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Document of The WorldBank

FOR OFFICIAL, USE ONLY Public Disclosure Authorized Report No: 48691-AM

PROJECT PAPER

ON A

PROPOSED ADDITIONAL FINANCING LOAN

Public Disclosure Authorized IN THE AMOUNT OF US$36.6 MILLION

TO THE

REPUBLIC OF

FOR THE

LIFELINE ROADS IMPROVEMENT PROJECT

Public Disclosure Authorized July 30,2009

Sustainable Development Department South Caucasus Country Unit Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the Public Disclosure Authorized perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective July 6,2009) Currency Unit = (AMD) US$l.OO = AMD 362.50 US$2.76 = AMD 1,000

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

AMD Armenian Dram ARD Armenian Roads Directorate ARR Armenia Road Rehabilitation Project CPS Country Partnership Strategy EMF Environmental Management Framework EMP Environmental Management Plan EIRR Economic Internal Rate ofReturn FMM Financial Management Manual GDP Gross Domestic Product GOA Government ofArmenia IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association IFRs Interim Financial Reports LRN Lifeline Road Network LRIP Lifeline Roads Improvement Project LRIP-AF Lifeline Roads Improvement Project Additional Financing MCC Millennium Challenge Corporation MOTC Ministry of Transport and Communications PA Project Account PDO Project Development Objective PIU Transport Project Implementation Unit PP Procurement Plan ROA . Republic of Armenia TA Technical Assistance WB The World Bank WTP Urban Transport Project

Vice President: Shigeo Katsu, ECAVP Country Director: Asad Ala, ECCU3 Sector Director: Peter D. Thomson, ECSSD Sector Manager: Henry G.R. Kerali, ECSSD Task Team Leader: Satoshi Ishihara, ECSSD FOR OFFICIAL USE ONLY

ARMENIA LIFELINE ROADS IMPROVEMENT PROJECT - ADDITIONAL FINANCING

CONTENTS

Page

I. Introduction...... 1

11. Background and Rationale for Additional Financing ...... 1 111. Proposed Changes ...... 3

IV. Consistency with Country Partnership Strategy ...... 4

V. Appraisal of Scaled-Up Project Activities ...... 5

VI. Expected Outcomes ...... 9

VII. Benefits and Risks...... 9

VIII. Financial Terms and Conditions for the Additional Financing ...... 10

Annex 1: Revised Arrangements for Results Monitoring...... 11

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

Project Paper Data Sheet

Project Name: Armenia Lifeline Roads Country Director: Asad Alam Improvement Project Additional Financing Environmental category: B

Borrower: Republic ofArmenia Responsible agency: Ministry of Transport and Communication (MOTC)

Revised estimated disbursements (Bank FY/US$m)' FY 2009 2010 201 1 Annual 32.7 20.8 8.1 Cumulative 32.7 53.5 61.6

under the original project, which is to upgrade

Proposed terms: Flexible Loan at 6 month LIBOR for US Dollar, plus variable spread,

Combined disbursement schedule based on the expected disbursement under the original LRIP and LRIP AF. LRIP AF only.

I. Introduction

1, This Project Paper seeks the approval of the Executive Directors to provide an additional loan in the amount of US$36.6 million to the Republic of Armenia for the Lifeline Roads Improvement Project (LRIP) (Credit: IDA-4549-AM). The proposed additional loan would finance the scaling up of the project’s activities through rehabilitating an additional 140 kilometers of the Lifeline Road Network. This additional loan would also help mitigate the impact of the financial crisis by creating temporary jobs in road construction. This Additional Financing would also finance the design of project roads, supervision of works, capacity development in pavement design and road safety, project operating costs, and financial and technical audits.

2. The Project Development Objective (PDO) would remain the same as in the original Project. The results framework and the monitoring indicators have been revised to reflect the increased scope of the Project. The implementation arrangements remain the same as in the original project. There would be no co-financing from other donors. The closing date is being extended by one year, from December 3 1, 20 10 to December 3 1,20 11.

3. While the implementation of the original LRIP project has advanced significantly since the project’s effectiveness, the proposed LRIP-AF does not meet one eligibility criteria for Additional Financing under the OPBP 13.20 which requires one year of satisfactory implementation of the original project. Thus, a partial waiver of OP 13.20 on Additional Financing is sought from the Board by means ofthis Project Paper.

11. Background and Rationale for Additional Financing

4. Original project: The original Lifeline Roads Improvement Project (US$25 million equivalent) was prepared under the “IDA Financial Crisis Response Fast-Track Facility’’ utilizing OP 8.0, Rapid Response to Crisis and Emergencies, in order to mitigate the impact of the global financial crisis in Armenia. The LRIP was approved by the Board on February 24, 2009, and became effective on April 10, 2009. The Project Development Objective of the LRIP is “to upgrade selected sections of the Lifeline Road Network and create temporary employment in road cohstruction”. The project has two components: (i)rehabilitation of an approximately 1OOkm of the LRN in seven different regions (Marzes) of the country, which includes civil works, consultancy services for construction supervision, design author supervision3, technical auditing of rehabilitation works, and updating of the earlier designs and environmental documents; and (ii)technical assistance for the strengthening of the Armenian Roads Directorate’s (ARD) capacity, including a consultancy to review low-cost pavement options for Armenia. The original project is making good progress towards its development objectives. Detailed designs of project roads prepared with Millennium Challenge Corporation funding in 2007 were reviewed and revised in light ofEuropean standards to ensure consistency with actual traffic, enhance sustainability and improve road safety. Three months after effectiveness, procurement for all civil works under the project was completed, and the contractors mobilized. Bids were 10 - 30 percent lower than the engineer’s estimates because of lower prices for key

According to Armenian legislation, the original designers will be paid up to 0.6 percent of the construction costs to ensure compliance with the designs and to cover design updates necessitated by field conditions.

1 materials such as bitumen and because of market conditions. As of end-June 2009, US$7.5 million (30.1 percent of the funds) had been disbursed, with over 90 percent committed. Disbursements are on schedule to reach more than 50 percent of the original Credit by August 27,2009, the scheduled Board date of the proposed LRIP-AF. The ISR ratings for the IP/DO for the original project are rated Satisfactory (S), and the project is expected to fully meet its Development Objective.

5. The original project was assigned the environmental category B and has not faced any fiduciary, environmental or social issues. The Environmental Management Plans (EMP) for all 16 project roads were developed in line with the Environmental Management Framework (EMF) and were disclosed prior to the beginning ofcivil works.

6. Rationale for the additionaffirtancing: Since approval of the original project, economic conditions in Armenia have worsened. The latest macroeconomic and fiscal outlook for 2009/1 O4 projects that GDP will decline by about 9.5 percent in 2009 and recover about 1 percent in 2010. However, downside risk remains significant. The construction subsector has been hard hit, with output projected to decline by 30 percent and employment by 40 percent5. Other industrial subsectors, such as mining, are also projected to slow down significantly. Exports are estimated to have declined by about 6.3 percent in 2008 and are projected to further decline in 2009. Foreign Direct Investment is also expected to drop to 4.8 percent of GDP in 2009, down from 7.9 percent in 2008. Effects ofthe economic slowdown in the Russian Federation is also being felt - many migrant workers have lost their jobs and returned home, further stressing local labor markets while depriving the rural poor of critical income in the form ofremittances’.

7. As a result, it is estimated that about 30 percent of the labor force is now unemployed. Poverty is expected to increase by about 5.2 percent between 2008 and 2010. This means that more than 147,000 people could fall below the poverty line in 2009 and another 25,000 in 2010. The projected poverty incidence is expected to be about 28 percent in 2010, which is higher than the 2006 level of 26.5 percent, implying that the poverty reductions recorded between 2006 and 2008 would be more than fully offset by poverty increases due to the crisis. The increase in the poverty gap would be more pronounced as those already poor become poorer.

8. Deteriorating road networks hamper the rural poor’s ability to cope with the increasing economic difficulties. The poor condition of rural roads - the bulk of which is called the LRN8- results in agricultural losses of over 40 percent of harvest to rural communities, with losses as high as 80 percent for the worst served communities, because of difficulty getting produce to market’. While precise data are not available, the poor condition of rural roads also constrains the rural poor’s basic access to external markets and to social services not available locally.

As agreed among the , the World Bank, and the International Monetary Fund in May 2009 during preparation ofthe First Development Policy Operation for Armenia. World Bank, 2009, “Armenia: Potential Implications of the Global Financial Crisis for Poverty April 2009.” Washington, D.C. Almost 80 percent ofArmenia’s migrant workers are in Russia. ’Remittances account for nearly 20 percent of GDP. About 20 percent ofArmenian households receive remittances, which account for 55 percent oftheir total income. The LRN roads are rural road links that connect rural communities in the country to an interstate road; they comprise some 3,014 kilometers ofArmenia’s 7,704 kilometers (39.1 percent) ofnonurban roads. World Bank, 2004, Rural Infrastructure in Armenia: Addressing Gaps in Service Delively. Washington, D.C.

2 9. Rehabilitation of such rural roads, especially the LRN which provides many rural poor's only access to social services and livelihood opportunities, would create temporary jobs and partially ameliorate the worsening job market, while reducing transport costs and supporting economic activities in rural Armenia. However, a considerable reduction in revenue has constrained the capacity ofthe Government to implement public works. Revenue collected from January to April 2009 was 15 percent lower than during the same period in 2008, and the projected revenue collection for 2009 indicates a reduction in 24 percent compared with 2008.

10. On April 18, 2009, the Minister of Economy requested the World Bank to provide additional financing to expand the implementation of the LRIP to rehabilitate an additional 140km of the LRN. The Government has already identified about 50km of road sections that require urgent rehabilitation and for which civil works could start in September 2009 and be completed within the current construction season. As stated in the request, this would allow creating additional jobs during this calendar year, an important goal for the Government. The remaining 90km would be rehabilitated beginning in 2010 and completed within the calendar year.

1 1. Supporting the proposed activities as Additional Financing would allow the Government to quickly implement "shovel ready" civil works that create urgently needed temporary jobs within a very short time horizon. Rehabilitation of additional LRN roads would create an estimated 10,000 person-months of labor in rural areas, where job markets are collapsing and unemployment is rising, and would alleviate nonincome poverty by improving basic access to services. Given the urgent need to scale up the project impact as well as the progress of the original project so far lo, it is considered appropriate to partially waive the OP 13.20 on Additional Financing which requires the satisfactory implementation of original projects over one year.

111. Proposed Changes

12. The proposed Additional Financing would rehabilitate an additional 140 km of LRN roads. The IBRD Loan would cover 80 percent oftotal project costs including taxes. The results framework and the monitoring indicators have been updated to include the additional investments (Annex 1). Retroactive financing of up to US$4 million would be allowed. The LRIP-AF would have two components.

13. Component 1: Rehabilitation of 140km of selected sections of lifeline roads (US$43.93 million including contingencies, out of which the Bank finances US$35.3 million). In total, 29 sections of lifeline roads in seven Marzes would be rehabilitated under the LRIP-AF. This component comprises civil works for the rehabilitation of the LRN roads; supervision of the works; design author supervision l1; technical auditing of rehabilitation works; and project implementation expenses including, but not limited to, funding technical and financial audits, monitoring and evaluation, and incremental operating costs. This operation would not require

loAs mentioned earlier, the disbursement is expected to reach 50% of the Credit by the Board date. See the footnote 3.

3 any land acquisition. This component would also finance the “safe villages” pilot program12 which would support rural communities in implementing road safety measures recommended by the road safety audit and the National Road Safety Strategy13.

14. Component 2: Technical assistance (US$l.7 million, out of which the Bank finances US$1.3 million). This component would finance capacity development in alternative pavement designs (based on the recommendations ofthe study under the original project); the procurement of laboratory and testing equipment, and vehicles for supervision; training; and designs for future investments. This component would also support the development of a road safety audit manual, tailored to the conditions in Armenia, to provide checklists for assessing designs and inspecting project sites throughout different phases of a road project development, including assessments of existing roads. The findings of the audit would inform the implementation ofthe “safe villages” pilot program under Component 1.

Table 1: Cost Summary by Expenditure Categories14

Summary by expenditure categories (Additional Bank financing Government Total cost Financing only) US$ financing US$ US$ Civil works, design and supervision* 34,446,900 7,673,100 42,120,000 Goods and technical assistance 2,061,600 1,448,400 3,5 10,000 Total activities 36,508,500 9,121,500 45,630,000 Front end fee ** 91,500 91,500 Total for all Components 36,600,000 9,12 1,500 45,721,500

15. Activities under the LRIP-AF would be implemented by the same Transport Project Implementation Unit (PIU) and the Armenian Roads Directorate (ARD) under the Ministry of Transport and Communication (MOTC) which are implementing the ongoing LRIP. The PIU implemented the World Bank-financed Transport Project (2000-2004) and two Grant project^'^, and has gained sufficient capacity to implement Bank-financed projects. The PIU would continue using the financial management systems and procurement and reporting mechanisms of the LRIP. The completion of LRIP-AF activities is expected within one year from the original closing date. The new closing date would be December 3 1,20 11.

IV. Consistency with Country Partnership Strategy

l2The “safe villages” pilot program will support the villages selected on a demand-driven basis in installing road safety measures, especially around schools, as required by a road safety audit. To be eligible for funding, villagers must prepare and start implementing their own road safety campaign. The proposed LRIP-AF would provide necessary support to villagers. l3Developed under Policy and Human Resources Development Fund Grant (TF 057789) for Preparation of Traffic Management and Safety Project, and submitted to the Government for adoption. The public was consulted with on the draft Strategy in October 2008. l4Inclusive of local tax O~US$S.~I. 15 Policy and Human Resources Development Fund Grant (TF 057789) for the Preparation of Traffic Management and Safety Project (2007-08) and Policy and Human Resources Development Fund Grant (TF090313) for Preparation ofRailway Restructuring Project (2008-09).

4 16. The proposed LRIP-AF for scaling-up is strategically aligned with the new Country Partnership Strategy (CPS) for FY 2009-12 (May 12, 2009; Report No. 48222-AM), discussed by the Board on June 11, 2009. The CPS emphasizes that “the road network is of particular importance for a landlocked country with partly closed borders. Investment and operating costs are high, and strategic interests indicate investments in both transit transport corridors as well as in rural or lifeline roads”. Accordingly, the proposed LRIP-AF is included in Results Area 2 “Adverse poverty impact limited amidst assured health and social protection” under the Strategic Objective 1 “Addressing Vulnerability”.

V. Appraisal of Scaled-Up Project Activities

17. Economic and financial analysis: The proposed roads were selected with the primary objectives of improving rural connectivity to alleviate income and nonincome poverty and creating temporary jobs to ameliorate the negative impact of the current financial crisis in rural Armenia. Project roads were thus selected only from the LRN which provides rural people’s only access to social services and livelihood opportunities that are unavailable in their areas. Project roads were also selected to minimize the geographical overlap with the original project16 and to target areas with closed mines and factories.

18. In order to ensure that all project roads also generate sufficient economic benefits that warrant the cost, the cost-benefit analysis was conducted for the first-year program that comprises about 50km of LRN roads, based on the traffic counts conducted in June, 2009. The Highway Development and Management Model (HDM4) was used to compare the economic costs and benefits ofthe proposed investments with the “without project” scenario, assuming that only minimum routine and periodic maintenance to preserve the roads current condition would be conducted. The quantified benefits comprise savings in vehide operating costs and passengers travel time due to the road improvements. The overall financial capital cost for the first year program is estimated at US$24.32 million. Economic costs (net oftaxes and subsidies) are estimated at US$l9.45 million. As under the original project, conservative traffic forecasts were used - growth of 0% in 2009, 1.65% in 2010, and 5.5% after~ard’~.The risk of price increase is considered minor, given the low inflation expected for the next several years and the experience of the original project receiving bids 20 percent lower than estimated.

19. The economic analysis shows not only that the proposed investments would improve rural connectivity and create job but also that they would be economically sound (Table 2). The overall economic return of the first year program would be 16.2 percent, and the net present value would be US$3.01 million. All road sections have EIRRs above 12 percent, ranging from 12.9 percent to 51.2 percent. Sensitivity analysis shows that all project roads would be economically justifiable even if cost were 20 percent higher and if traffic levels were 20 percent lower.’* The first year program would also improve access for more than 58,000 people - or 2.4

l6Please see the attached map. l7Income elasticity of 1.1 was applied to the GDP growth forecasts by the Bank and the International Monetary Fund. l8All project roads would yield EIRRs above 12 percent except for five roads whose EIRRs range from 10.4 percent to 11.4 percent if costs were 20 percent higher and traffic levels 20 percent lower. Given the conservative assumptions used for traffic growth and based on the experience of the original project where bids came at 20 percent lower than the engineering estimates, it is unlikely that actual EIRR for these roads would be below 12 percent.

5 people per $1,000 of investment. The economic viability of the second year program, which has been identified based on the same principles as under the first year program, will be tested based on the same assumptions and methodology. Should the EIRR for any road in the second year program fall below 12 percent, designs would be revised to reduce costs and ensure that all investments supported under the LRIP-AF are economically viable.

Table 2: Economic analysis (Results for First Year Program)

M2-Leva-- - Kuris -Karjevan (Vahravar-Kuris 4.33 asphalt 156 200,000 240,000 12.9 235 12 section) 13 M2-Tkhkut 0.42 gravel 39 22,500 27,000 26.2 427 14 M2 - 0.6 gravel 75 75,500 90,600 15.5 197 15 Tcambarak-Vahan 6.1 asphalt 263 2 10,000 252,000 16.6 7,586 Total 46.98 16.2** 58.194 * The Agarak Bypass connects mines with the main road and allows heavy tracks to pass through Agarak town ** Weighted average based on the cost of each section

20. Technical: The roads included in the LRIP-AF were built 15 - 20 years ago and have considerably deteriorated due to lack of maintenance. The project will repair road pavements on existing alignments. Some structures may need to be repaired, and proper drainage and safety facilities will be installed. No technical difficulties are expected. The LRIP-AF roads were selected to minimize geographical overlap with the original project, thereby ensuring that local construction industries would not be overloaded and that jobs are created over wide geographical areas.

2 1. Detailed designs have been completed for the first year program and for two roads to be financed using the savings from the original project. The designs have been reviewed and found adequate. All principles agreed to when the original project was prepared, including the installation of proper drainage and the adoption of European design standards, have been incorporated. Bidding would start from early August. Detailed designs for the second year program would be prepared by December 2009. The same principles would be applied to ensure consistency with traffic demands as well as the sustainability and safety of project roads.

6 22. Procurement: Procurement for the LRIP-AF would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” published May 2004 and revised in October 2006 (Procurement Guidelines); “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” published May 2004 and revised in October 2006 (Consultants Guidelines); and the provisions stipulated in the Loan Agreement for this LRIP-AF. The World Bank Guidelines on Preventing and Combating fraud and Corruption in Project Financed by IBRD Loans and IDA Credit and Grants dated October 15, 2006, would also apply. The LRIP-AF would include the procurement of road rehabilitation works, vehicles for contractor supervision by the ARD, and laboratory equipment. It will also support the procurement ofconsultancy services for design and supervision of civil works, the preparation of EMPs”, and the implementation of technical audits and road safety improvement.

23. Procurement Procedures: Unlike the original project which was prepared under the OP 8.00 and for which various policy exemptions were allowed, the LRIP-AF would follow standard Bank procurement procedures. Because of the urgent need to start civil works and create temporary jobs quickly, two streamlined procedures would be applied to allow civil works contracts to be procured under the National Competitive Bidding (NCB) method in 2009 (12 out of 28 contracts). They include: (i)providing bidders 21 days instead of 30 days for bid preparation and submission; and (ii)subjecting only the first two NCB contracts to the Bank’s prior review instead of all contracts above US$l million.

24. Retroactive financing up to US$4 million would be allowed for selected contracts to permit contractors to mobilize quickly, and to create urgently needed temporary jobs. Contracts with retroactive financing would follow procurement procedures acceptable to the Bank. The procurement assessment of the transport sector conducted in July 2009 put the overall procurement risk for the sector at “High”. The same mitigation measures used in the original project would apply to the LRIP-AF. The residual risk is rated “Moderate”.

25. Financial Management Arrangements: The financial management functions under the LRIP-AF, including the flow of funds, staffing, accounting, reporting and auditing, would continue to be handled by the PIU, which implemented financial management arrangements under the original project that have been found acceptable to the Bank. The latest financial management supervision, conducted in June 2009, found that the financial management arrangements were satisfactory. The PIU updated its Financial Management Manual and accounting software prior to the original project, and is in compliance with the audit covenant: previous audit reports with clean (unqualified) opinions on the grants’ financial statements under the Yerevan Urban Transport Project (YUTP) and Armenia Road Rehabilitation Project (ARR) were received by due dates and were acceptable to the Bank. The overall financial management risk for this Additional Financing is “Low”.

26. The project would be audited by independent private auditors using the terms of references acceptable to the Bank. Annual audited project consolidated financial statements would be submitted to the Bank within six months of the end of each fiscal year and at project closing. Existing formats for the project management-oriented Interim Un-audited Financial Reports (IFRs) would be used for the monitoring and supervision, and a full set ofIFRs would be submitted to the Bank every quarter, no later than 45 days after the end ofthe calendar quarter.

l9 The EMPs of all roads will be prepared and disclosed prior to the commencement of civil works.

7 27. Disbursement: The expected disbursement period is three years (CY2009 - CY 2011). The Disbursement procedures used for the original project would continue to be used for the LRIP-AF. There would be one Designated Account for the LRIP-AF, with the ceiling of the IBRD Loan at US$7.5 million. Prior to project implementation, the Borrower would open a Project Account in a bank acceptable to the IBRD and deposit 20 percent of the Borrower's contribution. The Operational Manual would be amended to incorporate changes introduced under the Additional Financing. Details of minimum application size and documentation to be submitted for disbursement purposes are provided in the Disbursement Letters.

Table 3: Expenditure Categories

Expenditure Category Amount in US$ Financing Percentage Works, goods, consultancy services, training and 36,508,500 80% incremental operating costs Total Project Costs 36,508,500 Front-end Fee (IBRD) 91,500 Total 36,6000,000

28. Disbursements from the Loan would be made only for eligible expenditures made on or after July 15, 2009. Retroactive financing would not exceed an aggregate amount of US$4 million and would be reimbursed promptly upon the Effectiveness of the Loan. All contracts procured under the retroactive financing would follow procurement procedures acceptable to the Bank.

29. Social: The LRIP would improve the livelihood of the local population by creating temporary jobs and improving rural connectivity. As under the original project, about 20 percent of the contract value under the LRIP-AF would go toward hiring local unskilled workers, who would earn an average of about US$500 a month. The original project's job creation im act so far has been very positive, with 10,135 workers working at least one day in June, 2009". An estimated 10,000 person-months of employment would be created under the LRIP-AF, earning US$5 million for the local population. No land acquisition or any other impact that would trigger the Bank Operational Policy 4.12 would occur under this Additional Financing.

30. Environment: The LRIP-AF is classified as Environmental Category B. Expected impacts on human health and the natural environment are minor. An Environmental Management Framework (EMF) developed under the original project has been updated and disclosed in country and through the Bank's Infoshop. The changes are minor and the only addition is road sections to be rehabilitated under the LRIP-AF, which are totally new road sections not financed under the original project. A stakeholder consultation meeting on the initial EMF was held on January 22, 2009, and no additional consultations on the updated EMF would be required. Site-specific Environmental Management Plans (EMPs) would be prepared for each road section, which would outline any environmental risks, recommend mitigation measures, and monitor compliance. Five EMP have already been prepared and found satisfactory. The other EMPs would be completed prior to the beginning of works and disclosed to and discussed with local stakeholders.

20 This is equivalent to 327 person-months ofjobs created.

8 31. An environmental supervision mission conducted in June 2009 found that EMPs of the original project have been complied with. A qualified firm has been hired to supervise contractors, including their compliance with EMPs, which helps ensure that environmental impacts have been adequately addressed. .

VI. Expected Outcomes

32. The proposed Additional Financing would scale up the original project by rehabilitating additional road sections. These would be measured with the indicators in the Table 4.

Table 4: Revised Results Framework

Project Development Objectives Project Outcome Indicators Use of Project Outcome Information The project development objectives (PDO):

(i)to upgrade selected sections ofthe Travel time reductions on project The information will be used by MOF lifeline road network roads. and MOTC to refine fiscal stimulus and to develop road sector policy (ii)to create temporary employment in Number ofperson-months of local road construction jobs created

Intermediate Outcomes IntermediateOutcome Use of Intermediate Outcome Indicators Monitoring Component 1 Component 1 Component 1 Rehabilitation of about 140 km of Number of km improved The information will be used by lifeline road network MOTC for the improvement of lifeline and other roads, and for scaling up the Pilot “safe village” program One Pilot of “safe villages’ program “safe villages” program in other implemented villages.

Component 2 Component 2 Component 2

Strengthening ofroad sector Road Safety Audit Manual is Used by the ARD to conduct Road developed Safety Audit in non-project roads

Roads in good or fair conditions as a Used by the ARD to keep track ofthe share oftotal classified roads LRN improvement measured

Share ofrural population with access to an all-season road measured.

VII. Benefits and Risks

33. No significant risks have been identified. Given the global economic slowdown, the risk of cost increases is low because inflation has subsided to single digits and is expected to remain

9 low over the life ofthe LRIP-AF. However, 2.5 percent contingency funding has been included in project costs. Risks related to the quality of works would be addressed with the technical assistance provided to strengthen the ARD’s supervision capacity. Risks related to safeguard policies are minor, as only Category B activities without land acquisition would be financed.

34. Overall fiduciary risks for Armenia are considered to be significant. However, the mitigation measures in place under the original project would continue to be employed under the LRIP-AF. Residual fiduciary risks are assessed to be “Moderate”. Originally established in 2000, the PIU has implemented Bank projects as well as PHRD grants, and has gained sufficient capacity to implement the proposed LRIP-AF.

35. There is a risk that the provision of the counterpart finding would be delayed due to fiscal shortfall. This risk is considered moderate and would be mitigated by a dated covenant included in the legal agreement which requires the Government to deposit 20 percent of the counterpart finding within two weeks after the ratification of the Loan Agreement. The requirement by the Government to clear all contracts above $1 million is a potential risk of delay in project implementation. However, the risk is considered low given that the Government promptly cleared all contracts that require its clearance under the original project.

36. Project benefits would include reduced travel time and transport costs for road users connecting to the inter-state roads, reduced transport bottlenecks to regional socioeconomic development, and about 10,000 person-months of employment created.

VIII. Financial Terms and Conditions for the Additional Financing

37. The client selected an IBRD Flexible Loan in US Dollars with an interest rate equal to 6 months LIBOR, plus variable spread, with a final maturity of 25 years including a grace period of 10 years. The client has confirmed the choice after the Bank provided a presentation on the different financial products available.

38. There are no additional conditions ofeffectiveness for this Additional Financing.

39. The project is ready for implementation. The detailed designs and Environmental Management Plans for road sections selected for the rehabilitation in 2009 have been prepared by July 3 1,2009, to ensure that civil works can start in September 2009.

10 Annex 1: Revised Arrangements for Results Monitoring (Combined for the original LRIP and LRIP-AF)

Data Collection and Re rting Baseline Frequency and Data Collection ResponsibiIity for Project Outcome Indicators Reports Instruments data Collection Travel time improvement to Upon drive the length of the section 20% Travel time completion of ARD over current situation Reduction survey each section Construction Number ofperson-months of Supervision 17,650 periodic Supervision jobs created consultant report consultant Project One Pilot of “safe villages’ periodic Monitoring PIU program implemented Reports IntermediateOutcome Indicators Component 1 Number of km upgraded Supervision Construction Quarterly until 240 consultant supervision lstQ 2011 monitoring consultant Component 2 Upon Project PIU Road Safety Audit Manual is completion Monitoring developed Reports

Roads in good or fair Upon Project ARD conditions as a share of completion Monitoring total classified roads Reports measured Upon Project ARD Share ofrural population completion Monitoring with access to an all-season Reports road measured

’’ Overall 20% reduction for all road sections after rehabilitation is completed.

11

IBRD 37060 To Shulaveri 45° 44° 46° 47° 48° To Dmanisi GEORGIA Bagrateshen GEORGIA To Bagdanovka ARMENIA Dzoramut Noyemberian LIFELINE ROADS IMPROVEMENT Alaverdi To Kazakh PROJECT 41° ROADS FINANCED UNDER THE ORIGINAL LIFELINE 41° SHIRAK Step'anavan 3.11 ROADS IMPROVEMENT PROJECT Amasiya Verdaghbiur Toumanian LRIP ADDITIONAL FUNDING LORRI 3.12 3.12 PRIMARY ROADS (DUAL CARRIAGEWAYS) 3.13 PRIMARY ROADS (OTHER) 2.14 3.1 RAILROADS To Kars NATIONAL CAPITAL Akhurit MARZ (PROVINCE) CAPITALS Tsakhkahovit 3.14 MAIN TOWNS/VILLAGES Krasnosel'sk AZERBAIJAN INTERNATIONAL BOUNDARIES Sevan Tsakhkadzor 2.13 MARZ (PROVINCE) BOUNDARIES Aragats No. ROAD SECTION LENGTH (KM)

’ K Y A T O KOTAYK’K STAGE I (JULY - NOVEMBER 2009) TO BE FUNDED BY THE SAVINGS OF ONGOING LRIP AND PARTIALLY BY LRIP ADDIONAL FUNDING (RETROACTIVE) A

k 1.1 H17 - ARMAVIR - - GYUMRI KM18+850 - KM25+956) (TO BE FUNDED BY THE SAVINGS) 7.1 h Verin Talin u ARAGATSOTN 3.7 1.2 SERS - MARTIROS - ZARITAP (TO BE FUNDED BY THE SAVINGS) 11.4 r 3.7 LAKE i Aragats Yegvard a n SUB-TOTAL: STAGE I 18.5 R SEVAN STAGE II (SEPTEMBER - NOVEMBER 2009) TO BE FUNDED BY THE LRIP ADDITIONAL FUNDING . 1.1; 3.10

Abovian 3.6 1.3 - (TO BE FUNDED BY ADDITIONAL FUNDING) 4.7 Mets GEGHARK’UNIK’ 2.1 M12 - HARTASHEN 6.5 Mazra Echmiadzin YEREVAN 2.2 GEGHAVANQ - KAVJUT - M2 6 Oktemberjan 2.12 3.9 2.3 ALVANQ - M17 2.6 3.8 Bagaran Garni 2.4 - M17 1.66 ARMAVIR YEREVAN Armavir Dzhrarat 2.5 M2 - LEVAZ - VAHRAVAR - GUDEMNIS - KURIS - KARJEVAN (VAHRAVAR - KURIS SECTION) 5.3 Markara 2.6 M17 - 3 Karakala 40° Massis 2.7 M2 - VARDANIDZOR 0.6 Ara 40° ks R. Artashat ARARAT 2.8 M2 - AGARAK 2.17 2.9 M2 - TKHKUT 0.42 2.10 AGARAK BYPASS 0.97 VAYOTS’ 2.11 H62, SISIAN - 5 Ararat 2.12 H3, YEREVAN - GARNI - GEGHARD (KM10+770 - KM13+850) 3.08 DZOR 2.13 TCAMBARAK - VAHAN 6 TURKEY Yeraskh 2.14 - 1.8 Yegegnadzor SUB-TOTAL: STAGE II 49.8 Getap STAGE III (MAY - NOVEMBER 2010) TO BE FUNDED BY THE LRIP ADDITIONAL FUNDING 3.1 Gyumri - - Musaelyan - Jrarat 18.1 Vaik 3.2 - HATCAVAN - - SISIAN 12.5 To Shusha 3.3 MUTSQ - - M13 6 To Shakhtakhty 1.2 3.3 Angekhakot 3.4 QIRS - QYURUT 2 Araks R. 2.11 Zabukh 3.5 - GEGHAVANQ 6 Sisian 3.6 H39 - - GEGHARQUNIQ 4.65 Vorot 1.3 2.1 3.7 GAVAR - TSAGHKASHEN 6.4 an To Nakhichevan 3.8 M10 - 2 R. ARMENIA 3.2 3.9 MARTUNI - 2.5 3.10 H17 - ARMAVIR - ISAHAKYAN - GYUMRI (KM9+425 - KM18+850) 9.4 A ZE 3.11 - M4 2 RB 3.12 - - M4 4 A 3.4 ’ 3.13 MOVSESGYUGH - NORASHEN - VERIN KARMIR AGHBYUR 8.6 IJ AN 3.14 M4 - APPROACH TO TSAKHKADZOR SPORTS COMPLEX 4.6 2.2; 3.5 SUB-TOTAL: STAGE III 88.75 TOTAL (STAGES I, II, III) 157.1 ISLAMIC Kadzh To Zangelan REPUBLIC 2.7 This map was produced by the 0102030 40 Miles 39° Map Design Unit of The World Bank. 2.3 The boundaries, colors, denominations and any OF 39° other information shown on this map do not 2.5 To Zangelan imply, on the part of The World Bank Group, any 2.4 0 1020304050 60 Kilometers judgment on the legal status of any territory, or To Ordubad 2.9 Megri 2.4 any endorsement or acceptance of such 2.9 boundaries. rak 2.8; 2.10 A s R. 44° 45° 46° 2.6 47° 48° JULY 2009