesser extent mules, are by far the most predominant and important means oftransport used by rural households. Intermediate means oftransport (IMTs) provide supporting services to the motorized fleet by linking remote rural villages to rural and urban markets, as well as passenger and freight transport within urban areas.

Urban Transport and City Growth. Addis Ababa, with a population of about 3.0 million, is the capital city and the seat ofthe African Union and a number of international organizations. It is the only major city, the next largest urban center being Dire Dawa with a population of only 250,000. The urban transport environment in Addis Ababa is characterized by heavy congestion during peak periods, low vehicle utilization, weak application oftraffic management measures, inadequate facilities for pedestrian and non-motorized transport (NMT) movement and poor road safety arrangements leading to high accidents. Public transport in the city consists ofbus services provided by the publicly owned Anbessa City Bus Enterprise, mini buses operated by the private sector, and conventional taxis. A scoping study ofurban transport issues in Addis Ababa has been carried out by the Urban Mobility Component ofthe Sub-Saharan Africa Transport Policy Program (SSATP) in October 2002. According to the study, the motor vehicle ownership is low at one automobile per 44 persons (compared with 39, and 50 for Dar es Salaam and Nairobi, respectively). The modal split in the mid-90s was also estimated at pedestrian trips (70%), public transport (26%) and cars (4%). Inadequate public transport services have constrained participation of city residents, especially the poor, in economic activities, as well as limited their access to other services (health, education, market, etc). A ring road and associated road improvements are under implementation and these should help cross-city movement. Since 1975, the population and physical size of the city has more than doubled. Addis Ababa is therefore a growing metropolis that needs a holistic approach to the planning and provision of its transport needs.

Railways, Ports and Marine Transport. A single narrow gauge railway line runs over 78 1 km from Addis Ababa to Djibouti. The Governments of Ethiopia and Djibouti are joint owners of the Chemin de Fer Djibouti-Ethiopian railway (CDE). At present, it is estimated that the CDE carries about 700-800,000 passengers and 200-250,000 toneslyear (about 2.6 and 3.75% ofthe total movement, respectively) . The share of CDE has been declining over the past decade principally due to its weak ownership and management structure, lack of commercial orientation and maintenance resources. The CDE Board ofDirectors and the two Governments (joint owners of CDE) have agreed to introduce important institutional changes including the transfer of operation and management ofthe railway to a private sector concessionaire. The reduced access to sea ports as a result of the conflict with Eritrea has led to the predominant use ofthe Djibouti port, and this has prompted Government to explore the use of other potential, but less used ports (including Berbera, Port Sudan and Mombasa). However, economic feasibility for the use of these ports needs to be firmly established with due consideration to the sources of supply and demand for import-export goods, potential high costs of transporting over long distances, associated transport regulations and security requirements.

A national merchant marine, the Ethiopian Shipping Lines (ESL) with twelve ships and vessels of gross and net registered tonnage of over 100,000 and 50,000, respectively, operate along routes to western Europe, the middle and the far east.

Civil Aviation. Civil aviation plays a more significant role in the transport sector of Ethiopia than in most developing countries because ofthe limited road infrastructure, rugged terrain and relatively long distances between major settlements and long joumey times). The civil aviation sector has an extensive infrastructure with two international airports (Bole airport at Addis Ababa, and Dire Dawa), seven major domestic airports, and over 30 other domestic airports and airstrips. The national airlines (Ethiopian Airlines), with a commercial fleet ofabout 25 carriers, provides regular scheduled domestic air services

-4- to 32 points, with the remainder being served by charter flights operated by private camers. There are five private national operators licensed, two ofwhich have already started operations. Internationally, Ethiopian Airlines not only provides a service to/from Ethiopia, but has also developed a highly successful hub and spoke operation connecting 49 international destinations in Asia, Europe and the USA, and Eastern Africa with Southern and West Africa: about 60 - 65 percent of international passengers, handled at Bole airport are in transit for other destinations. From its international operations, Ethiopian Airlines generates significant foreign exchange earnings for the economy

1.2 The Government Program for Road Sector Development (with Donor Assistance). Recognizing the relative importance of the road transport in supporting social and economic growth and meeting poverty alleviation objectives, GOE has given priority to improving the quality and quantity of the road infrastructure. This priority is reflected in Government’s Sustainable Development and Poverty Reduction Program (SDPRP) approved for implementation in 2002. To address the constraints in the road sector related to restricted road network coverage and low standards, GOE formulated a 10-year Road Sector Development Program (RSDP, 1997-2007). The first five-year phase ofthe program (RSDP I),1997-2002 to the planned total of $2757 million, was officially launched in September 1997, and ended in June 2002. Under RSDP I,Government and donor-funded projects have been implemented to rehabilitate the most essential core network. The World Bank, European Commission, African Development Bank, OPEC Fund, Bank of Arab for Economic Development in Africa, Nordic Development Fund, and the Governments of Japan, Germany, Italy, Ireland and U.K., have provided external financing to the Program to supplement the contribution from GOE. Of the planned expenditure under RSDP I,overall commitments by the mid-term review of the project was US$1607.4 million in February 2001. In the event, actual commitments with some activities extending beyond the period ofthe RSDP I,was US$1,447 million, of which US$ 817.9 million (57%) was disbursed.

-5- Table 1 -RSDP 1 (July 97 - June 2002) Components by Financiers Commitments and Disbursements (In Million USD)

Construction & Upgrading of Major

Total Commitments Source: Road Sector Development Program 2 (2002-2007), ERA (March 2003) ** Maintenance program includes federal, regional and city roads Note: I USD = 0.68 GBP I USD = 1.07 Euro I USD = 2.1 DM I USD = 8.70 Birr 1 USD = 118 Yen ** includes contribution from Road Users

Note: Others include: Germany, OPEC, BADEA, DffD, NDF, Japan and local communities.

1.3 IDA Support Program to RSDP Phase 1. IDA’Ssupport to RSDP was envisaged to be provided in successive but overlapping road sector projects. As a start, the IDA Board approved the Road Sector Development Program Support Project (RSDPSP) on January 15, 1998. The Credit (Cr. 3032-ET) for an amount of SDR 224 million (USS309.2 million equivalent) was signed between the Government and IDA on January 25, 1998 together with a Project Agreement signed between IDA and the Ethiopian Roads Authority, for implementing the Project. The RSDPSP was the first of a phased participation in a Sector Investment Program (SIP) designed to implement the 10-Year RSDP. The Credit proceeds for RSDPSP mainly supported: (i)rehabilitation and upgrading of four major roads (1380 km); (ii)capacity building support to ERA for monitoring and evaluating overall performance of RSDP, as well as for financial management, environmental and social impact monitoring.

The RSDPSP was complemented by other ongoing IDA-financed projects - Road Rehabilitation Project (RRP- Cr. 2438-ET) and the Roads Component ofthe Emergency Reconstruction Program (Em-Cr. 3438-ET), as well as special policy and strategy development studies financed with Japanese PHRD

-6- Grant administered by the Bank, and funds from European Commission (EC), Nordic Development Fund, GTZ, AfDB and UK, all of which have been implemented under RSDP I.The total IDA support amounted to US$435 million.

1.4 The RSDP Progress To-date.

A week-long review of RSDP Iprogress was held during the mid-term review in February 2001, which enabled the Government and the participating donors to take stock ofthe program-to-date, assimilate lessons learned and redirect efforts to a more efficient implementation ofthe program. A similar end program review was undertaken in July 2002 and March 2003. Key points noted were the overall priority given to RSDP since 1997, enhanced familiarization of ERA staff to donors’ policies and different procurement guidelines and streamlined procedures and processes, as well as the need to strengthen ERA to effectively address the social aspects of transport. The achievements made since the beginning ofthe program are:

Impact on Accessibility. The total classified road network has increased by about 40 percent over the last five years; much ofthe increase (107 percent) has been in the regional roads. The road density has increased from 21 km per 1000 sq. km in 1994 to 30 km per 1000 sq. km in 2002. As a result, the 80 percent of farms that were supposed to be more than half a day walk from an all-weather road in 1996, have now been reduced to 75 percent.

Impact on Quality. The efforts ofRSDP Iin improving the condition ofthe road network have not fully met expectations. This is mainly because of an unrealistic original schedule coupled with the slow initial implementation ofcivil works. Despite this, the improved maintenance efforts and the completion of the rehabilitation of the main road sections have improved the condition of the federal road network from 18 percent in “good” condition in 1995 to 30 percent in 2002.

Table 2 -RSDP I (July 97-June 2002) Targets and Achievements

II

Source: Road Sector Development Program, Phase 11, ERA, March, 2003

Impact on TrafJic Flow. Since 1992, a comprehensive traffic analysis has been made on the Ethiopian road network including most ofthe RSDP roads in order to see the overall trend oftraffic movement. An assessment of traffic along main roads has revealed rapid increase in volume; traffic growth along most roads has increased well above forecast levels with the growth rates as high as 12 percent per annum.

-7- Impact on Strengthening ERA and Regional Road Authorities’ Capacity. One ofthe goals of RSDP Iwas to develop institutional capacity ofthe road sector at federal and regional levels. This goal was pursued from the start with the strengthening of the administration and management ofthe road sector so that Federal and Regional Road Organizations would have the institutional capacity to ensure that the current road asset and future investments in the roads are protected. Key areas ofreform included: (a) improvements in contract administration, financial management, maintenance management systems and planning; (b) establishment ofa road functional classification and pavement management system and a road inspectorate unit; (c) a gradual move away in ERA from own force “project work” (rehabilitation and periodic maintenance) to concentrate on the routine and recurrent works; periodic maintenance work is being contracted out, freeing up District Maintenance Organizations (DMOs) to focus on routine and recurrent works; (d) improvements in ERA’Sprocurement capacity as evidenced in capacity assessment carried out as part of RSDP Iimplementation; (e) a number ofbackground studies have been conducted, including those on: the restructuring of ERA and Regional Roads Authorities (RRAs), Village Level Travel and Transport, Pavement Management and Road Functional Classification System, axle load control, transport regulation, road safety, road sector performance monitoring system, review of financial management and accounting system, contract document, standard specification, design manual and CADD system, etc.; (0 establishment of a Construction Sector Capacity Building Program in the newly established Ministry of Capacity Building to promote and enhance the capacity of DCIs.

Regional Road Authorities (RRAs) have been restructured, changing from departments in the Regional Bureaus ofWorks and Urban Department, to autonomous Regional Road Authorities established by Regional Governments’ proclamations. An organizational structure of the Amhara Regional Rural Roads Authority has been used as a model for the establishment of RRAs in four regions (Tigray, Amhara, Oromia and Southern Regions). The other four regions’ organizational structures were developed based on the findings of a study of the Rural Roads Department of the Beneshangul and Gumuz Region. The implementation ofthe reform study recommendations in terms of improved incentives and placement of staff is at different stages. A number of initiatives are under way by different donors to develop the capacity of the RRAs, especially with regards to planning and contract administration.

Impact on Road Network Integration. ERA has carried out a study which has led to the development of a coherent network based approach to federal road planning and management in the country, based on three objective criteria: (a) need to be responsive to food security and poverty alleviation objectives; (b) need to improve internal connectivity within the country; and (c) need to strengthen key export-import corridors. The Regions are also in the process ofpreparing road network master plans which together with the federal plan will be integrated into a national road network plan.

Impact on Sustainability of Financingfor Road Maintenance. The Ethiopian Road Fund (RF) was established in 1997 with the objective to: (a) commercialize road management; (b) increase efficiency of resource allocation and use; and (c) finance road maintenance by designated road user charges. Over the period 1997 to 2002, fuel levy (including dedicated sales tax and municipality tax) has increased from about US Cents 2.0 to 4.5; as a result, during this period, annual RF collections increased from ETB 160 million (US$23 million) to ETB 260 million (US32 million). Total annual expenditure on road maintenance has increased from about ETB 60 million in 1994 (prior to setting up the RF) to ETB 212 million in 2002. The RF is able to address more than 80 percent ofthe federal road network maintenance needs; however, the maintenance of regional and urban road network falls far short of the planned target (only about 25-30 percent). The constraint to maintaining the regional road network is not so much a lack of financial resources but rather a lack of capacity in the construction industry and willingness of experienced engineers to work in distant regions. The Road Fund Administration (RFA) has improved its effectiveness in a number of areas in the past few years, with a focus on: (i)establishing efficient

-8- commercial operations. Performance contract agreements have been developed between the RFA and ERA, which has resulted in improved accountability and efficiency in resource use. No longer is payment made on a cash flow basis but on submission ofpayment certificates (based on agreed unit rates), approved by a supervisor; and (ii)maintaining effective public information systems and transparency through independent financial audits and dissemination of information.

98/99 99/00 00/01 01102 ERA federal roads 15,353 13,792 14,936 12,562 Regional Roads 3,105 3,650 4,292 4,417 Municipality Roads 152 199 198 160

Impact on Social Assessment and Environmental Impact Monitoring. One of the key environmental and social policy measures proposed in RSDP Iwas to mitigate adverse environmental and social impacts (including HIV/AIDS mitigation) in the various phases ofthe project cycle. To that end, an Environmental Monitoring Branch (EMB) was established under the Planning and Programming Division. The work of the EMB has gone beyond strictly monitoring the mitigation of environmental impacts in IDA financed projects, it has also assisted other donors. Progressively, the EMB has been engaged in: reviewing EA reports prepared by design and EA consultants; monitoring all IDA sub-project operations and providing support to other donor financed projects in the mitigation of adverse environmental and social impacts. Also, the EMB has been responsible for the production ofthe Environmental Procedures Manual and the ResettlemenVRehabiIitation Policy Framework. Furthermore, the EMB prepared an HIV/AIDS strategy framework for the road sector, which is under implementation to include not only ERA personnel but also their spouses and/or suppliers of sexual services. The strategic framework is being used in ERA'Sproject preparation and will be instrumental in the implementation ofRSDP 11, with regards to environmental and social impact analysis and mitigation of adverse impacts including HIV/AIDS Impacts.

Impact on Developing a Rural Road and Transport Policy and Strategy. The GOE and IDA, as part of the RSDP Iand with the assistance of the Rural Travel and Transport Program (RTTP) of the Sub-Saharan Africa Transport Policy Program (SSATP) and participation of other donors and stakeholders, collaborated to develop a Rural Roads and Transport Policy and Strategy (RRTPS). The strategy addressed issues related to travel and transport needs of the rural communities (accounting for more than 80 % ofthe country's population), which have mostly no access to motorized transport. The RRTPS was accepted by GOE, and a 10-year indicative program referred to as the Ethiopian Rural Travel and Transport Program (ERTTP) prepared. The start up phase ofthis component was presented as part of Government's program document for RSDP II. Draft final Source Book and project proposals for eight pilot weredas have since been completed with Ireland Aid financing. The proposal was appraised jointly by Ireland Aid and DFID, and both have agreed to provide funding for pilot implementation. During the March 2003 appraisal, IDA'Sadditional support was also discussed and agreed with the Government.

Donor Harmonization. Since the launch of RSDP in 1997, donor coordination has been implemented mainly at the leadership of the ERA. ERA has worked with the Bank and donor partners to ensure harmonization rather than duplication in a number of areas, including: (i)the development of its Roads Sector Strategy and in financing various sector policy studies, (ii)institutional support to ERA and RRAs for capacity building; (iii)uniform progress reporting for contracts under execution; (iv) ERTTP studies

-9- and pilot program review and implementation; and (v) Environmental and social impact assessment and monitoring using the ERA Environmental Procedures Manual and resettlement Framework Paper, and HIV-AIDS strategy as basic guidelines.

1.5 The Government’s Proposed Road Sector Development Program Phase 2.

With the closing ofRSDP Ion June 30,2002, the Government has prepared RSDP I1 to be implemented over 5 years (2002-2007) with the objective to further develop management and technical capacity to manage the road network. If RSDP Iphase could be categorized as a “network rehabilitation” phase, the RSDP I1phase can be categorized as a “development” phase, with the focus on scaling up the impact of activities under RSDP I.Under this “development” phase, the road sector is seen as needing to increase its contribution to the achievement ofthe social and poverty reduction objectives ofthe SDPRP, thereby, contributing to the realization of the Millennium Development Goals (MDGs). In this regard, rehabilitation ofthe existing limited paved trunk road network and provision of funds for minimum maintenance alone will not be sufficient. Therefore, under the RSDP 11, the continuing investments in follow-on projects are required to ensure that agricultural production does not suffer from inaccessibility and high transportation costs, and include:

0 rehabilitation, upgrading and construction of federal trunk and link roads to improve connectivity between major centers, reduce travel times and costs; 0 heavy road maintenance on federal roads to help preserve existing investment 0 construction ofregional and community roads to, in particular, reduce the average distances of rural settlements to all weather roads to improve their access to markets, and social and economic facilities.

The physical and performance targets expected to result from planned improvements to the road network are given in Tables 4 and 5. In addition, with a view to further strengthen the management and financing of the roads sector, Government’s focus is on:

creating a more commerciallv oriented ERA, through: (i)defining business objectives ofthe new organization; (ii)identifying ERA activities consistent with various stages ofthe devolution process; (iii)identifying managerial functions to be delegated; (iv) upgrading systems and procedures, including contract management, planning, procurement and administration; (v) improving head office support services to the District Maintenance Organizations (DMOs); separating client (ERA) and contractor (DMOs) roles at the ERA operational district level; by addressing the management and administration ofmaintenance activities, i.e., the “client” side ofthe new ERA district set up resulting from client/contractor split, with a focus on: (i)identifying principles for effective planning; (ii)the management of equipment; (iii)performance reporting and implementation; (iv) providing a basis for improved management performance at all levels; and (v) developing a competitive environment for undertaking maintenance work; and (vi) addressing the creation ofcommercially oriented units, delivering cost effective maintenance services, i.e., the “contractor” side ofthe client/ contractor split, with a focus to: (a) reflecting true equipment costs in carrying out work activities; (b) developing ability of the district contractor to procure materials and spare parts; (c) management ofcosts; (d) identifying relationship between organizational performance and individual performance; (e) determining performance targets; and (0 developing managerial capacity to run an efficient business with accountability for output performance; 0 developing the capacitv of domestic construction industry and increasing their participation in the program. The focus is on introducing the private sector into routine and recurrent maintenance activities, while at the same time encouraging competition between the private sector and the DMOs

-10- for periodic maintenance work. It is also proposed to increase the participation of the larger domestic contractors in major rehabilitation works, previously dominated by international contractors, so as to continue the RSDP objectives ofrestoring and expanding Ethiopia's road network to maintain its contribution to the sustainability of the economic development program. 0 strengthening social and environmental management capacity ofthe executing agencies, and through collaborating with other sector agencies and local authorities be able to: (a) prepare RAPSfor all road projects; (b) include and enforce social and environmental safeguard measures in all contracts; (c) develop awareness and protection measures for HIV/AIDS; (d) improve efficiency ofRight-of-way management through public consultation, merging ROW with contract implementation, and assigning ROW agents and pay masters at project sites.

No. I Components I Km 1 !Rehabilitation of Trunk Roads I 1,014

Source: Road Sector Development Program, Phase 11, ERA, March, 2003

Indicators 2002 2007 Proportion of asphalt roads in good condition 35% 57% ~~_I1___^_I-" - _1 ,- ___I __I -_- -- - Proportion of gravel roads in good condition 30% 42% _--lr ---- 1- -1

IAverage distance to all weather roads I 17kml 14kml Source: Road Sector Development Program, Phase 11, ERA, March, 2003

1.6 Cost and Financing of the Program: The Program (RSDP II)is estimated at a total cost of Birr 12.9 billion (US $ 1.48 billion). GOE proposes to finance the program with the support of IDA, EC, AfDB, NDF, BADEA, OPEC Fund, Japan, Germany, Italy, Ireland, Sweden, U.K., several NGOs, Road Fund, and from its own budgetary resources. Other donors are expected to join in providing the financial and technical support for this multifaceted program. Ofthe total cost, 74 percent is already funded from the GOE, communities and multilateral and bilateral donors, while 14 percent is in the pipeline with 12 percent still unfunded. The proposed financing plan for RSDP I1is presented below.

- 11 - Table: 6 Government Proposed Draft Financine Plan for RSDP 2

GOE * IDA

Rehab. & Upgrading of Trunk Roads 154.7 On-going commitments 145.3 50.3 Expected pipeline 20.6 205.0 "296 Ylii Sub-total 165.9 118.5 83.4 1 626.1 Zonst. & Upgrading of Major Link Roads 239.8 On-going commitments 99.7 37.7 Expected pipeline 24.2 72.7 Sub-total 123.9 110.4 24.3 18.0 iegional Roads Program 11.5 On-going commitments 11.5 57.5 Expected pipeline 57.5 Sub-total 69.0 I 69.0 flaintenance Program (federal and regional) On-going commitments 189.3 ** 40.9 230.2 Expected pipeline 11.7 0.0 11.7 1 241.9 Sub-total 201 .o 40.9 I ~ Jrban Roads On-going commitments 14.1 14.1 Expected pipeline 0.0 0.0 14.1 LRTTP 10.0 On-going commitments 10.5 20.8 0.0 0.3 Expected pipeline 101.1 10.0 0.3 101.1 Sub-total 111.6 121.9 'olicy & Capacity Building On-going commitments 1.7 9.9 21.9 Expected piueline 3.4 2 9.8 15.0 Sub-total . 8.2 5.1 2.5 19.7 36.9 bridge Works and Equipment 4 'i; On-going commitments 8.4 18.1 26.5 Expected pipeline 0.0 0.0 0.0 Sub-total 8.4 18.1 26.5 'reparatory Studies (feasibility) )n-going commitments 0.5 2.2 Expected pipeline 0.0 ;:; Sub-total 0.5 1 1.7 'otal On-going commitments 476.8 263.1 118.7 Expected pipeline 114.2 126.4 26.6 ?b3 TOTAL 591.0 389.5 145.3 I 75.3 * GOE contribution includes revenues from the Road Fund ** IDA Support Under Emergency Reconstruction Program (ERP -Roads Component, Cr. 3438) *** Others includes the NDF, DfID, Japan, Germany, Italy, etc.

- 12- 1.7 The IDA-Supported Program

The IDA Support to RSDP II is on the basis of the Adaptable Program Lending (APL) instrument, and the phasing has been developed for implementation in four stages (APL 1-APL4). From the commencement ofAPL 1, subsequent stages will overlap with the previous one over an overall program implementation period of 10 years (2003-2013). The proposed components and stages are listed below. It is understood that the final list of roads to be considered under the APL3 & 4 (See Annex 2 Tables), including additional potential priority roads, will be subject to further review and prioritization during project appraisal for each ofthose Stages.

Stage One (APL1)

The upgrading and rehabilitation of federal trunk and link roads. This comprises rehabilitation of (a) Nazareth-Assela section (79 km) of the Nazareth-Dodola/ Shashemane-Goba federal trunk road to asphalt overlay surface standard; and Upgrading from gravel surface of (b) Woreta-Gob Gob section (98.9 km) of the Woreta-Woldiya federal link road to double bituminous surface treated standard; (c) Adigrat-Adwa section (108 km) ofthe Adigrat-Shire federal link road to asphalt concrete surface; and (d) Nekempt- Mekenajo section (127 km) ofthe Nekempt-Mekenajo-Assosa federal trunk road to asphalt concrete surface. The construction of Federal Link Road. This covers the Dera-Magna section (1 19.4 km) ofthe Dera-Mechara federal link road to a high standard gravel road. Strengthening the capacity of the DCI through the execution of the upgrading ofthe Woreta-GobGob federal link road. Construction Supervision. This comprises consultancy services for the construction supervision ofthe above road contracts, and the implementation ofthe associated environmental, safety, and resettlement plans and adverse social impact mitigation. Rural Travel and Transport Program. This comprises the support to be provided to the ERTTP for: (a) the preparation of about 100 Weredas Travel and Transport Plans (WTTPs), as part ofWereda Integrated Development Plans (WIDPs), for implementation at a later stage, (b) Development ofInformation, Education and Communication Strategy, and (c) Capacity building for ERTTP structures at the National, Regional and Wereda levels. The preparation ofthe WTTPs would involve consultations with the local communities to ascertain their views regarding their access and mobility needs. The plans would also include comprehensive set of specific demand-led multi-sectoral interventions to improve access through the better siting and increased provision of social and economic infrastructure and services. TA Support to ERA in Project Planning and Implementation, and Strengthening of Associated Social Actions. The TA to be provided to ERA would contribute to improving project planning and implementation and to support the continuing efforts in the road sector to mitigate the spread of HIV/AIDS. The TA focus in terms ofproject planning and implementation is to achieve (a) an extended social inclusion of local communities and local governments in various project phases to better address road constructiodtransport related poverty issues, (b) a continuous monitoring ofpoverty impact of road construction and transport operations through the establishment of transport-poverty observatories at local community and household levels, (c) the further enhancement of ERA'Scapacity in the areas of Contract Administration, review and auuroval of Engineering Designs, Environmental and Social Imuact monitoring and

- 13- Right-of-way (ROW) Management, so as to avoid Claims and facilitate dispute resolution. (vii) Road Financing Study and Technical Audits. Support to the Office ofthe Road Fund Administration (RFA) with (i)the aim of establishing technical and financial auditing systems and procedures, and to support the auditing of the operations financed by the Road Fund including outsourcing such services, and (ii)carrying out a road financing study. (viii) Preparatory Activities and Urban Studies. This comprises consultancy services to be provided for preparation of follow up activities, to be considered at later stages, including feasibility, and EIA studies, as well as, design andor design review for road projects to be included in APL Stages III. This component will also include providing support to the Addis Ababa City Government in the preparation of an urban transport strategy and policy document, with a long term vision to address access and mobility constraints, and development of a pilot project;

Stage Two (APL2)

The upgrading and rehabilitation of: (a) Assela-Dodola-Goba and Shashemane - Dodola section (3 16 km) of the Nazareth-Dodola/ Shashamane-Goba federal trunk road (b) Gob Gob-Woldiya section (194 km) ofthe Woreta-Woldiya federal link road; and (c) Shire-AdiAbun section (83 km) of the Adigrat-Shire federal link road. The construction of Magna-Mechra section (1 19.7 km) ofthe Dera-Mechara federal link road to a high standard gravel road. The upgrading from existing trail and construction ofnew sections ofthe Assosa-Guba regional road to gravel road surface standard (135 km) Consultancy services for the construction supervision of the above road contracts, and the implementation of the associated environmental, safety, and resettlement plans and adverse social impact mitigation. The continued support to the ERTTP with the preparation of additional WTTPs, and their physical implementation. The continued support to ERA to enhance its capacity to plan, procure and administer civil construction and service contract, and manage contract claims and disputes, and training ofERA personnel in the areas of planning and programming, environment management, and contract administration and management. (viii) Preparation of follow up operations in Stages 3, including feasibility ofprivate sector participation in financing and implementation of road programs nationally as well as in Addis Ababa.

Stage Three (APL3)

(i) Construction, upgrading and rehabilitation, the potential candidates ofroads are listed under Annex 2, of key links for improving access to regional and rural roads including specific interventions for community development and social support arising out of the corridor studies financed with PHRD grants; (ii) Continued implementation of private construction industry development action plan including private financing ofroads if feasible, and long-term area-wide road maintenance performance contracts; (iii) Implementation of community development and market and rural access programs along additional road corridors;

- 14- (iv) Expanded implementation of the ERTTP. (v) Possible support of the technical advisory services and investments associated with the concessioning of railway services (of CDE) as identified from the EC-financed services; and (vi) Implementation of action plan of commercialization of ERA maintenance districts developed in stage 1.

Stage Four (APL4)

(i) Construction, upgrading and rehabilitation ofkey link roads and regional rural roads, the potential candidates of roads are listed under Annex 2, (ii) implementation of additional ERTTP activities; and (iii) policy and institutional support at regional and wereda levels to consolidate the reform program.

2. Project development objective: (see Annex 1) 2.1 The Program Development Objectives.

The primary objective ofthe Road Program is to restore and expand Ethiopia’s road network to reduce poverty and increase employment through promoting growth and access in a socially and environmentally sustainable manner. The Program (APL) would support GOE’s Agriculture-Development Led Industrialization (ADLI) and Sustainable Development and Poverty Reduction Program (SDPRP) with the objective to realizing the MDGs and contributing to govemment’s decentralization efforts. The main focus ofthe program is on: (a) construction and rehabilitation ofkey links to remove constraints to growth and access and expedite exploitation ofthe vast natural resources, integrate the country, provide access to marginal and drought prone areas and reduce transportation cost; (b) strengthening the road management and financing reform program to ensure sustainability; (c) developing the capacity and increasing the participation of domestic consultants and contractors in the implementation ofroad contracts; and (d) developing a network based approach and addressing social, environmental and development issues in a comprehensive manner.

2.2 Project Development Objectives (the Project APL 1)

The development objective of the RSDP I1Stage 1 (APL1) (the Project) is to:

(a) construct, rehabilitate, upgrade and preserve the priority federal road network (b) strengthen ERA reform program with a focus on: (i)creating a more commercially oriented ERA through upgrading systems and procedures (contract management, planning, procurement and administration); (ii)creating commercially oriented District Maintenance Organizations (DMOs) delivering cost effective maintenance services; (iii)supporting rational provision of maintenance equipment; (iv) strengthening Regional Road Organizations (RROs); (v) developing a coherent planning and programming approach based on network stabilization program, in which federal and regional agencies formulate common methodologies of allocation ofavailable resources (c) improve resource mobilization, allocation and use for road maintenance and strengthen the Road Fund Administration (d) develop capacity in program implementation with a specific focus on: (i)enhancing the capacity in road construction and maintenance by creating an enabling environment for participation of domestic private contractors and exploring feasibility and options for private sector participation (PSP); (ii) reducing adverse effects ofroad works on road safety and the environment by incorporating mitigating

- 15- measures during design and implementation stages; (iii)promoting use of labor-intensive technology and ensuring community participation in building and maintaining regional and community roads; (iv) planning for the effective provision of community-based integrated village travel and transport infrastructure and services; and (v) conducting monitoring and evaluation studies of the impact of investments in the sector on poverty alleviation and environmental upgrading.

3. Key performance indicators: (see Annex 1) The physical target is to have an improved road condition and also to install regular maintenance on much ofthe Ethiopian road network. In addition, network density (Km per 1000 sq. Km) is expected to increase. Through this process the management ofthe sector will be strengthened, and an efficient and self-sustaining construction industry that is capable of meeting the diverse needs ofthe sector will be developed. Key output indicators are:

0 Increase proportion of asphalt roads in good condition from 35% in 2002 to 57% in 2007; of gravel roads from 30% to 42%; and ofrural roads from 28% to 40%. 0 Increase road density from 30 km/lOOO sq. km in 2002 to 35 km/lOOO sq. km. in 2007. 0 Decrease average distance to all weather roads from 17 km in 2002 to 14 km in 2007 0 ratio ofmaintenance expenditure (routine and periodic) to total requirements ofthe maintainable network increased from about 60% in 2002 to more than 90% in 2007 0 Number ofpeople employed in road works in project areas (disaggregated by gender). 0 Share of administrative costs to total expenditures/.

In addition to the output indicators identified above, a number of outcome indicators associated with the MDGs, and road sector specific outputs will be measured by setting up social observatories along the corridor development area with a focus on: improved earning capacity ofthe residents along the impact area, improved access to health facilities and education centers, improved capacity in preparation and review of social and environment reports and promoting gender equity, especially in employment. These indicators are presented as Attachment 1 ofAnnex 1. In addition, trigger indicators for moving from stage to stage in the APL are presented in Section B 4.2. of this document.

B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: 25591-ET Date of latest CAS discussion: February 4,2003 The program which was started with IDA support under Cr. 3032-ET is consistent with the Bank group Country Assistance Strategy 17009 dated August 19, 1997 and the Interim Country Assistance Strategy No. 21189 dated November 9,2000. A primary objective of IDA’S assistance strategy to Ethiopia is to reduce poverty, through a medium-term strategy focused on private investment-led growth and export diversification. Lowering transport costs, and improving reliability of access to infrastructure, is assumed in the CAS as a key element to facilitate business development, especially domestic contractors and consultants, and to support poverty alleviation. These still remain valid.

The Country Assistance Strategy (CAS), March 24,2003, supports Ethiopia’s Sustainable Development and Poverty Reduction Program - and focuses on improving human development outcomes, enhancing pro-poor growth, and reducing vulnerability. The planned strategic assistance comprises a mixture of lending, and analytical instruments designed to meet the needs of the evolving institutional structures of the country, and is focused on supporting capacity building within the public, and private sector, supporting policy reforms and investment financing, providing crucial capital investment funds for infrastructure development, while addressing fundamental policy issues through the analytical agenda.

- 16- The FY03-05 CAS presents three lending scenarios, though currently on the base case, which includes namely grants owing to its status ofdebt-vulnerable low-income country. The marked deterioration of Ethiopia’s debt sustainability, largely due to exogenous shocks, presently precludes extension to the high case lending, until a decision can be taken at the Heavily IndebtedPoor Countries (HIPC) Completion Point. Thus, this priority investment in the road sector in FY03 is on a grant basis, which also set the limit for the APLl project scope.

The CAS also seeks to build a free market economic system to enable the economy to develop rapidly, reduce food aid dependence and step up the pact towards achieving the Millennium Development Goals (MDGs). The project will support the pillars of Ethiopia’s SDPRP by: (a) enhancing pro-poor growth by supporting increased rural productivity with the provision of effective road infrastructure services in transport, stressing urban growth; and building labor augmenting sectors ofthe economy; (b) improving governance by supporting the reform ofthe public sector systems and strengthening decentralization to shift decision making closer to the grass roots; and (c) reducing vulnerability by contributing to improved access between rural centers and markets and urban centers; and enhancing programs to prevent the spread of HIV/AIDS. By design, the project will also provide increased opportunities for domestic contractor and private consultants participation in the program implementation.

2. Main sector issues and Government strategy: 2.1 Sector Issues

The SDPRP and RSDPSP have identified a number of key issues:

Quality and Quantity of the Road Network. The road network is limited in both quality and coverage. More than half ofthe road network in the country needs to be rehabilitated or reconstructed, and most of the remaining network is either in, or rapidly falling into, a state in which routine and periodic maintenance may soon be insufficient. Much ofthe country does not have access to all-weather roads. Estimates show that only 30 percent of Ethiopia’s area is served by the modem road transport system. Moreover, because the existing pattern of roads radiates from the capital, Addis Ababa, to major towns, adjacent regions often lack links between them. Such inter-regional roads, if they existed, would facilitate the growth oftrade between regions and promote national unity. Project planning has been limited to the application of selection criteria to individual roads or groups ofroads; there has been inadequate network planning and programming procedures.

Institutional Reform and Commercialization of ERA operation. ERA’Scapacity was enhanced through TA support and training during implementation ofthe RSDP Iin the areas ofplanning, procurement and network management. However, with intensification ofthe work program as proposed under RSDP 11, much more needs to be done to strengthen the critical areas ofreview and approval ofroad designs, internal regulations, project monitoring, evaluation and technical reporting. Key issues identified include: (a) the Contract Administration Division, set up under RSDP I,is understaffed and lacks efficient organizational structure to manage the expected increase in the roads program; (b) limited experience in dealing with complex technical, legal and commercial issues in international procurement and administration of services and works contracts; and (c) ERA is a large organization responsible for constructing and maintaining the strategic federal road network. It has over 10,000 employees, ofwhich about 7,000 are in DMOs. With such a large and geographically spread organization, the efficiency and effectiveness in delivery of services is compromised.

Regional Road Authorities (RRAs). The responsibility for construction and maintenance ofregional road network has been handed over from the ERA to RRAs since February 1993. However, the equipment

-17- and workshop facilities handed over to RRAswere not sufficient to carry out road maintenance/ construction. In addition, the formation of efficient RRAs requires a well-trained manpower. During implementation ofthe RSDP I,a number of initiatives were undertaken by different donors to develop the capacity ofthe RRAs especially with regard to planning and contract administration. There is a need to further strengthen the role of RRAs to more effectively plan, program, mobilize and administer finance and other resources for the construction, rehabilitation and maintenance ofregional roads. They also need to be strengthened in their ability to discharge their responsibilities with regard to rural transport.

Adequacy of road maintenance andfinancing arrangements. The Road Fund (RF) has contributed to providing resources for road maintenance. Total RF allocations (including supplementary budget) over the past six years (July 1997 to December 2002) were ETB 1.3 billion, of which ETB 887 million have been disbursed to road agencies. The direct Government contribution for road maintenance has gradually declined from ETB 68 million in FY98 to ETB 10.7 million in FYOO. The contributions to the Road Fund have increased gradually over the past three years with an increase in dedicated fuel levy and sales and municipality tax. During FYOl , total collections from fuel levy have increased (as observed in Section A 1.4) as a result of an increase in dedicated sales tax for petrol from 0.249 1 Birr (prior to September 2000) to 0.3606 and for diesel from 0.1662 Birr to 0.1917. The RFA now appears to be in charge of its mandate to address routine maintenance financing needs of the road network and improving efficiency in the use ofresources.

However, while routine maintenance needs of the federal road network are being met, the requirements ofregional road network as well as periodic maintenance needs have not been addressed adequately. The economic justification of applying extensive low cost regravelling under routine maintenance has also not been clearly established. In view ofthe huge backlog, and efforts by the executing agencies to keep the network in a passable condition, a planned and closely monitored maintenance regime needs to be applied. Absence oflinkages between the pavement management system, the maintenance management system and the road condition surveys has made it difficult to establish the overall maintenance needs of the current network. Ofcritical importance is the ability to meet the requirements to maintain roads in a passable condition especially with further improvement and possible expansion of the network during RSDP 11. The needs could rise to a substantial cost to the economy and make the current dedicated maintenance resources insufficient in the long run. Hence, mechanisms to meet the shortfalls would need to be identified to ensure sustainability of road maintenance, including a need to diversify the sources of funding for the Road Fund. In this regard, the Road Fund Administration is expected to finalize arrangements and carry out maintenance performance audits to ensure prompt and appropriate maintenance and make the best use ofmaintenance resources within the targets set under the ERA Maintenance Action Plan (2002-2007).

Domestic Construction Industry (DCI). One of the stated objectives ofthe 1997 Government Letter of Sector Policy was to strengthen the private contracting industry, including enhancing the capacity of local contractors and consultants. The objective was to gradually increase the share of contractor executed works from 11 percent in 1998/99 to 41 percent in 2001. Achievements to-date fall short of the targets agreed in the Letter, mainly due to lack of capacity in the local industry as well as access to finance. The DCIin Ethiopia is characterized by an inadequate capital base, old, limited and poorly managed equipment fleets; and deficiencies in technical, managerial, financial, and entrepreneurial skills, as a result of previous policies that were not favorable to its development. The majority of the firms engaged in road works, prior to the 1980, were either nationalized or forced to withdraw from the road sector and this has resulted in the lack of capability and competitiveness in the sector. Some reform measures were embraced under RSDP Ito change this scenario and build local capacity and increase involvement in the various aspects ofthe program. ERA and RRAs have also contracted out works to the DCI along with changing some conditions of contract in Govemment financed projects, to create an

- 18- enabling environment. The immediate requirement is to strengthen the capacity of DCIand increase their participation in road work contracts.

Equipment Constraints: The shortage of equipment and the inadequacy of its supporting arrangements have been recognized as major constraints to effective road maintenance. The shortage results from inheriting equipment without a stock of spares and with a limited ability to both maintain what exists and procure replacements. As a result, much ofthe equipment is not suited to maintenance tasks, the general age profile is high and the equipment maintenance load becomes progressively more difficult to meet with a consistent decline in equipment availability. The ERA objective of devolution, decentralization and commercialization can only be effectively met when issues related to purchase, preventive maintenance, acquisition of spare parts, routine maintenance, major component overhaul have been resolved.

Rural Travel and Transport: The Village Level Travel and Transport Study (VLTTS) shows that domestic transport in and around the village account for more than 70% ofthe trips, about 60% ofthe travel time and 93% of the transport effort in the rural areas. The two most important components of travel and transport in rural areas are collecting water and fuel, which together account for about 90% of domestic travel and transport time and effort. These trips are relatively short, frequent but time consuming and energy sapping. This means that the rural people, and especially women, waste much time in fulfilling their basic needs instead ofparticipating in productive activities. The key issues identified in RRTPS are: (a) absence of sound organizational structures to cater for the characteristics and levels of travel and transport requirements at the household and community levels; (b) absence of planning and programming methodologies to consider the nature and size oftransport demand in improving access to economic and social services at the local level; (c) lack of coordination and popular participation in the identification and prioritization ofrural roads; (d) lack of correspondence between design standards and travel and transport demand requirements; (e) shortcomings in the expansion of labor-based technology in the context of generating employment opportunity and promoting effective utilization of local resources in accordance with the government’s overall strategy.

Need to focus on social aspects of transport and the broader development related issues. The focus in the past has been on road network expansion, rehabilitation and maintenance. The performance was measured by reduction in road roughness index, quality ofroads, vehicle operating costs, length of roads constructed, etc. However, with a renewed focus on sustainability of investments, poverty alleviation, gender equality, participation and inclusion, social and environmental mitigation, there is a need to design interventions to ensure that the quality of life is improved and sustained for all the population in the project areas. This requires monitoring and evaluating the impact of road investments (in addition to improving the engineering standards) on improving access to all, increasing employment (with a special focus on female labor force), increasing capacity of domestic contractors, improving safety standards, and mitigating HIV/AIDS impact. There is also the need to address travel and transport needs at the village level as well as on the federal road network. The need to include environmental impact considerations during the planning and implementation phase ofroad works has also become a pressing issue. Ofparticular focus is the sustainability ofthe sector in terms of financial, institutional, environmental, operational and regulatory aspects.

- 19- 2.2 Government Strategy The Government has prepared RSDP 11 document including lessons learned from RSDP I,policies, proposed actions and scheduled which was presented to national and external stakeholders on March 14, 2003. The program document and other supporting documents, viz., Policy and Capacity Building ofthe Road Sector , December 2002; and Maintenance Action Plan (2002 - 2007), February 2003, provide the basis for the Letter of Sector Policy dated May 6,2003, submitted to the Bank (see Annex 12). Key areas for strengthening the reform program and investment allocation priorities have been identified, including:

Set up a more commercially oriented ERA organization, with a focus to: (a) build capacity in ERA in the areas ofcontract management, design reviews and monitoring; (b) contract out internal functions, such as procurement; (c) separate client and contractor roles at district level; (d) gradually open the competitive field to the district contractor; (e) introduce long-term performance based contracts on a pilot basis; (0 improve balance between professional and administrative staff; and (g) introduce performance indicators, measures and targets for main business units. To satisfy these objectives, a long term needs assessment of ERA will be conducted identifying specific functions to be retained by it after commercialization ofthe DMO and other nonessential functions. Commercialization and decentralization of DMOs. Improve productivity through the creation of cost and profit centers, commercialization and decentralization. With DFID support, a District Management Organization Capacity Building Project has been started with the objective to decentralize maintenance activities at the district level by separating “client” functions from “contractor” functions. The DMOs are expected to be gradually transformed from efficient cost centers to profit centers and finally as full commercial entities. Strengthen the capacity of the RRAs and weredas for decentralized delivery of improvements to rural travel and transport by facilitating the implementation of the ERTTP. A key aspect ofthe implementation mechanism is that it firmly puts the weredas and communities at the center of the decision making on needed intervention through the participatory approach to the preparation ofthe WTTP and the setting up of implementation structures at the wereda and village levels. Improvements to the rural transport services will include expanded use of IMTs, provision of appropriate rural transport infrastructure, location offacilities and use of labor based technology in road construction and maintenance. Increasing Local Private Contractors Participation in Road Contracts. There is a recognition by the Government that sustainability ofthe road sector reform program will depend on the performance of the domestic construction industry. Since 1991, various measures have been taken to encourage the establishment ofthe private sector road construction industry, which had stagnated during 1970s and 1980s. Under RSDP 11, further measures are being taken to strengthen the private construction sector, including: first, enhancing the development of different classes of local contractors and consultants by training and involving them more in major road works contracts, reforming contract documents, and implementing contractual requirements that facilitatelguarantee access to local Banks’ financing support for advance payment guarantees, performance and bid bonds, as well as in meeting capital requirements through easing collateral requirements, and facilitating establishment of equipment leasing companies. The second objective is to progressively increase the amount of regular maintenance activities let to private contractors. In addition, with the objective to improve the performance ofmaintenance works and introduce commercialization concepts in the operations of direct labor projects, ERA has prepared a new manual for administration ofworks, entitled “Standard Procedures and Technical Specification for Maintenance Works”. It is also proposed to introduce length-person system for maintenance work on selected sections in various ERA districts under a performance agreement to promote decentralization of works and improve effectiveness in maintenance of the road network.

- 20 - Strengthen the domestic construction industry. The Ministry of Capacity Building has established a Construction Sector Capacity Building Program (to be implemented in collaboration with ERA, etc.) under which the following initiatives have either been planned, in progress, or completed: (a) a human resource program to enhance construction skills, e.g., operators at Alemgena training and strengthen construction industry associations; (b) amend the licensing system for contractors and consultants, as well as the bid documents; adopting and adapting industry standards; drafting the Building Code, and setting up standard laboratories; (c) established the Office for Licensing and Equipment under the Ministry of Infrastructure; (d) provide training to trainers, comprising 57 technical teachers from 9 existing vocational training centers, and 50 construction foremen, for skilled labor in roadwork, concrete, reinforcements and formworks, masonry, ceramics, plastering and electricity. The Government has also formed a Steering Committee (DCI Development Board) with members from the public and the private sectors to follow-up implementation of the DCI development program. Strengthen Resource Mobilization and Road Financing. Further measures will be undertaken under RSDP I1to widen the financial base ofthe Road Fund (RF) and enhance community participation in road construction and maintenance. The efficiency in the use ofRF resources will also be strengthened by conducting independent technical and financial audits. Maintenance Action Plan. The Maintenance Action Plan will be updated to reflect provisions made to protect the length of the road network already in a maintainable condition (good or fair) and the needs for addressing backlog maintenance on roads kept in a holding condition. The resource requirement for maintenance (routine and periodic) will be further developed, integrating the pavement management system with the maintenance management system in identifying the improvement and maintenance needs program for hture interventions. Network Planning. The network planning study conducted at the federal network level will be integrated with the regional and community road network studies to develop a prioritized national road network plan, consistent with the overall Government strategy and the macroeconomic environment. Road safety and axle load regulation and compliance. Recommendation from two completed studies will be implemented, inter alia, through: (a) upgrading and constructing weigh bridges; (b) improving efficiency of controlling mechanisms; (c) issuing legislation on axle load limit and penalties; and (d) licensing based on axle weight. The road safety awareness will be enhanced by: (a) establishing a National Safety Council; (b) enforcing traffic regulations; (c) awareness campaigns; (d) enforcing vehicle inspection; (e) enhancing coordination of stakeholder activities; as well as (f) implementation of the road safety action plan. Enhanced focus on social and other development related impact of transport investments. The Government is committed to: (a) preparing RAPSfor all road projects; (b) including and enforcing social and environmental safeguard measures in all contracts; (c) creating awareness of, and protection measures against HIV/AIDS; and (d) improving efficiency ofright-of-way management. The poverty and other development impact of investments in roads will be evaluated by launching the Corridor Development Study.

3. Sector issues to be addressed by the project and strategic choices: 3.1 Issue: Improve quality and quantity of the road network and Rural Travel and Transport.

Strategy. The focus of RSDP 11 is to continue the momentum to achieve the road condition targets and to provide a sustainable level of essential road infrastructure to the rural population. The investment allocation priorities in the program are based on discussions with national stakeholders and interested donor partners and include: (i)roll-over of projects commenced under Phase I;(ii) road projects initially proposed under Phase 1 for which funding was not secured; (iii)roads connecting areas of agricultural

-21 - and economic potential; (iv) missing links in terms of importance to the national economy and roads contributing to regional balance; and (v) the provision of Rural Transport Infrastructure, promotion of rural transport services, and ownership and use of Intermediate Means of transport, as part of the ERTTP implementation. With respect to the latter, the emphasis would be on: (a) providing a basis for the assignment of responsibility and accountability, particularly in the areas ofrural roads, rehabilitation and maintenance, and to improve the efficiency ofplanning, programming and administration of contracts for existing regional roads force account units; (b) strengthening RRAs’ ability to coordinate project activities at the Zonal and wereda levels; and (c) constructing low cost roads, footpaths and trails, and projects that contribute to reducing the burden oftravel and transport, such as village/community water wells, grinding mills, local markets, etc.

To improve quality and extent of the road network at the local level, the Government has developed the Ethiopia Rural Travel and Transport Program (ERTTP) based on the RRTPS with the objective of strengthening the capacity of RRAs to coordinate the provision of rural transport infrastructure, means oftransport and other associated services. Whilst the RRA will be in charge of coordinating implementation activities, actual implementation will be led by the Wereda Development Committees (WDCs) and the Village Development Committees (VDCs) and involving locally based NGOs and the private sector. The first step in implementation of the Program has started with Ireland Aid funding: (a) the preparation ofthe Source Book which describes the ERTTP concept and approach and provides guidelines for the participatory identification ofneeded interventions and institutional and financing frameworks for implementation; (b) preparation of Wereda Travel and Transport Plans (WTTP) for eight pilot weredas; and (c) regional workshops for awareness creation. Implementation ofthese WTTPs in the pilot weredas will take place during APL 1 with funding by Ireland Aid and DFID.

3.2 Issue: Institutional Reform and Commercialization of ERA operations.

Strategy. At present ERA is in a much better position than it was when RSDP was launched. The restructuring ofERA with the accompanying measures has had a major effect on the implementation of RSDP and future capacity of the authority. As part of RSDP I1the reform process would be reinforced, especially in the following areas: (a) capacity to plan, procure and administer civil construction and service contracts and manage contract claims and disputes, contract administration, engineering design review, claims avoidance and dispute handling and financial management, accounting and control systems; (b) develop each maintenance district into self-accounting business units, capable ofproducing and implementing cost-effective annual maintenance programs; (c) create clear accountability for performance and pave the way for a competitive contractual relationship between those doing the work (Contractor) and those requiring it to be done (Client) ; (d) develop smaller, district, and regionally based contractors to undertake routine road maintenance work in addition to increasing their participation in civil work contracts; also encourage large local contractors to engage in routine maintenance by the introduction of large packages of work, such as “term contract” and “performance based contracts”; (e) update Maintenance Management System (MMS) to assist ERA to improve their capacity to plan and improve maintenance capacity.

3.3 Issue: Enhancing potential for public-private partnership in delivery andfinancing.

Strategy. The Government is implementing recommendations from its program document “Capacity Building Program in the Construction Sector” (March 2001) drawn from a domestic construction industry assessment study financed with PHRD funds. The draft proposal includes private sector development, includingprivate participation in delivery and financing, as well as possible contracting out of management functions by ERA for the expanded program under RSDP 11. The Government is in the process ofassessing the feasibility, options and additional requirements for public-private sector

- 22 - investment and financing. Key focus ofthe Government's approach will be on:

(a) strengthening Domestic Construction Industry (Del). Enhance opportunities for the DCI, through: (i)identification of specific constraints and mitigating measures and an action plan developed to satisfy the agreed objective. As part of the proposed strategy, capacity of local contractors and consultants would be enhanced, training provided and contract documents of Govemment financed projects reformed. In addition, domestic contractors participation in major road works contracts would be enhanced, inter alia, through revised packaging of contracts;

(6) supporting labor-based maintenance methods (LBM). As part ofproviding support to labor based maintenance methods, a total of 8,000 km ofdistrict roads have been identified (out of a total of 17,000 km) which can be maintained by the length-person system. The initial target is to have 800 km in each district maintained using length-person system over the next four years. A new labor based manual has been prepared and procedures for implementation through the DMOs have been finalized. The principal target group for this activity will be the small emerging contractors and community based organizations within each district, who will be provided training on labor-based maintenance contracting;

(c) supporting rationalization in the provision of maintenance equipment. In view of the deteriorating condition ofmaintenance equipment, arrangements for improving the management of equipment including possible plant leasing will be identified and implemented. One of the options considered would be to establish commercially operated plant pools in support of which specific proposals and action plan will be developed. It is also proposed to develop a systems approach to provide adequate planning, forecasting, controlling, and information and management systems appropriate to supporting a substantial fleet ofequipment.

3.4 Issue. Adequacy of road maintenance and financing arrangements.

Strategy. The road maintenance needs are expected to increase in the future in proportion to the increase in the density and coverage ofthe road network. While the current dedicated funding for road maintenance is sufficient to address about 80-90 percent ofthe assessed maintenance needs, this is less likely to be the case in future when maintenance needs increase. The focus ofthe strategy will be to: (a) clearly identify the mechanism to meet the shortfall, and Govemment has reflected its commitment in the Letter of Sector Policy to give priority to maintenance needs; (b) improve resource mobilization and allocation. The road network planning and programming scope would need to adequately reflect the changing scope and volume of annual maintenance need. ERA will plan and monitor implementation in two critical areas ofroutineh-ecurrent maintenance needs for: (i)maintainable roads comprising mainly the recently improved roads and other roads in "good" and "fair" condition; as well as (ii)roads normally kept passable in a "holding state" while awaiting major road improvementshehabilitation. Efficiency in the use of resources will be improved by expanding the scope ofperformance contract agreements to DMOs and RRAs. Arrangements for carrying out maintenance performance audits by the Road Fund Administration would be finalized; and (c) explore private sector participation in financing ofroad infrastructure. Options for commercializing maintenance activities would be developed with a view to reduce overhead costs and improve efficiency and accountability in the delivery of services. One ofthe options to be being developed for implementation is "term maintenance" which eventually lead to area-wide, multi-year performance based maintenance contracts to be implemented in a single contract over an extended period oftime; (d) ensure ownership of the proposed program by the communities by exploring options for participating regionskommunities to contribute up to about 40% of the cost ofthe low-level rural road development projects.

- 23 - A Maintenance Action Plan (2002-2007) has been prepared with details on maintenance activities and identification of how maintenance contributes to improving road condition and reducing road roughness. Maintenance priorities are considered together with optimal maintenance policy.

Federal Federal Regional Urban Gravel Paved 2002103 12411 3999 14480 1680 2003104 12378 4151 14680 1710 I 2004/05 I 12258 I 4333 I 14930 I 1740 I

Table: Cost of Maintenance

3.5 Issue: Developing a network based approach and addressing development issues in a comprehensive manner.

Key strategic focus will be on the following:

(a) ERA has developed a coherent network based approach to road planning and management in the country at the level of federal road network. The requirements at the federal level will be coordinated with regional and community roads network to ensure network integration. The prioritization program will be developed based on the responsiveness ofthe sector to address food security and poverty alleviation objectives, improve internal connectivity within the country and support the strengthening of key export-import corridors. (b) One of the approaches to be adopted in the project to complement ERTTP interventions would be to initiate a road corridor development approach, with a focus on improving network accessibility, taking into account the interdependence among different levels ofroad hierarchy, and the need to address community infrastructure, services and safety related issues. The Road Corridor Community Development Plan Study will take into account the planning requirements oflocal communities within the corridor ofthe roads under consideration. Most importantly, the study ofroad investment impact on poverty will help to: (i)develop an empirical approach to evaluate the impact of road investments on poverty alleviation; and (ii)assess the role oftransport on poverty alleviation, with a particular focus on gender equity and road accidents. (c) The EMB would address environmental and social effects on road works by taking measures to ensure conformity of design standards with environmental protection requirements & enforcement of safeguard measures as well as coordinating with other sectors to improve watershed management so as to minimize the damaging effects offlash flooding. The program would extend the scope of the HIV/AIDS Action Plan under implementation in RSDP I.Further actions will include: (i)incorporation of social scientists into the teams ofconsultant supervising engineers to facilitate monitoring of adverse social and

- 24 - environmental impacts; (ii)proactive and site specific social and environmental analysis and mitigation measures to enhance protection of road infrastructure from water erosion; (iii)full implementation ofthe HIV/AIDS strategy for the road sector as prepared by the EMB. The HIVIAIDS strategy will address both the demand side of sexual services (ERA personnel) and the supply side (professional sex workers); and (iv) efforts to create community based right-of-way management and communication strategies which target pedestrians (especially women, children and the elderly), and intermediate means of transport (IMTs) users for road safety improvements. (d) approaches to address road safety standards and mitigation measures would be developed and implemented as part ofproject implementation (in coordination with other donors).

3.6 Issue. Strengthening delivery of urban transport infrastructure and services

Strategy. As part of Stage 1 ofthe RSDP 11 (APL l),the focus will be on: (a) study ofurban travel patterns in Addis Ababa involving determining the characteristics of a wide range ofneeds in a broad context to understand trip purpose, temporal distribution oftrip making, spatial distribution and costs involved so as to establish feasibility of different modes meeting various market segments, including the poor and women; (b) based on the study above, formulate an urban transport policy to develop a long term vision to address mobility constraints; and (c) develop a pilot project for implementation during subsequent stages to assist realization of the plans into actions.

4. Program description and performance triggers for subsequent loans: 4.1 Program Description. The proposed Program will be implemented in four stages (APL1-4). The start up ofthe Program’s four stages will be based on the measured progress of implementation of components of each stage and the associated policy and institutional reforms, especially the readiness of the programs and contract awards for planned physical investments. The Program would support Federal Roads and Regional Roads rehabilitation and implementation of ERTTP. In addition, the Program would prepare sectorial work in the fields of road management and financing, environmental and social impact assessment and mitigation, social/poverty impact assessments along corridors, as well as road safety.

4.2 Performance Triggers. Trigger indicators have been suggested for each of the Stages as described below. The trigger indicators were agreed with Government during appraisal. As the program progresses through the stages, further review ofthe triggers will be carried out at annual and stage by stage mid-term review meetings involving Government, donor partners and other stakeholders.

-25- Stages Trimer Indicators Stage I (APL1). Overall average completion of at least 55 percent of the ongoing civil works under IDA-financedRSDPSP (Cr. 3032-ET). Design and contract documents for civil work components completed

up to 6 % of the Grant Proceeds disbursed and US40million equivalent of works contracts awarded under APLI Stage 2 (APL2) Contract awarded for urban transport study Contract awarded for setting up independent technical and financial audit of the road fund Certain functions of ERA DMOs have been devolved to: (a) District Engineering Division (b) each DMO, for its remaining functions, including Contractor activities, operates as a separate cost centers

Stage 3 (APL3). Pilot routine maintenance activities undertaken by contractors through a competitive process, with 10% of works under tender. Poverty/social criteria established and used in assessing road investment needs (including for regional and community access roads) Overall average disbursement of 35 percent of the ongoing civil works under APLI&2

Srage 4 (APL4). 80% disbursement of Credit proceeds from AF'L 1. Management of equipment including plant leasing arrangements implemented 100% ofDMOs function as commercial units, delivering cost effective maintenance services to program within a framework of intemal performance agreements

C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): The prioritized components for financing under Stage 1 (APL1) were revised to respond to the change in the original IDA credit allocation to an IDA Grant allocation of about US$127 million. The components and the costs were finalized after consultation with ERA/GOE and confirmed during appraisal and negotiations in April 2003.

Component

Rehabilitation and Upgrading ofFederal Roads 123.39 66.2 79.99 63.1 Upgrading and construction ofFederal /Link Road 34.41 18.5 20.64 16.3 Construction Supervision 11.93 6.4 11.27 8.9 Rural Travel and Transport Program 7.54 4.0 6.12 4.8 HIVIAIDS Control and Prevention, TA support services fa 4.80 2.6 4.65 3.7 ERA Road Financing Study and Technical Auditing 0.46 0.2 0.35 0.3 Urban Transport study 1.12 0.6 1.08 0.9 PreParatorv Activities 2.79 1.5 2.70 2.1 Total Project Costs 186.44 100.0 I 126.80 100.0 Total Financing Reauired 186.44 100.0 I 126.80 100.0

- 26 - 2. Key policy and institutional reforms supported by the project: The main sector policy reforms supported by the project build on the reforms initiated under RSDP I,and include:

0 Strengthen ERA‘Scapacity in the areas of project planning and procurement, design reviews and approval, contract management and administration and social and environmental mitigation 0 ERA to adopt a more commercial system of management (the client), with devolution of authority to District Maintenance Organizations (DMOs) (the contractor) 0 Develop commercially oriented DMO units (the contractor) to deliver cost effective maintenance services 0 Develop local construction industry to operate in a competitive environment for maintenance works. 0 Develop capacity at the RRA and wereda levels for decentralized implementation of improvements to rural transport infrastructures, services and associated facilities. 0 Strengthen management and financing for road maintenance while assuring regular and effective maintenance. 0 Strengthen right-of-way management capacity and integrate improvements in the road corridor catchment area as the road network is improved. 0 Improve the environment and traffic safety management of the road network; and 0 Develop public-private partnership in delivery and management ofroad network and services.

3. Benefits and target population: The Program, through rehabilitation, strengthening and upgrading ofthe national road network benefits the country’s economy and supports the major institutional reforms in the sector related to commercialization ofthe management and procurement functions ofthe implementing agencies and provision of a sustained financial source for road maintenance. The road works would lead to substantial savings in vehicle operating and infrastructure maintenance costs, as well as reductions in travel time and transport costs for road users in the rural areas. Since the identified sub-components are part of a comprehensive country-wide investment strategy for road development, they would contribute to fostering economic growth and poverty alleviation through improvements in market integration and accessibility to transport infrastructure and basic social services. These anticipated impacts are consistent with the objective of strengthening economic infrastructure, which has been identified in the CAS as a key element in GOE’s growth and poverty reduction strategy.

The target population would include: road users (includingpedestrians, IMTs/NMVs users and non-transport structure/sewices beneficiaries), who would benefit through improvement in road surfaces, availability of all-weather roads and road safety; producers and consumers, through improved access to municipal andor other basic social services, and in the transport ofgoods to the local markets and environmental protection; domestic construction industry, through enhanced opportunities to participate in business opportunities; road agencies, through improved management practices; and finance ministry, through greater efficiency in the use ofresources and reduced demands placed on the national budget for road development and maintenance.

- 27 - 4. Institutional and implementation arrangements: 1. Administrative. The overall program coordination will be the responsibility ofthe Ethiopian Roads Authority (ERA), the legally autonomous Federal Government Road Agency. ERA will also manage and administer the Trunk and Major Link Roads Program, and initially, the ERTTP. ERA is organized into three main departments as follows: (A) Regulatory and Engineering Services Department, which carries out its responsibilities through four Divisions: Planning and Programming, Contracts Administration and Right-of-way, Contracts Formulation and Design Review, Research and Network Management, and the District Engineering; (B) Operations Department, which has responsibility for force account maintenance, emergency road construction and maintenance, and associated logistics support; and (C) Human Resource and Financial Management Department which carries out its responsibility through three Divisions Finance, Human Resources Development and Personnel Administration. Under its Planning and Programming Division ofDepartment (A), ERA has six Branches responsible for Planning and Program Management, Programming and Budgeting, Monitoring and Evaluation, Management Information Systems (MIS), Environmental Management, and Rural Roads Technical Support. As part ofthis broad organizational setup for implementing the RSDP, ERA has set up a Program Advisory Office (PAO) under the General Manager. Staff ofthe PA0 have been supported by technical assistance (TA), comprising an RSDP Advisor (a senior highway engineedcivil works contract administration specialist) funded by the EC, who is on the second three-year term ofhis assignment. The PA0 advise the General Manager on matters related to program coordination, including the coordination of TA and the related multi-donor support and interests. In addition, a Road Inspectorate has been established which is accountable to ERA Board to provide independent inspection and monitoring reports on the performance of the road sector operations.

Maintenance ofthe federal trunk and link toads required to preserve the new road investments and keep existing roads passable, will be carried out both by the District Maintenance Offices of ERA, which is currently in the process ofcommercialization, and by private contractors, in accordance with the agreed Maintenance Action Plan.

The Regional Roads Authorities (RRAs), which have been set up as legally autonomous Regional Governments Road Agencies, are responsible for managing and administering the Regional Roads Program. They will also maintain the regional roads either directly, or by contract in accordance with their capacity. Village Development Committees (VDCs) whose activities would be organized and coordinated by Wereda Development Committees (WDCs) and the Wereda Rural Development Office will implement the Ethiopian Rural Travel and Transport Program (ERTTP). The WDCs will be supported by Regional Program Coordination Boards (RPCBs), and a Central Program Coordinating Board (CPCB). The CPCB, whose secretariat is ERA, will assume the leading role in policy formulation, legal dispositions, regulation, awareness development, and providing technical guidance and support, while the RPCBs, whose secretariats are RRAs, will guide, monitor the planning and execution of ERTTP initiatives.

With the establishment of the new Cabinet ofMinisters, in October 2001, a Ministry ofInfrastructure has been formed with the responsibility of developing the infrastructure of the nation. This new ministry has taken over all the duties of the previous Ministry ofTransport and Communications, the electric power function of the previous Ministry ofMines and Energy, and partially the duties (the works part) of the previous Ministry ofWorks and Urban Development. Under this new arrangement there are a number of executive agencies that are accountable to the Ministry of Infrastructure. Among them are the Ethiopian Road Authority, the Civil Aviation Authority, the Roads Transport Authority, and the Ethiopian Road Fund. Having these key authorities that are involved with the different aspects ofthe transport sector under the same umbrella is expected to facilitate efficient resolution of the key crosscutting sectoral

- 28 - issues, without compromising the autonomy of the ERA. The responsibility for the administration of matters affecting the (DCI) including registration, local contract document certification, and approval, as well as implementation ofthe proposed capacity building program is also expected to fall under the same Ministry. These responsibilities were previously under the former Ministry ofWorks and Urban Development. The other aspect relates to the central coordination body for the ERTTP at the federal level, which is now benefiting from the establishment ofthe Ministry of Rural Development which has also appointed the chair of the CPCB. This arrangement facilitates implementation by providing a direct linkage with the key beneficiaries of the ERTTP, the rural community. The administration of the Road Fund is presently the responsibility ofthe Road Fund Administration (RFA) under the Road Fund Board comprising representatives ofthe Federal Government, Regional States, ERA and local stakeholders. This arrangement is to continue.

2. Procurement (See Annex 6(A) for further details). Procurement will be implemented by the Ethiopian Roads Authority under its Contract Administration Division or other divisions designated by the General Manager or the Deputy General Manager, Engineering and Regulation, with the approval of the ERA Board. Institutional Support to ERA for planning and procurement of projects, design review and approval, contract administration, claims avoidance and management will also be provided under this project. The IDA-finance under APLl and financing by other donor partners - AfDB, DFID, EC, would further equip ERA to implement the full scope of the procurement and contract administration responsibilities required for the RSDP I1implementation. It is further confirmed that procurement thresholds set in Government procurement regulations under the Ministry ofFinance and Economic Development now provide ERA management with authorization to approve procurement transactions of ETB 2 million (or about US$230,000 equivalent), an increase from ETB 250,000 (about US$30,000 equivalent). This is a positive step towards the expedition of procurement for road work activities which often require frequent purchase of spares and consumable items.

Civil works will be awarded to pre-qualified contractors through international andor national competitive bidding procedures as appropriate in accordance with IDA Guidelines for Procurement under IBRD Loans and IDA Credits published by the Bank with latest revision on January 1999. All associated supervision, as well as TA and other consultant services, will be awarded to qualifying consulting firms (international and locally reputable and qualified firms) in accordance with IDA Guidelines for Selection and Employment of Consultants by World Bunk Borrowers (January 1997, lastly revised January 1999 and May 2002).

3. Financial Management and Auditing (See also Annex 6B). The existing accounting and reporting system of ERA is capable of producing accurate and reliable information regarding project resources and expenditures. The system will provide reliable records and reports on all assets and liabilities and financial transactions ofthe project, and sufficient financial information for managing and monitoring activities. ERA’Sfinancial management system is designed to produce financial statements of the entity as a whole to be used by all donors and the government.

The overall program and project management and coordination is the responsibility of the Ethiopian Roads Authority (ERA). ERA will manage all the components ofthe project in the first phase of the APL, but in the subsequent phases ofthe APL, the Regional Roads Authorities (RRAs) and Ethiopian Rural Travel and Transport Program (ERTTP) Offices at all levels will be involved in the implementation. Currently, Ireland Aid and DFID are financing the pilot implementation ofERTTP physical activities in 8 weredas, and their experience will be taken into account in designing the

- 29 - implementation and fund flow arrangements in the second and subsequent phases of the APL.

ERA is currently implementing two active projects financed by the World Bank, the Road Sector Development Program Support Project (RSDPSP, Cr. 3032-ET) and components from Emergency Recovery Project (Cr. 3438-ET). ERA had implemented various donor-financed projects in the past successfully, including the RRP (Cr. 2438-ET), which was closed in December 2002. In the existing active projects and the already closed ones, management and administration of funds are done at a central level by ERA and there has been no problem in disbursements and accounting of funds.

ERA will open a Special Account (SA) at the National Bank of Ethiopia. IDA will transfer the initial advance and subsequent deposits to the created SA. ERA will then pay contractors and suppliers from the SA.

Currently, the Audit Services Corporation is the external auditor ofERA. This arrangement will continue for the future. The annual audited financial statements, along with the management letter, will be submitted to IDA not later than six months after the end ofthe fiscal year.

ERA will produce quarterly Financial Monitoring Reports (FMRs) and submit the same to IDA 45 days after the end of each quarter. The FMRs will include financial, physical progress and procurement information. At a minimum, the financial reports must include the sources and uses offunds, expenditures by main expenditure classifications, beginning and ending cash balances and other supporting schedules. ERA agreed to use Form 2 ofthe FMR for reporting purposes during negotiation.

4. Disbursement ofIDA Funds (See also Annex 6B). There are two ways in disbursing funds from the Bank. The first is the traditional- disbursement method, which uses SA, SOE and direct payment procedures. The second is the report-based method, in which regular Financial Monitoring Reports (FMR) plus additional statements will be the basis for disbursement. ERA has selected the traditional way of disbursement using SA, SOE and direct payment procedures.

5. Monitoring and Evaluation. Monitoring and Evaluation (M & E) will be the overall responsibility of the M & E Branch ofthe Planning and Programming Division. Under the RSDP Phase 1, special arrangements for collecting data annually on the agreed 19 program indicators were carried out by a local consultant financed with EC support. It is agreed with ERA and donor partners that M & E data collection under RSDP I1will be continued under the same arrangements with EC financing. ERA will report on these indicators as part of the annual reviews ofproject performance. Indicators were also agreed for monitoring sector outcomes related to the various MDGs, as well as sector specific outputs. Baseline measurements will be made as part ofthe Corridor Development and Poverty Impact Assessment studies being financed under a PHRD Grant.

D. Project Rationale 1. Project alternatives considered and reasons for rejection: 1. APL versus SIL. The alternatives considered included updating the economic feasibility and detailed engineering studies for selected roads before implementation under a Sector Investment Loan, versus a phased implementation under an Adaptable Program Loan (APL). The former was rejected in favor of the latter to allow for a phased implementation ofthe overall program adopted by the Government in view of: (i)ERA'S capacity to manage programs; and (ii)need to ensure step-by-step achievement of key policy and institutional reforms critical for the success ofthe program. The phasing will also allow a systematic build up of institutional capacity which will be needed especially at the

- 30 - regional and wereda levels, and the associated procurement processing through an APL instrument. In this connection, implementation of each road sub-component has been contingent on the fulfillment of the following criteria: (i)economic viability established through an ERR of 12% or above for federal roads; (ii)socioeconomic justification to be confirmed for the rural transport infrastructure under ERTTP; (iii)completion ofbid documents for contract award; and (iv) when warranted, environmental/resettlementmitigation plans satisfactory to IDA. These criteria will be further tested during preparation of each subsequent Stage and fulfilled prior to proceeding with implementation.

2. IDA Grant vs. IDA Credit: Five criteria have been set out by IDA donors as part of the IDA 13 replenishment framework: (i)HrV/AIDS, (ii)natural disaster, (iii)post-conflict, (iv) poorest IDA-only country, or (v) particularly debt-vulnerable poorest IDA-only country. Ethiopia qualifies under the fourth and fifth criteria (and with the recent drought, probably the second criterion). The RSDP I1(APL1) has been allocated 100% grant financing from IDA so as to maintain the priority required for addressing the road transport and access needs to support the growth objectives ofEthiopia’s SDPRF’. APL 1 (i) emphasizes the need to address the social aspects oftransport (through monitored outcomes related to the MDGs) such as mitigation ofHIV-AIDS and other adverse social impact of investments, and provision of increased income and employment opportunity for the Ethiopian private sector and the rural poor along road corridors; and (ii)establishes the plans and programs for achieving holistic improvements to the access and mobility situation of the rural and urban poor and their livelihood.

3. Institutional reform options for ERA. Developingpublic-private partnership versus continued reliance on public sector based institutions in delivery, $financing and implementation of Project components. The alternatives considered include: (i)increasing ERA capacity through staff recruitment and training to the level required for the expanded program under Phase 11, versus, (ii)possible contracting out ofmanagement functions by ERA to specialized private firms for managing the implementation of selected groups of contracts under the program, or (iii)implementing a mixture ofthe options. Option (iii)is favored since it allows the benefits gained from strengthening ERA’Scapacity in contract administration, sector planning and program coordination to be sustained. The additional options included private sector development (PSD) to increase PS participation in delivery, financing and implementation. The June 2002 workshop on public-private partnerships in Roads held in Addis Ababa contributed to creating awareness of cross-country experience and opportunities which enabled GOE to further explore the ways ofimproving public-private sector investment and financing. Available options to be explored under the proposed project include: domestic financial capital markets; public-private partnerships with different mechanisms for government support and incentives; possible off-budget resources such as additional levy on fuel for the road fund; and increased domestic contractor participation in roadwork contracts.

4. Focus only on civil work aspects of network expansionhpgrading versus social and broader development impact related issues. The alternatives considered include: (i)improving quality and quantity of the road network as measured through engineering performance based parameters, such as length of network, roughness index, measurable benefits (reduced VOC); versus (ii)improving social, development, environmental, institutional and operational impact of investments in the sector (in addition to engineering standards). Option (ii)was favored since it directly links RSDP I1activities with the GOE’s SDPRP and the MDG thus enhancing its contribution to poverty alleviation. Accordingly, monitoring and evaluation parameters have been developed to measure improved access, employment opportunities, gender impact, capacity of domestic contractors, institutional capacity to manage the network, financing for road maintenance, improved safety standards, mitigating HIV/AIDS impact, etc.

- 31 - 5. Institutional reform options for RRAs. The alternatives considered included building up each RRA capacity for planning, contract management and executing ofmaintenance ofregional rural roads and community roads, versus building RRA capacity for planning and programming with associated training, with works contracted out to private contractors; and weredas given responsibility for planning and execution ofinterventions relating to community roads. The latter was chosen as the model for implementation, as it provides a less expensive alternative to building up capacity at the local level for managing and execution of road works.

2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). There are two ongoing Bank-financed projects in the road sector whose implementation is underway satisfactorily: (1) the Road Sector Development Support Project I (Credit 3032): the credit proceeds are allocated for: (i)the rehabilitation and upgrading offour priority trunk routes, with a total length of about 1380 km; (ii)consultancy services for supervision ofthe above civil works; and (iii)the Establishment a Road Inspectorate Office. (2) Emergency Recovery and Reconstruction Project (Cr. 3438-ET), has a road component covering maintenance and rehabilitation. The Road Rehabilitation Project (Cr. 2438-ET) closed December 3 1, 2002 and a completion report will be issued by June 30,2003. The project included strengtheninghehabilitation ofthe Mille-Assab road and parts of the Gewane-Assab road, establishment of road classification and pavement management systems, development of a standard design manual and specifications; Financial Management support to ERA and preparation of follow up operations including roads financed under this APL 1 and 2.

In addition, the European Commission has continued its support to the RSDP with technical assistance and institutional support to ERA includingpolicy studies related to axle load distribution, road safety, road transport regulation, as well as designs preparation and rehabilitation and strengthening of the Addis-Awassa, Addis-Jimma and Addis-Woldiya roads. The African Development Bank provided financing for the strengthening of the Semera-Elidar (a section of Mille-Assab) road (parallel financing with IDA Cr. 2438-ET) for which ICR is under preparation, construction ofthe Chida-Sodo road (ICR 1998) and the rehabilitation of the Alemgena-Sodo road. Other donors including Germany through GTZ and KfW, DFID, Japan, BADEA, and Nordic Development Fund (NDF) all are supporting through technical assistance to ERA and RRAs and improvement ofkey Federal and regional roads.

- 32 - Implementation Development Bank-financed Progress (IP) Objective (DO) General RRP (Cr. 2438-ET) and S S RSDPSP (Cr. 3032-ET) Counterpart Funds RRP (Cr. 2438-ET) and S S RSDPSP (Cr. 3032-ET) Project Management RSDPSP (Cr. 3032-ET) S S Compliance with agreed procurement RRP (Cr. 243 8-ET) and S S schedules RSDPSP (Cr. 3032-ET) Quality and reliability of Procurement RRP (Cr. 2438-ET) and S S Administration RSDPSP (Cr. 3032-ET) Environment RRP (Cr. 2438-ET) and S S RSDPSP (Cr. 3032-ET) Environmental Plan RRP (Cr. 2438-ET) and S S RSDPSP (Cr. 3032-ET) Financial Covenants RRP (Cr. 2438-ET) and S S RSDPSP (Cr. 3032-ET) Other legal documents RRP (Cr. 2438-ET) and S S RSDPSP (Cr. 3032-ET) Monitoring and Evaluation RRP (Cr. 2438-ET) and S S RSDPSP (Cr. 3032-ET) Resettlement RSDPSP (Cr. 3032-ET) S S

Project Management RRP (Cr. 2438-ET) S S Other development agencies African development Bank RSDPSP (Cr.3032-ET)

DFID RSDPSP (Cr.3032-ET)

European Commission RSDPSP (Cr.3032-ET)

GTZ RSDPSP (Cr.3032-ET)

Japan RSDPSP (Cr.3032-ET)

Nordic Development Fund RSDPSP (Cr.3032-ET)

- 33 - 3. Lessons learned and reflected in the project design: The importance ofa realistic planning and programming within achievable goals is one ofthe key lessons that has been drawn from implementation ofthe RSDP I.The targets set for RSDP Ihave not been fully realized partly because of inadequate funding and lack of capacity. The program objectives and targets therefore were reviewed and re-assessed taking into account the actual and projected progress in implementation, and how that could affect planning and programming for RSDP II both in terms of the realism ofproposed targets, the implementation capacity and budgetary requirements. The early capacity building provided to ERA in contract administration, financial management and planning served as the bedrock for the effective procurement processing and contract management on the program, as well as the reconciliation and bringing up to date, the ERA entity accounts. The experience gained in RSDP I further shows the importance of maintaining support to ERA for the continued establishment and implementation ofeffective functions for contract administration, financial management, planning and programming and review and approval ofroad designs identified for RSDP 11. ERA’Sproactive consultation and coordination of support from all agencies of Government - including customs and regulatory agencies, greatly improved the implementation of the civil works program as compared to works executed prior to the start of RSDP. The experience gained would be further improved and extended in RSDP 11. In this connection, the importance of ensuring finished designs and finished contract processing, as well as thorough pre-screening of contractors at pre-qualification stage have been essential prerequisites for successful implementation of the ongoing road improvement contracts. The association of local professionals and technicians with international firms have provided the ingredient for essential capacity building in the domestic private consulting industry, and for effective implementation ofconsultancy services within the country. Additional lessons drawn from RSDP Iand reflected in RSDP I1project design include the need to:

0 recognize the sequence of operations and mutual inter-dependence ofcritical activities 0 recognize seasonal and other constraints on implementation and therefore the contractual provisions such as completion period 0 observe proper maintenance cycle and include in the plan 0 strengthen design review capacity in ERA and other implementing agencies 0 integrate right of way management and adverse social impact mitigation with contract implementation 0 consider other donor requirements, procedures and policies and coordinate and harmonize them for effective implementation 0 qualify management and control for all aspects of project activities 0 delegate more powers to supervising engineers for decisions related to contract implementation 0 strengthen domestic construction capacity 0 need to inform and ensure inclusion of all stakeholders in the preparation and implementation of the program and address their social needs.

4. Indications of recipient commitment and ownership Four main factors are indicative of the Recipient’s commitment to the Program.

First, Government considers the availability ofbasic road infrastructure as a key strategic element in implementation ofthe country’s economic program as well as the core of its poverty reduction strategy. As part of that commitment, ERA has prepared a Road Sector Development Program (2002-2007), with details on the road network, implementation ofthe RSDP I,and progress made in the past five years, proposed works and improvements under RSDP II,specific targets to be realized at the end of the Program. Various other studies have been completed, such as the Reform Study of ERA, the District Maintenance Organization Capacity Building (with support from DFID), updating of standard

- 34 - specification, design manual and CADD system, network analysis, road master plan. ERA has developed a “Policy and Capacity Building ofthe Road Sector” (December 2002), with information on issues related to institutional strengthening, human resource development, road maintenance systems, capacity building at different levels and policy issues of the sector. In addition, a Maintenance Action Plan (2002-2007) has been prepared with details on maintenance activities and identification ofhow maintenance contributes to improving road condition and reducing road roughness. Maintenance priorities are considered together with optimal maintenance policy. Finally, GOE has demonstrated its commitment to the ERTTP by adopting it as a key instrument of policy on rural development and setting up an inter-ministerial Board to oversee its implementation.

Second, the Ministry ofCapacity Building (MCB) through its Construction Sector Capacity Building Program (CSCBP) is embarking on a human resource development program which includes training of foremen, operators, and managers of local contracting firms for road construction works. In addition, in the APL 1 domestic contractors with experience in building gravel roads will be given opportunity to build up their capacity to execute works to paved road surface standards.

Third, Government has, with the establishment ofthe Road Fund, assured a steady financing for road maintenance, in real terms, showing commitment to the sustainability ofthe proposed investments. As part ofthe updated Letter of Sector Policy, Government has renewed its commitment to addressing road maintenance as a top priority.

Fourth, as part of implementation of the RSDP, Government has monitored the policy aspects included in its December 1998 Letter of Road Sector Policy, with a specific focus on further strengthening the administration and management of federal, regional and rural road network, improving performance of maintenance works, strengthening capacity of local construction industry and reorienting the public expenditure to increase the overall size ofthe road budget. Government is also exploring alternative sources of financing including public-private partnership in financing. Nineteen indicators were developed to monitor the impact of RSDP Ion an annual basis, which include: (1) road density; (2) traffic flow; (3) roughness and road condition; (4) vehicle operating costs; (5) freight and passenger fares; (6) fatalities and accidents; (7) travel time; (8) maintenance budget and expenditure; (9) kilometers maintained; (lo) maintenance cost; (1 1) time elapsed for payments; (12) time taken in contract administration; (13) share ofprivate contractors; (14) share of labor based construction; (15) actual axle load; (16) constructiodrehabilitatiod upgrading cost; (1 7) employment opportunity oflocal labor; (1 8) income generation; and (19) improvement in road sector/works skill levels. The report was presented and discussed at the RSDP I1launch meeting on March 14,2003. The indicators would be revisited as part of RSDP I1implementation to reflect the broader social and development impact ofthe proposed investments including outcomes associated with the MDGs.

5. Value added of Bank support in this project: An important source of value added by Bank support is its comparative worldwide experience in the preparation and implementation of major capital expenditure programs. The donor community active in Ethiopia has acknowledged and recognized the Bank’s leadership role during preparation of the RSDP. The Bank also benefits from the experience gained in implementing comprehensive road sector development programs with institutional reforms in other African countries. Another source of advantage is the Bank’s experience in road sector reform in the region gained over the last ten years through the steering of the Road Management Initiative (MI)and the Rural Travel and Transport Program (RTTP) both of the Sub-Saharan Africa Transport Policy Program (SSATP). This has provided the Bank with the goodwill ofbeneficiaries and donors in creating a cooperative framework where sector reform has gradually been shaped, implemented and monitored. The APL instrument has been confirmed

- 35 - to provide greater flexibility in adapting project design and financing to client needs as they evolve. For this, the Bank team has already gained the experience in developing transport project using the APL instrument through a second stage in Uganda. The Bank’s participation thus provides for better continuity for the implementation of the long-term national program for which an initial support is under implementation. A review of the social aspects ofthe Bank’s Africa Region’s transport portfolio provided important cross-country experience and lessons which were built into lecture and field training to create awareness among policy makers, ERA staff, local social scientistdworkers, including university graduate students, doctors and local community leaders and people.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): 0 Cost benefit NPV=US$293 million; ERR = 34.8 % (see Annex 4) ‘3 Cost effectiveness 0 Other (specify) The economic analysis is conducted for civil work components of the project, constituting 90 percent of the total project financing. The project includes a number of investments in roads for which a detailed feasibility (including economic justification) was prepared under the Road Rehabilitation Project. As part ofRSDP I1 preparation, economic feasibility ofthe proposed project investments were revisited and information updated to reflect new data and findings. The analysis is conducted for: (a) upgrading and rehabilitation of (1) Nazareth-Assela section (79 km) ofthe Nazareth-Dodola-Goba federal trunk road; (2) Woreta-Gob Gob section (99 km) of the Woreta-Woldiya federal major link road; (3) Adigrat-Adwa section (1 08 km) ofthe Adigrat-Shire federal road; and (4) Nekempt-Mekenajo federal major link road (127 km); and (b) the construction ofDera-Magna section (1 19 km) ofthe Dera-Mechara federal major link road to a high standard gravel road.

Investment in roads were subject to specific cost-benefit analysis. The benefit stream for the four roads to be rehabilitated/ upgraded consists of savings in vehicle operating costs and travel time reductions. Economic analysis of the Dera-Magna federal road, to be constructed, has been computed using the producer surplus approach, with the benefits resulting from increase in agricultural outputs (hence generated traffic). The cost stream comprises the costs to the road agency arising from the proposed investments, net of incremental maintenance cost savings. The analysis period is assumed to be 20 years.

Normal traffic has been updated to take account ofEm’s 2001 classified traffic count. Traffic projections on the project road have taken into account past and future trend in GDP growth, population increase, agricultural activities, tourism, AADT, vehicle fleet and fuel consumption. These are among the major factors influencing traffic growth rates on the project roads.

The HDM 3 model (in HDM Manager) has been used for the analysis. The proposed option has been compared with a “do minimum” case. The “do minimum case” assumes that a minimum amount of maintenance of the existing road will be carried out. The economic analysis is based on benefits to road traffic (in terms of savings in VOCs & road maintenance costs) compared with the costs of rehabilitationhpgrading and maintenance. Discounted benefits are then compared to discounted costs to produce measures of worth. Sensitivity analysis was done taking into account three scenarios namely a 20% increase in costs, a 20% decrease in benefits and the worst case (costs +20% & benefits -20%). All road sections have an internal rate of return ofmore than 12%.

- 36 - Summary of the Results (cost in million ETB)

I I IBaseCase I Cost (+20%) I Benefit I cost +20% & I (-2 OYO) Benefit -20% Nazareth- NPV (ETB m) 913.3 888.9 706.2 681.8

I Woreta-Gob ~PV(ETB~)1125.6 Gob EIRR (%) 18.5 15.5 14.9 12.2 Adigrat-Adwa NPV (ETB m) 78 1.3 749.5 593.2 561.4 EIRR (%) 48.5 42.1 40.7 35.2 I Nekempt- NPV (ETB 1548.8 I 504.3 1 394.5 I 350.0 I Mekenajo m> ERR(%) 31.3 27.0 26.1 22.3 Dera-Magna NPV (ETB m) 180.8 127.1 94.2 57.0 EIRR(%) 20.9 17.2 16.4 13.3

An analysis of switch values is presented below. Switch values represent the percentage change in costs or benefits that would give an NPV of zero in the economic appraisal. The results show that construction costs would need to increase by over 70% to 300% in order for the NPV to be zero. Similarly, benefits would need to be reduced by 40% to 80% to achieve the same result.

Switching Values

cuon cost I Benefits

Nekempt- Mekenajo +2.5 -0.71 Dera-Magna +1.2 -0.54

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

Fiscal Impact: The fiscal impact ofthe actual expenditure of the RSDP I(between 1997198 and 200112) and the projected expenditure ofRSDP I1(2002/03 to 2005/6) were assessed during appraisal. The results ofthe analysis ofthe impact ofthe annual revenue and grants, as well as the annual capital and recurrent expenditure are presented in Annex 5. The assessment was made with due reference to the overall capital and recurrent expenditure for Ethiopia. Data on Public Expenditure was obtained from the Ministry ofFinance and Economic Development and reconciled with ERA'Sand Road Fund data. The analysis shows the impact of the actual capital and recurrent expenditure under the RSDP, as compared with the other health and education SIPS and the overall expenditure over the period ofthe RSDP Iassess

- 37 - the possible fiscal impact of the proposed road expenditure (construction, rehabilitation and maintenance) for the RSDP I1including the outstanding expenditure from RSDP I. Government will analyze projected expenditure implications annually and ascertain whether they are realistic in the context of public expenditure, and considering possible financing levels and sources from, Government revenue, the Road Fund and donors. During implementation, it is expected that Government will review with the Bank and find non-priority projects within the RSDP where planned expenditures could be reviewed as appropriate.

3. Technical: The main component of the Project comprises civil works and consultant services in respect of rehabilitation and strengthening of federal trunk and major link roads of paved (bitumen) standard, as well as construction ofnew sections of gravel surfaced regional roads, upgrading oflow-class roads classified as major link roads to gravel road surface standard, as well as upgrading ofgravel surface roads to paved (bitumen) standard. ERA with the assistance ofconsultant services provided under Credit 243 8-ET, completed economic feasibility analyses and environmental impact assessment (EIA) reports for the roads proposed for consideration in Stage 1. Consultancy services for detailed engineering designs for the selected roads are completed and the engineer's estimates formed the basis for estimating project costs during appraisal. The final designs are based on Ethiopia national (and other comparable international) road design standards and specifications. The design standards and specifications adopted for the individual road sections also take into account recommendations for improving road safety, as well as other provisions satisfactory to ERA, IDA and other donor partners. Contract documents are also being prepared under the same consulting services, and support is being given to ERA for the pre-qualification of contractors for the civil works contracts. The project costs have been confirmed on the basis ofthe completed detailed designs and engineer's estimates compared with available cost data from ongoing contracts. Construction supervision is to be entirely carried out by private consultants, who will comprise association of international and Ethiopian firms involving foreign and local engineers and technicians, as has been the practice during the RSDP Phase Iimplementation. Civil works in all stages of the APL will be implemented sequentially following satisfactory completion and acceptance of the results of economic and environmental feasibility analyses, as well as the resettlement action plans prepared and approved by IDA prior to appraisal of each stage.

Road classification and numbering, as well as pavement management systems have been established with IDA support under Cr. 2438-ET. The systems provide the basis for the road network administration and planning, as well as assessment of road maintenance and other improvement needs. An action plan for capacity building and the development and promotion ofthe domestic construction industry was presented by GOE as part ofproposals for capacity building and Private Sector development, in general. Elements of the plan have been incorporated into the Program, in such a way as to allow the increased participation ofdomestic contractors.

In addition, local consultants, with some advice from an experienced international rural transport consultant have prepared a Source book for rural transport infrastructure and services development, as well as proposals for pilot projects to be implemented in 8 weredas for infrastructure and local level transport services improvements including promotion and improvement of intermediate means of transport. The proposals have been evaluated by consultants employed by Ireland Aid and DFID and discussed with IDA during their appraisal mission in November 2002, and further confirmed during the IDA appraisal mission in March/April2003. Further implementation in the pilot districts will provide inputs for refining the recommendations from the consultant studies.

- 38 - 4. Institutional:

4.1 Executing agencies: The project builds on existing institutional arrangements and will contribute to a sustained effort of institutional strengthening for ERA and Regional Roads Authorities. As discussed under Section C.4, overall responsibility and management of the Project implementation rests with ERA, the autonomous Road Agency, with oversight provided by its Board. ERA’Sprogram coordination, contract management and administration capacity, as well as transport economics and planning were greatly enhanced by donor-supported TA during RSDP Phase 1. This was augmented by GOE’s commitment to contract administration capacity building in recruiting contract administration staff and through Bank and other donor-funded formal training and training-through-doing. In addition, ERA adopted and implemented the ERA Reform Study findings including the implementation ofuniform contract reporting and monitoring system. ERA’SContract Administration Division is responsible for processing and managing all construction and supervision consultancy contracts, as well as the consultancy services for the various studies. However, with the start of the RSDP Phase 2 activities, further support will be provided to enable ERA to handle the increased activities in: procurement, contract administration, design review and approval, adverse social impact mitigation and avoidance of claims. 4.2 Project management: Project management is to be coordinated by ERA senior core staff, together with staff of RRAs. TA has technically supported ERA and the RRAs for the management of RSDP Phase 1. Roads Inspectorate Office, which was established within ERA, has carried out independent program implementation performance monitoring and evaluation. Additional TA is being provided under APL 1 to support ERA in its increased load of procurement, design review and contract administration and management expected under Phase 2. In addition, ERA’s financial management capacity was strengthened with support from IDA, and ERA’s entity accounts have therefore been brought up to date. All project and entity audit reports are now up to date for the FY 2002.

Project management will be carried out by ERA with whom a separate Project Agreement will be signed. Procurement Management Systems were reviewed during project appraisal and action plans developed to ensure that the ERA and its associated agencies in the Regions will operate efficiently. 4.3 Procurement issues: ERA Contract Administration Division has shown sufficient capacity for procurement processing. A Country Procurement assessment review was completed and draft report submitted to GOE in June 2002. The CPAR is used to provide a firm basis for determining existing ERA capacity and any additional support needs. In order to provide the basis for monitoring the procurement activities, ERA has prepared a procurement plan incorporating the detailed engineering design and contract administration activities continued from Cr. 2438-ET, as well as the components under Stage 1. This provided an additional basis for selection of components to be implemented in the subsequent stages ofthe RSDSP II-APL 3-4. 4.4 Financial management issues: The Bank’s policy (OP 10.02) requires recipients and project implementingagencies to maintain financial management systems, including accounting, financial reporting and auditing systems, adequate to ensure that they can provide to the Bank accurate and timely information regarding project resources and expenditures. The assessment of the financial management systems ofthis project was done in line with the guidelines issued by the Financial Management Sector Board in June 2001.

ERA has a Finance and Administrative Department staffed with adequate and appropriately qualified

- 39 - staff. The Project Finance Section in the department handles all project related transactions. Staff working in the section have very good experience and understanding and are capable of handling project financial transactions in accordance with IDA’Sdisbursement guidelines and procedures.

In the past four years, there has been a substantial improvement in the finance division of ERA both in terms of qualified manpower and quality ofthe annual financial reports. The backlogs in the submission ofentity audit reports, which existed at the start of RSDP Ihave been cleared and currently ERA is up-to-date in closing the accounts and submitting the entity audit reports. The qualification points on the annual audit reports have also been reduced substantially in the last couple ofyears. The main qualification points mentioned in the last couple ofyears were long outstanding balances in goods-in-transit, debtors, creditors and cash at Bank accounts.

IDA, through RRP Credit no. 2438-ET, provided TA support to strengthen the financial management systems of ERA. In this TA, the Organizational Structure of the Finance Division was clearly defined and approved by the Board of Management ofERA, chart ofaccounts was designed and are being implemented, long outstanding balances in bank, debtors and creditors accounts cleared, other related activities are done, and the computerization process is underway with support of TA financed by GTZ and DFID. With the GTZ support, the ACCPAC accounting software is currently being installed in the Head Office ofERA. Employees are taking training on the use of the ACCPAC software and it is intended to close the accounts of ERA using the ACCPAC software for the year to be ended 7 July 2003. With the Support of DFID, the ACCPAC accounting software has been already installed in the district offices ofERA and training is underway to equip employees with the software. Other tasks may need additional financing from the RSDP I1depending on the scope and progress ofthe GTZ and DFID support in implementing the following activities:

1. Computerization of accounting and financial management system 2. Training program on computerization and users’ operating guidelines; 3. Computerization of the fixed assets accounting and fixed assets inventory system; 4. Training on computerization of fixed assets and user’s operating guide; 5. Improving the existing cost accounting system; 6. Finalization of the accounting and financial management systems, including the manual of fixed assets accounting systems.

Some ofthe resources from RSDP I1will be required to ensure that the financial management systems of ERA are further strengthened in terms of quality ofreports and adequately trained manpower. The resource, when confirmed with the cooperating donors, will be used to complete the already started computerization process by acquiring additional hardware and, if necessary, additional software, and training of staff to use the systems.

ERA is implementing a program of commercialization of its district maintenance office activities with DFID support. The existing financial management systems would therefore need to be changed to accommodate the commercialization activities at the district levels. At a minimum, additional trained staff would be required and the systems would need to be strengthened to accommodate producing of profit and loss accounts for the districts. Associated with this is the decentralization ofthe accounting activities at the district levels. It is expected that the decentralization ofthe accounting activities at the district level will start on July 8,2003 when DMOs will become cost centers. They are also programmed to become profit centers by July 2005, and commercial entities by July 2006. Decentralization ofthe accounting activities is likely to be less problematic than the commercialization process in the sense that decentralization of accounting activities need only additional staff to use the existing systems, whereas the commercialization would require a change of systems.

- 40 - Auditors' reports on the project and entity accounts of ERA for the Fiscal year that ended 7 July 2002 has been received by the Bank and there are no overdue Audit Reports.

5. Environmental: Environmental Category: A (Full Assessment) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. The potential negative impacts include: soil erosion, temporary loss of strips farmland along the road alignment, disturbances in the water quality, noise and dust are presumed to induce adverse physical environmental impacts during road construction work. For the purpose ofresettling and compensation ofthe affected people, five individual Resettlement Action Plans have been prepared and approved. The number of households affected can be summarized as follows: Total number of households affected by resettlement andor compensation: 1,763 Ofthe 1,763 , a total number of households which will be resettled and on their own land or will otherwise be affected in any way: 1,536 Ofthe 1,763, a total number of households which will be resettled on land other than their own: 227

The 5 road sections to be rehabilitated in the first year's program are: Nazareth - Assela road section, Dera - Magna road section, Nekempt - Mekenajo road, Woreta-Gob Gob road section, and Adigrat - Adwa road section.

Under RSDP I,the recipient has laid the foundation for sound environmental and social management within the roads sector in Ethiopia. As part of the RSDP IEA recommendations, an environmental monitoring branch (EMB) was established under the ERA. It consists ofan ecologist, a sociologist and an engineer. The EMB has been mainly engaged in reviewing environmental assessments reports prepared by design and EA consultants. Environmental monitoring activities are also being undertaken by the EMB. EMB operations are supported by an Environmental Procedures Manual and a Resettlement/Rehabilitation Policy Framework prepared under RSDP I. Both documents have been reviewed and cleared by ASPEN. In year 2003, the EMB changed its name in order to include safety issues in its functions. The Branch is now called, the Environmental Monitoring and Safety Branch (EMSB).

Individual Environmental Assessments (EA) including Environmental Monitoring Plans (EMPs) for the first year's road program (5 roads) have been prepared. These have been approved and cleared by ASPEN and disclosed in Ethiopia as well as at the Infoshop. Likewise, Resettlement Action Plans (RAP) for the first year's road program have been prepared, approved and cleared by ASTEN and the same were disclosed in Ethiopia and at Infoshop prior to project appraisal.

RSDP I1will continue to support EMSB to implement EMPs and RAPs prepared for each of the proposed road projects. The program will also strengthen the analytical and management capacity of the unit through training and logistical support.

The mitigation of adverse environmental and social impacts identified will be incorporated into the credit agreement. The implementation ofthe EMPs and the RAPs will be launched prior to commencement of civil works. Supervision of project operations will include a social scientist and environment specialists. Project progress reports shall include environmental and social development outcomes. 5.2 What are the main features ofthe EMP and are they adequate?

-41 - Individual EIAs were prepared for each of the 5 proposed sub-projects to be considered under RSDP II. The total road length is approximately 2, 250 km. The preparation ofPhase I1activities will integrate these findings on the selection, design and mitigation ofthe sub-projects. EMPs for each ofthe sub-projects have been prepared and will be implemented and monitored. In addition, RSDP I1will not only conduct actions ensuring environmental safeguards, but also undertake proactive environmental actions to enhance protection ofthe road infrastructure from floods, soil erosion and silt caused by environmental degradation in the catchments areas along the road alignments.

Progressively, the EMSB has been engaged in: reviewing EA reports prepared by design and EA consultants; monitoring all IDA sub-project operations and providing support to other donor financed programs in the mitigation ofadverse environmental and social impacts. Also, the EMSB has been responsible for the production ofthe Environmental Procedures Manual and the Resettlement/Rehabilitation Policy Framework. Furthermore, the EMSB prepared an HIV/AIDS strategy framework for the road sector. The three documents are finalized, they are being used in ERA'Sproject preparations and will be instrumental in the implementation ofRSDP 11. Support to the EMSB will continue under RSDP 11, in the aim to; a) strengthen the analytical capacity ofthe unit; b) strengthen management capacity of the unit through training and logistical support and c) facilitate the implementation and monitoring ofEMPs prepared for each ofthe proposed road projects 5.3 For Category A and B projects, timeline and status of EA: Date of receipt of final draft: March 2001 Individual EAs were prepared and cleared by ASPEN for each ofthe 5 proposed sub-projects to be considered under RSDP 11. The total road length is approximately 2,250 km. The EA reports are adequately prepared with identified environmental management plans, likewise, the Resettlement Action Plan. Resettlement action plans have been prepared for the five individual sub-projects in accordance with OP 4.12 and approved and cleared by ASPEN.

Sector Environmental Assessment was completed in March 200 1 Environmental Procedures Manual was completed in August 200 1 Resettlement Policy Framework was prepared and disclosed in February 2003. Resettlement Action Plans for affected road segments were also completed and disclosed on March 24, 2003.

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms of consultation that were used and which groups were consulted? Public consultations were held throughout the environmental impact assessment (EIA) and social impact assessment (SIA) processes in communities along the corridors ofroads selected for design and inclusion in the program . The stakeholders included: local governments and administrations, community based organizations (CBOs), community based facilitators (CBFs), NGOs, regional governments, sectoral administrations and federal authorities. The consultations focused on assessing the viability ofthe project, identifying potential areas of conflict between stakeholders and define areas of collaboration. The social assessment training provided in February-March 2003 for the ERA and key stakeholders focused on the consultative and participatory techniques to be further employed throughout the implementation ofthe project. 5.5 What mechanisms have been established to monitor and evaluate the impact ofthe project on the environment? Do the indicators reflect the objectives and results of the EMP? Environmental monitoring activities are being undertaken by the EMSB. EMSB operations are

- 42 - supported by the completed Environmental Procedures Manual and the Resettlement/Rehabilitation Policy Framework. The EMSB will produce progress reports to monitor environmental and social performance. The reports will be integrated into the overall project monitoring system. RSDP I1 of the Program will continue to support EMSB to monitor EMPs prepared for each ofthe proposed road projects as well to strengthen management capacity ofthe unit through training and logistical support. Transport - Poverty Observatories focusing on environmental and social indicators, will be established on each road alignment at local community level to monitor environmental and social impact in identified outcome indicators in panel surveys over a period of3-5 years. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. To help the project strengthen its effectiveness in reaching the poor and the most vulnerable groups and achieve its planned development outcomes, the following social actions have been undertaken.

A social impact assessment (SIA) was conducted by the government for each of the seven roads, in conjunction with the Environmental Impact Assessment (EIA). The EIA team included both social scientists and environmentalists. The socioeconomic data collected through review of existing documentation and public consultations, covered issues related to land acquisition, involuntary resettlement, road safety and HIVIAIDS, vulnerable groups, indigenous peoples and cultural property. The SIA concluded that project operations will have adverse social impacts induced by: a) land acquisition resulting in involuntary resettlement and b) dislocation of social values resulting in the spread of HIV/AIDS. 1763 households are likely to be involuntarily displaced by the rehabilitation ofthe 5 roads, i.e., about 350 project affected persons (PAPs) per road.

The ERA has existing resettlement /rehabilitation procedures (in the Resettlement Framework and in the Environmental Procedure Manual), providing guidance in the mitigation of adverse social impacts. The two documents have been approved by the Federal Government of Ethiopia and endorsed by the Bank. Resettlement Action Plans (RAP), have been prepared and disclosed for sub-projects with or above 200 PAPSprior to appraisal.

Drawing from lessons learned in RSDP I,RSDP I1will initiate pro-active social actions in terms of Accompanying Social Measures (ASM) that is, being formulated in a Social Action Program for RSDP 11. The focus ofthe program is twofold: a) strengthening ofcapacity in social analysis, e.g., in Regional Road Authorities after a needs assessment and b) increasing the inclusion ofsocial issues into road project designs. For instance, as part ofRSDP I1(APL) preparation, a corridor development study financed by the Japanese PHRD fund is to be carried out. The objective ofthe study is to identify and include into the road design, social issues ofconcern for the local communities along the road alignment; e.g. subjects such as local master plans, buss stops and market places, access to health services and schools. The expected social outcome ofthe study is to better serve local populations along the road alignment.

Enforcement of social clauses in contracts will be enhanced by: a) strengthening ERA's analytical capacity to undertake social analysis and review outputs; b) strengthening the capacity of the ERA's right-of-way agents to follow up on implementation ofresettlement action plans, including the compensation payments to PAPs, and addressing ROW related issues; c) developing a practical procedures manual for the resolution of right-of-way issues and c) improving the monitoring of compliance with the relevant safeguard issues and social clauses of contracts. 6.2 Participatory Approach: How are key stakeholders participating in the project?

-43- The design of the Road Sector Development Program (RSDP) is participatory at several levels. The SIA included consultations with stakeholders; local governments and administrations, CBOs, NGOs, regional governments, sectoral administrations and federal authorities, the association oflocal contractors to ensure the full participation ofthe primary beneficiaries in the final design ofthe program. Also, the consultations involved local communities, farmers groups, other nonprofit service providers, SMEs and informal sector, and focused on assessing the viability ofthe project, identifying potential areas of conflict between stakeholders and defined potential areas of collaboration.

The result ofthe public consultations carried out in the SIA in conjunction with the EL4 and ERA’S additional consultations, among others documented on video-films, confirm a solid support for the implementation ofthe project. Both local governments, civil society, e.g., the Fistula Hospital, NGOs, CBOs, CBFs and vulnerable groups such as women, youth, the handicap and the elderly are in favor of the project.

To further improve stakeholders participation, the following actions are proposed: (i)within ERA, the creation ofcoordination committees that will include private, informal and public organizations representatives; (ii)conduct of training activities to increase awareness ofrelevant issues and actions and to introduce the culture of continuous public consultation and feedback in the planning, development, maintenance and operation ofthe road and transport network; (iii)increased consultation ofproject stakeholders, local governments, local communities and project affected persons (PAPS) along the road alignment during the APL 1 implementation and the various stages of the project cycle to improve the planning and design proposals for APL 2 - 4. The consultations will provide the opportunity for the stakeholders (particularly rural stakeholders) to express their concerns and provide suggestions through public hearings and informatiodsensitization campaigns and to ensure that peoples’ needs have been taken into account. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Local governments’ participation has been requested at the design level to provide inputs to road alignments and at implementation level, to facilitate: a) the mitigation ofsocial and environmental impacts; b) the construction of camps and administrative services. CBOs, CBFs and NGOs are expected to participate in the design and implementation ofthe HIV/AIDS information and prevention campaigns. Sectoral and Federal administrations and authorities will coordinate all project operations, facilitate enforcement ofregulations and cany out monitoring. During project implementation, site specific social analysis and the implementation of mitigation measures, will include the participation of CBOs, CBFs, NGOs, private and informal sectors, and local administrations. The aim will be to ensure that participation of such stakeholders is not only limited to preparation of the road design, but that it also includes their implementation.

Social Contract: One option to be pursued during project implementation would be to look at the possibility ofinitiating “Social Contracts” with local communities, especially regarding road safety and road maintenance activities. To increase communities’ ownership of, and commitment to the project objectives and ensure sustainability, communities would be provided space to participate in; a) safeguarding the road from right of way encroachment and b) maintaining agreed sections ofthe road. For the delivery ofthese services, participating local communities would be remunerated. Social contracts of the kind proposed would not only provide a continuous dialogue with local stakeholders, but also strengthen ownership and sustainability ofthe road services provided. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes?

- 44 - The Environmental Monitoring and Safety Branch (EMSB) will ensure that the mitigation of adverse social impacts are effected by the contractors and the consultant engineers. Among the staff ofthe EMSB, is one social scientist. A second social scientist has been added to the team to focus on HIVIAIDS issues. The EMSB will continue designing the mechanisms for monitoring and evaluation of the social mitigation measures. Monitoring and evaluation will also be carried by independent entities (including selecting from the local social scientists that have participated in the social analysis training) at different stages ofimplementation of the social mitigation measures.

The Right-of-way Branch has been merged with the Contract Administration Division in order to improve service delivery to PAPS, to contractors and enhance communication regarding right-of-way issues between the contract division and the contractors.

Local social scientists and/or environmentalists will be recruited to become part ofthe consultant engineer team to ensure quality and compliance in the implementation of social and environmental clauses ofthe contracts, including accompanying actions.

As a follow-up to a recently completed ESW review of povertylsocial issues in the Africa Region Transport portfolio, AFTTR and AFTES have initiated a series ofregional capacity building workshops for local social scientists, key government agencies and transport authorities, in the aim to better address social issues in their project/program operations. The Ethiopia Road Sector Development Program was selected for the first regional training which took place in Addis-Ababa from mid-February to mid-March 2003. The overall objective of the training was to:

(1) create awareness among transport authorities about the range and importance ofpoverty/social issues; (2) strengthen social analysis capacity of road transport stakeholders, e.g., members ofthe EMSB, other relevant ERA staff, university students, private sector, NGO’s, regional road authorities, and relevant Federal Agencies, e.g., the Ethiopian Environmental Authority (EPA) and (3), help create a constituency ofadvocates for these key issues among policy makers, transport authorities, donors and civil society.

In the process ofpreparing the Ethiopian Rural Transport and Road Program (ERTTP), a study on how to assist women to make better use of IMTs was prepared and a workshop on gender and rural transport was organized for the ERA staff involved in rural roads. Both activities were funded under the Gender and Rural Transport Initiative (GRTI) ofthe Africa RTTP. GRTI is also funding a pilot implementation of some ofthe recommendations ofthe study and lessons learned will be included in the implementation of ERTTP operations. 6.5 How will the project monitor performance in terms of social development outcomes?

RSDP I1will have a strong focus on monitoring and evaluation. Social/poverty development outcomes matrix has been designed which will be refined and monitored along other indicators and throughout the APL 1 and subsequent APL 2-4 project cycles by the EMSB and ERA’Smonitoring and evaluation unit. Social clauses including HIV/AIDS will be included in contract documents. Together with the other main donors (EC and AfDB) of the program, RSDP 11 has developed road related social impacts/development indicators integrated with the Millennium Development Goals (MDGs).

-45- Road Sector Outcomes for Indicators MDGs I Goal 1. Eradicate Extreme Poverty Frequency oftransport services. and Hunger Ratio ofland transport cost to farmgate prices (for local produce) Reduced road transport costs. Ratio of land transport cost to border prices(c.i.f prices for Increased access to markets. import) Average travel time Increased income opportunities. Increased average household income.

Goal 2. Achieve Universal Primary % ofchildren within 1/2 hour travel to an education facility. Education I Number of children enrolled and attending school by gender. Increased school enrolment Goal 3,4, 5. Promote Gender Equity; I ~~----"- IllLlGClSG (Ivc--.-rage income for women. Improve Child and Maternal Health. tra to Enhanced access to health facilities Reduced vel time health facilities.

Goal 6. Combat HIV/AIDS Increased number HIV/AIDS awareness campaigns. Increased access to HIVIAIDS Increased use ofcondoms. prevention services

Goal 7. Ensure Environmental Improved contractors' compliance in implementing environmental Sustainability and social mitigation measures. Inclusion ofenvironmental and social Strengthened capacity to monitor environmental and social mitigation "res in Contract clauses mitigation measures (number ofreports, staff strength).

Transport - Poverty Observatories focusing on environmental and social indicators, will be established on each road alignment at local community level to monitor environmental and social outcome indicators over a period of 3-5 years panel survey. This would help RSDP I1to better monitor the impact of transport on poverty alleviation in terms ofperformance in social outcomes at the household level along each road alignment. The effort to evaluate the "before" and "after" impact ofthe roads will include setting up control observatories along nonintervention corridors. Some of the specific variables will be modified based on community feedback during the 1st year of analysis. This work will be executed in collaboration with other donors and with local universities. The EMSB progress reports regarding the mitigation of social clauses, will be the preferred instruments to monitor and evaluate performance in social development outcomes.

-46- 7. Safeguard Policies:

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. An Environmental Monitoring and Safety Branch (EMSB) was set up at ERA under RSDP I,to ensure supervision and monitoring of environmental and social mitigation measures in compliance with Bank's safeguard requirements. Bank supervision ofproject operations will include both environmentalists and social scientists to ensure continuity, quality and sustainability. A road sector EMwas prepared for ERA under RSDP I. Seven road specific EIAs were jointly prepared by environmentalists and social scientists. Additional studies will be undertaken to enhance project design and minimize adverse impacts during implementation, these studies include: a) the establishment of road corridor development plans incorporating into road design, the physical master plans of local community centers along the road alignment; b) an assessment ofroad poverty/social impacts of transport operations. Based on the findings ofthe EIA, five Resettlement Action Plans (RAPs) have been prepared to mitigate adverse social impacts identified in the EIA. For the purpose of resettling and compensation of the affected people, five individual Resettlement Action Plans have been prepared and approved. The number of households affected can be summarized as follows:

Total number of households affected by resettlement and/or compensation: 1,763 Of the 1,763, a total number of households which will be resettled and on their own land or will otherwise be affected in any way: 1,536 Of the 1,763, a total number of households which will be resettled on land other than their own: 22 7

An environmental procedures manual (EPM) has been prepared and a Resettlement/ Rehabilitation Policy Framework (RPF) establishing principles for compensation and rehabilitation have been completed, approved by the Ethiopian Government and endorsed by the Bank. The Resettlement/RehabilitationPolicy Framework and the five RAPs were disclosed prior to appraisal. Right of way requirements have been revised in the project design phase and will be revisited during project implementation to reduce land acquisition and involuntary resettlement, where safety is not compromised. Social clauses including HIV/AIDS awareness and prevention operations, as well as road safety awareness will be incorporated into the road works contract clauses. Environmental protectiodmanagement plans will be refined for each contract.

-47- F. Sustainability and Risks 1. Sustainability: The critical factor required for sustainability of the program and project benefits is continued Government commitment at the highest level to sector and institutional reform. Strengthening the institutional and organizational capacity of road agencies is essential for sustainable implementation of the RSDP and the up-keep ofthe road network. In addition, without fostering local contracting capacity to carry out maintenance and rehabilitation works, the country will continue to face capacity constraints to execute road program. Without greater resource mobilization, Government will continue to face budgetary constraints in funding the required level ofmaintenance. Actions to be undertaken during RSDP I1to address these issues are:

(a) ERA's capacity to plan, procure and administer civil construction and service contracts, contract administration, engineering design review and financial management will be strengthened; (b) by involving key stakeholders, including direct beneficiaries and project affected peoples, lawmakers and the civil society including local leaders and citizens in project preparation and design, the framework has been set for sustained mobilization of Government and local support essential for successful implementation; (c) public-private partnerships in the delivery and management of transport services will be enhanced. Term maintenance contracts which will lead to performance based maintenance program is also being developed as part ofthe commercialization of ERA's district maintenance offices operations, and local contractor participation will be encouraged so as to improve efficiency in the use ofresources; (d) major road works execution capacity will be enhanced through promotion and use of domestic contractors; (e) resource mobilization and allocation to improve maintenance of the road network will continue to be improved. In addition, representation ofthe private sector on the Road Fund Board ensures transparency and accountability in the use offunds; (0 the participating regions/communities will finance up to 40 percent of the cost of low-level rural travel and transport infrastructure and services development to ensure ownership of the proposed program; and (g) a specific focus ofthe project will be on addressing social aspects oftransport and broader development related issues.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column ofAnnex 1):

From Outputs to Objective GOE budget and Road Fund levels may M 3-year Target to be reviewed quarterly and not be kept high enough to meet the road annually; future program stages would be maintenance needs subject to satisfactory performance and realization oftriggers, as well as annual PER. Annual road maintenance program may M Maintenance Action Plan Targets set and not be implemented as scheduled reviewed quarterly and annually. Future program stages subject to satisfactory performance and realization oftriggers Contractor claims may not be settled on M ERA and GOE to continue to proactively time remove bureaucratic bottlenecks in processing contract related matters for foreign contractors; implement early dispute resolution as per contract.

-48- Private sector may not show much M GOE and ERA to proactively implement the interest DCI Development Strategy Domestic contractors may not be willing M Slice and package of major works contracts are to bid for available work to be made to facilitate domestic contractors involvement, while, contract provisions would also facilitate access to equipment and guarantees. A new labor based manual has been prepared and small emerging contractors will be provided training on labor-based maintenance contracting. Further investments may not have an S The program design integrates social and impact on poverty alleviation broader developmental impact related issues. Focus of the Corridor Development Plan Study will be to develop an empirical approach to evaluate the impact ofroad investments on poverty alleviation. Specific indicators have been developed to monitor program impact on improving access, generating employment, improving local capacity and safety standards.

~ From Components to Outputs Material and human resources in M Contracting out for additional capacity as implementing agencies may not be needed; institutional strengthening in critical available and capacity adequate as areas. needed; Resettlement Framework paper and N ERA ROW Branch has been merged with Action Plans may not be implemented on Contract Administration Department to time. facilitate compensation payments and works implementation. EMSB strengthened to monitor implementation Delays may occur in procurement, N ERA capacity to be enhanced to include contract processing and implementation contracting out capacity to expedite processing IDA team strengthening in the field Contractor performance may not be M Contractor Post qualification, early and prompt satisfactory as per contract warning of, penalty clause application for, delayed contractors Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risl M (Modest Risk), N(Negligib1e or Low Risk)

3. Possible Controversial Aspects: None

- 49 - G. Main Grant Conditions 1. Effectiveness Condition for the Grant (a) the Subsidiary Grant Agreement has been executed on behalf of the Recipient and ERA, satisfactory in form and substance to the Association, and has become effective;

(b) the Recipient has adopted the Project Implementation Plan in form and substance satisfactory to the Association.

(c) ERA has opened a Project Account and made an initial deposit equivalent to Birr 22 million.

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

The recipient shall maintain a financial management system and prepare project financial statements in accordance with International Accounting Standards. The recipient shall submit audited project financial statements and entity audit reports no later than six months after the close of each fiscal year. The recipient will also submit additional financial reports as required by the Bank.

Except as the Association shall otherwise agree, the Recipient shall, (a) for each of its fiscal years until completion of the Project, make adequate funding available for purposes of funding road maintenance activities under the Program; and (b) ensure that resources ofthe Road Fund are used to fully finance road maintenance and preservation activities.

Execution Covenants

ERA shall implement its five-year road maintenance program ofroads rehabilitated, upgraded or constructed under the Project with due diligence and efficiency and with appropriate engineering, and administrative practices, and with due respect for environmental practices, in accordance with the timetable set forth therein.

ERA shall implement the Environmental Mitigation Plan and the RAPSfor the Project in accordance with appropriate environmental practices set forth in said plans.

3. Assurances

During negotiations, Government and ERA gave assurances on the following:

ERA shall implement its five-year road maintenance program of February 2003 with due diligence and efficiency in accordance with the timetable set forth therein.

Project Coordination and Implementation

ERA shall establish and maintain until completion ofthe Project, an advisory unit with sufficient suitably qualified staff to assist the General Manager in coordination and implementation ofthe Program.

- 50 - Environmental Management

ERA shall implement the Environmental Mitigation Plan and the RAPs in accordance with appropriate environmental practices and safeguard policies of the Association. To this end, ERA shall maintain, with terms ofreference acceptable to the Association, until the completion ofthe Project, its unit responsible for the assessment and mitigation of environmental and social impact ofthe Project and the Program, including the implementation ofthe Environmental Mitigation Plan and the RAPs. Said unit shall be headed by a coordinator whose qualifications and experience shall be at all times satisfactory to the Association, and shall consist of suitably qualified staff in adequate numbers.

Annual Review

ERA shall prepare, under terms of reference satisfactory to the Association, and furnish to the Association, on or about October 3 1 of each year, commencing on October 3 1,2003, a report integrating the results ofthe monitoring and evaluation activities performed on the progress achieved in the carrying out of the Program during the period preceding the date of said report, including the environmental and social development outcomes in relation thereto, and setting out the measures recommended to ensure the efficient carrying out of the Program and the achievement ofthe objectives thereof during the period following such date.

ERA shall review annually with the Association, by January 3 1 of each year, commencing January 3 1, 2004, or such later date as the Association shall request, the report referred to in the above paragraph, and, thereafter, take all measures required to ensure the efficient completion ofthe Program and the achievement ofthe objectives thereof, based on the conclusions and recommendations ofthe said report and the Association's views on the matter.

Mid-term Review

1. Recipient and ERA shall carry out jointly with IDA, and other interested donors, a mid-term review of the progress made in carrying out the Project and the Program not later than March 3 1,2006.

H. Readiness for Implementation [x 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. 0 1. b) Not applicable.

0 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. 4. The following items are lacking and are discussed under loan conditions (Section G):

The draft PIP was reviewed and found satisfactory has formed the basis for preparing the PAD during appraisal in lieu of the reduction in IDA allocation for APL1. The contractor pre-qualfication documents have been reviewed and commented by IDA and the SPN issued, and the preparation and review offinal bidding documents are in progress. It is expected that the bidding process will be well advanced by credit effectiveness.

-51 - 1. Compliance with Bank Policies 1. This project complies with all applicable Bank policies. 0 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies.

\' Team Leader $ector MhagerlDirector Country ManagerlDirector

- 52 - Annex 1: Project Design Summary ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT Key Performance Data Collection Strategy Hierarchy of Objectives Indicators Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: :from Goal to Bank Mission) Support GOE’s ADLI for 0 Reduce transport costs Annual Economic Review economic growth and Poverty 0 Improve reliability of 0 Poverty Monitoring Reduction Strategy by access to road 0 ESW removing constraints in infrastructure 0 PER transport infrastructure and Promote gender equity services and employment opportunities

Program Purpose: End-of-Program Indicators: ’rogram reports: from Purpose to Goal)

Restore and expand country’s Increase proportion of 0 IDA supervision and 0 Continued GOE road network to reduce asphalt roads in good mission evaluation reports commitment to RSDP poverty and increase condition from 35% in Country’s economic and including institutional employment through 2002 to 57% by 2007; of sector data base & change, adequate funding promoting growth and access gravel roads from 30% to information systems and move to private/ in a socially and environ- 42%; and ofrural roads 0 “before” , “mid-term” and informal sector and local mentally sustainable manner from 28% to 40% by “after” surveys communities in road 2007. RSDP Performance maintenance Program Phasing 0 Increase road density monitoring reports Continued donor funding from 30 km/IOOO sq. km 0 Poverty impact for “right sizing” the Stages I. Sector reforms; in 2002 to 35 km/lOOO sq. monitoring surveys network policy, management, technical km by 2007. 0 sound governance and and financial management 0 Decrease average distance policies continue to allow studies; road investments with to all weather roads from the benefits of participation of domestic 17 km in 2002 to 14 km infrastructure and services sontractors; preparatory by 2007. to reach the poor activities for follow-up Social, environmental, 0 enhanced confidence in sperations economic and planning macro-economic stability management capacity of and reduced political/ Stage 2. Sector clients improved social risk implementation reforms, road 0 Sustainable and secure projected level of investments; preparatory financing for recurrent agricultural and industrial ictivities for follow-up maintenance ofroad production will be >perations network in place attained for growth 0 Targeted support to the Stage 3. Construction and poor will be effective & eehabilitation ofkey links; sustained for poverty mplement road corridor alleviation impact :ommunity development irograms; increased iarticipation of private :onstruction industry through naintenance management :ontracts; prepare and mplement ERTTP programs; ;upport for CDE

- 53 - concessioning; road safety

Stage 4. Upgrading and rehabilitation of key link roads and regional rural roads; implement ERTTP; and policy and institutional support at wereda level.

Project Development htcome I Impact 'reject reports: from Objective to Purpose) Objective: ndicators:

APL 1 Construct! rehabilitate/ 0 Reduction in freight and 0 Quarterly review of Donors support RSDP in upgrade and preserve the road passenger tariffs. implementation progress a coordinated manner. network 0 Reduction in trave time. reports and IDA 0 Financial management 0 Reduction in vehicle supervision missions. systems in the country is operating costs. 0 Progress and contract strengthened. completion reports. 0 RSDP Performance monitoring reports Improve mobilization and use 0 Ratio ofRoad Fund 0 Road fund quarterly 0 VDCs established, of resources for road annual collection against reports. functioning, and maintenance total annual maintenance arrangements to disburse needs. 0 Road Fund Annual funds & monitor 0 Maintenance expenditure Performance Reports. expenditures are put in as % ofneeds of place. maintenance network. Develop capacity in the 0 Number and value of Quarterly review of 0 DCIparticipation is private sector contracts awarded to implementation progress maintained and high domestic contractors. reports and IDA performance levels are 0 Number ofpeople supervision missions. sustained employed (by gender) in 0 Progress and contract road works. completion reports. 0 Total annual payments made to domestic contractors. Strengthen ERA reform 0 ERA DMOs as cost 0 ERA&DFID DMO 0 ERA can maintain DMOs program centers by January 1, Institutional Support operating in a competitive 2004 Progress Reports. market with private sector 0 ERA DMOs as profit centers by July 2005 0 ERADMOsas commercial center by July 2006

Output from each lutput Indicators: 'roject reports: from Outputs to Objective) Component:

Sections of federal roads 13 km of federal trunk and 2uarterly review of 0 Timely settlement ofany upgraded to paved standard or nk road network rehabilitated mplementation progress contractual claims issues

- 54 - strengthened; construction -eports and IDA supervision arising well supervised nissions. 0 Transparent, timely and fair tender and contract management by ERA Construction offederalilink 1 19 km offederal link road 2uarterly review of 0 Timely settlement ofany road to a high standard gravel network constructed mplementation progress contractual claims issues road. .eports and IDA supervision arising nissions 0 Transparent, timely and fair tender and contract management by ERA Preparatory activities for Road corridor integrated, 'rogress and contract 'rogram monitoring follow-up operations in Stages :ommunity plans prepared :ompletion reports "veysistudies 2 and 3 ERTTP weredu Travel and Weredu Travel and Transport tSDP Performance 3RTTP progress and study Transport Study Plans prepared for about 100 nonitoring reports eports Neredus HIV-AIDSprogram expansion HIViAIDS awareness and 'rogram Monitoring 3RA social aspects progress with MAP linkage ,revention program is ;urveys/studies eports leveloped and implemented RFA technical and financial Road Fund annual technical toad Fund Annual Reports toad Fund sufficient to assure audit capacity strengthened ind financial audits are idequate financing ofroad repared naintenance ERA strengthened for [ncrease in number of Juarterly review of 0 Timely settlement ofany procurement, contract :ontracts without arbitration mplementation progress contractual claims issues administration 'eports and IDA supervision arising nissions 0 Transparent, timely and fair tender and contract management by ERA TA Support for ERA in 0 Annual Implementation 2uarterly review of hualroad maintenance Project Planning and Plans preparedupdated mplementation progress rogram implemented as Implementation, and Social 0 Poverty indicators 'eports and IDA supervision cheduled Impact Monitoring measured nissions

Project Components I nputs: (budget for each 'roject reports: from Components to Su b-components: :omponent) htputs)

Rehabilitation and upgrading JS79.99 million 0 Disbursements reports; 0 Material and human of Federal roads 0 Implementation progress resources in reports implementing agencies Upgradingkonstruction of JS20.64 million 0 Social impact study of are available as needed; Federal Link Roads persons to be potentially 0 Resettlement Framework retrenched and paper and Action Plans Construction Supervision JS$ 1 1.27 million communities that might will be implemented as be most affected agreed; TA Services for preparing JS$6.12 million 0 Minimum delays in Rural Travel and Transport procurement & contract Program processing and implementation; HIViAIDS prevention JS$4.65 million 0 Contractor performance program and TA Services to is satisfactory as per ERA contract; 0 Security problems do not

- 55 - rechnical advisory services to JS$ 0.35 million delay surveys, detailed WA for Road Financing and engineering and echnical Audit. construction.

Urban transport study JS$l .OS

'reparatory activities for next JS2.70 million stages including support for 'rivate sector participation md development

- 56 - Millennium Development Goals Indicators Measuring Outcome of Investments in the Roads Sector Development Program-Case Studies (*)

Outcome Indicator MDG 1-Eradicate Dovertv

Reduce road transport costs - frequency of transport services - ratio ofland transport cost to farmgate prices (for specific local produce) - ratio ofland transport cost to border prices (c.i.f prices for imports) Increased access to market - average travel time (for different modes for a specific 0-D pair) - traffic flows (both motorized and NMT)

Increased local income - increased average household income

MDG 2-Universal urimarv education

Increased access to education - % ofchildren within % hour travel to school (by mode) opportunities - % ofchildren within % to 1 hour to school (by mode) - average school attendance on a daily basis - number ofchildren enrolled (by gender)

MDG 3.4,5-Gender. Child and Maternal Health

Reduce maternal child mortality - Reduce travel time to health center (by mode and location distance) Increase employment - number ofwomen employed in road works opportunities for women

MDG &Combat HIViAIDS

Increased access to HIV/AIDS - Increased number ofHIV/AIDS campaigns, on main corridors prevention services - Increased distribution ofcondoms

MDG 7-Ensure environmental sustainabilitv

Inclusion ofenvironmental and - Improved contractors’ compliance in implementing social mitigation measures in environmental and social mitigation measures contract clauses - Strengthened capacity to prepare and monitor environmental and social mitigation measures (number ofreports, staff strength, etc)

Note: (*) During RSDP 2 implementation, social and environmental observatories will be established on each corridor alignment at local community level to monitor the changes in identified indicators over a 5 year panel survey. Efforts to isolate the impact ofspecific road investments “before” and “after” interventions will include setting up control observatories along non-intervention corridors. Some ofthe specific variables will be modified based on community feedback during the 1‘‘ year ofanalysis. This work will be executed in collaboration with other donors and with local universities.

- 57 - Road Sector Specific Output Measures

Output Measure Indicator Improved road network Share ofgood and fair roads increased Increase in prop ofpop within 9'2 day walk from all weather roads Increase in road density Decreased number ofroad accidents and fatalities Enhanced sustainability ofroad Road sector expenditure as % ofnational budget sector expenditures Maintenance expenditure as % ofneeds ofmaintainable network Maintenance expenditure (routine/periodic) per km (paved/gravel/ earth roads)

Improved sector management reduce time for payments to consultants/ contractors (time from agreement ofinterim certificate to receipt ofpayment) reduce time for contract administration (time measured from publication ofinvitation to tender to issuing the letter ofcontract award) share ofadministrative cost to total expenditures value ofroad contracts per ERA staff Independent audit ofroad expenditures (financial and technical) Increased involvement of the Number ofdomestic contractors awarded routine/periodic/rehab private sector contracts financial value ofdomestic contracts as % oftotal contracts % ofplant equipment rented to owned creation ofleasing arrangements to facilitate the active participation

Increased commercialization of % ofcontracts awarded through competitive bidding process the ERA DMOs

- 58 - Annex 2: Detailed Project Description ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT GOE Road Sector Development Program and the Proposed Support

The Government has attached a high priority to the Road sector in its overall economic development program and poverty reduction strategy. In 1997, a major ten year Road Sector Development Program (RSDP) was launched in order to address the limited coverage and poor state ofthe road network, as well as, the growing transport requirements of the country. The Program was launched with a very significant donor support to create adequate capacity in the road sector, and to facilitate the economic recovery process through the restoration of essential road network. With the completion ofthe RSDP I,at the end of June 2002, the GOE embarked on the RSDP 11. The program aimed at the further development ofa strong management and technical capacity to manage the road network, in order to address key outstanding sectoral issues, along with the development of the capacity ofthe domestic construction industry. The investments under the program will continue to restore and expand the road network, to improve access ofrural communities to markets, off farm economic opportunities, and social services and facilities, which are still the major obstacles and impediments for a sustainable economic development.

The RSDP 11, estimated to cost about USD 1.48 billion, is expected to be financed in parallel by IDA, EC, AfDB, NDF, BADEA, OPEC Fund, Japan, Germany, Italy, Ireland, UK, Sweden, Several NGOs, Road Fund, Beneficiary Communities and the Government of Ethiopia. The target is, by 2007, (i)to have 45% of the roads in good condition from the current condition of 30%, (ii)to install regular maintenance on the Ethiopian road network, (iii)to increase the road density per 1000 sq. km from 30 (the current Figure) to 35 by June 2007.

The Government presented to IDA its proposal for IDA assistance over the RSDP I1period which is to be implemented through an APL instrument in four phases. The total cost ofthe proposed activities is US $ 863.63 million, out of which GOE has requested IDA financing support ofUS $570.30 million. The support would cover primarily the rehabilitation and upgrading ofpriority Federal Roads, rehabilitation and construction ofpriority Federal Link and Regional Roads, and the implementation ofthe Ethiopian Rural Travel and Transport Program, along with the required TA support to ERA and the regional road authorities.

Road Sector Development Support Program II - APL I The primary objective ofthe Road Program is to restore and expand Ethiopia’s road network to reduce poverty and increase employment through promoting growth and access in a socially and environmentally sustainable manner. The Program (APL) would support GOE’s Agriculture-Development Led Industrialization (ADLI) and Sustainable Development and Poverty Reduction Program (SDPRP) with the objective to realizing the MDGs and contributing to government’s decentralization efforts. GOE has submitted a proposal to IDA for implementation under RSDSP I1APLl a total amount ofUSD 2 19.27 million. However, the proposed IDA share of financing for the APL 1 amounts to USD 126.80 million.

The phasing of the APL has been developed for implementation in four stages. The subsequent stages will overlap with the previous one over an overall program implementation period of 10 years (2003-2013).

- 59 - By Component:

Project Component 1 - US$103.22 million Rehabilitation and upmading of Federal Trunk and Link Roads The road sections to be financed in APL1, all form part of four roads proposed initially for rehabilitation and upgrading under APLI and 11. The feasibility studies, environmental impact assessments, and detailed engineering designs for all the road projects were carried out as part ofpreparation ofseven road projects financed under the IDA Credit 2438 -ET. It involves the rehabilitation and upgrading of 412.9 km of Federal Roads, out of which 79 km of existing asphalt paved trunk road is to be rehabilitated, while the remaining 333.9 km oftrunk and link roads are to be upgraded from gravel to bituminous paved road surface standard.

(i) The upmadinp of the NekemDt-Mekenaio road (127 km) US$35.02 million. The road is located in the western part of Ethiopia, and is entirely situated in the Oromiya Region. The route is situated at the heart of a coffee producing area, and is also a potential area for mining, mainly marble and gold, all ofwhich are essential sources of foreign exchange earnings for the country. The area also experiences surplus production of cereals and grain for domestic needs. The road is fully engineered with gravel surface, 7 meters wide from shoulder to shoulder, with the riding surface in poor condition. The road is classified as trunk road and it is proposed for upgrading to an asphalt concrete surface with a 7.0 m width carriageway and 1.5 m wide shoulders.

(ii). The rehabilitation of the Nazareth-Assela road (79 km) US$ 19.35 million. This section of the road is part of the rehabilitatiodupgrading ofthe Nazareth-Dodola/ Shashamane-Goba pavedgravel road. The other sections ofthe road have been proposed for IDA financing under APL 11. The project road lies entirely in Oromiya Region in the South Eastern part of Ethiopia. It begins at Nazareth town, the riding surface is paved and has a width of 7.0 m. The overall road condition is fair to poor. The road is classified as a trunk road and is to be rehabilitated with an asphalt overlay surface to a 7.0 m width carriageway and 1.5 m wide shoulders. (iii) The uperadinv of the Woreta-Gob Gob road (98.9 km) US $24.1 1 million. The road commences from the western end of the town of Woreta and terminates at Gob Gob, a small settlement on the Road leading to Woldia. This section is part of the Woreta - Woldia Road upgrading Project covering a total length of about 293 km. The other sections are proposed for financing under the APL 11. The project road lies entirely in the Amhara Region. It is ofhigh socio-economic importance and serves as a major traffic collector, traversing mostly difficult terrain to connect the Wollo and Gondar sub-regions. The road is classified as a major link road, and is a fully engineered gravel-surface road originally constructed between 1977 and 1983, and later regravelled as part of the ERRP. The mountainous nature of the area traversed by the road has become a cause for erosion and surface wear. It is now recommended for upgrading from gravel to a double bituminous surface treated surface with carriageway width of 7 m and 1.5 m wide shoulders. The works on this section are to be packaged into at least 3 lots and contracted to enable increased domestic contractor participation as part of the project's domestic contractor capacity development objective. (iv) The upgrading of the AdiAbun - AdiPrat road (108 km) US$24.74 million: The road is part of the Adigrat-Axum-Shire road that provides an important east-west link between the two primary North-South trunk roads in the northern region of Tigray. The mountainous terrain, which the road traverses, makes transportation difficult during the wet season. The existing road is a fully engineered gravel surface road with a carriageway width of7 m covering an underlying Telford base. The Telford base is exposed over some sections ofthe road in spite ofbeing regravelled under the ERRP. The road is approximately 50-60 years old and the present pavement condition is fair to poor. It is classified as a major link road and is recommended to be upgraded from the existing gravel road to an asphaltic concrete surface. The remaining section ofthe road is proposed for IDA financing under the APL 11.

- 60 - Project Component 2 - US$28.66 million Construction of Federal/Link Road : The Dera - Magna section (1 19.4 km ) of the Dera-Mechara road (239.10 km) is located in the central part ofEthiopia in the Oromiya region. The road branches off at Dera town from the Nazareth-Assela trunk road at km 124 from the capital, and runs in a northeasterly direction to connect the Arbereketi-Mechara road. It runs through the villages and towns of Sire, Bulo, Moye, and Chole. The existing road is essentially a track which is only accessible by four-wheel drive vehicles during the dry season. The road is classified as a link road and is proposed to be constructed to a gravel surface pavement with 6.0 m wide carriageway and 1.5 m wide shoulders. The remaining section of the Dera-Mechara road is proposed for financing under the APL II.

Project Component 3 - US$ 10.55 million Construction Suuervision: This component comprises ofthe provision of consultancy services for the supervision ofthe above civil works. The terms of reference for these services are being prepared by ERA and procurement processing will be initiated once the project scope is defined and the TORSare discussed and agreed between the Bank and ERA. It is proposed that one consulting firm will be selected for supervising works on each proposed road and in the case ofthe Woreta-Gob-Gob road, one firm to deploy supervision teams to cover the 3-6 individual contracts.

Project Component 4 - US$6.66 million Rural Travel and Transport Program: This component supports the implementation ofthe ERTTP by financing (i)the preparation of about 100 Weredas Travel and Transport Plans (WTTPs), as part of Wereda Integrated Development Plans (WIDPs), for implementation at a later stage, (ii)Development of Information, Education and Communication Strategy , and (iii)capacity building activities for ERTTP structures at the National, Regional and Wereda levels. li)Preparation of 100 Wereda Travel and Transport Plans - US$5 m: This sub-component will support the preparation of the plans as part ofthe expanded pilot activities ofthe ERTTP. The concept and approaches are to be tested in the eight pilot weredas under funding of Ireland Aid and DFID during APL 1. The plans will be prepared using the methodologies and frameworks contained in the Source Book for the implementation ofthe ERTTP which has already been prepared, commented upon by donors collaborating in the implementation of the ERTTP, and is now being finalized by ERA. It is expected that lessons already learned in the preparation ofthe Pilot WTTPs as well as those emerging from the pilot implementation will be taken into account as appropriate in the preparation of the 100 WTTPs. The studies planned will be similar to the pilot wereda studies, Le., development ofWIDPs as a framework for the development of the WTTPs. This includes preparation of Community Project Plans (CPPs) and Non-community project plans (NCPPs).

The WTTP, for each wereda will contain interventions for (a) the improvement of community road networks including mechanisms for their sustainable maintenance; (b) the promotion of the use of IMTs; (c) the provision of small scale infrastructure facilities (e.g., water wells) which contribute to reducing the travel and time burdens of the community; (d) improving the institutional and financing frameworks for sustainable service delivery; and (e) promoting income generating activities. These interventions will promote the development of the local economy and thus contribute to poverty reduction. The weredas, for which these plans will be prepared, will be identified with due regard to regional balance through discussions between central and regional governments, collaborating donors, and their preparation steered by the Wereda Development Committee. The studies will be undertaken from 2003/04 to end of 2005/06. Each consultancy contract to be financed will cover the preparation of five WTTPs, with a requirement of about 50-man months per contract. The cost for the 100 weredas is estimated about US$ 4,850,000. The studies will be carried out in two phases, during which period, ERA will be supported by intemational consultants on an intermittent basis. The cost ofthese services is estimated at US$ 150,000.

-61 - lii) Development of Information, Education and Communication Stratew - US $0.12 m One of the focal areas ofthe program is to create awareness among all stakeholders of the program. To achieve this objective, it is critically important to formulate an IEC Strategy that will serve as an instrument for launching a broad based awareness raising campaign for the rural communities, concerned stakeholders and donors on the rural travel and transport issues. To this end it is proposed to carry out a study, which will investigate and make recommendations on how to raise awareness and monitor the impact of the ERTTP. This study will develop a strategy for providing relevant information, education and communication to all stakeholders on the ERTTP. The strategy formulation, implementation, Amharic translation, media promotion are the activities to be financed under this component.

liii) Capacity building for ERTTP structures at the National, Regional and Wereda levels - US $ 1.54 m : The activities under this sub-component include: (i)the development of capacity building strategy, (ii)development of GIS systems, (iii)provision oftransport facilities, training workshops, and seminars to build the capacity of the ERTTP structures at the National, Regional and wereda levels.

The development of a capacity building strategy will involve the following tasks: (i)identification of the capacity building needs; (ii)identification ofthe people to be trained and or target groups from both the public and private sector; (iii)detailed design of the training activities including production of training materials and instruments at the wereda level; (iv) identification of trainers (external) and potential trainers (internal); (v) identification of local partner institutions in the delivery of the training activities; and (vi) programming and implementation of the training activities. The approach may also require the identification of the skills/experience gaps within the country that would need to be provided at the beginning of implementation using international TA together with a time bound strategy for their replacement by nationals.

The need for properly mapping existing and planned local rural infrastructure is a central part of ERTTP. Thus the establishment of GIS systems at the national and regional levels is envisaged under the APL 1. The proposed activities for financing are training in GIS systems, and provision of GPS equipment and software for all regions.

The responsible body for the ERTTP implementation at the wereda level would be the wereda ERTTP Coordinating OfficeIDesk. The regional Coordinator would be providing technical assistance and monitor the implementation. In order to facilitate this activity the project will support the provision of 16 double cabin vehicles for regional and Pilot wereda coordinators. In addition the findings ofthe ERTTP pilot implementation need to be disseminated at the different weredas. The project will support the provision of continuous training, workshops and seminars through out the coming three-years.

Project Component 5 - US$4.29 million TA Support for ERA in Proiect Planning and Implementation, and Strengthen Associated Social Actions : The focus of this component is to support: (i)the continuous efforts in the road sector to mitigate the spread ofHIV/AIDS ; (ii)ERA in the areas ofproject planning and implementation in order to achieve (a) an extended social inclusion of local communities and local governments in various project phases to better address road constructiodtransport related poverty issues, (b) a continuous monitoring of poverty impact of road construction and transport operations through the establishment of transport-poverty observatories at local community and household levels, (c) the further enhancement of ERA'Scapacity in the areas ofContract Administration, Review and approval of Engineering Designs, Environmental and Social Impact monitoring and Right-of-way Management, so as to avoid Claims and facilitate dispute resolution.

- 62 - li)HIV/AIDS Control and Prevention and Technical Advisory Services to the ERA US $0.5 m :. The Ethiopian Government's HIV/AIDS policy urges communities at large, including ministries, regional governments, local governments and the civil society to assume responsibility for carrying out HIV/AIDS awareness and prevention campaigns. In line with this policy, and the findings of different studies on HIV/AIDS in work places (which confirm that the transport sector a one ofthe breeding grounds for HIV/AIDS and a vehicle ofthe pandemic), ERA and the IDA had taken the initiative to retrofit HW/AIDS activities under the RSDP Ioperations. ERA since then has been engaged in the development and the implementation ofHIV/AIDS awareness and prevention program within the road sector. Activities on the prevention and control measures have been started at project sites, especially under the major civil works contracts. ERA also submitted a proposal to the MAP with an estimated budget of 1.2 M USD for a three-year program and the first year's activities are underway with the approved budget of 0.4 M USD.

Based on the proposal, ERA under the Environmental Monitoring Branch, has recruited two professionals (one Sociologist - project coordinator) and one Health officer (assistant project coordinator) to carry out the day-to-day activities and implement the intervention measures. The tasks of the project coordinators include advocacy work, Information, Education and Communication (IEC), provision and distribution of protective devices, analytical work and outsourcing activities like increasing the access to prevention services regarding sexually transmitted diseases (STDs) and HIV/AIDS. The unit is working with a) ERA staff at Headquarters, Projects and Districts; b) Local and international contractors; and c) communities interacting with ERA road projects. In order to guide the coordinators, the recruitment of a consultant with PHRD Grant funding to carry out a baseline survey and prepare a three-year strategic work plan is underway. Under APL 1,2, 3 and 4, all civil works contracts will have HIV/AIDS clauses. The initiative under this APL Iis designed to complement the national MAP HIV/AIDS program of the country and further capitalize on the activities ofthe coordination unit. Additional funding would be obtained from the MAP as needed and agreed with the coordinating body.

(ii) TA SuDDort for ERA in Proiect Planninp and Implementation and Social Impact Monitorinp: US $3.78m The support to ERA will comprise the provision of a consulting service to enhance ERA'Scapacity to plan, procure and administer civil construction and service contracts, and manage contract claims and disputes. The scope of services will be targeted at Project Planning, Procurement, Contract Administration, Review of Engineering Design, Claims Avoidance and Dispute Handling. It is also intended to train ERA personnel in the areas of planning and programming, environment and social impact management, and contract administration and management.

One ofthe lessons learned from social and environmental supervision under RSDP I,as well as from the workshop on social aspects oftransport operations held in February/March 2003, is that the project planning and implementation process need to increase inclusion of local communities and local governments along the road alignments. A strategic partnership with local communities in project planning and implementation doesn't only facilitate right-of-way issues (resettlement /rehabilitation/environmental impact mitigation) and the work ofthe contractors, but it also provides critical inputs into the road design and the poverty impacts ofthe road.

Three activities that would be strengthened to increase social inclusion, and better address road constructiodtransport related poverty issues of local communities are: a) development and implementation of road specific IEC programs focusing on road construction related issues (e.g. safety, right ofway, resettlementhehabilitation, environmental impact mitigation, HIV/AIDS) for local communities and local governments; b) assessment and implementation of community specific

- 63 - operations related to road construction work (e.g., relocation of market places, location and improvement of "bus stops'', location of water bore holes to serve both contractors and communities, planting oftrees for shades at "bus stops", etc.)

In addition, with the aim ofmonitoring the impact of transport on poverty alleviation, transport - poverty observatories will be established on each road alignment at local community and household level to monitor environmental and social outcome indicators over a period of 3-5 years panel survey. This would enable ERA and GOE, under the RSDP 11, to get a better understanding ofthe impacts of transport on poverty alleviation in terms of performance in social outcomes at the household level along each road alignment. This work will be crafted to be executed in a partnership between the ERA, contractors, universities and NGOs. It is expected that the findings ofthe observatories, will contribute to planning and designing roads that would better address poverty issues.

Project Component 6 - US$0.42 million Road Financing Study and Technical Audits: This component will provide support to the Office of the Road Fund Administration (RFA) to establish technical and financial auditing systems and procedures. It will also establish a mechanism by which the Road Fund accounts are closed timely and public reports are produced, to an acceptable standard following international practices. In addition a road financing study will be carried out.

The two consultancy services under the APL Iare expected to enable the Road Fund office to achieve the following: (i)the establishment of effective technical and financial auditing arrangements; (ii)the design of an appropriate reporting system for use by the beneficiary road agencies covering the technical aspects of work done and the financial cost of carrying out road maintenance works; (iii)the design of model reporting forms for use by the beneficiary road agencies covering actual work done and the corresponding financial costs; (iii)the establishment of appropriate auditing and reporting systems for verifying the timely collection and deposit of funds into the central Road Fund account from all sources; (iv) a financial and technical audit ofthe road fund covering its first two years of operation; (v) the Terms of Reference and cost estimates for future extemal audits of the Road Fund; (vi) a plan for continually improving the RFA's capability and capacity for monitoring and auditing the Road Fund operations.

Project Component 7 - US$3.50 million Preparatory Activities and Urban studies: One of the purpose of this component is to provide consultancy services to carry out feasibility, and EIA studies, as well as, design and design review for road projects to be included under follow-on operations. The estimated cost is about US $ 2.5 million. The possible projects are those that are planned to be executed under APL Stages III.

The other sub component, estimated at US $ 1 million, focus on providing support to the Addis Ababa City Government in the preparation ofan urban transport strategy and policy document and a prioritized pilot project.

- 64 - Annex 2

ROAD SECTOR DEVELOPMENT PROGRAM II SUPPORT PROJECT PROGRAM AMOUKT AND PHASING

JlCA & Ireland Total IDA GOV PHRDGr. NDF Ad DFlD GTZ EC AfDB Community

stage I Rehabilitation & upgrading of Federal Roads 123.39 79.99 43.40 Construction of Federalkink Road 34.41 20.64 13.77 Construction Supervision 11.93 11.27 0.66 Rural Travel and TranspMt Program 23.63 6.12 3.43 5.03 5.03 4.02 Capaaty Building and Training 8.08 4.65 0.70 1.25 0.11 1.37 Road Financing Study & Technical Auditing 0.46 0.35 0.11 Preparatory Activities including Urban Studies 3.91 3.78 0.12 RAP and Cwndor Devdopment Studies 0.82 0.00 0.14 0.68 Preparatory Activities and TA Support RRAs and ERA 11.72 0.00 1.95 9.77 Axle load, Safety and Transport Regulation Activities 0.82 0.00 0.14 0.69 Road Network Planning (HDM & PMS) 0.10 0.00 0.02 0.08 Subtotal Stage I 219.27 126.80 64.44 0.68 9.77 5.03 5.03 1.25 0.88 1.37 4.02

stage II The upgrading and rehabilitationof: (a) hela- Wola and Shashemane - Goba, (b) Gob Gob 175.55 115.77 59.78 Woldiy (c) Shire-AdiAbun Construction Magna-Mechra 34.20 20.91 13.29 upgrading and mstruction of Assosa-Guba 20.80 12.72 8.08 Construction Supervision 18.44 15.13 3.30 Rural Travel and Transport Program 8.81 5.72 3.08 Capaaty Building and Training 2.00 1.79 0.21 Preparatory Activities 14.39 2.15 2.25 10.00 Subtotal Stage II 274.19 174.20 89.99 10.00

stage 111 Main Road Projects Gonder -Debark 22.86 16.34 6.51 Mekenajo -D/DOlo 48.23 31.35 16.88 Gedc- Nekempt 30.63 19.91 10.72 RuraVGraveI Roads Awash -Mon-Kassamender 48.00 31.20 16.80 Shehedi-TKetema-Guba 22.40 14.56 7.84 YabDalol 19.50 12.67 6.82 Babile-Fik 16.38 10.64 5.73 Meti-Were 9.36 6.08 3.28 Capaaty Building and Training 1.20 1.00 0.20 ERlTP 6.30 5.50 0.80 Preparatory Activities 1.10 1.00 0.10 Subtotal Stage 111 225.94 150.26 75.68

Stage N Main Road Projects Aposto - Bore-Negelle 56.46 42.20 14.26 Nekempt- &delle 24.00 17.94 6.06 Rural/Gravel Roads Sada-Maji 25.60 19.14 6.46 hossa-Dabus-Wonkera 28.80 21.53 7.27 Gog - AkOb 16.00 11.96 4.04 Capaaty Building and Training 1.10 1.00 0.10 ERTTP 6.10 5.00 1.10 Preparatory Activities 1.10 1.00 0.10 Subtotal Stage N 159.16 119.77 39.39

TOTAL 878.56 571.02 269.50 0.68 19.77 5.03 5.03 1.25 0.88 1.37 4.02

- 65 - Annex 3: Estimated Project Costs ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT

Total Baseline cost 58.75 98.54 157.29 Physical contingencies 5.35 9.14 14.50 Price Contingencies 9.07 5.59 14.66 Total Project Cost 73.16 113.28 186.44

- 66 - Project Component Local Foreign Total

- Civil Works 1 Rehabilitation & upgrading of Federal Roads A - Nazareth-Assela-Dodola/Shashamane-Goba 6.77 12.58 19.3! 0 - Woreta - Woldyia 8.44 15.67 24.1' C - Adigrat - Shire 8.66 16.08 24.71 D - Nekempt - Mekenajo 12.26 22.76 35.0: 2. Construction of FederallLink Road A - Dera - Mechara 11.46 17.1 9 28.61 Construction Supervision for the above Civil Works 3.69 6.86 10.5! I Rural Travel and Transport Program 5.77 0.89 6.61 'I HlVlAids Control and Preventation & contract dminstration support and Training 0.86 3.43 4.2! ' TA Support for the Road Fund 0.14 0.28 0.4: '11 Preparatory Activities including Urban Studies 0.70 2.80 3.5( Total Base Cost -58.75 -98.54 157.2! P hys ica I contingencies 5.35 9.14 14.51 Price Contingencies 9.07 5.59 14.6( Total Project Cost ---73.16 113.28 186.41 :omponents financed bv Other Donors

'Ill - JaDanese PHRD Grant 'A for the Preparation RAP for APL I Roads and Poverty npact of transport operations and road corridor ommunity development studies, Training and Stake iolder Consultation -0.16 -0.66 -0.8:

IX - NDF Financed 'A Support for Regional Roads Authorities -2.34 -9.38 -11.7. C - Ireland Aid Financed :onsultancyt Service and Implementation support for WTTPs -1.21 4.82 -6.0

:I - DFlD Financed mplementation support for WTTPs -2.41 -3.62 -6.0

:II - GTZ Financed testructring of ERA MIS Studies 0.60 -0.90 -1.4

:Ill - EC Financed ixle load, safety and transport Regulation Activities 0.1 6 0.66 0.8 toad Network Planning (HDM & PMS) 0.02 0.08 0.1 'raining 0.03 0.1 1 0.1 Subtotal 0.21 -0.85 -1.o

:IV - AfDB Financed Iesign Review Capacity Building -0.66 -0.99 -1.6

:ommunity Contributions for Implementation of WTTPs 4.02 -0.00 4.0 Total Project Cost --84.79 134.49 219.2

- 67 - Annex 4: Cost Benefit Analysis Summary ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT

Summary of Benefits and Costs: General.

For the identified national and regional road projects, specific traffic counts and projections, as well as preliminary engineering designs, were prepared with a view to appraise their economic feasibility. The analysis is presented in three sections. Section A presents key assumptions, input data and methodology used in the analysis. Section B presents the economic analysis for rehabilitation and upgrading of four federal roads: (1) Nazareth-Assela section (79 km) of the Nazareth-Dodola-Goba federal road; (2) Woreta-Gob Gob section (99 km) of the Woreta-Woldiya federal road; (3) Adigrat-Adwa section (108 km) of the Adigrat-Shire federal road; and (4) Nekempt- Mekenajo federal road (127 km). Section C presents economic analysis for construction of Dera-Magna section (1 19 km) of the Dera-Mechara link federal road to a high standard gravel road.

A. Assumptions, Input Data and Methodology

TrafJic Levels. Normal traffic has been updated to take account of ERA’S2001 classified traffic count. The table below shows the Average Annual Daily Traffic for the base year, for the project roads.

Roadlink Length Car L/R S/Bus L/Bus S/T M/T WT T/T Total (W Nazareth-Asse 79 89 178 312 121 140 287 147 44 1319 la Woreta-Gob 99 0 108 11 33 43 51 84 78 398 Gob Adigrat- Adwa 109 2 181 84 79 156 117 192 102 913 Nekempt-Meken 127 0 42 6 15 35 40 75 6 219 aj o

Traflc Projections. Traffic projections on the project road have taken into account past and future trend in GDP growth, population increase, agricultural activities, tourism, AADT, vehicle fleet and fuel consumption. These are among the major factors influencing traffic growth rates on the project road.

Costs. Construction is assumed to start in 2004 and last for three years, thus the road will be open to traffic in 2007. The analysis period is assumed to cover 20 years period i.e. up to the year 2023. The investment spread is expected to be as follows: 2004: lo%, 2005: 45% and 2006: 45%. The financial construction and maintenance costs have been converted into economic costs by applying a conversion factor of 0.76. The vehicle operating costs were estimated based on input costs from recent Ethiopian vehicle fleet data.

- 6%- Methodology. The HDM 3 model (in HDM Manager) has been used for the analysis. The proposed option has been compared with a “do minimum” case. The “do minimum case” assumes that a minimum amount of maintenance of the existing road will be carried out. The economic analysis is based on benefits to road traffic (in terms of savings in VOCs & road maintenance costs) compared with the costs of rehabilitatiodupgrading and maintenance. Discounted benefits are then compared to discounted costs to produce measures of worth. Sensitivity analysis was done taking into account three scenarios namely a 20% increase in costs, a 20% decrease in benefits and the worst case (costs +20% & benefits -20%).

Benefits. The proposed rehabilitationhpgrading of the project road would have essential benefits to the nation’s economy as well as to the environment including: 0 Reduced vehicle operating cost (e.g. fuel consumption, maintenance cost) e Reduced travel time e Increased road safety e Reduced noise and air pollution and 0 Area development.

B. Rehabilitation and Upgrading of Federal Roads

B1. Economic Analysis of Nazareth-Assela section (79 km) of the Nazareth-Dodola-Goba federal road

Cost. The construction cost of the project is estimated at ETB 135.4 million. The total cost for the rehabilitationhpgrading ofthe project road, including tax and contingencies is ETB 186.2 million .

NPV/EIRR & Sensitivity Analysis. Five links have been defined on the Nazareth-Dodola-Goba road based on the engineering sections and homogeneous traffic: (1) Nazareth-Assela; (2) Assela-Dodola; (3) Dodola-Melkawakena; (4) Melkawakena-Goba; and (5) Shashemene-Dodola. The economic analysis is conducted for the first section of this road, to be included for financing in Stage 1. Much ofthe stretch of the road would be upgraded to double surface treatment, while only the first link would be rehabilitated to a 50 mm thick asphalt concrete surface. Each link option has been compared with the “ do-minimum case” for the economic analysis.

Summary of the Results

The base case has resulted in an Economic Internal Rate ofReturn of 47.8% and a Net Present Value of

- 69 - ETB 913.3 million. The sensitivity analysis indicates that the EIRR values vary from 37% to 43% depending on the sensitivity test applied. The project would still be feasible with the worst case (benefits -20% & costs +20%)- EIRR in this case would be 37.5%.

B2. Economic Analysis of Woreta-Gob Gob section (99 km) of the Woreta-Woldiya federal road

Costs. The construction cost of the project is estimated at ETB 168.8 million. The total cost for the upgrading of the project road, including tax and contingencies is ETB 232.0 million.

NPV/EIRR & Sensitivity Analysis. Three links have been defined on the Woreta-Gob Gob road based on the engineering sections and homogeneous traffic: (1) Woreta-Ach; (2) Ach-Gasay; and (3) Gasay-Gob Gob. The links are proposed to be upgraded to double surface treatment, in stage 1. Each link option has been compared with the " do-minimum case" for the economic analysis.

Summary of the Results

Criterion Base cost Benefit cost +20% & Case +20% -20% Benefit -20%

Project Road NPV (in million ETB) 1 125.6 I 94.1 69.0 37.5 I" .I .. 14.9 12.2 14.4 12.0

From the economic analysis, it can be seen that the base case has resulted in an Economic Internal Rate of Return of18.5% and a Net Present Value of ETB 125.6 million. The sensitivity analysis indicates that the EIRR values vary from 12.2% to 15.5% depending on the sensitivity test applied. The project would still be feasible with the worst case (benefits -20% & costs +20%)- EIRR in this case would be 12.2%.

B3. Economic Analysis of Adigrat-Adwa section (109 km) of the Adigrat-Shire federal road

Costs. The construction cost of the project is estimated at ETB 173.2 million. The total cost for upgrading the project road, including tax and contingencies is ETB 238.1 million.

Alternatives. Three links have been defined on the Adigrat-Adwa-Shire road based on the engineering sections and homogeneous traffic. The economic analysis is conducted for the first of these sections, which is to be financed during stage 1. The road is proposed to be upgraded to a 50 mm thick asphalt concrete surface, with widening of all bridges in the first link. Each link option has been compared with the " do-minimum case" for the economic analysis.

NPV/EIRR & Sensitivity Analysis

- 70 - Summary of the Results

Link Name Economic Scenarios Criterion Base Cost Benefit Cost +20% & Case +20% -20% Benefit -20% Project Road NPV (in million ETB) 781.3 749.59 593.2 561.4 ...... "...... "...... "...... "" ._...... ""t".."...... I ...." ...... " _

Project Road EIRR (YO) 48.5 42.1 40.7 35.2 FYRR 57.3 47.7 45.8 38.2

From the economic analysis, it can be seen that the base case has resulted in an Economic Internal Rate of Retum of48.5% and a Net Present Value of ETB 781.3 million. The sensitivity analysis indicates that the EIRR values vary from 35% to 42% depending on the sensitivity test applied. The project would still be feasible with the worst case (benefits -20% & costs +20%)-EIRR in this case would be 35.2%.

B4. Economic analysis of Nekempt- Mekenajo road project

Costs. The construction cost of the project is estimated at ETB 245.1 million. The total cost for the upgrading of the project road, including tax and contingencies is estimated at ETB 337.1 million.

NPV/EIRR & Sensitivity Analysis. One link has been defined on the Nekempt-Mekenajo road based on the engineering sections and homogeneous traffic. The road is proposed to be upgraded to a 50 mm thick asphalt concrete surface. The option has been compared with the " do-minimum case" for the economic analysis.

Summary of the Results

Scenarios Base Cost Benefit Cost +20% & Case +20% -20% Benefit -20%

548.8 I 504.3 I 394.5 1 350.0 ...... "

From the economic analysis, it can be seen that the base case has resulted in an Economic Internal Rate of Return of 31.3% and a Net Present Value of ETB 548.8 million. The sensitivity analysis indicates that the EIRR values vary from 22% to 27% depending on the sensitivity test applied. The project would still be feasible with the worst case (benefits -20% & costs +20%)-EIRR in this case would be 22.3%.

- 71 - C. Dera-Magna section (119 km) of the Dera-Mechara link federal road

The proposed road is a track accessible by four-wheel drives during the dry season. It is proposed to construct a feeder road with 6.0 m wide carriageway with shoulders 1.5 m wide each and the surface will be a gravel pavement. Economic analysis of the project road has been worked out using the producer surplus approach. The proposed construction option has been compared with a “without road” case. It is assumed that benefits will not accrue before the road is completed. The economic analysis is based on benefits in terms of increase in agricultural outputs (hence generated traffic) compared with the costs of construction and maintenance. Discounted benefits are then compared to discounted costs to produce measures of worth.

Costs. The construction cost of the project is estimated at ETB 200.6 million. The total cost for construction ofthe project road, including tax and contingencies is estimated at ETB 275.8 million.

Benefits. The proposed construction of the project road would have essential benefits to the nation’s economy as well as to the environment including: e Reduced travel time e Reduced noise and air pollution and Area development and hence traffic generation.

In addition, during the construction period, the project will also generate employment for the people near the construction area.

NPV/EIRR & Sensitivity Analysis. The result of the economic analysis has been worked out using the producer surplus approach.

Summary of the Results

From the economic analysis, it can be seen that the base case has resulted in an Economic Internal Rate of Return of20.9% and a Net Present Value of ETB 180.8 million. The sensitivity analysis indicates that the EIRR values vary from 13% to 17% depending on the sensitivity test applied. . The project would still be feasible with the worst case (benefits -20% & costs +20%)-EIRR in this case would be 13.3%. The first year rate of return is below 12 percent. However, as this is construction of a road passing through an agricultural area and the methodology is based on producer surplus approach, the growth in traffic (and the resulting benefits) will lag behind the actual construction.

- 72 - Main Assumptions:

Sensitivity analysis / Switching values of critical items:

An analysis of switch values is presented below. Switch values represent the percentage change in costs or benefits that would give an NPV of zero in the economic appraisal. The results show that for the complete road links, construction costs would need to increase by over 75% in order for the NPV to be zero. Similarly benefits would need to be reduced by more than 40% to achieve the same result.

Construction cost Benefits Nazareth- Assela +7.5 -0.88 Woreta-Gob Gob +0.8 -0.44 Adigrat-Adwa +4.9 -0.8 Nekempt- Mekenajo +2.5 -0.7 Dera-Magna +1.2 -0.5

- 73 - Annex 5: Financial Summary ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT

I-Fiscal Analysis as Compared with Projected Amount (with SIP Fully Implemented) at Appraisal of Credit 3032-ET

Table 1A -Absolute Amount

Source Ethiopian Road Authonty, Ministry ofFinance & Economic Development, National Bank of Ethiopia & Road Fund Administration I/ Addis Ababa Retail Pnce Index Until FY 97 &National CPI thereafter 2/ The expenditure on road sector dunng FIY 2000101 doesn t Include Afar, Somale, Gambella & Dire Dawa Administrative Regions whereas F/Y 2001102 only indicates expenditure by Federal Govemment & Addis Ababa Administrative Regon * Average for the fiscal balance, totals elsewhere ** Ethiopia RSDP Project Support Document, December 18, 1997, page 44

- 74 - I-Fiscal Analysis as Compared with Projected Amount (with SIP Fully Implemented) at Appraisal of Credit 3032-ET

I/ Addis Ababa Retail Price Index Until FY 97 & National CPI thereafter. 2/ The expenditure on road sector during F/Y 2000101 doesn't include Afar, Somale, Gambella & Dire Dawa Adminstrative Regions whereas F/Y 200 1/02 only indicates expenditure by Federal Govemment & Addis Ababa Adminstrative Region. * Average for the fiscal balance; totals elsewhere ** Ethiopia: RSDP Project Support Document, December 18, 1997, page 44.

- 75 - I I - Fiscal Analysis as Compared with Projected Amount (Excluding Unidentified Source) at Appraisal of Credit 3032-ET

I1 Addis Ababa Retail Price Index Until FY 97 & National CPI thereafter. 21 The expenditure on road sector during F/Y 2000101 doesn't include Afar, Somale, Gambella & Dire Dawa Administrative Regions whereas FIY 2001102 only indicates expenditure by Federal Government & Addis Ababa Administrative Region. * Average for the fiscal balance; totals elsewhere ** Ethiopia: RSDP Project Support Document, December 18, 1997, page 44.

- 76 - I I - Fiscal Analysis as Compared with Projected Amount (Excluding Unidentified Source) at Appraisal of Credit 3032-ET

-acrual v', projected I ..%;&.. 6iG.h\:i 52 7 46 7 54.2 53 Y 54 0 54 3 Estimated Capital Exp. on Road Sector I BirrM 'XSDPB.&liiL; - i 1,532.9 3,359.2 3,384 9 3,036 3 1.274 8 15.947.3

Source Ethiopian Road Authority, Ministry of Finance & Economic Development, National Bank of Ethiopia & Road Fund Adminstration I1 Addis Ababa Retail Price Index Until FY 97 & National CPI thereafter. 21 The expenditure on road sector during FIY 2000101 doesn't include Afar, Somale, Gambella & Dire Dawa Adminstrative Regions whereas FIY 2001102 only indicates expenditure by Federal Govemment & Addis Ababa Adminstrative Region. * Average for the fiscal balance; totals elsewhere ** Ethiopia: RSDP Project Support Document, December 18, 1997, page 44.

- 77 - 111 - Fiscal Projections for RSDP I1with SIPSFully Implemented

Table 3A - Absolute Amount

I/Addis Ababa Retail Price Index Until FY 97 &National CPI thereafter. * Average for the fiscal balance; totals elsewhere ** Ethiopia: SDPRP Projections, 2002103-2OOYO6 I**Ethiopia: RSDP I1 Projections, 2002/03-2005106 N.A. -Not Available

- 78 - I11 - Fiscal Projections for RSDP I1 with SIPSFully Implemented

11 Addis Ababa Retail Price Index Until FY 97 & National CPI thereafter * Average for the fiscal balance; totals elsewhere ** Ethiopia: SDPRP Projections, 2002/03-2005106 *** Ethiopia: RSDP I1Projections, 2002103-2005106 N.A. -Not Available

- 79 - IV - Fiscal Projections for RSDP I1Excluding Unidentified Source

Source: Ethiopian Road Authority, Ministry of Finance & Economic Development, National Bank of Ethiopia & Road Fund Administration I/Addis Ababa Retail Price Index Until FY 97 &National CPI thereafter. * Average for the fiscal balance; totals elsewhere ** Ethiopia: SDPRP Projections, 2002/03-2005106 *** Ethiopia: RSDP I1 Ptojections, 2002103-2005106 N.A. - Not Available

- 80 - IV - Fiscal Projections for RSDP I1 Excluding Unidentified Source

l/Addis Ababa Retail Price Index Until FY 97 & National CPI thereafter. * Average for the fiscal balance; totals elsewhere ** Ethiopia: SDPRP Projections, 2002/03-2005/06 *** Ethiopia: RSDP I1 Projections, 2002/03-2005106 N.A. -Not Available

-81 - Annex 6(A): Procurement Arrange ments ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT

Procurement General

The Federal Government Financial Proclamation No. 57/1996 (Part Eleven -Procurement Contracts) and subsequent amendments constitute the applicable procurement regulations in Ethiopia. It was based on the 1995 Constitution, by which the autonomous regional governments were made responsible for their own procurement.

The "MOF procurement and contract directives regulations" were amended on the basis ofthe August 1998 CPAR recommendations, and a "Procurement Manual" for use of sector Ministries was drafted under Bank assistance and is currently the mandatory guideline for public sector procurement. A recent CPAR was also carried out and a draft report was sent to Government on June 28,2002 including the assessment ofthe capacity ofimplementing agencies. ERA'Sprocurement capacity was also assessed as part ofthis exercise. The lessons learnt during the CPAR have been considered in setting up the procurement management and implementation.

Use of Bank Guidelines.

Procurement for civil works and goods will be done in accordance with the Bank's Guidelines for procurement under IBRD Loans and IDA Credits (January 1995, revised January and August 1996, September 1997 and January 1999). The Bank's Standard Bidding Documents for Goods and Works, the Standard Pre-qualification Document and the Standard Bid Evaluation Forms shall be used.

For consultancv services, procurement will be done in accordance with the Bank Guidelinesfor the Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised September 1997, January 1999, and May 2002). The Bank's Standard Request for Proposals and Sample Form of Evaluation Report for the Selection ofConsultants will be used.

Advertisement General Procurement Notice (GPN) was issued in June 2002. It will be re-issued, upon Board approval, in the United Nations Development Business (UNDB), listing the project components, goods, works and consulting services for which specific contracts will be advertised. ERA is to keep a roster of the responses received from the potential bidders interested in contracts.

For all contracts for works and goods under ICB, the Specific Procurement Notices (SPNs) will be advertised in the "on-line" version of the United Nations Development Business (UNDB) and in at least one national newspaper ofwide circulation.

For contracts for works under USD 5.0 million equivalent per contract up to an aggregate amount of US$ 30 million under the component 'capacity building of domestic contractors', a specific pre-qualification of domestic contractors will be undertaken by seeking completed applications from domestic contractors based on publication of advertisements in the national press andor official gazette.

For specific consulting contracts expected to cost more than USD 200,000, the Borrower will advertise in the "on-line" version of UNDB and in an international or technical newspaper, in order to seek "expression of interest" (EoI). The Borrower will send a copy of this advertisement to those firms that

- 82 - have responded to the expression ofinterest of consulting contracts listed as a result of the GPN. The Borrower will be encouraged to also send a copy ofthe advertisement to embassies and professional organizations. The time period between the publication seeking EoIs and the closing date for receipt of EoIs should be at least two (2) weeks. For goods contracts subject to NCB the Borrower will advertise the contracts in the national press and/or official gazette and may do so in the national language. The advertisement should coincide with the date that the bidding document would be available for purchase by interested bidders. No domestic preference margins are applicable for goods and works subject to NCB.

Procurement Capacity of ERA.

1. The procurement capacity assessment ofERA was also carried out as part ofERA’S overall institutional capacity assessment for the appraisal and start of the RSDP in July 1997. Since then the procurement capacity has been monitored continuously as part ofthe implementation ofthe three IDA financed projects under Credit 2438-ET, 3032-ET and the Roads Component of the ERP Credit 3438-ET. ERA has demonstrated its capacity throughout. However, additional institutional support is required for managing the increased scope of the program under the RSDP 11.

Institutional Support will be provided to ERA, under the APL I, in areas of, among others, procurement, design review and approval, contract administration, and claims avoidance and management. The support will also include training ofERA personnel. In addition, the TA support being provided with funding by other donor partners - AfDB, DFID, EC, would further equip ERA to implement the full scope ofthe procurement and contract administration responsibilities required for the RSDP I1 implementation.

Based on the recommendations of the General Manager of the ERA, the ERA Board is the final decision making body with regard to procurement related matters. The decisions thresholds set in Government procurement regulations under the Ministry ofFinance now provide ERA executive management with authorization to approve procurement transactions ofETB 2 million (about USD 230,000 equivalent), an increase from ETB 250,000 (about USD 30,000 equivalent). This is a positive step towards the expedition of procurement of small maintenance works contracts and the associated supervision consultancy services.

Procurement Plan.

A procurement plan for the project has been prepared by the Borrower as part of a draft Project Implementation Plan (PIP) submitted to IDA in December 2002. The plan was reviewed during appraisal, and discussed during negotiations and ERA will adopt the final PIP prior to grant effectivemenss date. The PIP includes, among others, a detailed procurement plan for civil works and consultancy services.

Procurement Implementation Arrangements

Procurement will be implemented by the ERA under its Contract Administration Division, for works and services, and the Procurement Division for Goods. ERA executive management has an authorization to approve procurement transactions up to a threshold of about USD 230,000. The ERA Board will give the final decision with regard to procurement related matters, above this threshold, based on the recommendations of the General Manager ofthe ERA.

- 83 - Procurement methods (Table A)

Civil Works.

Contracts for upgrading and rehabilitation of 4 roads (ICB) with pre-qualification - US$130 million aggregate: Adigrat-AdiAbun/Adwa (1 Contract); Dera-Magna (1 Contract), Nazareth-Assela (1 Contract), Nekempt - Mekenajo (1 contract) up to an aggregate amount ofUS$ 130 million, will be procured through International Competitive Bidding (ICB) procedures, with prequalification.

Capacity Building of Domestic Construction Industry (DCI) using NCB procedures with pre-qualification - US$ 30 million aggregate: One of the objectives of the project is to build the capacity of domestic contractors by increasing their participation in the major works contracts. Considering the reduction in the number of road works contracts executed by domestic contractors in Ethiopia, over the three-year period, May 1998 - May 2001, as a result of the war between Ethiopia and Eritrea, GOE have recommended, and IDA has consented, to reduce the annual turnover requirements for domestic contractors bidding for the works under this program.

0 Works involving upgrading to bituminous paved road surface standard on the Woreta-Gob Gob section of the Woldiya-Woreta road (divided in 6 lots), and estimated to cost less than USD 5 million equivalent per contract up to an aggregate amount of USD30 million equivalent will be carried out under National Competitive Bidding procedures (with prequalification) acceptable to IDA.

0 Bidders to participate in the DCI capacity building initiative will be pre-qualifed based on the total capacity to handle contracts in financial terms.The criteria to determine the capacity in financial terms will be clearly specified in the pre-qualification application. It will also state the minimum equipment availability to perform the contracts, minimum financial requirements, personnel capabilities and past performance. The number of contracts that a single contractor could bid for would be decided based on the result of the pre-qualification. This will be categorized in two parts: (i)category 1 contractors who have a capacity of up to US$ 5 million equivalent (i.e. not more than one contract), and (ii)category 2 contractors who have a capacity of more than US$ 5 million equivalent but not less than US$ 10 million equivalent, with a provision that once a pre-qualified domestic contractor (category 1) is a awarded one contract or a contractor (category 2) is awarded contracts aggregating to US$ 10 million equivalent, the same contractors will not be included in the list ofpre-qualified bidders for subsequent bid packages.

0 GOE have agreed to waive: (i)Bid Security, substituting it with a penalty to bidders failing to honor a bid. A bidder who fail to honor a bid will be excluded from participation in future bids, all Bids to be floated by ERA, for a period of two years. and (ii)Performance Bonds, to be substituted with the retention money. GOE will also facilitate the access to Advance Payment Guarantee provided by the local banks, for those domestic contractors that are awarded the contracts, based on submission of (i)a signed contract with ERA (on behalf of the government); (ii)an account maintained by the contractor in the Bank providing the guarantee, and (iii)a formal letter from the ERA (on behalf of the government) confirming that the advance payment in accordance with the contract would be deposited in the contractor's account held with the same Bank upon receipt of a guarantee from the Bank, provided the contractor has a good financial standing with the Bank. Alternatively, advance payments could be released based on specific documentary evidence such as provision of: the shipping documents for importation of road construction equipment, receipt of imported equipment, procurement of road construction

- 84 - materials, and service agreement with firms for contract management and technical support, etc.

Goods.

Total cost of goods to be procured amounts to USD 1.41 million.

Goods estimated to cost more than USD 100,000 equivalent per contract shall be procured using International Competitive Bidding (ICB) Procedures.

Goods estimated to cost USD 100,000 equivalent or less per contract may be procured using National Competitive Bidding (NCB) Procedures. The standard bidding document for NCB will be submitted to IDA by the Borrower for prior review.

Goods including office equipment and vehicles and computers, estimated to cost less than USD 30,000 per contract up to an aggregate limit not exceeding USD 150,000, may be procured from IAPSO in accordance with the provisions of Paragraph 3.9 of the Guidelines.

Goods estimated to cost less than USD 30,000 per contract up to an aggregate limit not exceeding USD 100,000 may be procured using shopping procedures. In case of shopping, the following procedures need to followed (a) The request for Quotation should be issued in writing to at least three or more reputable suppliers, to insure that three quotations are received; (b) include specifications; (c) indicate delivery time if goods are not available readily (d) give the estimated cost, (e) be opened at the same time for evaluation; and (9 in case ofinternational shopping, be solicited from at least three suppliers from two different countries.

Domestic preference is allowed for ICB contracts only in accordance with the definitions in the Guidelines for procurement of Goods and Works.

Consulting Services.

Contracts for consulting services for: (i)construction supervision (estimated at US$ 11.93 million); (ii) TA support to ERA for planning and procurement of projects, design review, contract administration, claims avoidance and management, valued at US$4.24 million will be procured following the Quality Cost-Based Selection (QCBS) method. There are other consultancy services for Wereda Travel and Transport Plan Preparation ($5.52 million), Development of a financial and technical Audit system for the Road Fund ($0.09 million), Road Users Tariff Study ($0.06 million), follow up phases Project Preparation Studies and Urban Transport Study ($3.91 million), and services for HIV/AIDS Interventions ( $0.56 million), and Development and implementation of GIS system ($ .18 million), that will be procured using QCBS methods.

Individual consultants will be recruited for (i)the support to be provided for the preparation of WIDP by an International expert ( estimated at US$ .20) and (ii)the development ofIEC strategy for ERTTP (estimated at US$ .12) and (iii)the development of capacity building strategy for ERTTP (estimated at US$ .09) in accordance with the procedures applicable for the selection ofIndividual Consultants. The services required for training workshops for (i)the ERTTP (estimated at US$ .25) and (ii)Road Financing (estimated at US $ 0.06) will be done through Selection of individual consultants as per Section V ofConsultants Guidelines. Other Tasks which meet the requirement ofparagraph 5.1 ofthe consultants guidelines may be provided by Individual Consultants on the basis of CV and references in accordance with part 5 ofthe guidelines. In addition, where single source selection may be required, services

- 85 - estimated to cost $100,000 equivalent or less, may, with the Association's prior agreement, be procured in accordance with the provisions ofparagraphs 3.8 through 3.1 1 of the Consultant Guidelines.

For contracts not exceeding US$200,000 the short lists of consultants may be comprised of only national consulting firms. However, in accordance with the Consultants guidelines Section 2.7, there should be at least three qualified national firms, and foreign firms who have expressed interest would not be precluded.

Table A: Project Costs by Procurement Arrangements (US$ million equivalent)

1 Procurement Method Expenditure Category ICB NCB Othe; N.B.F. Total Cost 1. Works 129.88 27.92 0.00 0.00 157.80 (8 1.99) (1 8.63) (0.00) (0.00) ( 100.62) 2. Goods 0.00 0.00 1.41 0.00 1.41 (0.00) (0.00) (0.80) (0.00) (0.80) 3. Services 0.00 0.00 27.23 0.00 27.23 (0.00) (0.00) (25.3 8) (0.00) (25.3 8) 4. Miscellaneous 0.00 0.00 0.00 (0.00) (0.00) 0 0 (0.00) Total 129.88 27.92 28.64 0.00 186.44 (8 1.99) (18.63) (26.18) (0.00) (126.80)

2' Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff ofthe project management office, training, technical assistance services, and incremental operating costs related to (i)managing the project, and (ii)re-lending project funds to local government units.

- 86 - Table AI : Consultant Selection Arrangements (optional) (US$ million equivalent)

I\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-based Selection SFB = Selection under a Fixed Budget LCS = Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parentheses are the amounts to be financed by the Bank Grant.

- 87 - Prior review thresholds (Table B) Table B presents the prior review thresholds.

Procurement documentation for IDA-financed civil works contracts above US$ 500,000 equivalent per contract and Goods contracts above US$ 100,000 equivalent per contract will be subject to prior review by IDA as per paragraph 2 and 3 of appendix 1 of the guidelines. In the event of increase of works contracts by more than 15% of the original price, the Borrower must specify the reasons and request the Bank's no objection prior to proceeding with the additional works.

Consultancy contracts in excess of US$ 100,000 for firms and $ 50,000 for individuals will be subject to prior review by IDA as per paragraph 2 and 3 of the Appendix 1 of the guidelines.

Post review of contracts awarded below the above thresholds will be carried out selectively by IDA supervision missions and/or an independent auditor. Terms of Reference for all consultancy contracts, as well as all single source appointments, irrespective of their value, will be subject to prior review.

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Cate ory (US$ millions Method (US$ millions) L1. Works 5.0 and above ICB (with pre-qualification 0.5 and above NCB (with Below 5.0 pre-qualification) 2. Goods .1 and above ICB 0.1 and above

Below .I NCB None

~ Below .03 IAPSO and Shopping None

3. Services(Consu1tants) Firms 0.1 and above QCBS All

Less than 0.1 QCBS None Individuals 0.05 and above I SFB All

6. Miscellaneous

Total value of contracts subject to prior review: US$ 125 million Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed: One every 6 months (includes special procurement supervision for post-reviewlaudits)

I\ Thresholds generally differ by country and project. Consult "Assessment ofAgency's Capacity to Implement Procurement" and contact the Regional Procurement Adviser for guidance.

- 88 - Annex 6(B): Financial Management and Disbursement Arrangements ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT

Financial Management 1. Summary of the Financial Management Assessment

Financial Management

Introduction The Bank’s policy (OP 10.02) requires borrowers and project implementing agencies to maintain financial management systems, including accounting, financial reporting and auditing systems, adequate to ensure that they can provide to the Bank accurate and timely information regarding project resources and expenditures. The assessment of the financial management systems of this project was done in line with the guidelines issued by the Financial Management Sector Board in June 2001.

Countrv Issues A final draft report on the Country Financial Accountability Assessment (CFAA)-Ethiopia, was issued and submitted to Government on March 3 1,2003. The overall conclusion is that considerable progress has been made in the rationalization and strengthening ofbudgeting process at the Federal level. Despite some progress made in last three years, there are weaknesses in medium-term planning, accounting, auditing and reporting. Remedial actions on the weaknesses will be taken through the Expenditure Management and Control Program (EMCP), the Capacity Building Project for Decentralized Service Project (CBDSD) and Public Service Delivery Capacity Building Program (PSCAP).

Implementinp Entities for the Roads Program The overall program and project management and coordination is the responsibility ofthe Ethiopian Roads Authority (ERA). ERA will manage all the components ofthe project in the first phase of the APL, but in the subsequent phases ofthe APL, the Regional Roads Authorities (RRAs) and Ethiopian Rural Travel and Transport Program (ERTTP) Offices at all levels will be involved in the implementation. Ireland Aid and DFID have provided financing for the ERTTP pilot implementation activities in 8 weredas, and their experience will be taken into account in designing the implementation and funds flow arrangements in the second and subsequent phases ofthe APL.

ERA is currently implementing two active projects financed by the World Bank, the Road Sector development Program Support Project (RSDPSP, Cr. 3032-ET) and components from Emergency Recovery Project (343 8-ET). ERA had successfully implemented various Bank and donor-financed projects in the past, including the Road Rehabilitation Project (RRP, Cr. 2438-ET), which was closed on December 3 1,2002. In the existing active projects and the already closed ones, management and administration of funds are done at a central level by ERA and there has been no problem in disbursements and accounting offunds.

ERA has a Finance and Administrative Department staffed with adequate and appropriately qualified staff. The Project Finance Section in the department handles all project related transactions. Staff working in the section have very good experience and understanding and are capable ofhandling project financial transactions in accordance with IDA’Sdisbursement guidelines and procedures.

In the past four years, there has been a substantial improvement in the finance division of ERA both in terms of qualified manpower and quality ofthe annual financial reports. The backlogs in the submission of entity audit reports, which existed at the start of RSDP Ihave been cleared and currently ERA is

- 89 - up-to-date in closing the accounts and submitting the entity audit reports. The qualification points on the annual audit reports have also been reduced substantially in the last couple ofyears. The main qualification points mentioned in the last couple ofyears were long outstanding balances in goods-in-transit, debtors, creditors and cash at Bank accounts.

IDA, through RRP - Credit no. 2438-ET, provided TA support to strengthen the financial management systems of ERA. In this TA, the Organizational Structure of the Finance Division was clearly defined and approved by the Board ofManagement ofERA, chart of accounts was designed and are being implemented, long outstanding balances in bank, debtors and creditors accounts cleared, other related activities are done, and the computerization process is underway with support ofTA financed by GTZ and DFID. With the GTZ support, the ACCPAC accounting software is currently being installed in the Head Office of ERA. Employees are taking training on the use of the ACCPAC software and it is intended to close the accounts of ERA using the ACCPAC software for the year to be ended 7 July 2003. With the Support of DFID, the ACCPAC accounting software has been already installed in the district offices ofERA and training is underway to equip employees with the software. Other tasks may need additional financing from the RSDP I1 depending on the scope and progress ofthe GTZ and DFID support in implementing the following activities:

1. Computerization ofaccounting and financial management system 2. Training program on computerization and users' operating guidelines; 3. Computerization of the fixed assets accounting and fixed assets inventory system; 4. Training on computerization offixed assets and user's operating guide; 5. Improving the existing cost accounting system; 6. Finalization ofthe accounting and financial management systems, including the manual of fixed assets accounting systems.

Some ofthe resources from RSDP I1will be required to ensure that the financial management systems of ERA are further strengthened in terms of quality ofreports and adequately trained manpower. The resource, when confirmed with the cooperating donors, will be used to complete the already started computerization process by acquiring additional hardware and, if necessary, additional software, and training of staff to use the systems.

ERA is implementing a program of commercialization of its district maintenance office activities with DFID support. The existing financial management systems would therefore need to be changed to accommodate the commercialization activities at the district levels. At a minimum, additional trained staff would be required and the systems would need to be strengthened to accommodate producing of profit and loss accounts for the districts. Associated with this is the decentralization of the accounting activities at the district levels. It is expected that the decentralization ofthe accounting activities at the district level will start on July 8, 2003 when DMOs will become cost centers. They are also programmed to become profit centers by July 2005, and commercial entities by July 2006. Decentralization of the accounting activities is likely to be less problematic than the commercialization process in the sense that decentralization of accounting activities need only additional staff to use the existing systems, whereas the commercialization would require a change of systems.

Flow of funds ERA will open a Special Account (SA) at the National Bank of Ethiopia. IDA will transfer the initial advance and subsequent deposits to the created SA. ERA will then pay contractors and suppliers from the SA. The amount for the initial advance and subsequent deposits will be based on the cash flow requirements of ERA for four months of estimated expenditure for the IDA portion only.

- 90 - So far, no problems are anticipated in processing withdrawal applications and making payments to the contractors since all the payments are made centrally by ERA which will build on their experience in dealing with several contractors under the ongoing projects.

Staffing ERA Head Office has adequate number of staff with the required educational background and experience. The districts are currently employing accountants, with BA degree in accounting, who will be handling the decentralization of the accounting activities at the district level, starting 8 July 2003. Decentralization of the accounting activities will be the most challenging task for ERA under this process.

Accounting policies and procedures ERA uses accrual basis of accounting using the double entry accounting system. ERA follows the International Accounting Standards (IAS) in recording and reporting financial transactions. ERA has developed a financial management manual to be used as a reference book for all the staff. The ACCPAC accounting software is installed both at the Head Office and districts is being tested and used.

Internal Controls Internal control comprises the entire systems of control, financial or otherwise, established by management in order to, (a) carry out the project activities in an orderly and efficient manner; (b) ensure adherence to policies and procedures; and (c) safeguard the assets ofthe project and secure as far as possible the completeness and accuracy ofthe financial and other records.

ERA has an Internal Audit Unit. The Unit reports directly to the general manager ofERA. The Unit mainly conducts special investigations. In order to enhance the role of the Unit to perform post audit activities, required staff with adequate experience and educational qualifications should be assigned to the Unit. The Bank will assess the capacity ofthe Unit after one year of project implementation.

Reporting and monitoring The existing accounting and reporting system ofERA is capable ofproducing accurate and reliable information regarding project resources and expenditures. The system will provide reliable records and reports on all assets and liabilities and financial transactions ofthe project, and sufficient financial information for managing and monitoring activities. ERA financial management system is designed to produce financial statements ofthe entity as a whole to be used by government and all donors. The sources from all donors would be easily identified from the chart of accounts and the expenditures could be reported by major categories of expenditure.

ERA will produce quarterly Financial Monitoring Reports (FMRs) and submit the same to IDA 45 days after the end of each quarter. The FMRs will include financial, physical progress and procurement information. At a minimum, the financial reports must include the sources and uses offunds, expenditures by main expenditure classifications, beginning and ending cash balances and other supporting schedules. ERA agreed to use Form 2 ofthe FMR for reporting purposes during negotiation.

2. Audit Arrangements

External Audit The annual project financial statements ofthe project, the movement in the special accounts (SA), Statements of Expenditures (SOEs) and the entity accounts will be audited by an external auditor acceptable to IDA. The annual audited financial statements, along with the management letter, will be

- 91 - submitted to IDA not later than six months after the end ofthe fiscal year.

Since the Federal Auditor General is responsible for auditing all government funds, it will conduct the audit or assign other external auditor to the project. Currently, the Audit Services Corporation is assigned as the external auditor of ERA. This arrangement will continue for the future.

Auditors’ reports on the project and entity accounts of ERA for the Fiscal year that ended 7 July 2002 has been received by the Bank and there are no overdue Audit Reports.

3. Disbursement Arrangements There are two ways in disbursing funds from the Bank. The first one is the traditional- disbursement method, which uses SA, SOE procedures and direct payment procedures. The second is the report-based method, in which regular Financial Monitoring Reports (FMR) plus additional statements will be the basis for disbursement. ERA has selected the traditional way of disbursement using SA, SOE and direct payment procedures.

Allocation of grant proceeds (Table C) The life of the project is APLl will be 5 years. The proposed closing date is June 30,2009. Table C below shows the allocation of the Credit proceeds included in the APLl (Stage 1) which have been confirmed with ERA and GOE during negotitations. Proceeds ofthe Credit will be disbursed in accordance to the allocated amounts and percentage of category of expenditures.

Table C: Allocation of Grant Proceeds

Expenditure Category I Amount in US$million I Financing Percentage Civil Works [Project Component 1 (i), 70.23 100% of foreign expenditures (ii),(iv) and Project Component 21 5% of local expenditures Civil Works [Project Component 1 (iii)] 15.59 67% oflocal expenditures Goods 0.78 100% of foreign expenditures 10% of local expenditures Consultancy Services 23.62 100% of foreign expenditures 85% of local exDenditures IUnallocated I 16.58 I I Total Project Costs with Bank Financing 126.80

Total 126.80

Use of statements of expenditures (SOEs): Disbursements made on the basis of SOEs will be as follows: (a) for civil works less than US $ 500,000, (b) for goods less than US $ 100,000, (c) for consulting firms on all contracts less than US $ 100,000 and for individual consultants on all contracts less than US $ 50,000, and (d) for all local training and workshops. The recipient will retain all the Supporting documentation for SOEs, including completion reports and certificates. The supporting documents will be made available to IDA during project supervision and be audited annually by independent auditors acceptable to the Association. Disbursements for expenditures above these thresholds will be made against presentation of full documentation relating to those expenditures. During the project launch workshop, there will be a session on proper preparation of withdrawal applications, including the preparation and submission ofrequired

- 92 - supporting documents.

Special account: To facilitate disbursements against eligible expenditures under the Credit, ERA will establish a Special Account (SA) in the National Bank of Ethiopia. The authorized allocation for the Special Account will be $12,000,000. Upon effectiveness, IDA will deposit an initial deposit up to $6,000,000 into the Special Account. Once the total disbursements from the Credit account, including commitments, have reached an aggregate amount of SDR 15,000,000; the initial allocation may be increased up to the authorized allocation of $12,000,000. ERA will submit replenishment applications at least once in a month. The Special Account will be audited annually by independent auditors acceptable to the IDA. Counterpart funds

ERA, in its annual budgets, will include the counterpart contributions in local currency to cover the projected expenditure for the following financial year.

- 93 - Annex 7: Project Processing Schedule ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT

Project Schedule Planned Actual ITime taken to prepare the project (months) I 9 I I First Bank mission (identification) 0611 1/2001 0611 1/2001 Appraisal mission departure 02/24/2003 0313 112003 Negotiations 0412 112003 04/23/2003 IPlanned Date of Effectiveness I 09/30/2003 I I

Prepared by: John Riverson

Preparation assistance:

Bank staff who worked on the project included:

John Riverson Lead Highway Engineer (TTL) Nina Chee Environmental Specialist Antoine Lema Social Scientist, HIV-AIDSand Resettlement Specialist Negede Lewi Sr. Operations Officer, Infrastructure Eshetu Yimer Financial Management Specialist Aj ay Kumar Transport Economist George Banjo Sr. Transport Specialist Toshihiro Toyoshima Private Sector Development Specialist Wendy M. Walker Social Scientist Cheikh A.T. Sagna Social Scientist John S. Osika Sr. Health Specialist Samuel Haile Selassie Procurement Specialist Ani1 Bhandari Lead Transport Specialist, Peer Reviewer Jonathan Brown Operations Adviser, Peer Reviewer Farida Khan Operations Analyst Nina M. Jones Team Assistant Yeshi Gizaw Team Assistant Maic Tanguy Intern

- 94 - Annex 8: Documents in the Project File* ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT

A. Project Implementation Plan Draft Project Implementation Plan - December 2002.

B. Bank Staff Assessments Country Procurement Assessment Report Country Financial Accountability Assessment Report

C. Other 1. Addis Ababa Master Plan Revision Office, City Development Plan, 2001 - 2010, Executive Summary, August 2002, Addis Ababa. 2. Ethiopian Roads Authority, Resettlement Action Plans for 5 Roads, prepared by Abay Engineering PLC and PANAfrican Consultation in Association with Afro Consult & Trading PLC, March 2003. 3. ERA, Ethiopian Rural Travel & Transport Program Document - 1999. 4. Federal Democratic Republic ofEthiopia. Ethiopian Roads Authority: Pavement Design Manual Vol. I.Flexible Pavement and Gravel Roads. Draft (Addis Ababa), 2001. 5. Federal Democratic Republic ofEthiopia. Ethiopian Roads Authority: Bridge Design Manual. Draft (Addis Ababa), 2001. 6. Federal Democratic Republic of Ethiopia. Ethiopian Roads Authority: Drainage Design Manual. Draft (Addis Ababa), 2001. 7. Federal Democratic Republic of Ethiopia. Ethiopian Roads Authority: Geometric Design Manual. Draft (Addis Ababa), 200 1. 8. Federal Democratic Republic of Ethiopia. Ethiopian Roads Authority: Pavement Rehabilitation and Asphalt Overly Design Manual. Draft (Addis Ababa), 2001. 9. Federal Democratic Republic of Ethiopia. Ethiopian Roads Authority: Site Investigation Manual. Draft (Addis Ababa) 200 1. 10 Federal Democratic Republic ofEthiopia. Ethiopian Roads Authority: Standard Detail Drawings. Draft (Addis Ababa), 2001. 11. Federal Democratic Republic ofEthiopia. Ministry of Finance and Economic Development: Ethiopia: Sustainable Development and Poverty Reduction Program. Addis Ababa, 2002. 12. Federal Democratic Republic of Ethiopia: Ministry of Transport & Communications. Road Transport Authority: Study on Road Transport Regulations. Final Report. (Addis Ababa), 2002. 13. Final Feasibility Study ofRSDPSP I1- Seven Road Projects - Volume I& 11, prepared by KOCKS Consult GMBH, in association with Metaferia Consulting Engineers, November 1999. 14. Maintenance Action Plan (2002-2007), Ethiopian Road Authority, February 2003. 15. Road Functional Classification and Pavement Management System - Phase 1-RFCS Main Report, prepared by BCEOM, January 1997. 16. Road Sector Development - Phase 11, Environmental Impact Assessment Study Report, Prepared by Afiicon International (South Africa), February 2001. 17. Road Sector Development Program - I1Ethiopian road Authority, March 2003. 18. Rural Road Transport Strategic Plan, Somali National Regional state, prepared by FINNROAD, December 2002. 19. Scoping Study - Urban Mobility in Three Cities, SSATP Working Paper # 70, October 2002. 20. Study on Road Transport Regulations, by Studi e Planificazione del Territorio in association with CA

- 95 - Central Assessors, Essayas Hile Mariam, June 2001. 21. Transport Research Laboratory: Study Report for a Sectoral Road Safety Programme in Ethiopia Vol. 11: Supporting Documents. Unpublished Project Report Crowthome, 200 1. 22. Transport Research Laboratory: Study Report fro a Sectoral Road Safety Programme in Ethiopia. Vol. I:Main Report and Appendices. Unpublished Project Report. Crowthorne, 2001. 23. WSP International in association with TRL, Axle Load Management in Ethiopia, February 2000, Final Report, UK. 24. ERA-Network Analysis, Draft Final Report-November 2002-Prepared by Sheladia Associates Inc., USA in association with Pan African Consultants PLC. 25. Rural Roads and Transport Strategy, October 1999. 26. Ethiopian Road Sector Policy Support, Monitoring Report, Annual updates. *Including electronic files

- 96 - Annex 9: Statement of Loans and Credits ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT 02-Jan-2003 Difference between expected and actual Original Amount in US5 Millions disbursements' Project ID FY Purpose IBRD IDA GEF Cancel. Undisb. Orig Frm Rev'd PO50938 2003 Capacity Building for DeC.SeN.De1. 0.00 26.20 0.00 0.00 27.38 2.50 0.00 P0 4 9 3 9 5 2003 ENERGY ACCESS PROJECT 0.00 132.70 0.00 0.00 138.12 0.00 0.00 PO50383 2002 Ethiopia:FOOD SECURITY PROJECT 0.00 85.00 0.00 0.00 89.75 -2.00 0.00 PO74585 2002 Ethiopia Structural Adjustment Credit 0.00 120.00 0.00 0.00 0.01 -7.44 0.00 PO57770 2002 CULTURAL HERITAGE 0.00 5.00 0.00 0.00 5.43 0.36 0.00 PO52315 2001 CONSERVATION OF MEDICINAL PLANTS 0.00 2.60 0.00 0.00 2.40 -0.28 0.00 PO73196 2001 Demobilization and Reintegration Project 0.00 170.60 0.00 0.00 48.24 23.85 0.00 PO69886 2001 ETHIOPIA MULTISECTORALHlVlAlDS PROJ 0.00 59.70 0.00 0.00 44.57 13.76 0.00 PO69083 2001 GLOBAL DISTANCE LEARNING 0.00 4.90 0.00 0.00 4.81 2.57 0.00 PO67084 2001 EMERGENCYRECOVERYANDREHAB.PROJECT 0.00 230.00 0.00 0.00 145.46 136.96 0.00 PO50342 2001 WOMEN'S DEVELOPMENT INITIATIVES PROJ 0.00 5.00 0.00 0.00 4.54 1.28 0.41 PO35147 2001 CONSERV.& SUSTAIN. USE OF MEDIC. PLAN 0.00 0.00 1.so 0.00 1.75 0.40 0.00 PO00756 1999 HEALTH SECTOR 0.00 100.00 0.00 0.00 44.76 44.55 0.00 PO00755 1998 ROAD SEC. DEV. PROG. 0.00 309.20 0.00 0.00 126.86 135.76 74.83 PO00738 1998 ET ENERGY I1 0.00 200.00 0.00 0.00 58.51 51.22 0.00 PO00733 1998 AG. RESEARCH 8 TRAINING 0.00 60.00 0.00 0.00 31.59 24.47 0.00 PO00732 1998 EDUCATION SECTOR INVESTMENT 0.00 100.00 0.00 0.00 25.44 27.31 0.00 PO00764 1996 WATER SUPPLY DEVIREH 0.00 35.70 0.00 0.00 5.87 9.85 0.00 PO00771 1996 Social Rehab (ESRDF I) 0.00 120.00 0.00 11.48 41.16 36.63 23.83

Total: 0.00 1768.60 1.so 11.48 846.66 501.76 99.08

- 97 - ETHIOPIA STATEMENT OF IFC's Held and Disbursed Portfolio Ju~30 - 2002 In Millions US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

Total Portfolio: 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic

Total Pending Commitment: 0.00 0.00 0.00 0.00

- 98 - Annex IO: Country at a Glance ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT Sub- POVERTY and SOCIAL Saharan Low- Ethiopia Africa income 1 Development diamond' 2001 Population, mid-year (millions) 65.8 674 2,511 Life expectancy GNI per capita (Atlas method, US$) 100 470 430 GNI (Atlas method, US$ billions) 6.7 317 1,069 - Average annual growth, 1995-01 Population (%) 2.5 2.5 1.9 Labor force (%) 2.2 2.6 2.3 GNI Gross per primary Most recent estimate (latest year avallable, 1995-01) capita nrollment Poverty (% of populabon below national poverty line) Urban population (% of total populabon) 16 32 31 Life expectancy at birth (years) 42 47 59 infant mortality (per 7,000 bve births) 98 91 76 Child malnutrition (% of children under 5) 47 Access to improved water source Access to an improved water source (% ofpopulation) 24 55 76 Illiteracy (% ofpopulation age 75+) 60 37 37 Gross primary enrollment (% ofschool-age population) 71 78 96 -Ethiopia Male 85 85 103 Low-income group Female 57 72 88 I KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 1991 2000 2001 Economic ratios' GDP (US$ billions) 5.2 9.5 6.4 6.2 Gross domestic investmenffGDP 13.3 9.9 15.3 18.0 Trade Exports of goods and serviceslGDP 10.7 5.7 15.5 15.4 Gross domestic savingslGDP 7.3 2.7 -0.1 2.2 Gross national savingslGDP 8.1 4.4 10.0 13.7 Current account balance/GDP -4.8 -5.5 -5.3 -4.4 interest paymentslGDP 0.3 0.4 0.8 1.o Total debffGDP 35.6 95.9 86.2 91.4 Total debt servicelexports 10.3 25.2 13.8 18.9 Present value of debffGDP 51.3 Present value of debffexports 326.5 Indebtedness 1981-91 1991-01 2000 2001 2001-05 (average annual growfh) GDP 1.0 5.3 5.4 7.7 6.3 -Ethiopia GDP per capita -2.1 2.9 29_. 5.2 3.5 Low-income aroun Exports of goods and services 0.8 11.9 23.6 -1.6 6.7 STRUCTURE of the ECONOMY 1981 1991 2000 2001 1 Growth of investment and GDP (Oh) (% of GDP) Agriculture 56.1 59.1 52.3 52.3 Industry 12.3 10.1 11.1 11.1 Manufacturing 7.9 5.4 7.0 7.0 Services 31.6 30.8 36.5 36.5 Private consumption 79.0 81.8 76.8 80.3 96 97 6 99 00 01 General government consumption 13.7 15.5 23.2 17.5 -nnl d-nnu Imports of goods and services 16.7 12.9 30.8 31.2

1981-91 1991-01 2000 2001 Growth of exports and imports (%) (average annual growth) Agriculture 0.7 2.3 2.2 11.5 40 - Industry -1.o 6.4 1.8 5.8 20 Manufacturing -2.5 7.6 2.1 21.7 Services 2.5 8.2 9.5 4.6 0 Private consumption 0.8 2.7 -1.9 11.4 General government consumption 3.0 13.0 29.3 -18.5 20 : Gross domestic investment 0.2 10.9 -1.2 27.4 -Exports 'O-Imports Imports of goods and services 1.2 7.1 6.3 -1.8

Note: 2001 data are preliminary estimates. 'The diamonds show four key indicators in the Country (In bold) compared with its income-group average. If data ere missing. the diamond will be incomplete.

- 99 - PRICES and GOVERNMENT FINANCE 1981 1991 2000 2001 Domestic prices (% change) Consumer prices 6.1 20.9 4.2 -7.2 implicit GDP deflator 16.1 1.7 -7.0 Government finance (% of GDP, includes current grants) Current revenue 16.4 13.7 18.3 19.6 Current budget balance -0.2 4.7 -8.2 -0.4 I -GDPdeflator *CPI I Overall surplusideficit -4.9 -10.9 -14.8 -10.0

TRADE 1981 1991 2000 2001 Export and Import levels (US$ mill.) (US$ millions) Total exports (fob) 41 1 276 486 441 Coffee 130 262 175 I Leather and leather products 45 35 38 1.500 Manufactures Total imports (cia 744 1,029 1,611 1,558 1.000 Food 152 116 241 500 Fuel and energy 102 213 265 Capital goods 466 755 589 0 95 96 97 98 99 00 01 Export price index (1995=100) 82 77 64 59 Import price index (1995=100) 112 99 116 117 ?M Exports Imports Terms of trade (1995=100) 73 78 55 50 I

BALANCE of PAYMENTS 1981 1991 2000 2001 Current account balance to GDP (X) (US$ millions) Exports of goods and services 554 543 984 957 2- I Imports of goods and services 845 1,226 1,960 1,945 Resource balance -291 -683 -976 -987 Net income -7 -73 -60 -59 Net current transfers 50 229 701 774 Current account balance -249 -528 -335 -272 Financing items (net) 190 681 110 259 Changes in net reserves 59 -153 225 13 Memo: Reserves including gold (US$ miilions) 370 106 Conversion rate (DEC, local/US$) 2.1 2.1 8.2 8.3

EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 2000 2001 (US$ millions) Composltlon of 2001 debt (US$ mill.) Total debt outstanding and disbursed 1,842 9,119 5,483 5,697 IBRD 52 20 0 0 IDA 276 883 1,779 2,151 F 100 G:60 Total debt service 58 138 138 183 IBRD 7 9 0 0 IDA 2 11 34 36 Composition of net resource flows Official grants 135 781 Official creditors 894 145 122 435 Private creditors 63 212 -8 -10 Foreign direct investment 0 6 50 0 0 Portfolio equity 0 0 0 D: 946 World Bank program

Commitments 76 0 465 202 A ~ IBRD E. Bilateral Disbursements 28 59 137 455 B. IDA D. Other multilateral F. Private Principal repayments 4 12 21 22 C-IMF G - Short-term Net flows 23 46 116 433 Interest payments 5 8 13 14 Net transfers 18 38 103 419

Development tconomics YIZ4IUZ

- 100 - Additional Annex 11 Transport Sector Background ETHIOPIA: ROAD SECTOR DEVELOPMENT PHASE I PROJECT

The Transport System. The transport infrastructure in Ethiopia comprises a road network estimated (in 2002) at about 33,000 km (all classified with unquantified other unclassified roads, paths and tracks); a 780 km railway line from Addis Ababa to Djibouti (about 709 km within Ethiopia); a national merchant marine; and air transport facilities including two international airports, seven major domestic airports, and over 30 other domestic runways and airstrips. Ethiopia is now a land-locked country and almost 98 percent ofthe country’s export and import needs are presently served through the Djibouti port.

Road Transport Infrastructure. Road transport is the dominant mode of transport and it plays a pivotal role in supporting the economic and social development programs. The roads, in general, carry about 95 percent ofthe country’s passenger and freight traffic and provide the only form ofaccess to most rural communities. Ofthe total classified road network, about 16,000 km are federal roads and 17,000 km regional roads. About 4,000 km (12 %) are paved roads (all federal) and the remaining 29,000 km are gravel or earth surfaced. Since 1998, road transport has become even more important in connecting supply and demand centers because of a growing emphasis on poverty by connecting remote rural communities with the regional road network and improving accessibility. However, in spite ofthe relative importance ofroad transport, the condition of the infrastructure has been generally poor: only about 12 percent ofthe road network is paved and road density remains one of the lowest in Africa (Table 1). The road density at 30 km per 1000 sq. km in 2002, although better than that in 1994, only 21 km per 1000 sq. km, is still below the average of 50 km per 1000 sq. km for Africa (Table 1). The access to ports, markets and services is poor. It is estimated that about 70 percent of the total area of the country is more than half a day’s walk from all-weather roads. Responsibility for the road network is divided principally between (i)the Ethiopian Roads Authority (ERA), with an executive Board oversight, for federal roads and road sector policy implementation and coordination under the overall guidance of the Ministry of Infrastructure; and (ii)Regional Roads Authorities for the regional roads within their boundaries.

Table 1: Land Transport Network in Selected African Countries

Total Population Railroad Road Road Density Country Area (sq. (in million) s (km) Net-work (km/iooo km* km) (km) ) Cameroon 475440 13.5 1111 65000 137 Ghana 238540 17.8 953 32250 135 Kenya 582650 28.8 2650 64540 111 Madagascar 587040 13.9 1020 40000 68 Namibia 825418 1.7 2341 54500 66 Tanzania 945090 28.7 2600 81900 87 Ethiopia 1127127 63.5 681 3 1000 27

Source: World Bank Fact Books, 1996

To address the constraints in the road sector related to restricted road network coverage and low standards, GOE formulated a 10-year Road Sector Development Program (RSDP, 1997-2007). The first five-year phase of the program (RSDP I),1997-2002, was officially launched in September 1997, and

- 101 - since then, both Government and donor-funded projects have been under implementation. As a result of the investments, the share offederal roads in good condition has improved from 14 percent in 1995 to 25 percent in 1999 (Table 2). Some improvements have also been realized in the quality of regional roads especially in a decline in the share ofroads in poor condition.

Table 2: Condition of the Road Network, 1995-2002 (in percentages)

Source: ERA

Road Transport Services. The registered vehicle fleet is estimated at about 123,000, representing vehicle ownership ofover 2 vehicles per 1000 population, which is low in comparison with other SSA countries and is inadequate for satisfying the overall transport needs ofthe country. Out ofthese registered vehicles, about 50 percent were reported as having undergone mandatory vehicle inspections in 2001102 which provides a rough indication ofactual utilization. Most ofthe vehicles imported into the country are used vehicles. Due to the old age and service life of the vehicles, there is a high incidence of breakdowns, relatively low operational availability and higher vehicle operation cost. Some studies estimate that only about 70% ofthe fleet are operational at a time. Prior to 1992, motorized transport services were highly regulated both in terms oftariffs and modes ofoperation. The size ofthe vehicle fleet in the 10 years before 1992 remained largely stagnant. Since 1992, the Government policy to de-regulate services, encourage market competition, and tax privileges for mass transport vehicles has resulted in a significant increase in the fleet. Table 3 shows the high growth rate in service vehicles compared to cars, between 1992 and 1998.

Number of Vehicles

Year Cars Taxis and Buses Trucks

1991192 37,140 7,930 13,250 1997198 44,700 21,100 25,750 2001102 62,339 23,342 37,804 Av. Yearly Growth Rate 5.9% 10.2% 10.9%

Table 4 shows the total vehicle-!a oftravel from 1994 to 1999. The most striking feature in traffic flow trends is the consistent increase in total vehicle-kilometers traveled, particularly, for heavy vehicles, which is higher than for small vehicles. The adjusted aggregated index increased from 88.7 in 1994 to

- 102 - 100 in 1996, 105.6 in 1998 and 115.3 in 1999. This increase in total vehicle travel can be attributed to an improvement in the quality of the road network, increase in vehicle fleet and greater utilization of trucks and buses. At the same time, there have been signs ofmuch more efficient adaptation of types of trucks to types ofmarket, for example, along the import-export corridor. Kilometers traveled would continue to be influenced by the economy's growth potential.

Table 4 Total Vehicle km of Travel

Index Operational Vehicles 16.2 91.1 100.0 105.5 112.5 113.7

The vehicle ownership is concentrated in Addis Ababa and a few other major cities, and the impact of low vehicle supply is felt more in the rural areas. The use of motorcycles is also limited with the motorcycle fleet estimated at a total of 1172 vehicles (RTA 1997/98). Government and NGO staff mainly use these vehicles in rural areas. Bicycles and horse-carts are also mainly in use in and around urban areas and on bitumen roads. As a result, traditional modes oftransport (including walking, head loading and animal transport) have continued to be of great importance for rural transport, while motor vehicles remain the predominant mode in Ethiopia for longer distance freight and passenger movements. Pack animals, primarily donkeys and to a lesser extent mules, are by far the most predominant and important means of transport used by the rural households. The Village Level Travel and Transport Study quotes recent reviews ofequine utilization in Ethiopia which show the population of donkeys as 3.9 million, mules 1.2 million and horses 1.6 million. Camels are also used for load carrying in some more arid areas but no data has been found on numbers or extent of usage. Ministry of Agriculture (MOA) surveys in the 1970s estimated that about 18% of households owned donkeys and about 5% mules. More recent reviews suggest around 27% of the households own donkeys and 12% mules. Intermediate modes oftransport (IMTs) provide supporting services to the motorized fleet by linking remote rural villages to rural and urban markets, as well as passenger and freight transport within urban areas.

Urban Transport and City Growth. Addis Ababa, with a population ofabout 3.0 million, is the capital city and the seat of the African Union and a number of international organizations. It is the only major city, the next largest urban center being Dire Dawa with a population ofonly 250,000. The urban

- 103- transport environment in Addis Ababa is characterized by heavy congestion during peak periods, low vehicle utilization, weak application oftraffic management measures, inadequate facilities for pedestrian and non-motorized transport (NMT) movement and poor road safety arrangements leading to high accidents. Public transport in the city consists ofbus services provided by the publicly owned Anbessa City Bus Enterprise, mini buses operated by the private sector, and conventional taxis. A scoping study ofurban transport issues in Addis Ababa has been carried out by the Urban Mobility Component of the Sub-Saharan Africa Transport Policy Program (SSATP) in October 2002. According to the study, the motor vehicle ownership is low at one automobile per 44 persons (compared with 39, and 50 for Dar es Salaam and Nairobi, respectively). The modal split in the mid-90s was also estimated at pedestrian trips (70%), public transport (26%) and cars (4%). Inadequate public transport services have constrained participation of city residents, especially the poor, in economic activities, as well as limited their access to other services (health, education, market, etc). A ring road and associated road improvements are under implementation and these should help cross-city movement. Since 1975, the population and physical size ofthe city has more than doubled. Addis Ababa is therefore a growing metropolis that needs a holistic approach to the planning and provision ofits transport needs.

Railways, Ports and Marine Transport. A single gauge railway line runs over a distance of 78 1 km from Addis Ababa to Djibouti. The Governments of Ethiopia and Djibouti are joint owners ofthe Chemin de Fer Djibouti-Ethiopian railway (CDE). At present, it is estimated that the CDE carries about 700-800,000 passengers and 200-250,000 tondyear (about 2.6 and 3.75% of the total movement respectively) . The share of CDE has been declining over the past decade principally due to its weak ownership and management structure, lack ofcommercial orientation and maintenance resources. The CDE Board ofDirectors and the two Governments ('joint owners of CDE) have agreed to introduce important institutional changes including the transfer of operation and management of the railway to a private sector concessionaire. The reduced access to sea ports as a result of the conflict with Eritrea has led to the predominant use of the Djibouti port, and this has prompted the Government to explore the use of other potential, but less used ports (including Berbera, Port Sudan and Mombassa). However, the economic feasibility for the use ofthese ports needs to be firmly established with due consideration for the sources of supply and demand for import-export goods, and the potential high costs oftransporting over long distances and the associated transport regulations and security requirements.

A national merchant marine, the Ethiopian Shipping Lines (ESL) consisting of twelve ships and vessels with gross and net registered tonnage of over 100,000 and 50,000, respectively, and operate along routes to western Europe, the middle and the far east.

Civil Aviation. Civil aviation plays a more significant role in the transport sector of Ethiopia than in most developing countries because ofthe limited road infrastructure ( rugged terrain and long journey times). The civil aviation sector has an extensive infrastructure with two international airports (Bole airport at Addis Ababa, and Dire Dawa), seven major domestic airports, and over 30 other domestic airports and airstrips. The national airlines, with a commercial fleet of about 25 carriers, provides regular scheduled domestic air services to 32 points, with the remainder being served by charter flights operated by private carriers. There are five private national operators licensed, two ofwhich have already started operations. Internationally, Ethiopian Airlines not only provides a service to/from Ethiopia but has also developed a highly successful hub and spoke operation connecting 49 international destinations in Asia, Europe and USA, and Eastern Africa with Southern and West Africa: about 60 - 65 percent of international passengers, handled at Bole airport are in transit for other destinations. From its international operations, Ethiopian Airlines generates significant foreign exchange earnings for the economy.

- 104- -- I I Roa”d Netw-ork Develo~m-entin Ethiouia (19 51-20 0 2)

Total 64001

2.051 +I +I 9260 10068

122081

6.20 1

215341 23558

286621 2000 3824 12250 15480 31554 2001 3924 12467 16480 2002 4053 12564 16680

- 105 - Road Network Development (1951-2002) 35000

30000

25000

20000

15000

10000

5000

0

1 .Asphalt .Gravel H Rural HTotal 1

Road Network Development (1951-2002)

35000

30000

25000

4 20000 e L( 15000 &

10000

5000

-Asphalt -Gravel -Rural -Total I I

- 106- Annex 12 ETHIOPIA -ROAD SECTOR DEVELOPMENT PHASE IPROJECT

flk?f-lrj‘ &,%d-.llZ &Ph&&fF LT4A.h haAm- I+.**? Pmw.L+ AT+ .etnac ACDlS ABABA. ETHIOPIA THE FEDERAL 3E?AOCRAT!C REPUBLIC OF ETHIOPIA iMlNlSTRY OF INFRASTRUCTURE

Mr. Callisto Madavo Vice President The World Bank 1818 H Street, N.W. Washington D.C. 20433 USA

Subject: Ethiopian Letter of Road Sector Policy

Dear iMr. Madavo,

Iam writing this policy letter to draw your attention and Ethiopia’s development partners especially in the road sector to the on-going efforts in designing and implementing instruments to promote the required institutional, procedural and policy changes as part of the process offacilitating an enabling environment for the second phase of the Road Sector Development Program.

As you all recall, in early 1990s, Ethiopia’s classified road network was limited to about 23,000 lulometers, of which about 75 percent was rated as poor condtion. Faced with this situation, the Government gave greater emphasis on improving the main road network and regonal rural road access to meet the agricultural and other socio-economic development needs of the country.

The Government then proceeded with the preparation of the ten-year Road Sector Development Program (RSDP). The frst phase of the RSDP (1997-2002) is a culmination ofthe Government’s efforts, with significant support from the donor community, to create adequate capacity in the road sub sector to facilitate and hasten the economic recovery process and restore the essential road networks to acceptable condition. The Program that was launched in July 1997, covered measures aimed at: (i) creating a conducive atmosphere to the development ofthe road sector throw& introducing a series of policy and institutional reforms, and (ii)rehabilitating critical roads that have been identified as major impediments towards the attainment ofthe objectives of the Economic Recovery Program. In this regard, the rehabilitation oftrunk roads and the upgrading of key link roads have been accorded highest priority as they had proved to be major impediments to the evacuation ofcrops, the delivery ofagricultural inputs, and access to ports. This is now even more clear and reflected in Government’s Sustainable Development and Poverty Reduction Program approved for implementation in 2002.

- 107 - As it is clear for development partners most of the policy issues have been identified in the course offormulation of the RSDP. The subsequent discussions between the relevant authorities in the Government and Donors staff provided good opportunity for an understanding ofthe expected overall commitment in establishing policy goals. It is with this background that the context ofthe policy reform was determined, designed and implemented. Indeed, the administrative complexities of policy changes are obvious and it would be necessary to monitor and re-design the appropriate instruments in the course of implementation ofthe RSDP.

Implementationof RSDP I 1. A Donor’s conference was held in January 1996 to solicit funding for the RSDP. During the proceedings ofthe conference and thereafter, the World Bank, the European Union, the African Development Bank, the Nordic Development Fund, OPEC Fund, BADEA, the Governments of Japan, Germany, Italy, U.K., Ireland, Sweden as well as the Government ofEthiopia and Road Users pledged financial support for the execution of the Program.

2 . The first phase ofthe RSDP ended in June 2002 with overall physical implementation of88 % ofthe Program (as revised during the RSDP IMid-term Review) with a corresponding disbursement rate of 77 %. All in all, Birr 7,115 million (US$ 8 18.0 million) has been disbursed during RSDP I.Judged against the established objectives and benchmarks the overall performance ofthe RSDP Ihas been satisfactory. Substantial progress has been achieved in re-opening nearly all ofthe classified roads, accessibility has been improved and the percentage ofroads in good condition has also increased although not as much as anticipated. At the same time, substantial progress has been made in institutional capacity building and in securing the required levels of funding for maintenance and capital works; a very positive development compared to the previous decades. It is the belief of the Government that we should take confidence from the gains made to date and move forward in implementing the Program in order to realize the full potential benefits anticipated by the various stakeholders during the Program formulation.

General Appraisal 3 . In general, the policy and institutional reform introduced by the Government of the Federal Democratic Republic ofEthiopia has facilitated the implementation ofphase one ofRSDP. Several rehabilitation projects are currently under implementation, and progress is to be expedited as contractors improve their management, programming and resource utilization. Ofcourse, certain shortcomings do occur, which necessitate the revision of schedules. ERA’Sadministrative capacity has also been enhanced following institutional restructuring and accompanying measures.

4. The Road Fund has helped to address major shortcomings in protecting the capital invested in the road network. This together with the more effective enforcement of axle loads, the gradual contracting out of periodic maintenance and the commercialization ofmaintenance districts will have considerable influence in the sustainability of the road sector. Overall this should support government’s effort to stabilize the economy and meet the challenges ofpoverty reduction.

- 108 - 5 . Indeed, the success towards achieving growth and poverty reduction objectives depends upon the completion of the first phase and the timely start-up ofthe second phase of RSDP. Rehabilitation, upgrading and maintenance of the existing network will continue to become a dominant feature of RSDP 11. In view of a low road density substantial expansion of the network will also be required to support the economic development ofthe country. This is critical in increasing the productivity ofthe agricultural sector, and providing exports, raising incomes and improving food security. Related to this is the implementation ofthe Ethiopia Rural Travel and Transport sub- Program, which is viewed as a key intervention in support of the government’s poverty reduction and rural development strategies.

6 . As is clearly demonstrated implementation ofthe program is now well underway. The Government, however, believes that implementation of policy reforms is a continuing process, and is actively focusing on their implementation.

7 . The investment and policy reforms in the road sector need to be continued since a partial implementation would fail to yield the full potential benefits agreed among different stakeholders. Rehabilitation of the existing limited paved trunk road network and provision offunds for minimum maintenance alone will not ensure sustained protection ofthe network as a whole. That means without continuing investments in follow on projects included under RSDP, transport costs will remain high, and movement of agricultural inputs and outputs will continue to suffer.

The Second Phase of RSDP 8. It has been realized that progress has been less than hoped, especially in projects, which were not started in the initial period ofthe Program. In particular, stakeholders have raised concerns about the size ofthe Program vis-&vis the implementation capacity on the one hand and more critically the financial requirement ofthe Program on the other. The lessons learned have led to a critical examination of the whole planning and programming ofthe program. As a result the second phase of RSDP has been drafted with two scenarios: The RSDP I1basic program (low scenario) envisages: the rehabilitation of 1,014 km, the upgrading of 1,864 km, the construction of 5,693 km, including low-class roads and the implementation of comprehensive policy and institutional reforms that commenced during RSDP I.In addition, it includes heavy and routine maintenance in several types of roads, bridges works and studies for follow-on operation. The program is estimated to cost Birr 12,898.9 million (US$ 1,482.6 million). The estimated cost ofthe enhanced program (high scenario) for RSDP I1 is about Birr 14,550 million (US$ 1,673 million); 13 % higher than the basic program. The high scenario involves the rehabilitation of 1168 km, the upgrading of 2045 km and the construction of 8383 km of roads.

9. A regular annual assessment ofthe RSDP budget is also to be carried out taking into account the overall macroeconomic environment and under the framework of the Poverty Reduction Strategy. Through this process the implementation rate of RSDP will be geared to the pace of macro-economic growth and a medium-term public expenditure framework to maintain fiscal sustainability of increased public expenditures.

- 109 - 10. The Government will concentrate on resolving issues identified and the associated actions proposed during the mid term review of RSDP I(February 2001), Stakeholders’ Discussion ofRSDP I1(July 2002) and Launch Conference of RSDP I1(March 2003) specifically in areas of improving design and contract management, facilitating rights of way clearance, and increasing the capacity of domestic contractors.

11. The Government still believes that one key measure of success of the RSDP will be the extent ofmajor policy and institutional reforms that will make the investments in the road sector sustainable in the long-term. These reforms have now been directed towards ensuring adequate hnding for maintenance, increasing the capacity of ERA in areas of contract administration, design and the increased use of domestic private contractors. Many ofthese policy actions have been implemented over the last few years and further concrete actions will be taken to effectively implement the RSDP in accordance with the conclusions reached among stakeholders at different times in the course ofimplementing the Program.

12. Objectives of the RSDP 11: The objective of the RSDP is to restore Ethiopia’s road network, which has become an obstacle to the sustainability ofthe economic development program, and to develop institutional capacity of the road agencies to properly manage the networks. In addition to the infrastructure provision, the Program contributes to economic development by providing economic opportunity for the rural poor, creating employment in both rural road works and the development ofappropriate and affordable means oftransport. The second phase ofthe RSDP, like the first one, is consistent with the economic policy of the country. It is in line with the Agricultural Development Led-Industrialization policy in order to achieve food sufficiency, poverty alleviation, and assisting the objective of improving and expanding the road network so that it can enlarge social service coverage in the country.

13. Autonomy of ERA: The autonomy ofERA has been confirmed since the launching of the RSDP Iand full responsibility has been given to ERA to take final decisions and make recommendations on matters related to the Road Sector in exercising its responsibilities and duties. ERA’Smanagement is evaluated on the basis ofthe accomplishment of its annual work program in accordance with management controlled performance indicators. In this regard, ERA has been unequivocally given the authority and autonomy for day-to-day contract management (e.g. contractual progress payments to contractors following certification by the Engineers), as well as for prompt decisions on problems identified on site including readily endorsing and approving variation orders as required. Moreover, the Government has empowered ERA and its Board to give final decisions on award ofcontracts, procurement ofgoods, services and works of any size.

14. The long-term objective for ERA is to focus on policy, planning and contract administration and to pull out ofdirect operational works. An important component of institutional reform is the commercialization of the District Maintenance Organizations, which will be a separate entity after July 2006.

- 110 - 15. Institutional and Capacity Strengthening of Road Authorities: The provision of adequate program management capacity has been recognized as a critical issue which the Government is taking steps to address prior to, and during implementation ofthe RSDP. In this regard, following ERA’Sreform and strengthening needs study, the new organizational structure was adopted, and a new salary scale has been approved in June 1997 for ERA staff. At the moment ERA is revisiting the reform study mainly to deal with the revised salary scale in Civil Service Commission and propose a new salary scale so as to retain its professionals. As with ERA, there is an on-going process to implement the reform study ofthe Regional State Rural Roads Authorities (RRAs) and at the same time a Rural Roads Technical Support Branch within ERA has been strengthened to provide needed technical assistance and training to RRAs. In addition ERA will continue using the assistance being provided by donor partners on the identified technical assistance in areas ofdonors’ coordination, contract administration, planning, maintenance, rural roads, financial management, and monitoring ofthe program. These positions have been progressively tilled since March 1997 and the impact of these TAs has been substantial and positive. As a result ERA has demonstrated improved capacity in the execution of the first phase of RSDP. However, the task of establishing the District Maintenance Organizations as fully commercial units remains an important milestone in the reform of ERA under RSDP II.

16. The Government, however, realized that as ERA moves towards preparation and implementation of the second phase ofthe RSDP, the capacity ofERA would need to be strengthened more especially in the areas of contract management and design reviews. ERA has prepared a technical assistance project for submission to donors for developing in-house capacity to prepare and administer contracts for construction, maintenance and services ofboth ERA and RRAs, on a scale sufficient to implement the RSDP efficiently.

17. Adequate and Stable Flow of Maintenance Fund: During RSDP Ithe Government established the Road Fund as a source of adequate assured maintenance funding and by statute has allocated fuel levies and Sales Tax on fuel for this purpose and has ensured that the transfers to the Road Fund are made fully and promptly. The Government intends to study the practical modalities ofmoving to a full road-user charge system, including the possibility of identifying other sources ofroad financing, and the macro-economic implication of alternative financing options. In the mean time every effort will be made to ensure that funding levies are sufficient for full funding ofroutine maintenance and an increasing share ofperiodic maintenance. The goal is to attain financial self-sufficiency in all maintenance activities by the end of RSDP II.

-111 - Maintenance Needs Vs. Maintenance Revenue (In Million Birr) ] 2002/03 I 2003/04 I 2004/05 I Total I 1 I1 Total Maintenance Need* 1 281 I 468 I 490 1--m Routine-Federal 160 166 171 497

- .. - a---- I I I __ I --. Urban 30 31 31 92 I Periodic-Federal I 12 I 184 I 203 Regional 7 12 5 24 Revenue AnnualRoadFundcollection I 347 I 368 I 380 I 1095 IDA contribution 31 137 119 287 Total Revenue 378 505 499 1382 YOof revenue need 1.4:l 1.1:l 1.O:l 1.1:l

18. The Road Fund has given ERA, RRAs and municipalities an assured source of revenue for road maintenance, primarily from a dedicated surcharge on fuel. The Fund raised a sum ofover Birr 1.3 billion up to December 2002, with a level ofdisbursement of about Birr 887.0 million. It can be realized from the above Table that the forecasted revenue from the Road Fund and the contribution ofthe World Bank under the Emergency Recovery Program matches the maintenance need showing the sustainability and stable flow offund over time.

19. The Government is also talung measures to improve road maintenance planning, programming and budgeting as well as managerial accountability. As a whole, the Governments’ efforts to strengthen accounting ofroad sector institutions and to improve public expenditure planning, with emphasis on core program has been an essential aspect ofstrengthening the budget process.

20. Commercialization of the force account of ERA: The institutional reform led to the establishment of ERA as an autonomous organization with a clear focus on planning, contract management, road maintenance and monitoring functions. The reform has also involved the transformation of ERA from a centrally controlled, direct labor oriented organization to a decentralized one, with significant changes in staff rationalization, performance contracting and commercial accounting, as part of continuous goveminent activity aimed at gradual Corportization.

21. As part ofthis effort a five-year capacity building project was set up in 200 1 to cover ERA’Sten District Maintenance Organizations (DMOs). The overall objective of this project is to strengthen the DMOs so that they can undertake cost effective road maintenance and thus be able to complete with the private sector on equal terms. To achieve this objective a series ofsteps are envisaged: ...... * Note that the estimated costs are on a full recovery basis, which does not take into account the available maintenance equipment in ERA and RRAs. IDA’Scontribution is for emergency restoration ofthe war damaged roads.

- 112- a ) Firstly, the DMOs will be started to operate as Cost Centers in July 2003. This is aimed at encouraging effective asset utilization and management, the elimination of waste, better cost control and productivity; b) Secondly, the Cost Centers will be changed into Profit Centers. This will change the management emphasis from controlling costs to making a profit. The operation of Profit Centers is scheduled to start in July 2005; and c ) Thirdly, the Profit Centers will be turned into Commercial Entities (by July 2006) to manage their own business strategy and decision-making. At this stage all DMOs function as commercial units, delivering cost effective maintenance services within a framework of internal performance agreements.

22. In order to carry out these three stages ERA has already developed an internal agreement whereby the quality and quantity control ofmaintenance activity of each District is supervised by engineers designated outside ofthe Operations Department of ERA. In the mean time a wide range ofmeasures will be introduced which include: New management procedures and systems (covering cost accounting, finance, road maintenance, stock control, procurement, performance management and personnel), contract procedures (for the management of labor only contracts), training of district of personnel, installation of computer hardware and systems software will be introduced.

23. The Ethiopian Rural Travel and Transport sub-program: Subsequent to a Village Level Travel and Transport Study, which revealed the seriousness of transport burden of the rural population, the Government is committed to design a program for rural travel and transport to address problems ofaccess to facilities and services. The Government believes that the ERTTP will form an essential component of the poverty reduction and rural development strategies, which re-affirm the government’s direction in meeting the central challenge of improving living conditions in rural areas, with special emphasis on agricultural production, economic and social infrastructure. The program has been developed specifically to address interventions that can be tackled by the decentralized local government structures at Woreda and kebele level.

24. Coupled to the on-going effort the preparation of the disaggregated local transport plans in the form ofWoreda Travel and Transport Plans (WTTP) and implementation of the same is a comer stone of the process. Each Woreda will have its own WTTP delivered through their participation in the light of local authorities development plans. This is expected to have a very positive contribution for the delivery of the integrated transport system that the country wants to see. The strategies will include the construction oflow-level rural roads, the provision and expansion ofboth conventional and intermediate means oftransport, and the expansion and improvement offacilities and schemes that raise the rural household income level.

25. Systematic Methodological Framework for Setting Priorities for Roads: Trunk, link and main access road projects arc subjected to rigorous technical, financial, economic, socio-cultural and environmental investigation. Crucial to project formulation is the economic feasibility, which has to show at least an Economic Internal Rate of Return of 10 percent, the opportunity cost ofcapital in Ethiopia. There are also other considerations in priority ranking, role of strategic link in the network, contribution to regional integration and other development objectives, In this regard, a road network analysis has been completed by a consultant, with the objective of evaluating possible

- 113 - scenario options and coming-up with a Road Network Master Plan. As part of the. assignment, new links have been identified and evaluated in the framework of future road network development.

26. As for rural roads, ERA is advising Regional Authorities to effectively structure the identification, formulation and implementation of their projects. There is a consensus that greater development impact can be ensured by improving the quality of projects/programs by means ofbetter project identification and preparation. Related to this is the increased awareness ofthe benefits of integrating road investment programs into regional inter sectoral plans. Additionally, project preparation should also aim at ensuring a balance between technical, environmental and socio-cultural objectives.

27. Road Safety and Axle Load Enforcement: Road safety and axle load studies have been carried out by consultants. Action plans for the implementation of the recommendations ofthe studies have been prepared with the involvement of stakeholders.

28. Available records clearly illustrate that overloading continues to be a serious policy concern, despite efforts being made for more rigorous control. Government would continue to introduce measures for more effective sanctions. Initiatives here include the improvement and construction ofweighbridges, an awareness building campaign, and increased penalties for overloading.

29. As the monitoring report for RSDP points out vividly, a rise in total casualties due to road accidents, road safety education and publicity programs shall be formulated and implemented. Improvements to ease driver tasks at high-risk locations shall also be given due consideration in the planning and design ofroad projects. A basis is also laid to establish a National Road Safety Board. The Road Transport Authority (RTA) will be the main responsible body for road safety activities at the national level. An Interim Working Group including representatives from ERA, the RTA, the Road Fund and the Federal Police has been set up to coordinate and initiate work in this area.

30. Road Transport Services: The Government had removed restrictive regulations and introduced incentives through tax exemptions in the provision ofroad transport services. As a result, the fleet of commercial vehicles, both freight and passenger has gone up significantly. The deregulation process has led to greater competition between transport operators.

3 1. The Government has also introduced measures in improving the market and competitive environment by defining the roles ofpublic transport enterprises. Individual public enterprises have been down sized, their objectives set and their performances evaluated. Improvements have also been made in accounting and financial auditing. As complete privatization has taken much time to plan and implement than initially anticipated, the reforming of these enterprises has contributed to the general improvement of the market environment.

32. Increasing Capacity of Local Private Contractors: The Government believes that the sustainability of measures to be undertaken under the RSDP will depend, to a great extent, on the performance ofthe domestic construction industry, which is now reemerging

- 114 - under RSDP, after years of stagnation and almost non-existence in road subsector activities. The Government has, as one of its stated objectives, the encouragement ofprivate sector participation in the road maintenance and construction program.

33. At present, the domestic road construction services sector is small but is a growing industry as it emerges from a period of stagnation. Indeed, a few major contractors would appear well placed to expand their activities, both in periodic maintenance and increasingly in construction projects. However, many contractors face particular obstacles in the areas of finance, commercial management, project management and acquisition ofheavy equipment, which need to be addressed. Specific activities are being introduced in RSDP II to assist these contractors through training and procurement programs. The use of long-term level-of-service maintenance contracts is being considered as these contracts can provide emerging firms with a suitable continuity ofwork to finance equipment purchase.

34. Under the RSDP 11, further measures will be taken to strengthen the private contracting sector. These include enhancing the development of local contractors and consultants by offering training, and involving them more in road works contracts and reforming the contract documents of Government financed projects as required, and facilitating the establishment of equipment leasing companies. Government is committed to further facilitate the development ofthe industry based on the findings and recommendation from the Domestic Construction Industry study.

35. Every effort will be made to increase the involvement of local contractors not only in constructiodupgrading works but also in maintenance works. Contractors will be involved in routine maintenance towards the end of RSDP 11, whereas their involvement in periodic maintenance is expected to increase to more than 90% (in 2006/07) from the current 28%. Specific capacity building initiative is also underway to further facilitate the involvement of local contractors. In this regard, the Government will waive (i)bid security, substituting it with other penalty to bidders failing to honor a bid; and (ii) performance bonds, to be substituted with the retention money. The Government will also facilitate the access to advance payments guarantee provided by the local banks, for those domestic contractors that are awarded the contracts, based on submission of(i) a signed contract with the Government; (ii)an account maintained by the contractor in the bank providing the guarantee, and (iii)a formal letter from the govemment confirming that the advance payment in accordance with the contract would be deposited in the contractor’s account held with the same bank upon receipt ofguarantee from the bank provided the contractor has a good financial standing with the bank.

Involvement of force account vs. private sector in Periodic maintenance works (payment in YO)

2002103 2003104 2004105 2005106 2006107 Force account 72 33 36 26 10

- 115 - 36. Social and Environmental Considerations. In both phases of RSDP the Government is not just concerned with roads and transport costs but also concerned with the social effects, A particular issue for main road development is the question ofthe possible disruption caused to communities living along the line of the road. For this reason a great deal ofattention is given to resettlement issues and resettlement plans which are an important component of our planning.

37. An Environmental Monitoring and Safety Branch whose part of its responsibilities cover, among other things, the development of a Resettlement Policy Framework and the preparation ofResettlement Action Plans has continuously been strengthened. ERA has recently undertaken social impact assessments ofa number of roads that help understand how communities may respond to the new road investments and to see how livelihoods of particular groups will be affected. A “Road Corridor and Poverty Impact” study is shortly to be commissioned that should help understand better the relationship between road investment and the impact on the poor. The Program also addresses a variety of social objectives including road safety, environmental protection, and HIV/AIDS prevention and mitigation.

38. Program Coordination and Monitoring: The RSDP will continue to be managed and implemented by ERA (together with rural road inputs from the Regions), the legally autonomous road management agency, and its line departments and district offices under the General Manager. ERA’s organization has three main departments as follows: (A) Engineering and Regulatory Department, which is to discharge the responsibilities through four Divisions of (i)planning and programming, (ii)contracts implementation, (iii)network management; and (iv) engineering services procurement, design and technical support (B) Operations Department, which is to discharge responsibilities for force account maintenance, emergency road construction and maintenance, associated logistics support; and (C) Human Resource and Finance Department. As part ofthis broad organizational setup for implementing the RSDP, ERA has a program advisory office (PAO) under the General Manager supported by TA comprising RSDP Advisor for program coordination, advice, including the coordination ofroad related multi-donor support and interests. To facilitate the monitoring functions, the Inspectorate Unit, which will continue as part of ERA’s normal organizational unit, has also been performing technical and financial audits to ensure the timely implementation ofdirectives and report its findings to the Board. It is also providing suitable advice to ERA management for action.

39. The Government has already recognized the need to improve the identification and monitoring ofprojects and the evaluation oftheir development impact, particularly with respect to RSDP objectives, institutional requirements and implementation risks mitigation. A monitoring system for the RSDP has been introduced and indicators were initially developed to assist in systematically recognizing pertinent core issues at regular intervals, to serve in improving the quality and development impact of RSDP I.Four Monitoring Reports have so far been prepared by a consultant involving the updating of the indicators. The analysis ofthe trends has enabled ERA’s management and the Donor

- 116- Community to draw lessons from the view points ofbenefits and sustainability. ERA’S management is particularly focusing on introducing measures in overcoming capacity constraints in road maintenance with much more emphasis on promoting the role ofthe private sector.

40. Risks Involved in the Implementation of the Program: The political and economic risks are low. The Government is totally committed to this program and hence problems that could arise in implementation is being dealt with an efficient and flexible manner. Institutional and policy reforms have been taken to enhance the existing capacity ofERA coupled with the establishment ofthe Road Fund that provides funds for maintenance expenditures and lay the basis for a sustainable road maintenance program. If revenues from user charges accruing to the Road Fund fall below projections, which are to be reviewed annually, the shortfall will be met by increasing Government contributions to the Fund so as to obtain the required maintenance expenditure level. Should overall budgetary constraints occw to limit these contributions, priority will be given to maintenance over new investments.

In conclusion, the Government realizes that although substantial progress has been achieved when ERA acts as the champion ofchange, the implementation ofpolicy reforms would be complex as they involve many other ministries and agencies, Serious effort will be exerted to bring these ministries/agencies to the same level ofchange to keep the momentum. To this end the Government look forward to the continued generous cooperation of the Program donors and other stakeholders so that together it is possible to develop an appropriate road transport system that will serve efficiently all sectors ofthe economy and facilitate the improvement in the quality of life for all peoples of the country.

Iwould like to take this opportunity to assure you and all development partners once again the commitment of my Government to speed up the needed changes in supporting the policy reform process. -

- 117 - - 118- MAP SECTION